Kerala HC Upholds Condition That Co-op Banks Should Dispose of Non-Banking Assets By 7 Yrs of Acquisition [Read Judgment]

A division bench of Kerala High Court has restored Section 56A of the Kerala Co-Operative Societies Act, which was struck down as unconstitutional by a single bench judgment. Section 56A mandates co-operative banks to dispose of non-banking assets acquired by them within seven years of acquisition. This provision was declared as unconstitutional by the single bench in Radhakrishna Kurup v Nadakkal Co-operative Bank Ltd 2016(4) KLT 82. The single bench reasoned that the provision violates Article 14 of the Constitution, as the restriction was applicable only to co-operative banks and not to commercial banks.

The division bench comprising Justice V Chitambaresh and Justice Satish Ninan disagreed with that view, noting that similar restriction was applicable to commercial banks as well, as per Section 9 of the Banking Regulation Act. Tracing the legislative wisdom behind such restriction, the division bench observed: The object of these statutory provisions is to persuade the co-operative banks or the banking companies to sell the non-banking asset and liquefy the same in cash for it to be available as working capital. Otherwise the non-banking assets would remain as a stumbling block paralyzing the entire banking system thereby producing results which are totally counter-productive. There will be liquidity crunch for the bank either to lend money to the borrowers or to pay interest to the depositors if a sizeable portion of the working capital is sunk in such assets for long.

The court also went on to state that co-operative banks and commercial banks cannot be treated as forming a single class.  The motive of operation of co-operative banks is 'service' whereas the motive of operation of commercial banks is 'profit' and therefore both cannot be treated on par to test the plea of discrimination. The borrowers of the cooperative banks are member shareholders having a definite say in the lending policy of the bank obviously on account of their voting power. But the borrowers of the commercial banks are only account holders with no voting power and the lending policy of the bank is governed by the regulations of the Reserve Bank of India. The co-operative banks usually cater to the credit needs of agriculturists whereas the commercial banks provide short-term finance to industry, trade and commerce. The co-operative banks have comparatively less variety of services and offer lesser rate of interest whereas commercial banks have an array of services and offer slightly higher rate of interest. The co-operative banks is a separate class by itself when compared to the commercial banks and the classification is based on an intelligible differentia.

The matter arose out of a litigation initiated by a borrower seeking re-conveyance of the mortgaged property from the bank, which had purchased the same in the auction sale held for realization of arrears. The government had intervened in the meantime, directing the bank to give option to the borrower to take back the property on clearing off the dues. The Lok Ayukta had also intervened, directing the bank to act as per Section 56A. The bank challenged the Lok Ayukta order and also the vires of Section 56A. The borrower filed writ petition, challenging the sale, and also seeking to direct the bank to act as per the direction of the government.

The single bench had accepted the challenge of the bank against Section 56A, while refusing the prayers of the borrower. The division bench also did not grant any relief to the borrower, observing that the challenge was belated. It noted that the borrower was estopped from challenging the sale, as he had withdrawn his earlier writ petitions on the issue. It added that the government has no power to intervene in the issue between the bank and the borrower.