Supreme Court Issues Notice On RBI Appeal Against Kerala HC Order That Lifted Loan Restrictions Imposed On Co-Operative Bank

The Supreme Court on Friday issued notice to in an appeal filed by the Reserve Bank of India, against an order of the Kerala High Court that lifted the loan restrictions imposed by it on Thiruvalla East Co-Operative Bank Ltd.

The notice was issued by a division bench of Justice Sanjay Kishan Kaul and Justice Sudhanshu Dhulia. Attorney General for India R Venkataramani appeared for the RBI.

A division bench of the Kerala High Court had affirmed the order of a single bench that lifted the restriction placed on the Co-Operative Bank by RBI to stop further sanction/disbursal of loans and advances as the bank was not given an opportunity of hearing.

RBI had conducted an inspection before issuing a prohibitory order to the Cooperative Bank, along with an inspection report. According to the inspection report, there were some deficiencies in banking practice, including some loan advance schemes that were susceptible to foul play.

Referring to the Banking Regulation Act, 1949, the Kerala High Court had held that the RBI cannot completely prohibit the transactions of the bank under Sections 35 and 36 unless there were exceptional circumstances to do so. The High Court had held that factual appreciation was required before passing orders of prohibition and that an opportunity of hearing must be given to the banking company before passing such an order.

“We are of the firm view that in normal circumstances, RBI cannot pass a prohibitory order under Section 36(1) without giving banking company an opportunity of being heard. The deviation is exceptional and that too, to protect public interest. If RBI intends to pass such an order, it must demonstrate with reasons in the order itself how the larger public interest would adversely be affected if prohibition order is not imposed.”

The High Court thus concluded that the RBI had not given proper reasons before passing the order, which showed non application of mind:

“..no demonstrable reasons are assigned by RBI before resorting to complete prohibition of disbursal of fresh loans and advances. If the particular loan scheme is against banking policies, RBI could have ordered the bank to stop advancing loan under that scheme till deficiencies are cured. We already noted that no reasons are assigned in the impugned decision except the appending inspection report. In such circumstances, we are of the view that the impugned decision prohibiting disbursal of fresh and advances was without application of mind.”

Case Title: Reserve Bank of India V. Thiruvalla East Co-Operative Bank Ltd, Special Leave to Appeal (C) No(s). 15667/2023

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