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Can Banks be sued in Court for piling of bad loans

Vijay Mallya’s default of loan to banks created such a hype and hysteria among media that many people forgot the true reasons behind a business failure and rather started judging banks from the same lens. The raw emotion and a feeling of helplessness has created anger and frustration towards people like Vijay Mallya and banks who supported his businesses and lot of clamour on filing cases against banks in court. In this article, we try to understand whether banks lend recklessly or they follow structured procedure.

Does Company defaults happen overnight

Each business works under severe and several constraints. So if the industry is not doing well then the companies under it also suffer. The stress levels get reflected in delayed payments to banks as well as salaries of employees. So what will banks do when companies show stress ? 

Banks simply dont make a provision on day one. There is a process involved wherein banks try various means to restore the business operations of stressed companies. Banks follow CDR (Corporate Debt Restructuring)  guidelines (Corporate Debt Restructuring Mechanism) to give handhold to sick and stressed companies during needy time.

Whenever any company comes under stress, the same would be reported to RBI and a consortium of banks would be made to track the revival and smoothen the operations on monthly basis. If the business does not revive within stipulated time then banks declare the loan as non performing asset. There are set of RBI guidelines on provisioning/write-off mechanism for bad and non performing loans: Master Circulars.

Whatever provisioning is getting made, the same is reported to RBI on a regular basis and the same gets spread over 4 years. For example, if a company had outstanding loans and interest to the tune of Rs. 100 crores with a bank and the entire thing has to be written off then banks write off loan to the extent of  Rs. 25 crore in 1st year, Rs. 40 crore in year 2 and 3 and Rs. 35 crore in 4th year.

Whatever write-off/provisioning is done is under RBI guidelines and is permitted as per law. Post write off, banks initiate recovery mechanism by selling the assets pledged by company. In case of any recovery, provisioning will be written back in balance sheet as non-operating non-cash profit in subsequent years.

So, coming to our discussion topic today, depositors cannot sue the banks as they are already following the guidelines of RBI and existing laws. Unless a fraud is committed and guidelines not complied, court won’t find any merit in such cases. So my request for all those depositors is dont get duped by fake promises of dubious financial institutions. Investing in Banks is much safer than other forms of financial institutions because of stringent measures being implemented on monitoring and other parameters.