*THE HONOURABLE SRI JUSTICE P.S.NARAYANA +WRIT PETITION NO.6893 of 2006 %30.01.2008 Between: # M/s.Meeran Minerals, Survey No. 558/A, Orvakal village, Orvakal Mandal, Kurnool District, represented by its proprietor Mohammad Khaleem and three others. .. PETITIONERS versus Central Bank of India, Bastian Road, Kurnool, represented by its Branch Manager and another. .. RESPONDENTS !Counsel for Petitioners: Sri T.V.L.Narasimha Rao ^Counsel for the Respondent No.1: Sri Ch.Siva Reddy. ^Counsel for the Respondent No.2: Sri M.P.Ugle. <Gist : >Head Note: ?Cases Referred: 1. WP No.2528 of 2006, dated 14.2.2006 (Madras High Court) 2. 2005-1-L.W.58 (DB). THE HON’BLE SRI JUSTICE P.S.NARAYANA WRIT PETITION NO.6893 of 2006 DATED : JANUARY, 2008. Between: M/s.Meeran Minerals, Survey No. 558/A, Orvakal village, Orvakal Mandal, Kurnool District, represented by its proprietor Mohammad Khaleem and three others. .. PETITIONERS versus Central Bank of India, Bastian Road, Kurnool, represented by its Branch Manager and another. .. RESPONDENTS THE HON’BLE SRI JUSTICE P.S.NARAYANA WRIT PETITION NO.6893 of 2006 ORDER: Heard Sri T.V.L. Narasimha Rao, learned counsel representing the writ petitioners, Sri Ch.Siva Reddy, learned counsel representing the 1st respondent and Sri M.P.Ugle, learned counsel representing the 2nd respondent. 2. The Writ Petition is filed for a Writ of Mandamus declaring the impugned letter dated 3.3.2006 issued by the 1st respondent bank to the petitioners as violation of Mandatory Guidelines under OTS 2005 of the 2nd respondent illegal, discriminatory, indiscrete and contrary to Sections 21 and 35 A of the Banking Regulation Act, 1949 and also violation of fundamental rights guaranteed under Articles 14 and 21 of the Constitution of India and consequently directing the 1st respondent bank to receive amount under OTS 2005 Scheme from the petitioners for full and final settlement of their dues and pass such other suitable orders. 3. Sri T.V.L.Narasimha Rao, learned counsel representing the writ petitioners had taken this Court through the contents of the affidavit filed in support of the Writ Petition and the respective stands taken in the counter affidavits filed by respondents 1 and 2 as well and would maintain that the stand taken by the opposite parties that these are the only guidelines relating to One Time Settlement Scheme and hence they cannot be enforced in a Court of law, cannot be sustained. The learned counsel also would maintain that in the light of the language employed in the said Scheme and the guidelines, they are perfectly enforceable and hence suitable directions are to be given. 4. Per contra, Sri Siva Reddy and Sri Ugle, learned counsel representing respondents 1 and 2 had taken this Court through the respective stands taken in the counter affidavits and would maintain that these guidelines are not enforceable in a Court of law and a Writ of Mandamus cannot be issued on the strength of such guidelines. The learned counsel representing respondents 1 and 2 also placed reliance on certain decisions to substantiate their submissions. 5. Heard both the learned counsel and perused the respective pleadings of the parties and the material produced before this Court. 6. The 4th petitioner had sworn to the affidavit filed in support of the Writ Petition. It is averred that the 1st respondent is a statutory Corporation constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, having its Head Office at Mumbai and one of its branches at Kurnool (A.P.) represented by its Branch Manager and hence the 1st respondent is an ‘Instrumentality of State’ in terms of Article 12 of the Constitution of India. Further it is stated that the 2nd respondent is a Statutory Corporation constituted for the purposes of taking over the Management of the Currency from the Central Government and of carrying on the business of Banking besides being the licensing, controlling and monitoring authority of commercial and co-operative banking outfits and their business. Its entire capital is owned and held by the Government of India and thus it is an ‘instrumentality of State’ in terms of Article 12 of the Constitution of India. It is also averred that the 1st and 2nd applicant units are proprietory concerns and self-employment ventures of 4th petitioner’s two sons who are MBA and Mining Diploma holders respectively and are situated side by side near the Quartz Mining areas and are non- polluting tiny units under SSI category situated in a rural place catering livelihood to 20 families in the aggregate and both the Units manufacture Quartz related powders from Mining extractions to cater the raw material needs of Ceramic industries, Tyre Manufacturing Industries and Glass Manufacturing Industries such as M/s. Associated Glass Industry, Erragadda, Hyderabad, M/s. Krishna Ceramics, B.B.Nagar, Hyderabad, M/s. St. Gobin Glass Industry, Sriperambadur, Madras, M/s. Larsen & Toubro Ltd., Glass Division, Nasik, M/s. Mysore Lamps, Yaswantpur, Bangalore, M/s. Kalpana Lamps, Ranipet, Madras, M/s. Regency Ceramics, Yanam, Pondichery and M/s. St.Gobain Fiber Glass, Timmapur, Hyderabad. Further it is stated that the 1st respondent Bank sanctioned to the 1st applicant two term loans amounting to Rs.6,47,000/- and a working capital cash credit limit of Rs.40,000/- on 6.1.2000 under the Government sponsored Schematic lending of Khadi Village Industries Corporation (KVIC) for manufacturing Quartz Powder. The Unit was fully grounded by 24.10.2000 on owned plot of the proprietor with construction of sheds and buildings and erection of plant and machinery/equipment utilizing the bank funds and promoter’s margin. It is also averred that the 1st respondent bank also sanctioned to the 2nd applicant two term loans amounting to Rs.3,27,000/- and a working capital cash credit limit of Rs.75,000/- on 6.1.2000 under the Government Sponsored Schematic lending of KVIC for manufacturing Quartz Sand. The Unit was fully grounded by 24.10.2000 on owned plot of the proprietor with construction of sheds and buildings and erection of plant and machinery/equipment utilizing the bank funds and promoter’s margin. It is also stated that the 3rd petitioner has been claimed as mortgagor of her house property vide door No.45/24/K-63-4 and 45/24/K-63-5 at Ashok Nagar, Kalloor village, Kurnool to the debt extended by the 1st respondent bank to the 1st and the 2nd petitioners. Further, both the 3rd and 4th petitioners have been claimed as guarantors to the said debts. It is also further averred that the KVIC provided back-end subsidy/margin money amount of Rs.3,00,000/- and Rs.1,70,000/- to the respective Units under Minority Quota which was received through the 1st respondent bank during the month of July, 2000. The Units became sick during 2002 year though running on sustaining levels as on this day due to the commissions and omissions on the part of the 1st respondent bank. The 1st respondent bank not only fixed repayment terms contrary to the KVIC Scheme but also deprived the Units from the working capital leverage by adjusting the subsidy received from the KVIC to the credit facility accounts of the 1st and the 2nd petitioners without any due communication of details of appropriation. Further it is stated that the Units are cat6egorized as NPAs as on 31.3.2002. However, the 1st respondent bank did not reverse the interest applied to the accounts of the credit facilities for the Quarters ended September, 2001 and December, 2001 as mandated under the Guidelines on Prudential Norms such as Income Recognition and Asset Classification by the 2nd respondent. It is further stated that the petitioners repaid nearly a sum of Rs.5,00,000/- to the credit of Credit Facility Accounts outstanding in the name of the 1st and the 2nd petitioners after the said accounts were categorized as NPA. It is averred that the 2nd respondent issued Guidelines on One Time Settlement Scheme for SME Accounts vie its letter Ref.no.RPCD.PLNFS.BC.No.39/06.2.31/2006-06 dated 3.9.2005 which are mandatory, non-discretionary and non-discriminatory and hence shall have to be implemented by the Public Sector Banks uniformly including the 1st respondent bank. It is further stated that the credit facility accounts of the 1st and the 2nd petitioners maintained with the 1st respondent bank are ‘Doubtful Assets’ as on 31.3.2004 and hence are entitled to be covered under the OTS-2005 Scheme of the 2nd respondent. It is also stated that the total amount payable by the 1st petitioner and the 2nd petitioner put together is the aggregate of the outstanding balances in the four term loan accounts and two cash credit accounts of the 1st and the 2nd petitioners respectively as on 30.6.2001 (including the interest up to 30.6.2001) less amounts paid by the petitioners since 1.7.2001 till this day. It is also stated that the 1st respondent invited the petitioners to offer for settling their dues under OTS-2005 vide its letter dated 25.10.2005. In pursuance of the same, the petitioners made an application dated 2.1.2006 to the 1st respondent bank seeking crystallization of their dues in terms of OTS- 2005 directed by the 2nd respondent and offered to pay an amount of Rs.13,30,137/- as per the approximation in the wake of the 1st respondent bank refusing to give a detailed and full account statements ab initio. It is also stated that the 1st respondent bank addressed a letter to the petitioners vide reference No.KUR:65:05- 06:569, dated 3.3.2006 as a reply to the petitioner’s letter dated 2.1.2006 refusing to grant receipt of amount to be crystallized under OTS-2005 which is a clear contravention of the guidelines of the 2nd respondent. Aggrieved by the letter vide reference No.KUR:65:05- 06:569 dated 3.3.2006 of the 1st respondent bank, the petitioners filed the present Writ Petition seeking crystallization of their dues under OTS-2005 by the 1st respondent bank and a direction to the 1st respondent bank to receive the said amount as full and final settlement of the dues of the petitioners in terms of the guidelines of the 2nd respondent, and several grounds also had been averred and the guidelines relating to one time settlement and the correspondence and the representations also had been placed before this Court. 7. The Senior Manager, Central Bank of India, Kurnool, had sworn to the counter affidavit filed on behalf of the 1st respondent. It is also averred in paragraph 3 that the petitioners 1 and 2 are the sole proprietory concerns and they approached the 1st respondent bank for financial assistance for running their respective businesses of manufacture of quartz related powders. They took quartz mines on lease from the Government of Andhra Pradesh in the name of the 4th petitioner and the loan proposals were sponsored by the Khadi Village Industries Corporation (KVIC). On request of the 1st and 2nd petitioners, the 1st respondent Bank sanctioned loan facilities on 6.1.2000. The petitioners 1 and 2 utilised the cash credit and term loan accounts as sanctioned by the respondent-Bank and in the course of time the petitioners closed the cash credit account. As on today the 1st petitioner is due of Rs.7,60,694/- and interest thereon from 1.1.2002 in term loan account. The 2nd petitioner is due of Rs.3,67,594/- and interest thereon from 1.1.2002. For repaying the loan amounts, the petitioners have executed the loan documents, and both the petitioners 1 and 2 had hypothecated their respective plant and machineries apart from mortgaging the landed property situated in Sy.No.558/A, B Orvakal village, Kurnool District. The 3rd and 4th petitioners stood as guarantors and the 3rd petitioner also mortgaged the house property bearing No.45/25/K-63-4 and 5, Ashok Nagar, Kurnool towards the security for the repayment of the above said loans. The value of the mo9rtgage properties are Rs.23,30,425/-. It is also stated that the petitioners did not run the Units on the expected levels and failed to repay the loan amounts as agreed upon. Since the repayments were not forthcoming, the loan accounts of both the 1st and 2nd petitioners were classified as Non-Performing Assets as per the Reserve Bank of India guidelines on 31.3.2001. The Reserve Bank of India had introduced in phased manner the prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks so as to move towards greater transparency in the public accounts. For the purpose of asset classification, non-performing asset was defined as a credit facility in respect of which the interest and/or instalment of principal has remained past due for a specified period of time. During 2001, when the accounts of the petitioners 1 and 2 were classified as non- performing assets, the period specified was two quarters and when the account is classified as non-performing asset, the interest shall not be debited to that account and interest shall not be taken as income from any non-performing asset. In the normal course if interest is debited to the account after two quarters expecting the recovery in that account, subsequently it should be reversed or provided for if same is not realized and that interest shall be kept in suspense account. But banks are given discretion in debiting interest to as an NPA account. Debiting and non-debiting of interest in NPA accounts is for the purpose of reporting the actual income of the bank to Reserve Bank of India every year. However recovery of interest from the borrowers is not waived in case of non-performing assets after classifying an account as NPA. Therefore, the interest debited in the accounts of the petitioners 1 and 2 for the quarters September and December, 2001, will make no difference whether it is reversed or not. Since the interest portion was already reported to RBI as interest income of the bank for that period, this respondent bank did not reverse the said interest from the accounts of petitioners 1 and 2. Further, unless the account is brought into order, once the account is classified as non-performing asset, it will continue to be non-performing asset. It is further stated that the respondent bank received the margin money of Rs.3,00,000/- in case of the 1st petitioner and Rs.1,70,000/- in case of the 2nd petitioner from the KVIC and the same was adjusted towards the loan accounts as per the rules. As per KVIC guidelines, the borrowers shall not utilize the margin money/subsidy amount but if the repayments are not coming, the bank shall credit the said amount to the loan accounts after 2 years so that the installment liability of the borrowers shall be reduced. As the petitioners were not repaying the installments regularly this respondent bank credited the subsidy/margin amount to their respective loan accounts as per the norms and that was in the knowledge of the 1st and the 2nd petitioners. Further it is stated that the 2nd respondent i.e., the Reserve Bank of India had issued guidelines on One Time Settlement Scheme for SME (small or medium enterprises) accounts. It is stated that the circulars issued by the Reserve Bank of India are either mandatory or directory or advisory depending upon its tenor, contents, intent and provisions under which they have been issued. The directives issued by Reserve Bank of India under Sections 21 and 35(A) of Banking Regulation Act, 1949 are binding being statutory directions and the banks are under legal obligation to follow the mandatory directions issued by Reserve Bank of India. The guidelines issued by Reserve Bank of India are expected to be followed by banks in letter and spirit. However, as the guidelines by Reserve Bank of India on One Time Settlement (OTS) Scheme were not issued under Section 21 or Section 35(A) of the Banking Regulation Act, they do not have statutory effect and not binding on the banks. In the OTS scheme the amount specified is the minimum amount to be recovered but not be maximum amount. Since the minimum amount is prescribed in the OTS scheme, the banks have discretion to accept either the minimum amount as stated therein or any amount over and above the said minimum depending upon the value of security and other factors. By the very nature of things, a settlement involves consent and it is a voluntary act of the party. In the matter where a creditor is enforcing its rights upon a debtor, the debtor has no legal right to claim that the claim be settled on favourable terms proposed by him whereby the claim of the creditor is reduced. As the transaction between the petitioners and the 1st respondent is a commercial transaction, the terms of contract cannot be modified or altered in the writ jurisdiction under Article 226 of the Constitution. It is stated that in a loan granted in terms of contract, grant of OTS or reschedule of the loan amount is really a modification of the contract which can only be given by the mutual consent of the parties. These guidelines are applicable to the SME sector and within that sector, there shall not be any discretion or discrimination of accounts for implementing the same. The words ‘non-discretionary’ or ‘non- discriminatory’ used in the guidelines are in relation to the accounts in the said SME category. Since the banks are advised to give wide publicity and to give notices to the eligible borrowers, the 1st respondent bank sent notice dated 25.10.2005 to the petitioners to avail the One Time Settlement facility. In the said notice the bank has very clearly stated to submit the proposal to forward to higher authorities to get their approval if falls within the guidelines of Reserve Bank of India. Sending the letter calling for proposal for One Time Settlement itself is not the acceptance of any amount offered by the borrowers. The 3rd petitioner submitted the proposal agreeing to pay Rs.13,30,137/-. If this proposal is accepted, the bank has to waive Rs.10,81,151/- which is uncharged interest. To reduce the amount of waiver of interest, the 1st respondent bank advised the petitioners to improve the offer as valuable securities shall be discharged by the bank vide their letter dated 3.3.2006. Instead of arriving at a negotiated settlement, the petitioners have filed the present Writ Petition with mala fide intention to delay and avoid the repayment of the loans. It is pertinent to mention that the accounts of the 1st and 2nd petitioners wee classified as non-performing assets in 2001 and till now they had not cleared the dues nor made any attempts to clear. When this bank initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Security Interest Act, 2002, the petitioners approached the Debt Recovery Tribunal in S A 122/2005 and obtained, but the said appeal was dismissed on 14.11.2005. Now to avoid the repayment of the loan availed, the petitioners filed the Writ Petition. Certain specific averments were made traversing the grounds No.1 to 4 which had been raised in the affidavit filed in support of the Writ Petition. 8. In the counter affidavit filed by the 2nd respondent, Reserve Bank of India, a preliminary objection had been raised that the Writ Petition itself is not maintainable. It is averred that the Reserve Bank of India (the bank), a body corporate constituted by Section 3 of the Reserve Bank of India Act 1934 to regulate the issue of Bank notes and keeping of the reserves with a view to securing monetary stability in India and to operate the currency and credit system of the country to its advantage. The Bank is the sole note issuing authority. Bank notes issued by the Bank are legal tender under Sections 22 and 39 of the Reserve Bank of India Act. The Bank regulates and controls the money in the country. The Bank also acts as statutory banker to the Government of India and all State Governments and also manages their public debts. The Bank regulates and supervises commercial banks and cooperative banks in the country. The Bank exercises various powers and discharge various statutory functions under Foreign Exchange Management Act, 1999, Banking Regulation Act, 1949, Reserve Bank of India Act, 1934 etc. Further it is averred that the Bank issued guidelines dated 3rd September 2005 in exercise of the powers conferred under Section 36 of the Banking Regulation Act, 1949 to public sector banks at the request of Government of India. It is also stated that the public sector banks are governed by statutes constituting them like State Bank of India Act, 1955, State Bank of India (Subsidiary Banks) Act, 1959, Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and Banking Companies (Acquisition an Transfer of Undertakings) Act, 1980. Board of Directors of public Sector Banks is appointed by Central Government in consultation with Reserve Bank. Public Sector banks constitute a different and dinstinct class by themselves. In terms of Section 18 of State Bank of India Act, 1955 and Section 8 of Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980, its subsidiary banks and other nationalized banks are governed by the directions issued by the Central Government in consultation with Governor, Reserve Bank of India. The Government of India, Ministry of Finance prepared a policy packet for stepping up credit to small and medium enterprises (SMEs) and placed the same before the Parliament on 10th August, 2005. The Government forwarded the policy paper vide letter dated 11th August, 2005 to Reserve Bank of India and other public sector banks requesting therein to take all necessary steps to follow the policy in letter and spirit. The policy paper in paragraph 5 provided inter alia, as under: “One time settlement scheme to apply to small scale NPAs account in the books of the bank as on March 31, 2004 will be introduced. The scheme will be in force up to March 31, 2006”. A copy of the letter dated 11th August, 2005 of Ministry of Finance is enclosed to the Counter Affidavit. As requested by the Government of India, the Reserve Bank vide letter RPCD PLNF.BC No.31/06.02.31/20 dated 19th August, 2005 issued the policy package for stepping up credit to SMEs to Chairman/Managing Director of all public sector banks. As the policy was placed by the Government before the Parliament and was addressed to public sector bank, the same was considered for issuance to public sector banks. One time settlement scheme was formulated by the Reserve Bank on the basis of statement made by the Finance Minister before the Parliament on 10th August, 2005 in the policy paper submitted for stepping up credit to SMEs and the Reserve Bank issued guidelines on one time settlement scheme for SME account vide RPCD.PLNFS.BC.No.39/06.02.31/2005-06 dated 3rd September, 2005. Para 4 of the said guideline specifically provide that any deviation from the above settlement guidelines for any borrower shall be made only by the Board of Directors. These guidelines have not been issued under Section 35A of the Banking Regulation Act, 1949, therefore, they are directory in nature and each bank has to apply its decision in individual cases. The respondent No.2 relied on the decisions of the Supreme Court in Joseph Kuruvilla Vellukunnel vs. Reserve Bank of India (AIR 1962 SC 1371), which is popularly known as Palai Central Bank case. In paragraph 45 of the Judgment, the Supreme Court has observed, inter alia, as under: “In view of the history of the establishment of the Reserve Bank as a Central Bank of India, its position as a banker’s bank, its control over banking companies and banking in India, its position as the issuing bank, its power to license banking companies and cancel their licenses and the numerous other powers, it is unanswerable that between the Court and the Reserve Bank, the momentous decision to wind up a tottering or unsafe banking company in the interest of the depositors, may reasonably be left to the Reserve Bank. No doubt, the Court can also, given the time, perform this task. But the decision has to be taken without delay, and the Reserve Bank already knows intimately the affairs of banking companies and has had access to their books and accounts. If the Court were called upon to take immediate action, it would almost always be guided by the opinion of the Reserve Bank. It would be impossible for the Court to reach a conclusion unguided by the Reserve Bank if immediate action was demanded. But the law which gives the same position to the opinion of the Reserve Bank is challenged as unreasonable. In our opinion, such a challenge has no force”.