Individual notices by banks may delay loan recovery – Banking & Finance News

The Reserve Bank of India (RBI)’s recent circular mandating banks to send individual notices to the defaulter in cases of consortium lending may delay recovery process, say bankers. The circular, issued on Monday, says in case of consortium lending, all banks will be required to send separate show-cause notices to the borrower.

Lenders argue that separate notices will likely have variations in language and content, potentially giving the defaulter grounds to approach the court, claiming inconsistency among the notices.

“There can be some difference in the language and the content of notices because each bank starts its own proceeding after an account is declared fraud. This can create some legal complications later on,” head of recovery of a public sector bank told FE.

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The RBI on Monday revised its master directions on fraud risk management to incorporate the recommendations of a Supreme Court judgment which asked banks to hear a borrower before an account is classified as fraud.

As per the revised rules, all regulated entities will now have to issue a detailed show-cause notice to the persons, entities and its promoters, whole time and executive directors against whom allegation of fraud is being examined. The notice would have to provide complete details of transactions and events on the basis of which declaration and reporting of a fraud is being contemplated, the RBI said. The circular stated that defaulters should be given a reasonable period of at least three weeks to respond to the show-cause notice.

“The bank (in case of sole lending) or the individual banks (in case of multiple banking arrangement or consortium lending) shall ensure that the principles of natural justice are strictly adhered to before classifying/declaring an account as fraud,” said the RBI circular.

According to sources, bankers had discussed this issue recently and advocated for a single notice issued by the lead bank. They cited the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act in which the lead bank communicates with the defaulter.

“When the lenders initiate proceedings under the SARFAESI Act, the lead bank sends the notice on behalf of the consortium. Same should have been applied in this case,” said a senior official of a public sector bank.

Legal experts say that banks should coordinate with each other before sending notices to a defaulter. “If each bank in the consortium is sending individual notices with different language, then some borrowers may take advantage of it and delay the process,” said senior corporate lawyer HP Ranina. “Banks should coordinate before sending individual notices,” he said.