The introductory Para stretch on the recent episode of Banking Frauds in our country and how the Judicial System has responded to it.
Well, the author is exercising his freedom of Speech & Expression granted to him under Article 19(1) (a) of the Constitution of India (C.O.I) to express his animosity with the current state of affairs of our banking sector & its policy reforms.
It’s strange that the term Banking Fraud has found no place in the Indian Statute Books. We have a Banking Regulation Act, 1949 which gives a passing reference to the “act of fraud” committed by the Directors or Auditors under section 45G and what is more peculiar here in the Act, that the examination can be conducted only when the order for winding up is passed by the court and the official liquidator is appointed.
So the grey area here is;
Whether Public examination of Directors or Auditors is allowed during the schedule functioning of the Bank.
Well, the answer is, Liquidator has to submit the report to the HC and if Court is of opinion that the conduct of Director or auditor is in question then the court issue Notice to the director or auditor and meanwhile the petition is filled and comes for hearing the fraud like of Nirav Modi has already been executed and the petition becomes infructuous.
Now, if we refer to the Indian Penal Code, 1908 then the fraud as a crime is nowhere defined in the Indian Penal Code but we all use this term in general & in our day to day life. It is Synonym to “Cheating” and defined as an act of deliberate deception with the design of securing something by taking unfair advantage of another. It is a deception in order to gain by another’s loss. So, this deception persists in our legal system and the statute books.
Arbitrary Exercise of Discretionary Power– Yes, with power comes the responsibility, a responsibility to handle the public’s Deposit lying with the Banking institution. The Banking institutions or the monetary authority R.B.I have not developed any “Best practise code” for the management & functional staff of the banks disbursing the loan. The best practise code relates to the detail procedural rule for entering into the financial transactions like lending of loans. So, there exists a gap between the banking function & its administration, the discretionary power is exercised by the management of the bank within this gap to facilitate the lending of the loan. This is a reason why the Indian Banking Sector is concerned with the substantial increase in its Non- Performing Asset (N.P.A) over the year and until December 2017 it was 8.31 Lakh Crore then this substantive portion of the public fund is write off the as a bad debt ( loan which cannot be recovered and hence write off/ waived) If we make a comparison between the state-owned banks and the private sector banks, then the share of private sector bank in N.P.A & writing off is far less in comparison to state-owned banks.
In the last three years, public sector banks (PSBs) in India have lost a total of Rs. 22,743 crore, on account of various banking frauds and this, raises serious concern over the effectiveness of corporate governance at the highest echelons of these banks.
What can be done;
The principle of absolute liability can be borrowed and court while exercising the judicial activism can frame the similar principle in economic offence matters.
Limit the constitutional doctrine of “presumption of innocence” rule in such matters.
Reasoning – The Doctrine of the presumption of innocence is an offshoot of Principal of Fair Trial and the fair trial principal rest on the premise of opportunity to present the case which is settled preposition of law. Moreover, a stronger criticism is that it loses virtually all independent significance when it is coupled with the much more fundamental reasonable doubt instruction. Because the presumption of innocence is given practical effect through the reasonable doubt standard, it can scarcely be said to possess any true weight of its own. Further, I quote “actus curiae neminem gravabit” – from a stronger presumption that the act of the court harms no one until rebutted with a principal unreasonableness.
Pending Legislation– “Contra legem facit, qui id facit, quod lex prohibit”– He who does contrary to the law, or who does what the law prohibits; he acts in fraud with the law. The application of this maxim is discussed in the landmark Judgement of SC in Rajaram Vs. Daulatram 1980. So, the present Acts, rules & regulations like SARFASI ACT & DRT Act operates in the different field.
The FRDI Bill (Financial Resolution & Deposit Insurance), 2017 is pending before the parliamentary committee for its review. So, let’s analyse the key features of this Bill.
- Provide for the resolution of certain categories of financial service providers in distress;
- The deposit insurance to consumers of certain categories of financial services;
- The categorisation of financial institutions & Risk Management Rating;
- Establishment of a Resolution Corporation for protection of consumers of specified service providers and of public funds for ensuring the stability and resilience of the financial system and for matters connected therewith.
The best part of this Bill is that an independent body is set-up for the banking & financial institutes and it’s power is to regulate the functioning of these institutes and will provide the deposit insurance to banking institutes, classification of these institutes, and the power of investigation in case of reasonable apprehension that the banking institute is carrying on the activities which are detrimental to the interest of consumers.
This Act will override the certain provisions of Companies Act, 2013 in relation to the Directors and key managerial persons of the institute and the independent body will supervise their activities.
The independent body has the power to restrain the bank from carrying on certain financial transactions in which interest of the depositors is at high risk.
Clause 52 BAIL –IN & BAILOUT; gives the Corporation the power to carry out bail-in, as a method of resolution, either through a bail-in instrument or a scheme made specifically for this purpose. It empowers the Corporation to cancel a liability, and to modify or change the form of a liability, including the power to convert an instrument from one class to another, replace an instrument with another, create a new security, and for central counterparties specifically, direct a haircutting of collaterals and margins, and the issuance of equity to creditors. It also specifies which liabilities the bail-in instrument or scheme will not affect. It also provides that the appropriate regulator in consultation with the Corporation shall require certain specified service providers to maintain liabilities that may be subject to bail-in and for the bail-in instrument to contain a specific provision clarifying that such liabilities may be subject to bail-in. It also requires the Corporation to forward the bail-in instrument to the Central Government together with a report stating the reasons for making such an instrument or scheme, along with its effects and a copy of the said report be laid before each House of Parliament by the Central Government.
In layman’s language- A “bail-in” is a process to rescue a financial institution that is on the verge of collapse, by making its creditors and depositors take a loss on their holdings. It is the opposite of a “bail-out”, which involves the rescue of a financial institution by external agencies, typically governments, using taxpayers’ money. In other words, instead of the government rescuing a failing bank or any other financial intermediary by infusing capital, depositors’ funds are being proposed to be used for this purpose. So, the depositors run the risk of losing their money or facing inordinate delays in realizing the money—and that too may not be the full amount as deposits may get converted into other financial instruments such as equity or a quasi-equity.
Summary- “Jus et fraudem numquam cohabitant- Right and fraud never go together” in a similar the banking institution cannot function if the major portion of the Public fund is write off every year in such banking fraud. The Banks are the custodian of Public money and it’s the Fundamental Duty of the State to protect the right of its citizen. It is a fundamental right under article 19(1) (a) & Art. 21 of COI to deposit the money with the state and withdraw the money at any point in time.
The banking institution primarily works operate to accept the Deposit from the Public and secondary function is to lend the same to the credible borrowers. With the present scenario, the banking institutions write off 15% of their borrowings which directly affects the Indian economy and shake the credibility of Indian economy which in turns also affect the Foreign Direct Investment & reserve in Indian economy.
With the recent FRDI Bill, 2017, an independent Corporate Committee will be setup to regulate the service providers and the right of both the service providers & the depositors will be protected.
(These are the personal views of the author)