To what extent restrictions could be imposed by RBI which may not interfere with right to continue with trade & livelihood:Punjab & Haryana HC to examine

Read Order: Avantha Holdings Limited, Gurugram And Others v. Reserve Bank Of India And Another

Tulip Kanth

Chandigarh, September 8, 2021: The Punjab and Haryana High Court has enumerated certain issues pertaining to a RBI Circular dated August 6,2020, in which it was stated that no bank shall open current accounts for customers who have availed credit facilities in the form of cash credit (CC)/ overdraft (OD) from the banking system and all transactions shall be routed through the CC/OD account.

This petition laid challenge to the very circular on the ground that it is violative of the fundamental rights of the petitioners as guaranteed to them under Article 19(1)(g) of the Constitution inasmuch as with the withdrawal of the banking facilities, it would not be able to carry on with the trade, it is currently pursuing, which is their fundamental right. This would be  moreso, when the petitioner has various disputed issues with its earlier Lending Bank, namely, Yes Bank, with which the petitioner is unable to have banking arrangements.

The petitioner mainly contended that in this Circular directions were issued primarily to the effect that no Current Accounts can be opened by a non-lending Bank for an entity having availed of credit facilities from a lending Bank.

Petitioner Company had been availing credit facilities with its lending Bank, namely, YES Bank for some time. For various reasons, the said account was declared Non Performing Asset (NPA) by YES Bank. Prior thereto, since 2007 the Company had been maintaining a Current Account with HDFC Bank (second respondent), which is a Non-Lending Bank insofar as the petitioner was concerned, as no credit facilities had been availed from the said Bank. Precisely therefore, even while YES Bank had declared the loan account of the petitioner as NPA, it continued to maintain its banking operations with HDFC Bank by operating its Current Account.

Later, as a consequence of the aforementioned circular, the petitioner received a communication from HDFC Bank seeking to close its current account. Since, representations and reply by the petitioners to HDFC Bank did not bring out the desired results, therefore, the present petition had been filed.

The petitioner’s counsel contended that Yes Bank is stated to have filed a recovery suit before Debts Recovery Tribunal which is yet to be adjudicated.

It was submitted that withdrawal of banking facilities by HDFC Bank would practically render it, without any banking system and will choke the business. RBI could not have forced the petitioner to stay along with a banker with whom it has  serious disputes. Moreover, the instructions ought to be treated prospective in nature and would not apply to the existing current accounts.

Reserve Bank of India appearing on advance notice through Deepinder Singh Patwalia, Senior Advocate, raised a preliminary objection regarding maintainability of the present petition being premature. It was also stated that if the petitioner was aggrieved it could have raised an issue with RBI which could have been examined. Moreover, RBI is open for any amendments if any, as may be required to operationalize the circular in a non-disruptive manner.

The High Court was prima facie, of the view that the RBI is statutory body entrusted with the duty to supervise the banking functions and to maintain banking standards in best interest all concerned.

The Division Bench of Justice Jaswant Singh and Justice Sant Prakash found that the purpose of introducing the said Instructions were to ensure that the borrower entities maintain all their accounts with the lending institutions only to ensure financial discipline. The object is that a defaulter entity does not shift on to another bank to conveniently proceed to perform its operations, while the lending bank is left to its remedy to recover the amounts so exposed to such borrower. The circular is intended to bring out some accountability of such borrower entity, opined the Bench.

The HC also noted that Para Nos. 2 & 4 of the Instructions dated August 6, 2020, clearly state that it would apply to all the current accounts, including the ones which are already in existence. It was also clarified that that the impugned circular is neither prospective or retrospective but is rather retroactive in its operation and applies to all accounts in presenti.

The Division Bench further observed that since the validity of the circular itself has been challenged, what is required to be examined is to what extent such restrictions could be imposed by the Reserve Bank of India (RBI), which may not interfere with the right of a citizen to continue with its trade and livelihood, especially in the circumstances, when there are existing disputes with the Lender.

The respondents would also have to address to the issue as to what is the Grievance Redressal Mechanism under these set of circulars, which practically lay down the entire Code and Procedure for Opening and Maintaining of Current Accounts, which we find missing in these circulars, added the Bench.

“We have noticed the laudable object of these circulars, but it needs to be balanced with the practical issues at the ground level as well, i.e. to ensure that genuine entrepreneurs are not choked to death with this large sweep of wave. In a case, where an entrepreneur may be genuinely aggrieved of its lender bank and has resorted to legal remedies, by the time the lis would be adjudicated if it is not left with any banking arrangement, it may not even survive till that time., the High Court pointed out. 

Listing the matter on September 16,2021, the Court held that RBI would also require to reconcile its existing circulars providing restructuring and revival of NPA accounts (including the Master Circular – Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated July 1,2015), with the impugned circulars, as it may not seem to be possible to restructure an existing NPA account, without any banking facility. This is especially when after NPA, all Cash Credit Accounts / Overdraft Accounts become unavailable due to existing overdues.