Supreme Court Clarifies One Time Settlement (OTS) Eligibility for Loan Defaulters: Bijnor Urban Cooperative Bank vs. Meenal Agarwal (2021)

Introduction

Date of the Judgment: 15 December 2021

Citation: 2021 INSC 771

Judges: M.R. Shah, J., B.V. Nagarathna, J.

Can a bank be forced to accept a One Time Settlement (OTS) from a borrower, even if the bank believes it can recover the full loan amount? The Supreme Court of India addressed this critical question in a case involving The Bijnor Urban Cooperative Bank Limited and a borrower, Meenal Agarwal. The court clarified that borrowers cannot demand OTS as a right and that banks have the discretion to decide based on their commercial wisdom and recovery prospects. The judgment was delivered by a bench comprising Justice M.R. Shah and Justice B.V. Nagarathna.

Case Background

Meenal Agarwal had obtained a loan of approximately Rs. 1 crore from The Bijnor Urban Cooperative Bank Limited. This loan account was later classified as a Non-Performing Asset (NPA). The bank initiated proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) to recover the dues. While Agarwal was servicing two other loan accounts regularly, no payments were made towards this particular loan account until she applied for an OTS.

The bank had issued an OTS scheme on 01.08.2013, which was extended till 30.11.2019. Agarwal applied for OTS on 22.07.2019. However, her application was rejected on 17.09.2019, because her account was an NPA and the bank believed they could recover the loan amount by auctioning the mortgaged property. Subsequently, Agarwal deposited Rs. 60 lakhs on 02.03.2020, after her initial OTS application was rejected. The bank’s board also resolved on 28.12.2020, that Agarwal was ineligible for OTS because the loan was fully recoverable.

Timeline:

Course of Proceedings

Agarwal initially filed a writ petition before the High Court of Judicature at Allahabad challenging the rejection of her OTS application. The High Court directed the bank to reconsider her representation after a hearing. Subsequently, after the bank rejected her application again, Agarwal filed a fresh writ petition seeking to quash the rejection orders and for a writ of mandamus to direct the bank to grant her the benefit of OTS. The High Court allowed this petition, directing the bank to positively consider her OTS application. The bank then appealed to the Supreme Court against this order.

Legal Framework

The case revolves around the One Time Settlement (OTS) scheme issued by the bank and the Reserve Bank of India (RBI) guidelines for such schemes. The OTS scheme aimed to recover non-performing assets by offering a settlement to borrowers. The scheme specified eligibility criteria, including that a willful defaulter or a person whose account is declared NPA, is not eligible. The scheme also required the bank to form a Settlement Advisory Committee to examine applications and make recommendations. The relevant clauses of the OTS scheme are as follows:

• “A large part of various types of loans dispersed from time to time by the urban co-operative banks of the state to the institutions/ members are currently in the form of time-less loans has been blocked. Despite all the efforts regarding recovery of such lapsed loans, the recovery of loans is not being done for a long time. According to the guidelines issued by the Reserve Bank of India for OTS from time to time, it has been decided to implement the revised one time settlement (OTS) for recovery of non-performing assets in the state so that serious timeless debts of the bank can be saved to get maximum recovery.”
• “This scheme in respect of all types of debts classified as doubtful or loss assets as on 31 .3.2013 on entities/individuals as per the revised guidelines by the Reserve Bank of India will apply.”
• “The following categories of defaulters will not be eligible under this scheme: 1.Willful defaulter in repayment of loan, (The person or institution who has not paid even one installment after taking the loan, he will not be able to pay the loan will be considered in the category of defaulter). 2.Cases of fraud and forgery. 3.Loans taken by salaried employees. 4.Such timeless loan which has been availed by the bank secretary / operator or whose guarantee has been taken by any director of the bank or the close relative of the operator or any institution in which the interest of the current or former director is vested. 5.Such a timeless loan whose guarantee has been given by the government. 6.Loans taken by government departments / institutions approved by the government.”
• “Accounts of non-performing assets which were or should have been classified as doubtful/loss as on 31st March 2013, the recovery of the amount will be equal to the total balance (principal and interest) in that account on the date the account is classified as doubtful and loss.”
• “Under this scheme, with the consent of the defaulter, the total amount of the settlement will have to be deposited in one lump sum, but if the defaulter is unable to deposit all the amount in one lump sum, then 25 percent of such amount till the date of the consent letter and for the recovery of remaining 75 percent, amount will have to be deposited in three equal installments over a period of one year on which interest will be payable at the rate of minimum loan interest from the date of settlement till the date of final repayment. Penal interest, legal expenses and other expenses will be waived.”
• “The Scheme will be first approved by the concerned bank management committee constituted under the provisions contained in the Uttar Pradesh Co-operative societies Act and the right to decide on one time settlement cases up to an amount of Rs 5.00 Lakhs will be there’s and for the cases involving more than Rs. 5.00 Lakhs prior approval of the Registrar Co-operative Societies, Uttar Pradesh will have to be obtained.”

Arguments

The bank argued that the High Court erred in issuing a writ of mandamus to positively consider Agarwal’s OTS application. They contended that the decision to reject her application was in line with the RBI guidelines and the OTS scheme, as she was not eligible. The bank also argued that OTS cannot be claimed as a matter of right, especially when the bank believes it can recover the full loan amount by auctioning the mortgaged property. The bank highlighted that Agarwal had not paid a single installment on the loan until after her first OTS application was rejected, and that she deposited Rs. 60 lakhs to come out of NPA status, to become eligible for OTS. The bank relied on the decisions of the Allahabad High Court in M.M. Accessories v. U.P. Financial Corporation, Kanpur, reported in AIR 2002 All 96 and Vipin Kumar Gupta v. Branch Manager, Union Bank of India, Gyanpur, reported in AIR 2004 All 319, which held that no writ of mandamus can be issued to grant OTS benefits.

Agarwal argued that the bank’s rejection of her OTS application was arbitrary and against the principles of natural justice. She contended that she had deposited more than 50% of the amount to be paid and that the bank had accepted the cheque, implying acceptance of her OTS request. She alleged that the bank was deliberately refusing to grant her the benefit of OTS to seize her property.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether benefit under the OTS Scheme can be prayed as a matter of right?
2. 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?

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

Judgment

The Court viewed the authorities as follows:

• M.M. Accessories v. U.P. Financial Corporation, Kanpur, reported in AIR 2002 All 96: The Court relied on this case to support its finding that a writ of mandamus cannot be issued to direct the grant of OTS.
• Vipin Kumar Gupta v. Branch Manager, Union Bank of India, Gyanpur, reported in AIR 2004 All 319: The Court relied on this case to support its finding that a writ of mandamus cannot be issued to direct the grant of OTS.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The eligibility criteria of the OTS scheme, which clearly stated that willful defaulters and those whose accounts are declared NPAs are not eligible.
• The fact that the borrower had not paid any installments on the loan until after her first OTS application was rejected.
• The bank’s assessment that it could recover the full loan amount by auctioning the mortgaged property.
• The principle that OTS cannot be claimed as a matter of right and that banks have the discretion to decide based on their commercial wisdom.
• The need to prevent dishonest borrowers from taking undue advantage of OTS schemes.

The ratio of Fact:Law suggests that while the factual aspects of the case were considered, the legal principles and interpretation of the OTS scheme and the powers of the High Court played a more significant role in the court’s decision.

The Court’s reasoning was based on the following points:

• “The grant of benefit under the OTS is always subject to the eligibility criteria mentioned under the OTS Scheme and the guidelines issued from time to time.”
• “If the bank/financial institution is of the opinion that the loanee has the capacity to make the payment and/or that the bank/financial institution is able to recover the entire loan amount even by auctioning the mortgaged property/secured property, either from the loanee and/or guarantor, the bank would be justified in refusing to grant the benefit under the OTS Scheme.”
• “Ultimately, 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 and having regard to the factors which are narrated hereinabove.”

Key Takeaways

• Borrowers cannot claim One Time Settlement (OTS) as a matter of right.
• Banks have the discretion to decide on OTS applications based on their commercial wisdom and recovery prospects.
• High Courts cannot issue a writ of mandamus to direct banks to positively consider OTS applications, especially if the borrower does not meet the eligibility criteria.
• The judgment emphasizes the need to prevent dishonest borrowers from taking undue advantage of OTS schemes.
• Banks are justified in refusing OTS if they believe they can recover the full loan amount by other means.

Directions

The Supreme Court did not provide any specific directions in this judgment, other than setting aside the High Court’s order.

Development of Law

The ratio decidendi of this case is that borrowers cannot claim One Time Settlement (OTS) as a matter of right and that banks have the discretion to decide on OTS applications based on their commercial wisdom and recovery prospects. This judgment reinforces the principle that banks are not obligated to accept OTS offers, especially when they believe they can recover the full loan amount through other means. The Supreme Court clarified that the High Courts should not interfere with the commercial decisions of the banks by issuing a writ of mandamus directing the bank to grant OTS.

Conclusion

The Supreme Court’s judgment in The Bijnor Urban Cooperative Bank Limited vs. Meenal Agarwal clarifies that borrowers cannot claim One Time Settlement (OTS) as a matter of right. Banks have the discretion to decide on OTS applications based on their commercial wisdom and recovery prospects. The High Court cannot issue a writ of mandamus directing banks to grant OTS, especially if the borrower does not meet the eligibility criteria. This ruling aims to prevent dishonest borrowers from exploiting OTS schemes and reinforces the importance of banks’ autonomy in recovering their dues.