Supreme Court: Notice Issued On RBI Appeal Against Kerala High Court That Lifted Loan Restrictions Imposed On Co-Operative Bank

The Supreme Court in the case Reserve Bank of India V. Thiruvalla East Co- Operative Bank Ltd observed and has issued the notice to in an appeal filed by the Reserve Bank of India, against an order of the Kerala High Court that lifted the loan restrictions imposed by it on Thiruvalla East Co-Operative Bank Ltd.
The Division bench comprising of Justice Sanjay Kishan Kaul and Justice Sudhanshu Dhulia in the case observed and has issued the notice.
In the present case, the Division bench of the Kerala High Court in the case observed and has affirmed the order of the single bench headed by single bench that lifted the restriction placed on the Co-Operative Bank by RBI to stop further sanction or the disbursal of loans and advances as the bank was not given an opportunity of hearing.
Therefore, the Reserve Bank of India, RBI had conducted an inspection before issuing the prohibitory order to the Cooperative Bank, along with an inspection report.
As per the inspection report, there being some deficiencies in banking practice, which includes some loan advance schemes that were susceptible to foul play.
The court in the case also referred to the Banking Regulation Act, 1949, wherein it has been held by the Kerala High Court that the RBI cannot completely prohibit the transactions of the bank under Section 35 and Section 36 unless there were exceptional circumstances to do so.
Further, the High Court observed and has held that factual appreciation was required before passing orders of prohibition and that an opportunity of hearing must be given to the banking company before passing such an order.
It has been concluded by the said court that the RBI had not given proper reasons before passing the order, which showed non application of mind and there being no demonstrable reasons are assigned by RBI before resorting to complete prohibition of disbursal of fresh loans and advances. The RBI could have ordered the bank to stop advancing loan under that scheme till deficiencies are cured. Therefore, this court have already noted that no reasons are assigned in the impugned decision except the appending inspection report.
Accordingly, the court stated that the impugned decision prohibiting disbursal of fresh and advances was without application of mind.