The Kerala High Court, In a recent ruling, has underscored the restricted scope of writ courts in challenging decisions made by lending institutions like banks. The judgment reiterates that writ jurisdiction should not be invoked against lending institutions’ decisions unless there are substantial violations of rules, regulations, or statutory provisions. The case involved a petitioner who sought relief after the bank rejected his request for loan restructuring, highlighting the importance of adherence to lending institutions’ policies and procedures. The Court’s decision also emphasizes the discretion lending institutions have in assessing the viability of loan restructuring requests. This ruling serves as a reminder of the judiciary’s role in upholding principles of equality and fairness in matters concerning lending institutions and borrowers while respecting the lenders’ discretion.

The Kerala High Court recently emphasized that the jurisdiction of writ courts cannot be invoked against decisions of lending institutions like banks unless there are compelling reasons, such as violations of rules, regulations, or statutory provisions. This clarification came in response to a petitioner who approached the writ court after the bank rejected his request for loan restructuring.

Justice K. Babu noted that the bank had denied the petitioner’s request for loan restructuring after carefully considering the viability of his proposal. In the exercise of its jurisdiction under Article 226 of the Constitution of India, the Court cannot replace the discretion of lending institutions unless there are substantial violations of rules, regulations, or statutory provisions.

The petitioner had obtained a loan from the 6th respondent in 2015 by depositing title deeds of property, including a theatre complex, as collateral for an equitable mortgage. However, in 2020, the petitioner defaulted on the loan repayment, and the bank classified the loan account as a Non-Performing Asset (NPA). The bank initiated SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest) proceedings by issuing a notice. The petitioner subsequently filed a writ petition (W.P.) No. 25727/2021 in the High Court, which was disposed of by allowing the petitioner to approach the bank for loan restructuring or a one-time settlement. The petitioner then sought restructuring of the loan, which was subsequently denied by the bank. This denial led the petitioner to file a writ petition.

The petitioner’s counsel argued that the bank’s rejection was contrary to guidelines issued by the Reserve Bank of India (RBI). It was alleged that the bank refused loan restructuring without considering the commercial viability of the petitioner’s property.

In response, the respondent bank contended that the restructuring of the loan was denied because it was not commercially viable and was against the bank’s MSME Rehabilitation and Restructuring policy. The bank also cited other financial impediments for denying the restructuring. The bank asserted that the firm managed by the petitioner was operating at a loss and did not meet the parameters for loan restructuring. The bank emphasized that lenders have the discretion to assess the viability of loan restructuring, as the commercial contract for borrowing money was between the lender and the borrower, and broad guidelines are provided by the RBI and the Union Government.

The Court took note of the bank’s rejection of the petitioner’s proposal for loan restructuring, which was based on RBI circulars and the finding that the petitioner’s proposal was not commercially viable. The Court emphasized that lending institutions like banks have the authority to assess the viability of proposals based on approved policies and make informed decisions.

The Court stated that the bank had analyzed the proposal for restructuring and concluded that the borrower would not be able to generate a positive cash flow, making the proposal commercially unviable. The Court found that the bank had considered all the relevant aspects before rejecting the petitioner’s proposal.

In the present case, the bank has carefully analyzed the proposal for restructuring based on the inputs submitted by the petitioner himself and came to the conclusion that the proposal was not viable. It is evident from the materials placed before the Court that the bank has considered the entire relevant aspects while rejecting Ext.P13 proposal.”

This judgment reaffirms the discretion and authority of lending institutions to evaluate loan restructuring requests and make decisions in accordance with their established policies. It also highlights the limited role of writ courts in reviewing such decisions, emphasizing that writ jurisdiction should only be invoked in cases involving substantial violations of rules, regulations, or statutory provisions.

Relevant Provisions of Law:

1. Article 226 of the Constitution of India: Article 226 grants the High Courts of India the power to issue writs for the enforcement of fundamental rights and for any other purpose.

2. Reserve Bank of India (RBI) Circulars: RBI issues circulars and guidelines that banking institutions are expected to follow. These circulars may provide instructions and standards for various banking activities, including loan restructuring.

3. MSME Rehabilitation and Restructuring Policy: This policy outlines the procedures and criteria for restructuring loans for Micro, Small, and Medium Enterprises (MSMEs).

This case demonstrates the importance of adherence to lending institutions’ policies and procedures when seeking loan restructuring. It also underscores the judiciary’s role in ensuring that the principles of equality and fairness are upheld in matters involving lending institutions and borrowers. The Court’s decision emphasizes that writ courts should only intervene when there are clear violations of the law or established rules and regulations.

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