Banking Related Laws

Dr.P.R.Kulkarni111 August 15, 2011

Dr.P.R.Kulkarni

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Banking Related Laws

DRT ( Recovery of Debts Dues to Banks and

Financial Institutions Act 1993 ) The securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002. The consumer Protection Act 1986. Ombudsman Lender Liability Act Indian Contract Act Sale Good Act 1930
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DRT
Business of banking depends upon lending to various

individuals, firms, corporate bodies and other organizations. It can be under various types of loans such as term loans,OD, Cash Credit, bank guarantee and other nonfund limits. The prospects of repayment is supported by way of proper and valid contracts. Such contact between the banker and customers will from the basis for granting of financial facilities and repayment. The contract between the Bankers and customers are guided by the Indian Contract Act 1872. Which is force able in the court of law. Debt :Debt means any liability which is claimed as a due from any person by a bank or financial institutions. The word debt means a sum of money due from one person to other.
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Machinery for Enforcement

Both the Narsimham and Tiwari committes (1981)

reports have recommended for the setting up special tribunals for speedily recovery of NPAs. The Recovery of Debt of Banks and Financial Institutions Act (RDBFI ) was passed by Parliament in 1993. There is provision in the Act to set up DRTs in various part of the country.

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Need for DRT-Objectives

Improve recovery of loans given by Banks &

Financial Institutions Huge time required in an ordinary suit Tribunals are made to deal with the cases in a speedy manner Nation losing away its valuable assets Recovery procedure blocking significant portion of funds Nations Interest Banks play developmental role in the economy
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Functioning of DRT
The functioning of DRT can be divided under

various areas. They are: Jurisdiction and Cause of Action Impeding Provision Form of Application Summons to Defendant and Filing of Reply Set-Off and Claim of the Defendant

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Functioning of DRT
Counter Claim

Discretion to Pass Interim Orders

Power to Pass Attachment Order Punitive Powers Appointment of Receiver

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Jurisdiction and Cause of Action

Banks and Financial Institutions can file the

application in DRT in whose limit a defendants actually and voluntarily resides or carry on business. The Tribunal is conferred with the jurisdiction based on cause of action arising totally or partially. In other word, the application can be filed in the tribunal within whose limit the cause of action arises wholly or partly.

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Imp leading Provision

Any bank or financial Insinuation other than

applicant which is having the claims against the borrower can join the applicant at any stage. This provision avoids multiplicity of proceedings.

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Form of Application
The application made into the tribunal should comply

with the conditions contained in section 19 of the Act. Documents supporting to claims of the bank like loan documents, security documents, acknowledgement of debt, statement of accounts and other material documents must be enclosed with application. DRT will check the application as per check list and incomplete application will be returned.

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Summons to Borrower-Filling reply

Subsection 4 of section 19 requires that Tribunal

shall issue a summon to the defendants why relief prayed should not be granted. Borrower has to reply within 3o days of the notice. The borrower is also allowed to appear the hearing and present the written statement.

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Counter Claims
If borrower has a counter claim, a separate suit had to

brought against the bank in the civil court in respect application filed in DRT. It is now possible to entertain and decide the claims and counter claims of the borrower together on the same application. Borrower need not go for relief to civil court. He can make the counter claim in the same application.

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Discretion to pass interim order

The Tribunal can pass the interim order or issue the

injunction against the borrower. This will help to restrain the borrower from transferring or disposing of any property or assets. The Tribunal has also power of issuing attachment order. But Tribunal should be satisfied that borrower is about dispose the property or likely to cause any damages.

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Punitive Power and Appointment of receiver

Whenever the order of Tribunal are violated or

flouted, Tribunal can pass an order for detention of borrower. Sub Section 18 0f section 19, gives power to Tribunal to appoint the receiver at any stage either before or after issuing recovery certificate.

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Transfer of recovery certificate and disposal of application

If the property is situated within the Jurisdiction of

two or more Tribunal than copies of recovery certificate will be to such other Tribunal for execution. The objective of the Act is to recover the claims of the bank speedily. The time limit for disposal of application in the Act is therefore fixed for 180 days.

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Securitization Act

Presented by: Dr. P.R.Kulkarni

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WHAT IS SECURITIZATION?
Securitization is the acquisition of financial assets by any

securitization company or reconstruction company, from any originator, whether by way of raising funds by such securitization company or reconstruction company from qualified institutional buyers by way of issue of security receipts representing undivided interest in such financial assets or otherwise.
A banks lending activity has four basic functions:

Originating, funding, servicing and monitoring loans. Securitized lending introduces the possibility of selling assets on a bigger scale and eliminating the need for funding and monitoring. The securitized lending process has only three steps- originate, sell and service
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CONTD
Securitization involves selling financial assets to

trusts or special purpose vehicles, that are independent from the bank. It serves as an effective balance sheet management tool by reducing or eliminating the need to hold capital against risk weighted assets, enabling capital to be reduced or redeployed to alternative revenue generating purposes.

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IMPORTANT ASPECTS OF THE ACT

Enforcement

of security interest by secured creditor (banks/fin inst), where secured interest means right, title and interest of any kind, whatsoever, upon property, created in favour of any secured creditor and includes any charge, hypothecation, assignment other than those specified in the act.

Transfer of non performing assets to Asset reconstruction

company, which will then dispose off those assets and realize the proceeds.
19 Dr.P.R.Kulkarni To provide a legal framework for Securitization of assets.

Securitization Act Facilitates the following:

Easy transferability of financial assets by the Securitization Company to acquire financial assets of Banks by issue of debentures. This Act gives power to raise funds & declared as a public financial institution for the purpose of Section 4A. Allows reconstruction of financial assets. The Act authorizes Banks to take possession of securities given for financial assistance in the event of default. It allows for an appeal to the to the concerned Debts Recovery Tribunal or Appellate Debts Recovery Tribunal.
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 The registration and regulation of

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securitization or reconstruction companies by RBI. It helps in securitization of financial assets of banks and financial institutions with or without the benefit of underlying security. The Act allows reconstruction of financial assets and change n management. Application is initially to banks and Dr.P.R.Kulkarni financial institutions the government 4/18/2012

SECURITIZATION COMPANY
Securitization company or reconstruction company is any

company formed and registered under Companies Act 1956 for the purpose of Securitization. Registration :These companies can commence business only after they are registered under this act. The Securitization company should not have incurred losses in any of the three preceding financial years. The co should have made adequate arrangements for realization of the financial assets acquired. It should be able to pay periodical returns and redeem on respective due dates on the investments made in the co by QIBs or other persons. The directors of the securitization co should be experienced in matters relating to finance, securitization and reconstruction.
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Registration
Make an application of

Cancellation
Cancellation can be done if: Fails to carry the business Failed to comply with any

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registration to RBI Should have owned funds of Rs.2 crore or more or 15% of the total financial assets acquired Application for registration to the RBI should be made before expiry of 6 months from the date to commencement RBI looks into aspects before giving CoR Profitability Payment of Returns Experience of the Director Composition of Board of Director Dr.P.R.Kulkarni

condition subject to which CoR was granted Fails to comply with any direction issued by RBI Fails to maintain accounts in accordance with the requirements of any law or any direction issued Fails to submit or offer for inspection, its books of account
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CONSEQUENCE OF THE ACQUISITION

If the Bank or the Financial Institution is the lender to

any financial asset acquired by the Securitization Company then the Securitization company after the acquisition will be the lender and all the rights of the bank with regard to financial asset will be transferred to the Securitization company.

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Securitization and Reconstruction Of Financial Assets and Enforcement Of Security Interest Act, 2002
This act provides Enforcement of security interest for

realization of dues without intervention of Courts or Tribunals.

The Security Interest rule, 2002 has also been notified by

Government to enable Secured creditors to authorize their officials to enforce the securities and recover the dues from the borrowers.

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FUNCTIONS OF ASSET RECONSTRUCTION COMPANY

It can ensure that proper management of the

borrowers business is done by change in, or takeover of, the management of the borrowers business.

It can sell or lease a part or whole of business of

the borrower.
It can reschedule payment of debts payable by the

borrower.
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FUNCTIONS OF ASSET RECONSTRUCTION COMPANY

It can enforce the security interest in accordance with

the provision of this Act.

It can settle dues payable by the borrower. It can take possession of secured assets in accordance

with the provision of this Act.

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Powers Of RBI To Determine Policy and Issue Directions

The Securitization and Reconstruction of Financial Assets

and enforcement of security interest (SARFAESI) Act was enacted in June 2002. It deals with regulation of securitization and reconstruction of financial assets. Act vests the RBI with powers to registration such companies and frame regulations for their functioning. SC/RC seeking registration are required to have minimum owned fund of Rs 2 crore. SC/RC registered with RBI would confine their activities to the business of securitization and reconstructions only.
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 To regulate financial system of the country to its

advantage.
To prevent affairs of any Securitization company or

Reconstruction company from being conducted in the manner detrimental to the interest of investors.
Determine the policy and give directions to all or any

Securitization company.

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 SC/RC should not accept the deposits.

Every SC/RC shall have assets acquisition

policy approved by the Board. Every SC/RC should classify assets into standard and non performing assets and nonperforming assets into.. SC/RC should maintain the CAR not less than 15%.

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Powers Of RBI To Determine Policy and Issue Directions

Determine policy and give direction to all or any Securitization company in matter related to
1.

2.
3.

Income recognition. Accounting standards. Making provisions for Bad and Doubtful debts.

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ENFORCEMENT OF SECURITY INTEREST

In case of default in repayment of any loan the security interest

created in favor of creditor may be enforced without intervention of court.

of notice by the secured creditor, the creditor has the right to takeover the management or possession of the concern. vest in the transferee all the right to property.

In case the borrower fails to discharge his liability within 60 days

Any transfer of the property made by the secured creditor shall Secured creditors shall have the same rights and powers with

respect to goods manufactured or produced from the goods forming part of the security held by it as it has with respect to original goods.

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Consumer Protection Act, 1986

The industrial revolution and the development in

the international trade and commerce has led to the vast expansion of business and trade, as a result of which a variety of consumer goods have appeared in the market to cater to the needs of the consumers and a host of services have been make available to the consumer like insurance, transport. Electricity, Housing. Entertainment, finance and banking.
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Legal Frame-work: Consumer Protection

1.

Consumer Protection Consumer Credit Act of 1974 of U.K aimed at protecting the borrower in credit agreements, loans & mortgages. The Act requires full written details of the true interest rate to be quoted, a cooling of period to be given during which borrowers may change their minds and cancel agreements and all agreements to be in writing. Based on the Consumer Credit Act 1974, the Consumer Protection Act 1986 was introduced in India.
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Consumer Protection Act, 1986

Objectives Seeks to provide better protection of interest of

consumers and to establish consumer councils and other authorities for the settlement of consumer disputes. Seeks inter alia, to promote and protect rights of consumers. Right to be protected against marketing of hazardous goods. Right to information. Right of competitive pricing. Right to be heard and assured of consumer interest at appropriate forums. Right to seek redresses against unfair trade practices. Right to consumer education.

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Consumer Protection Act, 1986

Promoted and Protected by Consumer Councils established

at central and state levels. --To provide simple and speedy redresses to consumer disputes, etc. The right to seek redressed against unfair trade practices or unscrupulous exploitation of consumers and --Right to consumer education

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Composition & Functions of District, State & Central Level Consumer Councils

These are quasi-judicial bodies. Observe the principles of natural justice Empower to give relief of a specific nature To award, wherever appropriate compensation to consumers Penalties for non-compliance have also been provided in the Act.

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1.

a. b.

The District Consumer Protection Council (the Consumer Protection Amendment Act, 2002 Sections 8 A & 8 B & Section 16 Manner in which complaint shall be made Sections 12 & 13. Composition of the District Forum State Commissions National Commissions Appeal & hearing of Appeal - Section 19 & 19A & Section 27

2. 3.

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Nam Forum provisions of the Act District Consumers District Level disputes redressal Judge forum (sitting or retired) Sate Level Consumers disputes redressal forum

The Following Forums are created at various levels to give effect to the Chairman Members Jurisdiction
One women & another representing trade, industry, science, etc -doArea of dist. Involving complaints of up to Rs 5.0 lacs

High Court Judge (sitting or retired)

Entire state involving complaints of Rs 5.0 lacs to Rs 20.0 lacs. Appellate jurisdiction over the decision of the district forums in the state
Entire country, Maters involving Rs 20.0 lacs & over are taken by National commission having appellate jurisdiction over 4/18/2012 state level commissions

National Level

National Consumers disputes redressal commission

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Supreme Court Judge (sitting or retired)

Four members having PRO VEN ability in various fields

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THE BANKING OMBUDSMAN SCHEME

The procedure for the redresses of grievances under the Banking Ombudsman Scheme is profiled as under:-Written complaint is to lodged by a person or an unauthorized representative Complaint shall include signature of the Complainant or an unauthorized representative along with the name, address & also name & address of the bank office / branch among with supportive documents, the nature & extent of the loss incurred & the relief sought from the Banking Ombudsman & a statement about the compliance of the conditions referred to in Sub-clause 3 of this clause

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a.

b.

No complaint t the Banking Ombudsman shall lie unless: Written representations was made to the bank and either the bank had rejected the complaint or no reply was received from the bank within 60 days of receipt of complaint or in case of unsatisfactory reply received from the bank The compliant is made one year after the rejection of the representation by the bank and dispatch of final reply by the bank on the representation

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c.

d.

e.

The complaint is not in receipt of the same subject matter if selected by the Banking Ombudsman in previous proceeding / s whether received from the same complainant or anyone or more of the parties concerned with the subject matter The complaint is not the same subject matter, for which any proceedings before any court, tribunal or arbitrator or any other forum is pending or a decree or Award or order of dismissal has already been passed by any such court, tribunal, arbitrator or forum. The complaint is not frivolous or vexatious in nature.

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Guidelines on Lenders liability Laws

Based on Working Group on lenders Liability Law the fair

practices codes are issued to improve the quality of banking services. Loan application from for priority sector advances should indicate processing fee and repayment options. Acknowledgement should be given for the application. The reasons for rejection should be conveyed to applicant. Lender should ensure proper assessment of credit of the borrowers. Lender should ensure timely disbursement of loan sanctioned. Post disbursement supervision should be constructive. Consent or objection for transfer of borrower account should be conveyed within 21 days.
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Law of Limitation
The limitation Act, 1963 has significant application to the

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banks and financial institution. These entities provides the financial assistance to borrowers and in default by the borrowers, they are required to take appropriate action for the recovery of the money lent. Definition : the period of limitation is always in relation to document which entitles the beneficiaries to take action in court of law. Period of limitation means the period of limitation prescribed for any suit, appeal, or application by the schedule and the prescribed period the means the period of limitation computed in accordance with the provisions of this ACT. It is absolutely necessary that every suit or application or appeal shall have to made within the period of limitation Dr.P.R.Kulkarni 4/18/2012

Provision of Bankers Book evident Act

Bank keep their accounting and its details in

various ledgers, registers . When any claim of the bank is required to be established or proved in the court of law or any other such forums, these books are required to produced in original. It is difficult to do so, therefore it extracts and statement of accounts are produced to facilitates the production of such evident in easy way and to have evidentiary value to the extract and copies.
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Indian contract Act

The law of contact constitutes the most important branch

of commercial law. It fact the entire trade, commerce, and industry in the country. In India the law relating to contracts is governed by the Indian Contact Act 1872. The Act is broadly divisible in two parts : (1) the part one describe the general principle of contracts which are applicable to all types of contacts. (2) the second part deals with the special type of contract, namely indemnities, guarantees .
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Meaning of Contacts
The contacts means an agreement enforceable by law. It

has two major constituents : (1) An agreement between two persons and more (2) the agreement must be enforceable by law.( the right and obligation arising out of it )

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Indemnity
A contact of indemnity is a contact by which one party

promises to save the other from loss likely to be cost to him. This loss can be either any the conduct of the promise himself or by conduct of any other person. The indemnity holder has the following when sued : The promisee is entitle to recover from the promiser in respect of the matter to which the promise to indemnify applies. 1. All damages which he may compelled to pay any suit 2. All cost which he may be compelled to pay any suit 3. All sum paid in compromise, not contrary to indemnity
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Guarantee
A contract of guarantee is a contract to perform the

promise or discharge the liability of a third person in case latters default. A guarantee may be either oral or written. The question whether a particular contact is the contract of indemnity or guarantee has to decided by examining the language of documents entered in to between the party and nature of transaction. Parties to contacts; the person who gives guarantee is called surety

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Bailment
A bailment is the delivery of the goods by one person tp

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another foe some purpose. When the purpose is accomplished the good are to returned or otherwise dispose of according to the direction of person delivering them. The person delivering the goods is called the bailor. The person to whom they are delivered is called the bailee. When one person deliver to another certain goods to be used for a certain purpose, the contract is known as the a contract of bailment. Here the contract will specify the time for which the goods will be remain with person taking them .The person who gives the goods can direct the other to return the goods after Dr.P.R.Kulkarni expired date or ask to dispose. 4/18/2012

contract of Pledge
The bailment of goods as security for the payment of

debt or performance of promise is called pledge. The bailer in this case is called pawnor. The bailee is called pawnee.

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Contract of Agent
First the concept of understanding of Agent and

Principal is required. An agent is the person employed to do foe another person or to represent another person in dealing with some person. The person for whom such act is done is called principal. When banks collect various financial instrument for their customer ,this law would come into force.

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Sales good Act 1930

The Contract Act covers the aspects of general

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principles and essentials of contract made in the commercial world. However the Sale of Good Act specially enacted to lay down the law relating to sale and purchase of the moveable goods in the country. Goods means every kind of moveable property and includes stock of goods, growing crops, the things attached to or forming part of the land which are agreed to be served before sale or under the contract of the sale. Buyer means the person who buys or agree to buy goods Seller means a person who sell or agree to sell Dr.P.R.Kulkarni 4/18/2012 goods.

Thank You

Good Luck and Grand

Success in the Examination

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