Legal Question in Banking Law in India

Can an assignment of debt, especially NPA be considered as a sale?


Asked on 2/08/15, 3:09 am

1 Answer from Attorneys

Fca Prashant Chavan Expert Edge LLP

08.02.2015

Dear Sir / Madam,

A legal transfer of a debt account from a creditor (assignor) to a third-party (assignee) that then becomes the rightful owner of the account for purposes of resolving the debt through collection from a debtor. In debt collections, the assignor typically shares in the receipt of any debt repayment made to the assignee by the debtor.

Supreme Court ruling : NPA Trading is legitimate !

In 2006 ICICI Bank sold a clutch of non-performing assets to Kotak Mahindra Bank. One borrower - APS Star, objected to that transfer on grounds that the Banking Regulation Act, 1949 did not permit trading in debt. The Gujarat High Court agreed with the borrower, putting a spanner in the business of NPA transfers as well as probably the business of securitization.

ICICI Bank appealed to the Supreme Court and the Apex court overturned the Gujarat High Court decision saying and I quote, �the corporate debt restructuring is one of the methods for reducing NPA's. Thus, such restructuring as a matter of banking policy cannot be treated as �trading�.'

The Supreme Court goes on to say '... it cannot be said that �transfer of debts/NPAs� inter se between banks is an activity which is impermissible under the 1949 Act.�

And finally, �The Supreme Court emphasized that debts are assets of the assignor bank. The High Court(s) has erred in not appreciating that the assignor bank is only transferring its rights under a contract and its own asset, namely, the debt as also the mortgagee�s rights in the mortgaged properties without in any manner affecting the rights of the borrower(s)/mortgagor(s) in the contract or in the assets.'

Indian Banking Association had also intervened and filed its say in the matter and the Supreme Court has basically relied on the provisions of the banking Regulation Act which gives power to the Reserve Bank to frame banking policy and issue directions to the banks. And the Supreme Court has said that these directions issued by the Reserve Bank have the force of law and the banks are bound to follow it and since the law enables the Reserve Bank to issue directions this is one of the directions issued by the Reserve Bank, a circular has been issued permitting the banks to sell NPAs to other banks and therefore that circular is valid and is within the powers of the RBI and it is not correct to say that there is no power with the banks to trade in their loans.

Regards,

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Answered on 2/08/15, 4:39 am


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