Take a relook at OTS norms for loan recovery: Karnataka HC

Questions why a borrower is allowed to pay only 70% on the secured portion and the remaining 30% is waived

The High Court of Karnataka has advised the Ministry of Finance and the Reserve Bank of India to have a re-look into the norms of One Time Settlement Scheme (OTS) for banks to recover loans while questioning why payment of only 70% of the secured portion of loan under OTS is demanded even when more amount could be realised from the pledged assets.

“It is not understandable as to why a borrower is permitted to pay only 70% on the secured portion and the remaining 30% is waived. This means even when a security can realise more money, borrowers are absolved by paying only 70% value. Though this is a policy matter and not under challenge, it is appropriate for those concerned in the Ministry of Finance and the RBI to have a re-look into the Scheme,” the High Court said.

Justice P.S. Dinesh Kumar made these observations while dismissing with ₹2 lakh cost a petition filed by one Balakishan Boob, who is a guarantor of M/s. Bhagwan Cotton Ginners Pvt. Ltd., Raichur.

“It is rather strange that banks lend money without proper tangible security and offer to receive a portion of it under the OTS Scheme. Logically, this is preposterous because, banks deal with money belonging to the depositors. Waiver of portion of money lent by whatever name it is called, directly results in inflation and shall have adverse impact on the economic health of the nation,” the court observed.

On petitioner’s claim that OTS is non-discriminatory and non-discretionary in nature, and as per the norms OTS has to be considered on the ledger balance as on the date of declaration loan as non-performing asset (NPA), the court observed, “if this contention is to be accepted, any borrower/guarantor may choose to repay at their sweet leisure several years after declaration of NPA. This is anti-thesis of economic progress. In financial market, money has to grow by the day.”

The petitioner had questioned the decision of the Bank of Maharashtra in rejecting petitioner’s claim on behalf of the company for OTS scheme 2020-21. The bank had said that the petitioner had not honoured the OTS benefit extended in 2018-19 and went on making claims under OTS every year thereafter. While pointing out that the overall dues from the company was around ₹14 crore and pledged assets were valued around ₹50 crore, the bank said the petitioner was offering around ₹5 crore repayment under OTS.

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