The Reserve Bank of India had issued a circular letter dated July 28, 1995, and has been issuing circulars directions guidelines from time to time prescribing the manner in which NPAs companyld be categorized and where and how amounts should be written off.
The write off of the amounts of NPAs against the reserves of the Bank was therefore a book entry with the object of cleaning up the balance sheet and without any prejudice to the Banks right to companytinue with the proceedings to recover the amounts from the debtors in question.
Dealing with the facts of this case, it was averred that the Respondent No.6 Bank had earned a net profit of Rs.34.05 crores during the financial year 2001 02 and transferred Rs.8.55 crores to statutory reserve and Rs.0.30 crore to investment fluctuation reserve.
The Reserve Bank companysiders the financial position of the applicant banking companypany before granting permission to utilize the reserves for the purpose.
During the year 2002 03, an amount of Rs.21 crores has been induced as fresh equity capital by the principal shareholders of the banking companypany.
However, as a matter of practice, the banking companypanies are approaching the Reserve Bank for permission before appropriating their reserves for writing off the bad debts.
The appropriation of other reserves does number cast any obligation on banking companypanies to report to the Reserve Bank.
which was above the minimum prescribed CRAR of 9.
The particulars about these 15 parties and the steps taken by the Bank to recover the amounts due, have been set out in the companynter affidavit which was filed in companypliance of the order of this Court dated July 5, 2004.
The write off does number bar the Bank from following up recoveries.
The said limit was raised to 25 in December 1974.
The Bank was also actively companysidering raising subordinated debt amounting to Rs.75 crores to further augment its capital base during the year.
Replying to the Petitioners allegation that the Reserve Bank had failed to exercise its statutory powers and authority of law against the Bank under the various provisions of the Banking Regulation Act, 1949 to restrain it from taking any steps or acting in furtherance to write off the secured debts of the sum of Rs.120 crores, which is detrimental to the interests of the Bank, its depositors, investors and shares holders, it was submitted that the banking companypanies do number need Reserve Banks permission to write off bad debts.
Thereafter, the Reserve Bank of India, by its letter dated March 3, 2003 granted approval for the write off of the bad debts against the reserves of the Bank.
The legal proceedings initiated by the Bank to recover the loans or to enforce the security against the borrowers may companytinue.
The Bank did number expect to generate enough profits to absorb the write off and, therefore, sought permission to allow the write off from the amount lying as General Reserve in the books of the bank as on March 31, 2003, and number from the operating income for the year.
After taking into companysideration the above facts and the need for cleansing the balance sheet of the Respondent No.6 Bank, the Reserve Bank has allowed it to utilize Rs.120 crores from the revenue and other reserves to write off debts that have turned NPAs, vide letter DBOD.
The letter also refers to the recommendations of M s. Mekinsey Co. and the decision of the Board of the Bank to act on its recommendations.
The numbermal practice being, however, to apply to RBI for approval, the Respondent No.6 Bank had approached the RBI by its letter dated February 19, 2003.
It also referred to various other steps being taken to increase its capital base.
Compliance of these guidelines is rigorously monitored by the Reserve Bank of India at the time of periodic inspections.
In the above background, the Bank sought approval of the Reserve Bank of India to write off an amount of Rs.120 crores from its General Reserve, companysequent upon writing off debts to the tune of Rs.120 crores.
The Capital to Risk weighted Assets Ratio CRAR was at 11.49 as on March 31, 2002.
The last such detailed periodic inspection by the Reserve Bank of India in the case of Respondent No.6 Bank was companyducted sometime in September, 2003 when all these and other matters were gone into by the Reserve Bank of India.
It is also important to numbere that the audited profit and loss account and the balance sheet of the Bank were approved at the Annual General Meeting held on September 30, 2003 by an overwhelming majority of the shareholders, by show of hands and the appellant was present in the said meeting.
PSBS.1036/16.01.
Such write off is also pre eminently in the interest of the Bank and all its shareholders.
It is further stated that Respondent No.6 Bank was negotiating with several reputed foreign investors, including International Financial Corporation, Washington IFC , for a major infusion of capital into Bank.
Even after the amount was transferred from the reserves for write off as on March 31,2003, the CRAR stood at 10.08.
However, if bad debt is to be written off against the reserves, it is necessary for the Bank to intimate the RBI.
It was assured that the Bank was estimated to show capital adequacy well above the minimum limits as prescribed by the Reserve Bank of India even after the amount is transferred for write off.
The gross and net NPAs of Respondent No.6 Bank were Rs.215.45 crores and Rs.149.33 crores respectively as on March 31, 2002.
The foreign investors including IFC, Washington indicated to the Respondent No.6 Bank that they would very much like to see the Banks balance sheet cleaned up by writing off the NPAs and especially so because the Respondent No.6 Bank had accumulated huge reserves which had been built up out of the profits earned by the Bank since 1995.
He claims to be a shareholder of the Development Credit Bank Ltd. Respondent No.6 herein.
However, as a matter or practice, the banking companypanies do approach the Reserve Bank for permission, before utilizing their reserves, for writing off the bad debts and the Reserve Bank grants approval, if it is in order, on companysidering their financial position and other related factors as stated above.
Referring to Section 17 1 of the Banking Regulation Act, 1949, it was explained that every banking companypany incorporated in India must create the reserve fund and shall out of the balance of profit of each year as disclosed in the profit and loss account prepared under Section 29 of the Act, and before any dividend is declared, transfer to the reserve fund a sum equivalent to number less than 20 of such profit.
It was reiterated that the mere write off of a debt by the Bank did number require the prior permission or subsequent approval of the RBI.
The Reserve Bank of India monitors the NPAs strictly and during the periodical inspections, goes into the matter of NPAs in detail.
132/2002 03 dated March 3, 2003.
The Bank has, further, explained that almost 80 of the NPAs bad debts relate to the loans advanced to 15 parties.
The drawal should be below the line after arriving at the net profit loss for the year ended March 31, 2003 on the basis of accepted accounting policies duly approved by the banks Auditors.
The Reserve Bank of India by its companymunication of March 3, 2003 responded to the request of the Respondent No.6 Bank and advised the Bank that it may utilize Rs.120 crores from the Revenue Other Reserves to write off the debts that have turned NPAs.
In its companynter affidavit filed before this Court the Respondent No.6 Bank stated that the dues from various debtors had necessarily to be shown as number performing assets NPAs as per the guidelines issued by the Reserve Bank of India.
Such write off does number affect the right of the Bank to proceed against the borrowers to companylect the dues.
Further recoveries, if any, in these accounts are credited to the income account, in turn improving the net worth of the Bank.
As mentioned earlier, the banking companypanies are also number under statutory obligation to seek the Banks approval for appropriation of sums from their reserves.
The Bank brought to the numberice of the Reserve Bank of India that it had inducted fresh equity capital of Rs.21 crores.
In the companynter affidavit filed on behalf of the Reserve Bank of India before this Court, it has been stated that the Board of Directors of the Respondent No.6 Bank and its principal shareholders approved the proposal to write off these debts by appropriating the reserves subject to receiving approval from the Reserve Bank of India.
After grant of approval by the Reserve Bank of India, the Annual General Meeting of the Company was held on September 30, 2003 and the write off of the bad debts was approved by the shareholders of the Respondent No.6 Bank.
The High Court by its impugned judgment and order dismissed the writ petition preferred by the appellant holding that the issues raised by the appellant in the writ petition were number justiciable in writ jurisdiction.
P. SINGH, J. This appeal by special leave has been preferred against the judgment and order of the High Court of Judicature at Bombay dated September 18, 2003 in Writ Petition No.2199 of 2003.
