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By Venkatesh Nayak*
Media reports indicate that the Reserve Bank of India (RBI), India’s banker to banks (Central Bank) has submitted to the Hon’ble Supreme Court of India, in sealed cover, a list of defaulters on loans, worth Rs. 500 crore or more (USD 75.3 million approx at current exchange rate), taken from those banks. The Apex Court sought this information from the RBI after it reportedly took suo motu cognizance of a recent news report published in a popular English language daily about how a majority of the public sector banks had written off bad debts to the tune of Rs. 1.14 lakh crores (USD 17.18 billion at current exchange rate) between the financial years 2013-15. This national daily had sourced this data through The Right to Information Act, 2005 (RTI Act).
In order to justify its action of submitting the names of loan defaulters in sealed cover, RBI argued in its affidavit that public disclosure would dent the ‘fiduciary relationship‘ that it has with the commercial banks and in turn the ‘fiduciary relationship’ that those banks have with their borrowers. Reacting to this justification the said newspaper has rightly pointed to a December 2015 judgement of the Apex Court in which it ruled that the relationship between RBI and the banks that it regulates, is not ‘fiduciary’ in nature.
Readers might like to see my contemporaneous email alert analysing this judgement delivered in the matter of Reserve Bank of India vs Jayantilal N Mistry and related cases [Transferred Cases (Civil) Nos. 91-101, judgement dated 16/12/2016] for details of how the Apex Court ruled. The Court’s ruling, created some heart burn amongst those whose interests it affected adversely, and a lot of cheer amongst pro-transparency activists like me.
“25. Customer Confidentiality Obligations
The scope of the secrecy law in India has generally followed the common law principles based on implied contract. The bankers’ obligation to maintain secrecy arises out of the contractual relationship between the banker and customer, and as such no information should be divulged to third parties except under circumstances which are well defined. The following exceptions to the said rule are normally accepted:
(i) Where disclosure is under compulsion of law
(ii) Where there is duty to the public to disclose
(iii) Where interest of bank requires disclosure and
(iv) Where the disclosure is made with the express or implied consent of the customer.”
The RBI has issued this circular every year to all Indian and foreign banks that fall under its regulatory control updating information when necessary. However, the paragraph relating to “customer confidentiality” has remained the same, since at least 2011- the oldest year for which I found a version of the Master Circular. This Master Circular makes it clear that the term: “customer”, includes both ‘depositors’ and ‘borrowers’. Given its own annual exhortation to other Banks, the characterisation of a bank’s relationship with its borrowers, particularly those who defaulted on repayment of loans as ‘contractual’ in nature clearly contradicts what it said before the Apex Court. RBI needs to explain to its depositors whose hard earned money it lends out, why it is pushing for double standards – one for internal operations and one when faced with litigation launched in public interest. According to media reports cited above, the Apex Court’s latest actions are in connection with a public interest litigation suit of 2003 vintage filed by the Centre for Public Interest Litigation led by the renowned Supreme Court advocate Mr. Prashant Bhushan.
“2.1.3 Wilful Default: A ‘wilful default’ would be deemed to have occurred if any of the following events is noted:
(a) The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations.
(b) The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
(c) The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
(d) The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank / lender.
The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions / incidents. The default to be categorised as wilful must be intentional, deliberate and calculated.”
There is very little information in the public domain about whether these banks checked whether the defaulters were ‘wilful defaulters’ or not before writing off bad loans or pushing for debt restructuring. 10 public sector banks rejected my request for this information in 2014. They cited “commercial confidence” covered by Section 8(1)(d) of the RTI Act as the reason for refusing access to names of defaulters and the manner in which bad loans were restructured.
So, in response to RTI applications these banks claimed “commercial confidence”, while there is no mention of “fiduciary relationship” to refuse disclosure of information about defaulters and non-performing assets (NPAs). However, the RBI now claims “fiduciary relationship” as a shield before the Apex Court. Unless RBI’s affidavit submitted to Court is placed in the public domain, it is not possible to say with certainty whether it claimed “commercial confidentiality” also as a ground for seeking to keep the names of defaulters secret. But what is without doubt – RBI and the banks seem to be bending over both backwards and forwards, without being able to decide which way for sure, to justify secrecy for ‘loan defaulter information’ thereby making excuses for their own poor performance.
Borrowers do not mint money (although the current state of affairs seems to allude otherwise). They are given as loans, such funds the citizenry deposits in these banks. The entire banking sector, with a few exceptions, is in the private sector in India, unlike in several other developed and developing countries. Surely, citizen depositors have the right to know what banks are doing with their money. If one were to concede RBI’s argument about “fiduciary relationship” for the sake of argument, banks would then have a higher ‘fiduciary duty’ towards depositors, period.
A bank’s relationship with its borrowers cannot take precedence over the relationship with depositors who put their money in these banks trusting them to make the right use of it. If hardworking people did not save money and deposit it with Banks, they would have nothing but stones and grass to lend to borrowers. So RBI must pay also attention to the “fiduciary relationship” to which it is obligated in relation to its depositors.
Fiduciary relationships are a sub-category of power-dependency relationships where the fiduciary (agent) is required to act in the best interests of the beneficiary (principal).Such relationships create specific duties which the fiduciary must perform:
Media reports indicate that the Reserve Bank of India (RBI), India’s banker to banks (Central Bank) has submitted to the Hon’ble Supreme Court of India, in sealed cover, a list of defaulters on loans, worth Rs. 500 crore or more (USD 75.3 million approx at current exchange rate), taken from those banks. The Apex Court sought this information from the RBI after it reportedly took suo motu cognizance of a recent news report published in a popular English language daily about how a majority of the public sector banks had written off bad debts to the tune of Rs. 1.14 lakh crores (USD 17.18 billion at current exchange rate) between the financial years 2013-15. This national daily had sourced this data through The Right to Information Act, 2005 (RTI Act).
In order to justify its action of submitting the names of loan defaulters in sealed cover, RBI argued in its affidavit that public disclosure would dent the ‘fiduciary relationship‘ that it has with the commercial banks and in turn the ‘fiduciary relationship’ that those banks have with their borrowers. Reacting to this justification the said newspaper has rightly pointed to a December 2015 judgement of the Apex Court in which it ruled that the relationship between RBI and the banks that it regulates, is not ‘fiduciary’ in nature.
Readers might like to see my contemporaneous email alert analysing this judgement delivered in the matter of Reserve Bank of India vs Jayantilal N Mistry and related cases [Transferred Cases (Civil) Nos. 91-101, judgement dated 16/12/2016] for details of how the Apex Court ruled. The Court’s ruling, created some heart burn amongst those whose interests it affected adversely, and a lot of cheer amongst pro-transparency activists like me.
What is problematic with the RBI’s latest stance?
The RBI’s own Master Circular relating to customer service issued from time to time, the latest version being put out in July 2015, makes its stance before the Hon’ble Supreme Court like an attempt to mislead. Paragraph #25 of this Master Circular reads as follows:“25. Customer Confidentiality Obligations
The scope of the secrecy law in India has generally followed the common law principles based on implied contract. The bankers’ obligation to maintain secrecy arises out of the contractual relationship between the banker and customer, and as such no information should be divulged to third parties except under circumstances which are well defined. The following exceptions to the said rule are normally accepted:
(i) Where disclosure is under compulsion of law
(ii) Where there is duty to the public to disclose
(iii) Where interest of bank requires disclosure and
(iv) Where the disclosure is made with the express or implied consent of the customer.”
The RBI has issued this circular every year to all Indian and foreign banks that fall under its regulatory control updating information when necessary. However, the paragraph relating to “customer confidentiality” has remained the same, since at least 2011- the oldest year for which I found a version of the Master Circular. This Master Circular makes it clear that the term: “customer”, includes both ‘depositors’ and ‘borrowers’. Given its own annual exhortation to other Banks, the characterisation of a bank’s relationship with its borrowers, particularly those who defaulted on repayment of loans as ‘contractual’ in nature clearly contradicts what it said before the Apex Court. RBI needs to explain to its depositors whose hard earned money it lends out, why it is pushing for double standards – one for internal operations and one when faced with litigation launched in public interest. According to media reports cited above, the Apex Court’s latest actions are in connection with a public interest litigation suit of 2003 vintage filed by the Centre for Public Interest Litigation led by the renowned Supreme Court advocate Mr. Prashant Bhushan.
Who is a “wilful defaulter”?
Until the Apex Court directs the public disclosure of the names of defaulters contained in sealed cover handed over to it by RBI, it will not be known how many of them are “wilful defaulters”. Another RBI Master Circular describes ‘wilful default’ in the following manner:“2.1.3 Wilful Default: A ‘wilful default’ would be deemed to have occurred if any of the following events is noted:
(a) The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations.
(b) The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
(c) The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
(d) The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank / lender.
The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions / incidents. The default to be categorised as wilful must be intentional, deliberate and calculated.”
There is very little information in the public domain about whether these banks checked whether the defaulters were ‘wilful defaulters’ or not before writing off bad loans or pushing for debt restructuring. 10 public sector banks rejected my request for this information in 2014. They cited “commercial confidence” covered by Section 8(1)(d) of the RTI Act as the reason for refusing access to names of defaulters and the manner in which bad loans were restructured.
So, in response to RTI applications these banks claimed “commercial confidence”, while there is no mention of “fiduciary relationship” to refuse disclosure of information about defaulters and non-performing assets (NPAs). However, the RBI now claims “fiduciary relationship” as a shield before the Apex Court. Unless RBI’s affidavit submitted to Court is placed in the public domain, it is not possible to say with certainty whether it claimed “commercial confidentiality” also as a ground for seeking to keep the names of defaulters secret. But what is without doubt – RBI and the banks seem to be bending over both backwards and forwards, without being able to decide which way for sure, to justify secrecy for ‘loan defaulter information’ thereby making excuses for their own poor performance.
Why should the defaulter’s list be in the public domain?
Nevertheless, why should ‘fiduciary relationship’ be claimed to protect “wilful defaulters” (assuming that there are some on the RBI’s list) when the borrowers have committed one more more of the actions listed in the Master Circular quoted above? Fiduciary relationship is a relationship based on mutual trust and everything that is done in it must be done lawfully. The law does not permit any kind of protection based on trust for illegal or wrongful actions.Borrowers do not mint money (although the current state of affairs seems to allude otherwise). They are given as loans, such funds the citizenry deposits in these banks. The entire banking sector, with a few exceptions, is in the private sector in India, unlike in several other developed and developing countries. Surely, citizen depositors have the right to know what banks are doing with their money. If one were to concede RBI’s argument about “fiduciary relationship” for the sake of argument, banks would then have a higher ‘fiduciary duty’ towards depositors, period.
A bank’s relationship with its borrowers cannot take precedence over the relationship with depositors who put their money in these banks trusting them to make the right use of it. If hardworking people did not save money and deposit it with Banks, they would have nothing but stones and grass to lend to borrowers. So RBI must pay also attention to the “fiduciary relationship” to which it is obligated in relation to its depositors.
Fiduciary relationships are a sub-category of power-dependency relationships where the fiduciary (agent) is required to act in the best interests of the beneficiary (principal).Such relationships create specific duties which the fiduciary must perform:
a) Duty of care (highest standard) towards the beneficiary;
b) Duty of loyalty towards the beneficiary;
c) Duty to act in the best interests of the beneficiary;
d) Duty of confidentiality (of information provided by or relating to the beneficiary);
e) Duty of disclosure of all facts and conflict of interests to the beneficiary; and
f) Duty to use one’s discretionary power in the best interests of the beneficiary.
If the Apex Court reverses its stance taken in Jayantilal N Mistry and decided to characterise the relationship between banks and borrowers are being fiduciary in nature at a later date, banks would still have a duty of disclosure towards their depositors as to why such a large volume of loans went bad. Readers might like to go through an interesting case decided by the Supreme Court of Canada where it reiterated some basic principles underlying a “fiduciary relationship” {Galambos v. Perez, 2009 SCC 48, [2009] 3 S.C.R. 247}
Courts have taken a reasonable stand in India regarding transparency of defaulting borrowers. In the matter of Mr. K J Doraiswamy vs The Assistant General Manager, State Bank of India Erode Branch & Ors., [(2006) 4 MLJ 1877] A single Judge Bench of the Madras High Court upheld the Respondent Bank’s right to publish the photograph of a borrower who had defaulted on repayment of a loan along with details of the property that had been pledged as security for the loan. The Court ruled as follows:
25. Once it is seen that the right to privacy is not an absolute or inviolable right, then the next question that falls for consideration is as to whether the Bank, with whom the customer has a fiduciary relationship, is entitled to disclose or publicise the information in their possession, resulting in a breach of the duty of secrecy and confidentiality . Dealing with the duty of the Bank to maintain secrecy qua its customer, it was held in Shankarlal Agarwalla v. State Bank of India AIR 1987 Calcutta 29, as follows:
11. In the case reported in (1924) 1 KB 461 at 472 Tournier v. National Provincial and Union Bank of England it was held that under four heads the bank could disclose such information namely – (a) where the disclosure was under compulsion by law, (b) where there was a duty to the public to disclosure, (c) where the interest of the bank require disclosure and (d) where the disclosure was made by express or implied consent of the customer. It was held:
“An instance of the first class is the duty to obey an order under the Banker’s Books Evidence Act. Many instances of the second class might by given. They may be summed up in the language of Lord Finlay in Weld-Blundell v. Stephens where he speaks of cases where a higher duty than the private duty is involved, as where “danger to the State or public duty may supersede the duty of the agent to his principal”. A simple instance of the third class is where a bank issues a writ claiming payment of an overdraft stating on the face of the writ the amount of the overdraft. The familiar instance of the last class is where the customer authorises a reference to his banker.”
26. Thus even the English law recognized that the ‘duty of the Bank to disclose information to the public’ or the ‘interest of the Bank requiring disclosure’ supercedes the duty of secrecy….
30. Coming to the authority of law, by which the Bank may be allowed to publish the photograph of the defaulter, it is seen that Section 13(4) of the SARFAESI Act authorizes the Bank to take possession of the secured asset and sell it. The procedure for such sale is prescribed under Rule 8 of the Security Interest (Enforcement) Rules, 2002. Sub-rule (1) of Rule 8 reads as under:
8. Sale of immovable secured assets.–(1) Where the secured asset is an immovable property, the authorised officer shall take or cause to be taken possession, by delivering a possession notice prepared as nearly as possible in Appendix IV to these rules, to the borrower and by affixing the possession notice on the outer door or at such conspicuous place of the property.
Appendix IV to the said Rules which contains the Form in which the Possession Notice is to be issued by the Bank, steers clear any doubt that one may have. Para 2 and 3 of the Format of Notice under Appendix IV reads as follows:
"The borrower having failed to repay the amount, notice is hereby given to the borrower and the public in general that the undersigned has taken possession of the property described herein below in exercise of powers conferred on him/her under Section 13(4) of the said Ordinance read with rule 9 of the said Rules on this… day… of the year….
The borrower in particular and the public in general is hereby cautioned not to deal with the property and any dealings with the property will be subject to the charge of the… (name of the Institution) for an amount Rs… and interest thereon.
Thus the Statutory rules themselves provide for a notice not merely to the defaulting borrower, but also to the public in general. Therefore the threat held out by the Bank to publish the photograph of the borrower and the surety, is also authorized by the statutory rules.”
Although the Court described the relationship between a bank and its borrower as being ‘fiduciary’ in nature, this may not be treated as a conclusive pronouncement as the RBI’s Master Circular on Customer Service does not seem to have been presented before the Court by any party to show that such relationship was not fiduciary in nature.
Further, the Madras High Court examined various provisions of the RTI Act although (this law was not involved in any manner in the debt recovery proceedings) and ruled that the “right to privacy” of the defaulter fades away in front of RTI Act and the “larger public interest”. In conclusion, the Court observed:
“32. If borrowers could find newer and newer methods to avoid repayment of the loans, the Banks are also entitled to invent novel methods to recover their dues….Hence I find no violation of any right or legal provision in the threat held out by the respondent Bank to publish the photographs of the borrower and the surety for the non repayment of the loan. Consequently the writ petition fails and is dismissed. No costs. Consequently, connected miscellaneous petitions are also dismissed.”
The RBI, as a statutory regulator, must pay attention to the developing case law and act in the larger public interest, namely that of the citizenry rather than in favour or a narrow band of interests. The Central Government must also clarify whether its promise of “sab ka saath, sab ka vikas” (with all development for all) will include loan defaulters also, particularly wilful defaulters who seem to have a ‘dented and painted relationship’ with some banks which is now being characterised as ‘fiduciary’ in nature.
If Marcellus were standing guard on the ramparts of the Delhi’s Red Fort today, he would have surely exclaimed: “Something is rotting in the state of India” (apologies to William Shakespeare’s “Hamlet”). The Central Government has a duty to act in the larger public interest. In its election manifesto of 2014, the Bharatiya Janata Party – the largest constituent of the NDA Government- promised to act on NPAs as follows:
“NPAs have increased sharply over the past few years and the trend continues. BJP will take necessary steps to reduce NPAs in Banking sector.”
An important step in this direction is undoubtedly greater transparency about the identity of loan defaulters and the placement of more and more official documents (and not mere press statements) explaining what is being done to achieve this goal.
—
*Programme Coordinator, Access to Information Programme, Commonwealth Human Rights Initiative, New Delhi
b) Duty of loyalty towards the beneficiary;
c) Duty to act in the best interests of the beneficiary;
d) Duty of confidentiality (of information provided by or relating to the beneficiary);
e) Duty of disclosure of all facts and conflict of interests to the beneficiary; and
f) Duty to use one’s discretionary power in the best interests of the beneficiary.
If the Apex Court reverses its stance taken in Jayantilal N Mistry and decided to characterise the relationship between banks and borrowers are being fiduciary in nature at a later date, banks would still have a duty of disclosure towards their depositors as to why such a large volume of loans went bad. Readers might like to go through an interesting case decided by the Supreme Court of Canada where it reiterated some basic principles underlying a “fiduciary relationship” {Galambos v. Perez, 2009 SCC 48, [2009] 3 S.C.R. 247}
Courts have taken a reasonable stand in India regarding transparency of defaulting borrowers. In the matter of Mr. K J Doraiswamy vs The Assistant General Manager, State Bank of India Erode Branch & Ors., [(2006) 4 MLJ 1877] A single Judge Bench of the Madras High Court upheld the Respondent Bank’s right to publish the photograph of a borrower who had defaulted on repayment of a loan along with details of the property that had been pledged as security for the loan. The Court ruled as follows:
25. Once it is seen that the right to privacy is not an absolute or inviolable right, then the next question that falls for consideration is as to whether the Bank, with whom the customer has a fiduciary relationship, is entitled to disclose or publicise the information in their possession, resulting in a breach of the duty of secrecy and confidentiality . Dealing with the duty of the Bank to maintain secrecy qua its customer, it was held in Shankarlal Agarwalla v. State Bank of India AIR 1987 Calcutta 29, as follows:
11. In the case reported in (1924) 1 KB 461 at 472 Tournier v. National Provincial and Union Bank of England it was held that under four heads the bank could disclose such information namely – (a) where the disclosure was under compulsion by law, (b) where there was a duty to the public to disclosure, (c) where the interest of the bank require disclosure and (d) where the disclosure was made by express or implied consent of the customer. It was held:
“An instance of the first class is the duty to obey an order under the Banker’s Books Evidence Act. Many instances of the second class might by given. They may be summed up in the language of Lord Finlay in Weld-Blundell v. Stephens where he speaks of cases where a higher duty than the private duty is involved, as where “danger to the State or public duty may supersede the duty of the agent to his principal”. A simple instance of the third class is where a bank issues a writ claiming payment of an overdraft stating on the face of the writ the amount of the overdraft. The familiar instance of the last class is where the customer authorises a reference to his banker.”
26. Thus even the English law recognized that the ‘duty of the Bank to disclose information to the public’ or the ‘interest of the Bank requiring disclosure’ supercedes the duty of secrecy….
30. Coming to the authority of law, by which the Bank may be allowed to publish the photograph of the defaulter, it is seen that Section 13(4) of the SARFAESI Act authorizes the Bank to take possession of the secured asset and sell it. The procedure for such sale is prescribed under Rule 8 of the Security Interest (Enforcement) Rules, 2002. Sub-rule (1) of Rule 8 reads as under:
8. Sale of immovable secured assets.–(1) Where the secured asset is an immovable property, the authorised officer shall take or cause to be taken possession, by delivering a possession notice prepared as nearly as possible in Appendix IV to these rules, to the borrower and by affixing the possession notice on the outer door or at such conspicuous place of the property.
Appendix IV to the said Rules which contains the Form in which the Possession Notice is to be issued by the Bank, steers clear any doubt that one may have. Para 2 and 3 of the Format of Notice under Appendix IV reads as follows:
"The borrower having failed to repay the amount, notice is hereby given to the borrower and the public in general that the undersigned has taken possession of the property described herein below in exercise of powers conferred on him/her under Section 13(4) of the said Ordinance read with rule 9 of the said Rules on this… day… of the year….
The borrower in particular and the public in general is hereby cautioned not to deal with the property and any dealings with the property will be subject to the charge of the… (name of the Institution) for an amount Rs… and interest thereon.
Thus the Statutory rules themselves provide for a notice not merely to the defaulting borrower, but also to the public in general. Therefore the threat held out by the Bank to publish the photograph of the borrower and the surety, is also authorized by the statutory rules.”
Although the Court described the relationship between a bank and its borrower as being ‘fiduciary’ in nature, this may not be treated as a conclusive pronouncement as the RBI’s Master Circular on Customer Service does not seem to have been presented before the Court by any party to show that such relationship was not fiduciary in nature.
Further, the Madras High Court examined various provisions of the RTI Act although (this law was not involved in any manner in the debt recovery proceedings) and ruled that the “right to privacy” of the defaulter fades away in front of RTI Act and the “larger public interest”. In conclusion, the Court observed:
“32. If borrowers could find newer and newer methods to avoid repayment of the loans, the Banks are also entitled to invent novel methods to recover their dues….Hence I find no violation of any right or legal provision in the threat held out by the respondent Bank to publish the photographs of the borrower and the surety for the non repayment of the loan. Consequently the writ petition fails and is dismissed. No costs. Consequently, connected miscellaneous petitions are also dismissed.”
The RBI, as a statutory regulator, must pay attention to the developing case law and act in the larger public interest, namely that of the citizenry rather than in favour or a narrow band of interests. The Central Government must also clarify whether its promise of “sab ka saath, sab ka vikas” (with all development for all) will include loan defaulters also, particularly wilful defaulters who seem to have a ‘dented and painted relationship’ with some banks which is now being characterised as ‘fiduciary’ in nature.
If Marcellus were standing guard on the ramparts of the Delhi’s Red Fort today, he would have surely exclaimed: “Something is rotting in the state of India” (apologies to William Shakespeare’s “Hamlet”). The Central Government has a duty to act in the larger public interest. In its election manifesto of 2014, the Bharatiya Janata Party – the largest constituent of the NDA Government- promised to act on NPAs as follows:
“NPAs have increased sharply over the past few years and the trend continues. BJP will take necessary steps to reduce NPAs in Banking sector.”
An important step in this direction is undoubtedly greater transparency about the identity of loan defaulters and the placement of more and more official documents (and not mere press statements) explaining what is being done to achieve this goal.
—
*Programme Coordinator, Access to Information Programme, Commonwealth Human Rights Initiative, New Delhi
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