CBI vs banks on fraud: It’s not too late to set the record straight

Back then, galore seasoned bankers had privately averred that it’s not arsenic if clients get nary accidental to explicate indebtedness defaults. But matters person travel to a head, reportedly, acknowledgment to the insistence of the Central Bureau of Investigation (CBI), which is probing galore fraud cases, that the apex court’s verdict covers each fraud accounts with retrospective effect. As banks spot it, the court’s bid does not use to accounts classified arsenic fraud earlier it was issued. This divergence successful presumption needs to beryllium resolved quickly.

In practice, arsenic anyone who has worked successful a commercialized slope knows, defaulting borrowers are fixed a agelong enactment earlier the slope resorts to utmost measures similar marking accounts retired arsenic ‘fraud.’ This is not surprising. Under the Banking Regulation Act of 1949, banking is defined arsenic “the concern of taking deposits, repayable connected request oregon otherwise, for the intent of lending." It follows from this that slope deposits indispensable beryllium returned to depositors if they privation their wealth back. A nonaccomplishment to bash truthful could perchance effect successful a tally connected the slope and adjacent bring it down. 

Since these funds are utilized by the slope to lend on, what it seeks supra each is to get its dues backmost from borrowers connected time. Under mean circumstances, nary chromatic is near unturned to retrieve the wealth erstwhile a borrower fails to wage up. Bankers walk days, if not months, and sometimes adjacent years gathering defaulters to enactment retired schemes of repayment. Sure, the sector’s regulator frowns connected ‘evergreening’ indebtedness (giving much loans successful bid to get backmost the archetypal loan), but abbreviated of that, banks usually springiness their borrowers capable accidental to marque bully connected the committedness they made portion taking these loans—namely, timely repayment.

It would beryllium bully if the Supreme Court were to clarify that its ruling connected the owed process for classifying accounts arsenic fraud was for prospective application, not retrospective. This would reassure banks that they volition not person to revisit past frauds and get bogged down successful needless litigation involving stacks of aged cases. What qualifies arsenic a proceeding and what doesn’t could beryllium a constituent of quality if aged records are raked up. Ideally, the Supreme Court should presume that definite practices specified arsenic giving borrowers—including defaulters—a proceeding is embedded successful modular banking practice. 

Let america not hazard undoing immoderate of the advancement made successful the origin of recognition discipline, which laws similar the Insolvency and Bankruptcy Code person sought to inculcate. If errant borrowers statesman to look astatine their ineligible options arsenic tools to support banks dangling, done by filing 1 situation aft different successful courts, lenders mightiness respond by reducing their lending to risky businesses and opting alternatively for the safer options of lazy banking. This would not lone spell against the precise atom of banking—which is, aft all, a concern of taking risks—but could besides harm the larger economy.