Bank Can't Be Directed By Writ Of Mandamus To Grant 'One-Time Settlement' Benefit To Borrower : Supreme Court

No writ of mandamus can be issued by the High Court in exercise of powers under Article 226 of the Constitution of India, directing a financial institution/bank to positively grant the benefit of One Time Settlement Scheme to a borrower, the Supreme Court has held in a judgment delivered on Wednesday (15 December 2021).

The bench comprising Justices MR Shah and BV Nagarathna observed that no borrower can, as a matter of right, pray for grant of benefit of One Time Settlement Scheme. It was held as follows:

1. Grant of benefit under the OTS is always subject to the eligibility criteria mentioned under the OTS Scheme and the guidelines issued from time to time. 
2. If the bank/financial institution is of the opinion that the loanee has the capacity to make the payment and/or that the bank/financial institution is able to recover the entire loan amount even by auctioning the mortgaged property/secured property, either from the loanee and/or guarantor, the bank would be justified in refusing to grant the benefit under the OTS Scheme. Ultimately, such a decision should be left to the commercial wisdom of the bank whose amount is involved
3. It is always to be presumed that the financial institution/bank shall take a prudent decision whether to grant the benefit or not under the OTS Scheme, having regard to the public interest involved.

In this case, the borrower submitted an application for consideration of her case under OTS. This came to be rejected on the ground that she is not eligible for OTS under the OTS Scheme and that the loan can be recovered by auction of the mortgaged property and that there are chances of recovering the loan amount and that her loan account has been declared as 'NPA'. Allowing the writ petition, the Allahabad High Court directed the Bank to positively consider her application for grant of benefit under the OTS Scheme.

Before the Apex Court bench in appeal, the Bank contended that the High Court has materially erred in issuing a writ of mandamus directing the Bank to positively consider the application of the original writ petitioner for grant of OTS which, according to the learned counsel appearing on behalf of the Bank, could not have been passed in exercise of powers under Article 226 of the Constitution of India. The borrower contended that as it was found that though she is ready and willing to deposit the entire amount under the OTS Scheme and though she is eligible for the grant of benefit under the OTS Scheme, her application for grant of benefit under the OTS Scheme was rejected. This was found to be arbitrary and against the principle of natural justice and thus the High Court has rightly set aside the decision rejecting the application of the original writ petitioner for grant of benefit under the OTS Scheme, it was contended.

The court observed that merely because the proceedings under the SARFAESI Act have remained pending for seven years, the Bank cannot be held responsible for the same. While allowing the appeal, the court made the following observations:

No bank can be compelled to accept a lesser amount under the OTS Scheme 

8.What is required to be considered is a conscious decision by the Bank that the Bank will be able to recover the entire loan amount by auctioning the mortgaged property and a due application of mind by the Bank that there are all possibilities to recover the entire loan amount, instead of granting the benefit under the OTS Scheme and to recover a lesser amount. It is ultimately for the Bank to take a conscious decision in its own interest and to secure/recover the outstanding debt. No bank can be compelled to accept a lesser amount under the OTS Scheme despite the fact that the Bank is able to recover the entire loan amount by auctioning the secured property/mortgaged property. When the loan is disbursed by the bank and the outstanding amount is due and payable to the bank, it will always take a conscious decision in the interest of the bank and in its commercial wisdom

No borrower can, as a matter of right, pray for grant of benefit of One Time Settlement Scheme

9. Even otherwise, as observed hereinabove, no borrower can, as a matter of right, pray for grant of benefit of One Time Settlement Scheme. In a given case, it may happen that a person would borrow a huge amount, for example Rs. 100 crores. After availing the loan, he may deliberately not pay any amount towards installments, though able to make the payment. He would wait for the OTS Scheme and then pray for grant of benefit under the OTS Scheme under which, always a lesser amount than the amount due and payable under the loan account will have to be paid. This, despite there being all possibility for recovery of the entire loan amount which can be realised by selling the mortgaged/secured properties. If it is held that the borrower can still, as a matter of right, pray for benefit under the OTS Scheme, in that case, it would be giving a premium to a dishonest borrower, who, despite the fact that he is able to make the payment and the fact that the bank is able to recover the entire loan amount even by selling the mortgaged/secured properties, either from the borrower and/or guarantor. This is because under the OTS Scheme a debtor has to pay a lesser amount than the actual amount due and payable under the loan account. Such cannot be the intention of the bank while offering OTS Scheme and that cannot be purpose of the Scheme which may encourage such a dishonesty.

10. If a prayer is entertained on the part of the defaulting unit/person to compel or direct the financial corporation/bank to enter into a one-time settlement on the terms proposed by it/him, then every defaulting unit/person which/who is capable of paying its/his dues as per the terms  of the agreement entered into by it/him would like to get one time settlement in its/his favour. Who would not like to get his liability reduced and pay lesser amount than the amount he/she is liable to pay under the loan account? In the present case, it is noted that the original writ petitioner and her husband are making the payments regularly in two other loan accounts and those accounts are regularised. Meaning thereby, they have the capacity to make the payment even with respect to the present loan account and despite the said fact, not a single amount/installment has been paid in the present loan account for which original petitioner is praying for the benefit under the OTS Scheme.

It is always to be presumed that the financial institution/bank shall take a prudent decision whether to grant the benefit or not

11. The sum and substance of the aforesaid discussion would be that no writ of mandamus can be issued by the High Court in exercise of powers under Article 226 of the Constitution of India, directing a financial institution/bank to positively grant the benefit of OTS to a borrower. The grant of benefit under the OTS is always subject to the eligibility criteria mentioned under the OTS Scheme and the guidelines issued from time to time. If the bank/financial institution is of the opinion that the loanee has the capacity to make the payment and/or that the bank/financial institution is able to recover the entire loan amount even by auctioning the mortgaged property/secured property, either from the loanee and/or guarantor, the bank would be justified in refusing to grant the benefit under the OTS Scheme. Ultimately, such a decision should be left to the commercial wisdom of the bank whose amount is involved and it is always to be presumed that the financial institution/bank shall take a prudent decision whether to grant the benefit or not under the OTS Scheme, having regard to the public interest involved and having regard to the factors which are narrated hereinabove.

Click here to Read/Download Judgment