IMPORTANT POINT
Writing off of non-performing assets (Debts) by a Bank is an exercise undertaken to clean the balance sheet and is an internal accounting procedure and it does not require permission of Reserve Bank of India.

Headnote:Banking Regulation Act, 1949 — Sections 17 — Securitisation Act, 2002 — Sections 13 and 14 — Recovery of Debts Due to Banks Act, 1993 — Sections 19 and 31A — Request by Respondent No. 6 Bank to Reserve Bank of India to grant permission and allow Bank to write off and from its financial records, debts that had turned non-performing assets over the years amounting to Rs. 120 crores — Writ petition by appellant, a shareholder of respondent No. 6 Bank, that RBI illegally approved the proposal of Bank without following proper procedure under the Acts — High Court dismissed the writ holding that issues raised in writ were not justiciable no writ jurisdiction — Appeal — Writing off of Non Performing Assets was an exercise undertaken to clean the balance sheet and was an internal accounting procedure — It did not require permission of Reserve Bank of India — Permission asked for by Respondent Bank was by way of abundant caution — No justification for grievance that in granting approval to bank to write off its non-performing assets, RBI committed breach of any statutory provision or acted illegally or arbitrarily in the matter — Despite writing off the debt, was still recoverable by Bank.
       Held : It will thus appear from the facts noticed above that the writing off of NPAs is an exercise undertaken to clean the balance sheet, and is an internal accounting procedure. It does not require the permission of the Reserve Bank of India but as explained by the Reserve Bank of India, banks usually make such a request as a matter of practice and permissions are granted by the Reserve Bank after considering all relevant aspects of the matter. In the case where a banking company appropriates sums from the reserve fund or the share premium account, it is required to report to the Reserve Bank of India within 21 days explaining the circumstances relating to such appropriation.(Para 14)
       In the instant case also since the Respondent No. 6 proposes to appropriate the sums from their reserves, it sought by way of abundant caution the approval of the Reserve Bank of India. There is, therefore, no justification for the grievance that in granting approval to the bank to write off its non-performing assets to the tune of Rs. 120 crores, the Reserve Bank of India committed breach of any statutory provision or acted illegally or arbitrarily in the matter. There is not even an allegation that the Reserve Bank of India acted on extraneous consideration, or that its action was malafide.(Para 15)
       In fact and in law it is not so. Despite writing off the debt is still recoverable by the Bank. The affidavit filed by the Bank also discloses the steps which are being taken to realize the dues from the debtor. Some amounts have been recovered over the years though the figure does not appear very impressive. Even so, steps are being taken to recover the dues whenever possible and Respondent No. 6 Bank has furnished particulars of the various proceedings pending for recovery of such debts. The write off is only an internal accounting procedure to clean up the balance sheet, and it does not affect the right of the creditor to proceed against the borrower to realize his dues. Moreover, it does give some benefit to the Bank under the Income Tax Laws because after write off tax is payable only on the amount recovered as and when recovery is made.(Para 17)
       It is no doubt true that amounts advance by banks must be recovered. Such debts should not be permitted to become non-performing assets. However, one cannot lose sight of the realities of the situation. Having regard to the nature of banking business, it is possible that the Bank may commit an error of judgment in advancing funds to a particular party or industry. It may be that on account of other factors beyond its control, or even beyond the control of the borrowers, it may become difficult, or even impossible to recover the loan advanced in accordance with the schedule of re-payment, or to recover the loan at all. There are risks inherent in the banking business, though a wise banker with foresight and anticipation may reduce such risks to the minimum level. One cannot however, jump to the conclusion that only because some of the debts have become bad, there is lack of proper management of the Bank, or that the conduct of the Bank is dishonest or mala-fide. In a given case, there may be evidence of such mis-management or dishonest conduct, but in the absence of any such accusation one cannot draw an adverse inference against the Bank. In the instant case, though some of the debts have to be written off, with little chance of substantial recovery, we cannot lose sight of the fact that the Bank has general considerable operating profits and has built up a substantial general reserve over the years, against which the debts written off have been adjusted. We, therefore, find no merit in this appeal. (Paras 27 and 28)

JUDGMENT

B.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. 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 not justiciable in writ jurisdiction.

2. The appellant has appeared before us in person and argued his appeal. He claims to be a shareholder of the Development Credit Bank Ltd. Respondent No. 6 herein. In sum and substance, the grievance of the appellant in the writ petition was that the Reserve Bank of India being the statutory and regulatory authority, illegally approved the proposal of the Respondent No. 6 Development Credit Bank Ltd. for writing off of debts, amounting to Rs. 120 crores, of the Bank without following the proper procedures prescribed under the provisions of Sections 13 and 14 of the Securitisation Act, 2002 and Sections 19 and 31A of the Recovery of Debts Due to Banks Act, 1993.

3. To appreciate the grievance of the appellant it is necessary to notice the background in which the controversy arises.

4. On February 19, 2003, Respondent No. 6 Bank made a request to the Reserve Bank of India to grant permission and allow the Bank to write off from its financial records, debts that had turned non-performing assets over the years amounting to Rs. 120 crores. It was stated in the letter of request, that to institute better balance sheet management and a tighter control environment, the Board of Directors and the principal shareholders of the Bank in Finance had approved the bank’s strategy to write off these debts, subjects to approval of the Reserve Bank of India. The Bank had taken necessary steps to recover the dues and will continue to take follow up action, but there appeared no prospect of early recoveries from some of these accounts. The Bank did not 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 not from the operating income for the year. 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 Bank brought to the notice of the Reserve Bank of India that it had inducted fresh equity capital of Rs. 21 crores. The Bank was also actively considering raising subordinated debt amounting to Rs. 75 crores to further augment its capital base during the year. It also referred to various other steps being taken to increase its capital base. 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. 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, consequent upon writing off debts to the tune of Rs. 120 crores.

5. The Reserve Bank of India by its communication 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. 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 above adjustment should be prominently disclosed in the Notes to Accounts.

6. 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.

7. In the counter affidavit filed on behalf of the Reserve Bank of India before this Court, it has been stated that the Boa

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2006 Supreme(SC) 481

IMPORTANT POINTWriting off of non-performing assets (Debts) by a Bank is an exercise undertaken to clean the balance sheet and is an internal accounting procedure and it does not require permission of Reserve Bank of India.

IMPORTANT POINT
Writing off of non-performing assets (Debts) by a Bank is an exercise undertaken to clean the balance sheet and is an internal accounting procedure and it does not require permission of Reserve Bank of India.