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Co-Op banks come under Sarfaesi Act: Supreme Court

Topics Covered: Separation of powers between various organs dispute redressal mechanisms and institutions.

Co-Op banks come under Sarfaesi Act: Supreme Court

What to study?

For Prelims: Key provisions of Sarfaesi Act, about Co- op banks.

For Mains: Relevance of Sarfaesi act for cooperative banks, need for and significance.

Context: The Supreme Court has held that the cooperative banks involved in the activities related to banking are covered within the meaning of ‘banking company’ and Parliament has legislative competence to provide for procedure for recovery of loan under the Sarfaesi Act.

 What’s the issue?

The judgment came in view of several conflicting decisions by high courts on the issues of:

  1. Whether the Co-operative banks can be called ‘Banks (financial Institution)’ under the Banking Regulation Act of 1949.
  2. Whether the Parliament has legislative competence to regulate financial assets of cooperative banks formed under state law.

What has the Court said?

A five-judge Constitution bench headed by Justice Arun Mishra said,

  1. The meaning of ‘banking’ cannot be confined to a particular definition, as given in the Banking Regulation (BR) Act, 1949. The word ‘banking’ has been incorporated in Entry 45 of List I.
  2. The decision in Rustom Cavasjee Cooper (1970 verdict) vividly leaves no room for doubt that banking done by the cooperative bank is covered within the ambit of Entry 45 of List I. 
  3. Therefore, cooperative banks come under the category of banks as defined under Section 2(1)(c) of the Sarfaesi Act, and the recovery procedures mentioned under that law apply to cooperative banks as well.

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002:

  1. It allows banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans.
  2. It enables banks to reduce their non-performing assets by adopting measures for recovery or reconstruction. 
  3. It is effective only against secured loanswhere banks can enforce the underlying security.
  4. It promotes the setting up of asset reconstruction companies (ARCs) and asset securitization companies (SCs) to deal with NPAs accumulated with the banks and financial institutions.

Need for:

According to an RBI report, there were 1,551 urban cooperative banks as on 31 March 2018, and 96,612 rural cooperative banks as on 31 March 2017, with the latter accounting for 65.8% of the total asset size of all cooperative banks.

  • The recent crisis surrounding Punjab and Maharashtra Co-operative Bank Ltd and other such lenders exposed the vulnerability of cooperative banks, after the central bank superseded the lenders’ boards after uncovering several irregularities.
  • Recognizing that cooperative banks can have Sarfaesi rights should enable cooperatives get better control over handling defaults and on the negotiation table with defaulters. 

Insta Links:

Prelims Link:

  1. What are ARCs and who can set up?
  2. Can courts interfere in matters related to ARCs?
  3. What are NPAs?
  4. Definition of banking.
  5. Banking under 7th
  6. Powers of parliament under Sarfaesi act.

Mains Link:

Discuss the significance of Sarfaesi Act of 2002.

Sources: livemint.