Secured lending a regulated activity in your jurisdiction
Banking-Yes, secured lending is a regulated activity in India. Various types of institution are entitled to engage in lending activities. These include:
- scheduled and non-scheduled commercial banks;
- non-banking finance companies (NBFCs);
- cooperative society banks;
- small finance banks;
- microfinance institutions; and
- money lenders.
Regulations require lending agencies to maintain standards relating to capital adequacy, prudential norms, cash reserve ratio, statutory liquidity ratio, credit ceiling and know-your-customer guidelines – although each of these norms would apply to each category of lending agency in a different manner. Each agency plays a different role in terms of the type of lending and borrower. For example, infrastructure NBFCs can extend credit facilities to entities in the transport, energy, water and sanitation and communication sectors.
Loans and advances of up to Rs2.5 million are required to constitute at least 50% of the loan portfolio of small finance banks. A security interest over the assets of the borrower or third party can be created to secure any regulated lending activity. However, if a loan is provided for financing the purchase of a vehicle, it is common for a security interest to be created only over the vehicle which is purchased through the financing and no additional asset is provided as security, although the security is a depreciating asset.
If there are any specific regulatory issues which a prospective borrower should consider when arranging or entering into a secured loan facility
An Indian company may borrow funds in compliance with the Companies Act 2013. A public limited company in India would need the approval of 75% of its shareholders if the proposed borrowing, together with the money already borrowed by the company, would exceed the aggregate of its paid-up share capital and free reserves. This provision excludes temporary loans which are repayable on demand or within six months of the date of disbursement,
such as short-term, cash credit arrangements or bill discounting facilities obtained in the ordinary course of business. Appropriate corporate authorisations must be passed along with statutory filings.
If there are any specific regulatory issues which a prospective lender should consider when arranging or entering into a secured loan facility
Prospective lenders should be registered with the RBI as a bank or NBFC. The RBI regulates the banking sector by issuing various regulations, guidelines, notifications and policies from time to time. However, certain intercompany loans are permitted without the company being recognised as a bank or NBFC by the RBI.
The lender should conduct due diligence on the assets provided as security to ensure the security provider’s absolute title over the same. A lender should ensure that the borrower, third-party security provider and/or guarantor has the due capacity to enter into the financing documents and
that these are enforceable under their respective governing laws.
Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“DRT Act”)
Important Highlights of the DRT Act are:
- The act constitutes a Debt Recovery Tribunal for speedy recovery of loans mainly.
- The act is applicable to any bank, financial institution or a consortium of them for the recovery of debt which is more than 10 Lakhs.
- Applicable to the whole country except J&K.
- Debt is a used in a broad purpose, the following are some of its types:
- Any liability inclusive of interest, it may be secured or unsecured;
- Any liability which is to be paid under a decree, order of any civil court or any arbitration award or otherwise; and
- Any liability payable under a mortgage and subsisting on and legally recoverable on the date of application.
Debt Recovery Tribunals
The Debts Recovery Tribunal has been constituted under Section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The main feature of the DRT is to receive claim applications from Banks and Financial Institutions against their defaulting borrowers. After the enforcement of SARFAESI Act in 2002, it also becomes an adjudicatory authority for that Act.
Now, The DRT now deals with both the SARFAESI act and the DRT act,
the aim of both the acts is similar but the way is different. Appeals against orders passed by DRTs lie before Debts Recovery Appellate Tribunal (“DRAT”). DRTs can take cases from banks for disputed loans above Rs 10 Lakhs. In the present scenario, there are 33 DRTs and 5 DRATs functioning in the various parts of the country. In 2014, the government paved the way for six new DRTs to speed up loan related dispute settlement.
The civil courts are barred from handling any case which the DRT is handling, no court or authority has the power or
jurisdiction to deal with any kind of recovery of debt which is above 10 lakhs (Jurisdiction of the DRT). The High court and Supreme Court have the jurisdiction under Art 226 and 227 of the Constitution.
Banks have to file an application for the recovery of a loan taking into consideration the jurisdiction and cause of action. Other banks or financial institutions can also apply jointly. The application is filed with the required fees, documents and evidence. The LI Act is also applicable to the DRT cases, so the bank has to take proper care and file the application well within time. If the defendant has to appeal an order of the DRT,
he has to first deposit the 75% or the prescribed amount as decided by the tribunal. Failure of payment would automatically mean a failure of filing application of appeal.
The tribunal also issues a recovery certificate to the applicant. Recovery officers attached to the tribunal have adequate powers for recovery under the act. On the receiving of the recovery certificate, the recovery officer has to proceed
by attachment and eventual sale of a movable and immovable property. The defendant is not allow to dispute the correctness of the amount given in the recovery certificate. Orders of the recovery officer are applicable within thirty days to the tribunal.
The extraordinary feature of the DRT is the overriding effect when there is an inconsistency with any other law or
in any instrument by virtue of any other law for the time being in force.
In Allahabad Bank v. Canara Bank, AIR 2000 SC 1535 it was held that DRT is said to be a special Act for recovery of the debt due to banks and financial institutions. DRT has overriding effect over the provisions of Companies Act,1956,
hence leave of the company court is not require even if the company is under winding up proceedings.
Lok Adalats under Legal Services Authority Act
Lok Adalats are organize under the Legal Services Authorities Act, 1987. They were develop to bring about a dispute settlement mechanism all over the country. Lok Adalats basically derive jurisdiction by consent or when the court is convince that the dispute can be potentially settled at Lok Adalats. It is govern by the ideas of fair, equity and good conscience and various other legal principles. In case of a settlement, the award would be binding on the parties to the dispute. No appeal lies in any court against the award. Presently, Lok Adalats are typically organised between a dispute which is under the value of 20 Lakhs.
Lenders Liability Act
On the basis of the recommendations of the working group on Lenders’ Liability Laws constituted by the Government of India, RBI had finalised a set of codes of conduct known as ‘the Fair Practice Code for Lenders’ and advised banks to adopt the guidelines. All the banks went ahead and went to make their own versions of Fair Practice Codes as per the guidelines and
started implementing them from 1st November 2013.
The most interesting features in the Lenders Liability Act are:
- Banks and financial institutions should give acknowledgement to all loan applications with a receipt. The loan applications should scrutinize all the applications within a reasonable period of time. Loan applications for the priority sector and advance amounting up to 2 Lakhs should be comprehensive.
- Lenders should ensure that the credit appraisal is properly done only after there has been an assessment of the creditworthiness of the applicants. Margin and security stipulation SHOULD NOT be a substitute for the due diligence on the creditworthiness or other important terms and conditions.
- The lender should inform the borrower the sanction of the credit limit that he can allow along with the terms and conditions. Further, he should keep the borrower’s acceptance of the credit limits and terms and conditions on the record.
- Duly signed acceptance letter should form part of the collateral security.
- In the particular case of Consortium Advances, the participating lenders should make their own procedures to complete the appraisal of the proposal in a time-bound manner. Communicate their decision on financing or otherwise in a reasonable period of time.
- The lenders should make sure that timely disbursement of loans sanctioned in conformity with terms and conditions governing the sanction.
- Post disbursement supervision by lenders, with respect to loans up to 2 lakhs, should be constructive with a view taking care of any difficulty the borrower can face.
- The lender should release all securities on receiving payment or realization of the loan, subject to any conditions or right of lien or any other claims that a lender can have against the borrowers.
- Lenders should not interfere in the business or affairs of the borrower except what is allow and agree upon in the terms and conditions of the loan sanction documents. At the time of recovery of loans, lenders should not stoop down to a level of undue harassment towards the borrower.
- Apart from implementing the Fair Practices Code, banks should have a proper system for grievance redressal system.
- Bankers should also set up codes for Bankers’ Fair Practices Code, Fair Practices Code for Credit Card Operations, Model Code for Collection of Dues and Repossession of Security etc. These codes are all voluntary base and can be implement only if the bank wishes to set them up.
It is a grievance redressal system. The service is available for complaints against a bank’s deficiency of service. A customer of the bank can submit a complaint against the deficiency in the services of the bank. If he does not get a satisfactory response from the ban,
He can go ahead and approach the banking ombudsman for further action and investigation. Banking Ombudsman is typically appoint by the RBI under the Banking Ombudsman Scheme, 2006. RBI as per Section 35A of the BR Act, 1949 introduced the Banking Ombudsman Scheme with effect from 1995.
Important Features about the Banking Ombudsman Scheme:
- Banking Ombudsman is a senior official appoint by the RBI to redress customer complaints against certain deficiencies in certain banking services cover under the grounds of complaint specify under Clause 8 of the Banking Ombudsman Scheme 2006.
- All Schedule Commercial Banks, Regional Rural Banks and Schedule Primary Co-operative Banks are cover under the scheme.
- Twenty Banking Ombudsman have been appoint with their offices located mostly in state capitals. The addresses and contact details of the Banking Ombudsman offices have been mentioned under Annex I of the Scheme.
- A customer can also make a complaint on the following groups if he feels there is a deficiency in the service with respect to loans and advances:
- Non-observance of Reserve Bank Directives on interest rates; – delays in sanction, disbursement or non-observance of prescribed time schedule for disposal of loan Applications;
- Non-acceptance of application for loans without furnishing valid reasons to the applicant; and
- Non-adherence to the provisions of the fair practices code for lenders as adopted by the bank or Code of Bank’s Commitment to Customers, as the case may be;
- Non-observance of any other direction or instruction of the Reserve Bank as may be specified by the RBI for this purpose from time to time.
Other Important Provisions
There are no costs involve in filing complaints with the banking ombudsman. The banking ombudsman does not levy or charge any fee for filing and resolving customers’ complaints.
The amount to be pay by the bank to the complainant in the form of compensation because of the loss suffer by the complainant is limit to the amount arising directly out of the act or omission of the bank or
Rs 10 Lakhs, whichever is lower.
The Banking Ombudsman can award compensation not exceeding Rs 1 lakh to the complainant only in the case of complaints relating to credit card operations for mental agony and harassment. The Banking Ombudsman has to take into account the loss of the complainant s time, expenses incurred by the complainant,
harassment and mental anguish suffered by the complainant while passing such award.
The Consumer Protection Act,1986
The Act extends to the whole of India except J&K, it covers all goods and services except the ones which can be resold or
for commercial purpose and services rendered free of charge and a contract of personal service.
Some of the features of this Act include:
- The complaint can be makes by a consumer or any voluntary consumer association register under the Companies Act, 1956 or under any law enact by the Centre or State Govt. or one or more consumers, having the same interest in case of death of a consumer his/her legal heirs or representative.
- This act is made for speedy disposal of the redressal of consumer disputes.
- Consumer councils are mainly made to promote and protect the rights of the consumers. The central councils have the jurisdiction of the whole country, while the state council takes care of the whole state followed by a district council which has jurisdiction over the whole district.
- State Council is head by the chairman of the council, who is the minister in charge of the Consumer Affairs in the State Government.
- The complaint of the consumers are deal by the District, State and National Commissions. District and State are establish by the State Governments and the National is establish by the Central Government. There is a pecuniary jurisdiction of these commissions, cases up to 20 lakhs are deal by the district forum. Above 20 lakhs and less than 1 crores are mainly handle by state commissions, plus the appeals against the orders of the district forum within the state. The cases exceeding 1 crores will be handle by the Central Commission. They also deal with appeals against the order of any State Commission.
- Complaints should be made in a prescribe manner with all the relevant details, evidences and applicable fee. Supporting affidavit is require. Admissibility of the complaint is to be decide within 21 days.
Tax Laws applicable to Banking Operations
Like all the business, banks also have to ensure that they are compliant with the tax laws of the country. They should be aware of the different applicable provisions and laws (Finance Act, Income Tax Act) to deduct and pay all kinds of taxes including – Income Tax, Service Tax, Finance Tax etc. As an employer and the beneficiary of different services, banks have to adhere to the applicable tax provisions through which it is governed. Apart from all the role that it plays as an employer and beneficiary of different kind of services,
Banks are expected to pay tax on the interest payable to the customers as per the directives of authorities like Tax Deducted at Source (“TDS”) on interest that is payable on fixed deposits, NRO deposits,
income on investments made by the bank and dealing in securities by banks etc.
Banks should take care of a series of things when it comes to tax laws that are applicable to them:
- Collection of taxes and recovery is handle properly.
- Deducted taxes should be pay within the prescribed limit to the concerned authorities. This is one of the crucial steps of compliance requirements. Non-compliance or wrong information can lead to legal action or penalty.
- Banks are require to keep proper records of their tax collections and remittance.
- Further, Banks are also require to report the details to the authorities within a specific time frame. The reporting requirements can include quarterly reporting, submission of half yearly or annual statements.
- At the time of salary being given to the employees, banks should as a practice deduct applicable tax at the source and arrange to issue the certificate for TDS on Form 16 to employees. For deductions like payment to contractors, a similar form of TDS on Form 16A should be issue to service providers.
- Form 16 and 16A (TDS Forms) should serve as evidence of tax deducted at source; as a record; and enable the employees and contractors to claim a refund of the tax.