IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE P.N.RAVINDRAN MONDAY, THE 23RD MAY 2011 / 2ND JYAISHTA 1933 WP(C).No. 19039 of 2010(D) --------------------------------------- PETITIONER: ------------------- S.R.EDUCTIONAL AND CHARITABLE TRUST, S.R.BUILDING,MAIN ROAD, VARKALA, THIRUVANANTHAPURAM, REP.BY ITS CHAIRMAN AND MANAGING TRUSTEE R.SHAJI. BY ADV. SRI.ANIL K.NARENDRAN. RESPONDENTS: ------------------------ 1. STATE OF KERALA,REP.BY THE SECRETARY TO GOVERNMENT,CO-OPERATION DEPARTMENT,GOVERNMENT SECRETARIAT,THIRUVANANTHAPURAM-695 001. 2. THE REGISTRAR OF CO-OPERATIVE SOCIETIES, BEHIND GOVERNMENT SECRETARIAT, THIRUVANANTHAPURAM-695 001. 3. THE KERALA STATE CO-OPERATIVE BANK LIMITED, HEAD OFFICE,COBANK TOWERS,PALAYAM, THIRUVANANTHAPURAM-695 033,REP.BY ITS MANAGING DIRECTOR. 4. THE SENIOR MANAGER,THE KERALA STATE CO-OPERATIVE BANK LIMITED,HEAD OFFICE BRANCH, COBANK TOWERS,PALAYAM,THIRUVANANTHAPURAM-695 033. 5. NATIONAL BANK OF AGRICULTURE AND RURAL DEVELOPMENT,KERALA REGIONAL OFFICE, PUNNEN ROAD,STATUE,THIRUVANANTHAPURAM-691 039. REP.BY ITS GENERAL MANAGER. R1 & R2 BY GOVERNMENT PLEADER SRI. BASANT BALAJI, R3 & R4 BY ADV. SRI.NAGARAJ NARAYANAN,S.C, R5 BY ADVS. SRI.P.B.SURESH KUMAR, SRI.K.N.SASIDHARAN NAIR. THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 31/03/2011, THE COURT ON 23/05/2011 DELIVERED THE FOLLOWING: W.P.(C). NO.19039/2010-D: APPENDIX PETITIONERS' EXHIBITS: EXT.P.1: COPY OF THE LETTER DTD. 20/03/2010 OF THE R.4, ADDRESSED TO THE PETITIONER. EXT.P.2: COPY OF THE LETTER DTD. 01/06/2010 OF THE STATE PUBLIC INFORMATION OFFICER OF THE R3, ADDRESSED TO THE PETITIONER. EXT.P.3: COPY OF THE LETTER DTD. 26/03/2010 OF THE R.5, ADDRESSED TO THE R.3. EXT.P.4: COPY OF THE CIRCULAR NO.68/DOS 10/2008 DTD. 12/05/2008 ISSUED BY THE R.5. EXT.P.5: COPY OF THE LETTER DTD. 30/03/2010 OF THE R.2, ADDRESSED TO THE R.3. EXT.P.6: COPY OF THE PRINTOUT OF THE WEB PAGE www.kerala cobank.com/about history.htm, TAKEN ON 13/06/2010. EXT.P.7: COPY OF THE BALANCE SHEET OF THE R.3. AS AT 31/03/2009, PUBLISHED IN DESHABHIMANI DAILY DTD. 21/09/2009. EXT.P.8: COPY OF THE CERTIFICATE DTD. 20/03/2010 ISSUED BY THE STATE BANK OF INDIA TO THE PETITIONER. EXT.P.9: COPY OF THE RESOLUTION NO.137 DTD. 16/07/2001 OF THE EXECUTIVE COMMITTEE OF THE R.3. BANK. EXT.P.10: COPY OF THE CIRCULAR NO. ILD/9/2001-07 DTD. 06/08/2001 ISSUED BY THE R.3. BANK, ALONG WITH ANNEXURE A GUIDELINES. RESPONDENTS' EXHIBITS: EXT.R3.A: COPY OF THE MINUTES OF THE MEETING OF THE BOARD OF DIRECTORS DTD. 16/03/2010. EXT.R3.B: COPY OF THE NOTICE DTD. 02/03/2010 SENT TO ALL THE 21 MEMBERS OF THE BOARD OF DIRECTORS. EXT.R3.C: COPY OF THE MINUTES OF THE MEETING HELD ON 29/03/2010. //TRUE COPY// P.S. TO JUDGE. Prv. P.N. RAVINDRAN, J. ------------------------------- W.P.(C) No.19039 of 2010 ------------------------------- Dated this the 23rd day of May, 2011 J U D G M E N T The petitioner, a charitable trust, has filed this writ petition challenging Ext.P3 letter dated 26.3.2010 sent by the fifth respondent to the third respondent and Ext.P5 letter sent by the second respondent to the third respondent in the matter of sanctioning of a loan applied for by the petitioner. The brief facts of the case are as follows:- 2. The petitioner has established and is administering a Dental College by name, Sri Sankara Dental College at Akathumuri in Varkala. It proposes to establish a Medical College at Akathumuri with a 400 bed general hospital. On 8.3.2010 the petitioner applied to the third respondent bank for financial assistance to the tune of Rs.27 Crores consisting of a term loan of Rs.26 Crores and working capital of Rs.1 Crore. In the application for financial assistance, the petitioner had disclosed the fact that it has availed a term loan of Rs.7.85 crores from the State Bank of India. The application submitted by the petitioner was to take over the loan of Rs.7.85 Crore availed from the State Bank of India and for financial assistance to establish a Medical College. The Board of Directors of the third respondent bank that met on 16.3.2010 resolved to extend financial assistance to the petitioner. W.P.(C) No.19039 of 2010 2 Thereupon, Ext.P1 letter was sent by the fourth respondent to the petitioner informing the petitioner that the Board of Directors of the third respondent bank have decided to extend financial assistance to the petitioner. The petitioner was called upon to open a current account in the Head Office Branch of the third respondent bank and the petitioner opened a current account in the Head Office Branch of the 3rd respondent bank on 24.3.2010. 3. It appears shortly thereafter, a controversy arose regarding the sanctioning of the loan to the petitioner. This in turn resulted in the Registrar of Co-operative Societies sending Ext.P5 letter dated 30.3.2010 to the third respondent bank directing the third respondent bank not to sanction the loan applied for by the petitioner and another agency. In the meanwhile, fifth respondent sent Ext.P3 letter dated 26.3.2010 to the third respondent bank informing the bank that the decision to sanction a term loan of Rs.27 Crores to the petitioner is in violation of the Credit Monitoring Arrangements ('CMA guidelines' for short). By that letter, fifth respondent directed the third respondent bank to take action to comply with the CMA W.P.(C) No.19039 of 2010 3 guidelines. The instant writ petition was thereupon filed challenging Exts.P3 and P5 and seeking the following reliefs:- i) Call for the records leading to Exts.P3 and P5 and issue a writ of certiorari or any other appropriate writ, order or direction quashing the same to that extent; ii) issue a writ of mandamus or any other appropriate writ, order or direction, commanding the 3rd and 4th respondents to sanction the financial assistance sought by the petitioner, referred to in Ext.P1, in terms of Ext.P4 Credit Monitoring Arrangements (CMA) guidelines issued by the NABARD, forthwith; 4. The main contention raised by the petitioner is that the reasons stated in Ext.P5 are not tenable and that it is not the policy of the third respondent bank to decline to take over loans advanced by other financial institutions. The petitioner further contends relying on Ext.P10 circular issued by the third respondent bank that the bank can take over existing loans, if the security is not a non-performing asset and the bank is satisfied about the credit worthiness of the applicant. 5. The Registrar of Co-operative Societies has filed a W.P.(C) No.19039 of 2010 4 counter affidavit dated 30.7.2010. In paragraph 3 thereof, it is stated that third respondent bank can disburse loans and advances in accordance with the guidelines issued by the NABARD, the Reserve Bank of India and the Registrar of Co-operative Societies. In paragraph 5, it is stated that the fifth respondent has by Ext.P3 letter informed the third respondent bank that its decision to grant loan to the tune of Rs.27 crores to the petitioner is in violation of the CMA guidelines issued by the National Bank for Agriculture and Rural Development ('NABARD' for short). In paragraph 6 of the counter affidavit, the Registrar of Co-operative Societies has stated that during the period from 2001-06, the third respondent bank has taken over huge liabilities of other banks and no repayment was made by the parties in the majority of the cases; that a large number of vigilance enquiries are pending with reference to the loans thus taken over by the third respondent bank and that the non repayment of loans has led to the refinance from the NABARD being stopped. In paragraph 7 of the counter affidavit, it is stated that as a result of stoppage of refinance by the NABARD, co-operative societies have W.P.(C) No.19039 of 2010 5 been forced to disburse agricultural loans from the deposits available with them at the rate of 7% interest thereby resulting in loss to co- operative societies. As regards the competence of the Registrar of Co-operative Societies to issue Ext.P5, it is contended that in the absence of any provision in the Kerala Co-operative Societies Act to take over loans advanced by other financial institutions, the second respondent is competent to issue Ext.P5 under section 66 of the Kerala Co-operative Societies Act. 6. The petitioner has filed a reply affidavit dated 18.9.2010 wherein relying on Ext.P10 circular, it is contended that third respondent bank can take over the performing assets of other banks and financial institutions. It is contended that since the asset classification of the petitioner is standard and will not come within the category of non-performing assets, the decision taken by the Board of Directors of the third respondent bank to extend financial assistance to the petitioner trust is not illegal or irregular. The petitioner has also contended that as the third respondent bank is carrying on banking business in accordance with the policy formulated W.P.(C) No.19039 of 2010 6 by the Reserve Bank of India in exercise of the power conferred on it under section 35A of the Banking Regulation Act, 1949, the second respondent has no authority to interfere with the banking activities of the third respondent in exercise of the powers conferred on him under section 66 of the Kerala Co-operative Societies Act, 1969. 7. Respondents 3 and 4 have filed a counter affidavit dated 20.7.2010. In paragraph 3 thereof, it is stated that after receipt of Ext.P5 letter from the Registrar of Co-operative Societies, the Board of Directors resolved as per resolution No.26 dated 23.4.2009 not to proceed further with the loan application submitted by the petitioner, that in the mean while, a private complaint was also filed in the Vigilance Court, Thiruvananthapuam which directed an enquiry into the complaint and thereupon the Deputy Superintendent of Police, Vigilance and Anti Corruption Bureau, Thiruvananthapuram has commenced the enquiry. In paragraph 5 thereof, it is stated that upon receipt of the application for loan from the petitioner, a unanimous decision was taken by the Board of Directors of the third respondent bank at its meeting held on 16.3.2010 to sanction a term W.P.(C) No.19039 of 2010 7 loan of Rs.26 Crores and working capital cash credit of Rs.1 Crore to the petitioner trust for establishing a hospital and also for purchase of hospital equipment subject to the terms and conditions set out in detail therein. In paragraph 8 of the counter affidavit, it is stated that as per the guidelines issued by the third respondent bank vide Circular No.ILD/9/2001-07 dated 6.8.2001 (Ext.P10 produced by the petitioner along with I.A.No.15665/2010), the third respondent bank can take over only performing assets of other banks and that as per the Credit Information Report received from the State Bank of India, the asset classification of the petitioner is standard and will not come within the category of non performing asset and therefore as per the loan sanction guidelines of the third respondent bank, there is no bar for the bank to take over loans availed by the petitioner from other banks. As regards the alleged violation of the CMA guidelines, in paragraph 9 of the counter affidavit, it is stated that as per the guidelines, the exposure limit is only Rs.26.93 crores and the variation is only 0.07 crores which is negligible. In paragraph 15 of the counter affidavit, it is stated that the fifth respondent has vide W.P.(C) No.19039 of 2010 8 Ext.P3 letter dated 26.3.2010, informed the third respondent bank that the sanction of the term loan to the tune of Rs.27 Crores is in violation of the CMA guidelines and had advised the third respondent bank to comply with the CMA guidelines while sanctioning the loan. Respondents 3 and 4 have in paragraph 12 of the counter affidavit stated that the third respondent bank was included in the Second Schedule to the Reserve Bank of India Act, 1934 with effect from 2.7.1966 and that it was granted licence under section 22 of the Banking Regulation Act, 1949 on 6.4.1972. 8. The petitioner has filed a reply affidavit dated 18.9.2010 reiterating its contention that the second respondent has no jurisdiction or authority to interfere with the decision of the third respondent bank to sanction the loan applied for by it. 9. The fifth respondent has filed a counter affidavit wherein it is stated that the unit-wise exposure limit for the third respondent bank which has a 'D' rating as per the latest inspection conducted by NABARD with reference to the financial position of the third respondent bank as on 31.3.2009 is fixed as 40% of the capital W.P.(C) No.19039 of 2010 9 fund of the lending bank and that as per the CMA guidelines issued by the fifth respondent bank, the maximum amount that can be sanctioned by the third respondent bank to a unit is Rs.2693.31 lakhs and therefore as per Ext.P3 communication, the third respondent bank was directed to comply with the guidelines. 10. I heard Sri.Anil K.Narendran, learned counsel appearing for the petitioner, Sri.Basant Balaji, learned Government Pleader appearing for respondents 1 and 2, Sri.Nagraj Narayanan, learned counsel appearing for respondents 3 and 4 and Sri.P.B.Suresh Kumar, learned counsel appearing for the fifth respondent. I have also considered the pleadings and the materials on record. It is evident from the pleadings and the materials on record that but for Ext.P5 letter sent by the Registrar of Co-operative Societies, the third respondent would have proceeded to sanction and disburse the loan applied for by the petitioner. The Registrar of Co-operative Societies has in Ext.P5 letter directed the third respondent bank not to sanction the loan applied for by the petitioner on the short ground that it is not the policy of the co-operative sector to take over loans advanced by W.P.(C) No.19039 of 2010 10 other banks and financial institutions and that there is no provision in the Kerala Co-operative Societies Act and Rules or the Bye-laws of the bank to take over existing loans disbursed by other banks. The fact that the third respondent bank has been licenced by the Reserve Bank of India to conduct banking business and that the third respondent is a Scheduled Co-operative Bank governed by the provisions of the Banking Regulation Act, 1949 are not in dispute. The provisions of the Kerala Co-operative Societies Act do not govern or regulate banking business. The said enactment only controls the functioning of co-operative societies which inter alia are engaged in lending and advancing money to their members. The third respondent on the other hand though a co-operative society is empowered to lend and advance money to persons who are not its members. This is by virtue of the inclusion of the third respondent bank in the Second Schedule to the Reserve Bank of India Act, 1934 and the licence issued by the Reserve Bank of India to the third respondent under section 22 of the Banking Regulation Act. Therefore, the third respondent bank is bound to follow the policy laid down by the W.P.(C) No.19039 of 2010 11 Reserve Bank of India and the directions issued by the Reserve Bank of India. The third respondent bank has issued Ext.P10 circular dated 6.8.2001 laying down the guidelines regarding disbursement of loans and advances to individuals and companies in tune with the guidelines issued by the NABARD. Ext.P10 was approved by the executive committee of the third respondent bank at its meeting held on 16.7.2001. Paragraphs 9, 10 and 11 of Ext.P10 read as follows:- “9. Proposals from sick units/NPA should not be considered as it is not prudent for the Bank to take over such liabilities of other Commercial Banks/Financial Institutions as part of any settlement as per NABARD/RBI guidelines. 10. In line with the guidelines issued by NABARD proposals for take over of only the performing assets of other Banks alone may be considered. 11. In the case of an existing unit having financial assistance from other Banks/institutions a satisfactory confidential credit opinion should also be insisted for considering the application.” 11. The third respondent bank has stated in paragraph 8 of the counter affidavit in categorical terms that as per the loan sanction guidelines of the bank, there is no bar for the bank to take W.P.(C) No.19039 of 2010 12 over loans availed from other banks provided the asset is a performing/standard asset and does not come within the non- performing asset category. As regards the alleged violation of the CMA guidelines issued by the fifth respondent bank, it is stated that even as per the CMA guidelines, the third respondent can sanction a loan of Rs.26.93 crores to the petitioner and that the variation is only 0.07 crores which is negligible. The tone and tenor of the counter affidavit filed by the third respondent is that but for the intervention of the Registrar of Co-operative Societies it would have proceeded to disburse the loan applied for by the petitioner. The stand of the fifth respondent, the NABARD, in its counter affidavit is that in the matter of sanction of loans, the third respondent will have to comply with Ext.P4 revised guidelines and that as per the said guidelines, the third respondent bank can sanction only a maximum of Rs.2693.31 lakhs as loan. The stand taken by the fifth respondent is that they have advised the third respondent to comply with the guidelines. The fifth respondent justifies Ext.P3 letter on the ground that under section 35 of the Banking Regulation Act, 1949, it has been entrusted with the W.P.(C) No.19039 of 2010 13 power to inspect State Co-operative Banks and to issue guidelines laying down the unit wise exposure norms. During the course of arguments, the learned counsel for the petitioner submitted that the petitioner has no objection to the third respondent bank acting in accordance with Ext.P4 revised guidelines and acting as directed by the fifth respondent in Ext.P3 letter. The Registrar of Co-operative Societies has however taken the stand that the third respondent bank cannot take over a loan sanctioned by another bank. The Registrar of Co-operative Societies has while taking such a stand failed to take note of the fact that in Ext.P4 guidelines issued by the NABARD, there is no such restriction and that even going by Ext.P10 guidelines issued by the third respondent bank itself, it can take over loans advanced by other banks if the asset is a performing asset. Further, there is no express provision either in the Kerala Co-operative Societies Act or the Rules framed thereunder prohibiting the third respondent bank from taking over loans disbursed by other banks and financial institutions. In such circumstances, I am of the considered opinion that the stand taken by the Registrar of Co-operative Societies in W.P.(C) No.19039 of 2010 14 Ext.P5 letter cannot be sustained. Whether, having regard to the various terms and conditions stipulated in Ext.P10 and the decision taken by the Board of Directors of the third respondent bank at its meeting held on 16.3.2010, the loan application submitted by the petitioner is to be further proceeded with is a matter essentially for the third respondent to consider, having due regard to the guidelines issued by the NABARD and the Reserve Bank of India from time to time. The stand taken by the Registrar of Co-operative Societies in Ext.P5 that as the Kerala Co-operative Societies Act does not envisage taking over of loans advanced by other banks and it is not the policy of the Co-operative Sector to re-finance loans, the third respondent bank cannot sanction the loan applied for by the petitioner cannot in my opinion be sustained. Both these objections cannot, in my opinion, be sustained having regard to Ext.P10 guidelines issued by the third respondent bank and the stand taken by respondents 3 and 5 in their respective counter affidavits. Necessarily therefore, it has to be held that the petitioner is entitled to have its loan application considered by the third respondent bank untrammelled by the W.P.(C) No.19039 of 2010 15 directions issued by the Registrar of Co-operative Societies in Ext.P5 letter. I accordingly dispose of the writ petition with a direction to respondents 3 and 4 to take a final decision on the petitioner's application for loan having due regard to the guidelines issued by the third respondent bank (Ext.P10) and the NABARD (Ext.P3) untrammelled by the directions issued by the Registrar of Co- operative Societies in Ext.P5 letter dated 30.3.2010 and take an appropriate decision thereon expeditiously and in any event within two months from the date on which the petitioner produces a certified copy of this judgment. P.N. RAVINDRAN, JUDGE. nj.