Read Time: 14 minutes

Supreme Court has ruled that no borrower can, as a matter of right, pray for grant of benefit of One Time Settlement Scheme and that the bank has discretion to offer grant.

---

While considering the relevant clauses of the One Time Settlement (OTS) Scheme, the Supreme Court yesterday held that the grant of benefit of OTS Scheme cannot be prayed as a matter of right and the same is subject to fulfilling the eligibility criteria mentioned in the scheme.

"In a given case, it may happen that a person would borrow a huge amount, for example Rs. 100 crores. After availing the loan, he may deliberately not pay any amount towards installments, though able to make the payment. He would wait for the OTS Scheme and then pray for grant of benefit under the OTS Scheme under which, always a lesser amount than the amount due and payable under the loan account will have to be paid..... If it is held that the borrower can still, as a matter of right, pray for benefit under the OTS Scheme, in that case, it would be giving a premium to a dishonest borrower, who, despite the fact that he is able to make the payment and the fact that the bank is able to recover the entire loan amount even by selling the mortgaged/secured properties, either from the borrower and/or guarantor....", observed the top court.

The Supreme Court while relying on the OTS Scheme of The Bijnor Urban Cooperative Bank Limited, Bijnor, ('Bank') who had approached the court in the present case, noted that the defaulters who are ineligible under the OTS Scheme were clearly mentioned in clause 2 of the said scheme.

"A wilful defaulter in repayment of loan and a person who has not paid even a single installment after taking the loan and will not be able to pay the loan will be considered in the category of “defaulter” and shall not be eligible for grant of benefit under the OTS Scheme. Similarly, a person whose account is declared as “NPA” shall also not be eligible....", noted a bench of Justices MR Shah and BV Nagarathna.

The Court further found that as per the guidelines, the Bank was required to constitute a Settlement Advisory Committee for the purpose of examining the applications received and thereafter the said Committee had to take a decision after considering whether a defaulter is entitled to the benefit of OTS or not after considering the eligibility as per the OTS Scheme.

"While making recommendations, the Settlement Advisory Committee has to consider whether efforts have been made to recover the loan amount and the possibility of recovery has been minimized, meaning thereby if there is possibility of recovery of the amount, either by initiating appropriate proceedings or by auctioning the property mortgaged and/or the properties given as a security either by the borrower and/or by guarantor, the application submitted by the borrower for grant of benefit under the OTS Scheme can be rejected", the bench noted.

In the instant case, an appeal was filed by the Bank assailing the judgment passed by the Allahabad High Court, by which the High Court had allowed the writ petition preferred by one Meenal Agarwal and, in exercise of powers under Article 226 of the Constitution of India, issued a writ of mandamus directing the appellant – Bank to positively consider the petitioner’s application for One Time Settlement.

Agarwal had obtained a credit facility from the bank of about Rs. 1 crore. The said loan account with the Bank was categorised as “Non-Performing Asset, (NPA)”. The Bank also initiated proceedings under the provisions of SARFAESI Act, 2002.

Moreover, there were two other loan accounts also which were being regularly serviced by Agarwal, but so far as the present loan account was concerned, which was declared as NPA, not a single amount was paid till an application for extending the benefit of OTS was submitted.

The said application came to be rejected on the ground that Agarwal was not eligible for OTS and that the loan can be recovered by auction of the mortgaged property and that there are chances of recovering the loan amount and that her loan account has been declared as ‘NPA’.

The following questions were posed before the Court for its consideration:

i) Whether benefit under the OTS Scheme can be prayed as a matter of right?;
ii) Whether the High Court in exercise of powers under Article 226 of the Constitution of India can issue a writ of mandamus directing the Bank to positively consider the grant of benefit under the OTS Scheme and that too de hors the eligibility criteria mentioned under the OTS Scheme?

The High Court's response to the Bank that, there are all possibilities of recovery of the loan amount and the efforts were being made to recover the amount by initiating proceedings under the SARFAESI Act were found to be illusory and not supported by any material on record.

"Merely because the proceedings under the SARFAESI Act have remained pending for seven years, the Bank cannot be held responsible for the same. No fault of the bank can be found. What is required to be considered is a conscious decision by the Bank that the Bank will be able to recover the entire loan amount by auctioning the mortgaged property and a due application of mind by the Bank that there are all possibilities to recover the entire loan amount, instead of granting the benefit under the OTS Scheme and to recover a lesser amount", added the Court.

The top court was also of the opinion that a bank cannot be compelled to accept a lesser amount under the OTS Scheme despite the fact that the Bank is able to recover the entire loan amount by auctioning the secured property/mortgaged property.

Furthermore, the court held that no writ of mandamus can be issued by the High Court in exercise of powers under Article 226 of the Constitution of India, directing a financial institution/bank to positively grant the benefit of OTS to a borrower.

"...such a decision should be left to the commercial wisdom of the bank whose amount is involved and it is always to be presumed that the financial institution/bank shall take a prudent decision whether to grant the benefit or not under the OTS Scheme, having regard to the public interest involved...", held the court.

With this view, the impugned judgment and order passed by the High Court was found to be unsustainable and thereby quashed and set aside.

Cause Title: The Bijnor Urban Cooperative Bank Limited, Bijnor & others v. Meenal Agarwal & others