Parliament has competence to make laws regarding recovery of loans for cooperative banks

The Supreme Court on Tuesday held that the cooperative banks involved in the activities related to banking are covered within the meaning of 'banking company' and Parliament has legislative competence to provide for procedure for recovery of loan under the SARFAESI Act.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, allow banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans. It enables banks to reduce their non-performing assets by adopting measures for recovery or reconstruction.

A five-judge Constitution bench headed by Justice Arun Mishra said, "In our opinion, the framers of the Constitution cannot be said to have confined the meaning of 'banking' to a particular definition, as given in the Banking Regulation (BR) Act, 1949. The word 'banking' has been incorporated in Entry 45 of List I. The decision in Rustom Cavasjee Cooper (1970 verdict) vividly leaves no room for doubt that banking done by the cooperative bank is covered within the ambit of Entry 45 of List I".

The bench also comprising Justices Indira Banerjee, Vineet Saran, M R Shah and Aniruddha Bose, said entries have to be given full effect in pith and substance considering forms of business of cooperative banks performing the activities of banking under a licence and the same is covered within the purview of Entry 45 of List I.

It held, "The cooperative banks registered under the State legislation and multi State level cooperative societies registered under the MSCS Act, 2002 with respect to 'banking' are governed by the legislation relatable to Entry 45 of List I of the Seventh Schedule of the Constitution of India".

It said that "the Parliament has legislative competence under Entry 45 of List I of the Seventh Schedule of the Constitution of India to provide additional procedures for recovery under section 13 of the SARFAESI Act, 2002 with respect to cooperative banks".

The top court in its 159-page verdict held that the cooperative banks run by the cooperative societies registered under the State legislation with respect to the aspects of 'incorporation, regulation and winding up', in particular, are outside the purview of Entry 45 of List I (union list ) of the seventh schedule of the Constitution.

"The cooperative banks involved in the activities related to banking are covered within the meaning of 'Banking Company' defined under Section 5(c) read with Section 56(a) of the Banking Regulation Act, 1949, which is a legislation relatable to Entry 45 of List I. It governs the aspect of 'banking' of cooperative banks run by the cooperative societies," the bench said.

It added that the cooperative banks cannot carry on any activity without compliance of the provisions of the Banking Regulation Act, 1949 and any other legislation applicable to such banks relatable to 'Banking'.

"The recovery is an essential part of banking; as such, the recovery procedure prescribed under section 13 of the SARFAESI Act, a legislation relatable to Entry 45 List I of the Seventh Schedule to the Constitution of India, is applicable," it said.

The five-judge bench answered the reference made by a three-judge bench due to conflicting opinions and the question relates to the applicability of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) to the cooperative banks.

Some of the writ petitioners had also challenged the Parliament's competence to amend the provision of SARFAESI Act, which also relates to the cooperative banks.