Wednesday, November 28, 2012


In our initial blogs we have cautioned our readers against curiamphobia, that is the fear of Courts, driving home the point with Case references from the Honourable High Courts and the Supreme Court. But there are many angles to the relationship between the Credit Analyst and the Rules (ya-‘of the game’ if you are the Sportsy type!) A fundamental belief which has already been put forth by us on an earlier occasion is that Credit and the Legal are at best distant cousins, far from being brethren. The following exchange we had a few days back with a senior officer we were interviewing for the post of Credit Processing Cell head is illustrative of the malady. In the capacity of the CPC head, he would be in charge of all loan proposals of Rs. 10.00 crores and above, not an amount to be sneezed at.
The question we posed was like this: In the states of the North East, save may be Tripura, normally an industrial unit should have a local entity as a co-owner in some manner, and rightly so. A Company ABC Ltd. is proposed under the Companies Act, under which the local partner is setting up a state of the art hospital in association with a well known specialized group from the mainland. The share capital the local person is inducting is in the form of land worth Rs. 5.00 crore. Now, as things stand today, property registration is on hold in the state. Can the land, which is at the moment non-transferable, be so inducted, tell me..? Without batting a eyelid, our friend said “I’ll forward the file for legal examination..”. Zero out of Hundred, my friend, we exclaimed. The issue is not a TP Act issue at all. If a non-transferred property exists in the books of a Company, the Auditors are required merely to make a mention of the absence of transfer in the Notes, but the property can be inducted as share capital. In short it’s a legal issue for the promoter, but not for the Company, which as we all know, is a separate entity. So, don’t rush for the Law Officer’s cover at the drop of a hat, we all know what hemmers and hawers the tribe is, and what bleak view the legal fraternity holds about itself is evident from the last entry of our good old blog….

Secondly, what’s a legal opinion? For most analysts it’s like operating a vending machine- drop in a coin, and lo…out it comes! No my friends, it’s not so simple. Now tell us…in the state of Meghalaya, can agricultural land be mortgaged to a lender for non-agricultural purposes? No, goes common wisdom, for its not so in maybe Assam. We had the issue legally examined. How..? First we went through the Meghalaya Statute ourselves. It turned out that there is no distinct land use defined anywhere- ‘land’ is just ‘land’ – not ‘residential’, ‘agricultural’ or ‘industrial’ and it can be charged for any purpose. So progressive. Keep things simple, we are told by the best brains.  Armed with the two Bare Acts, we went to our Senior Counsel, showed her the works, and by evening we had in hand an opinion conforming to our research, and it surprised the most seasoned top bureaucrats of the Government!

Now for the thing we started with- the practical side of Analyst vis-à-vis Rules, or we’ll broaden it to Public Sector FI executive vis-a-vis Rules.

Broadly, you will be confronted with two types of Rules- External and Internal. By external rules we mean Law, be it the IT Act, Companies Act, Anti Money Laundering legislation, the CrPC, the DRT Act, etc. etc. Internal Laws, those which are Internal to your institution or your department, or your person, could be written or un-written. They are the Circulars, the Manuals, why, even your Morals, the Ten Commandments…Important thing is, a violation of the first set could end in Prosecution and worse, whereas the violation of the second set could lead to service related issues, you know what. Thus not acting on an Income Tax attachment order could lead to State vs. You, whereas overstaying your sanctioned leave would earn you at the most a memo. So, it’s best to pause and think when you are considering transgressing a rule- you are jumping a red light if the rule is external, but merely annoying your Mom or Spouse if you momentarily turn you head to appreciate a beautiful face while riding a bike!

On the other hand, look at the liberal interpretation of Law as illustrated in our previous Posts. The institution may not lose in the Court relying upon the Case Law, but you could be in trouble over the violation of internal procedure and rules. For instance, a material credit into a loan account by a borrower revives the debt for purposes of the Limitation Act, but if you Institution’s rules say that the officials should obtain a Balance Confirmation every 6 months, you could be questioned for violating the internal rules.

Time for a vow: this is becoming a legal blog it seems. So in our next entry, we shall talk about money…the business of lending…


A -who else?- blonde goes for an interview for the post of financial executive. What do you think eminently qualifies you to become a Finance Executive?...asks the Boss. “Wellllll….I’ve always loved to handle money you know… says the lady!

Tuesday, November 27, 2012


At a recent talk we gave at the premier financial institution of North East India, we had occasion to mention some legal 'believe it or not 'facts. One that turned a few heads was 'Genuine Mistake of Counsel'.

It was our legal mentor TVS Rao who brought to our notice this interesting phenomenon. That a genuine mistake of a brother legal practitioner is looked upon by the top Courts with indulgence. The case TVSR mentioned was about time-barred debt, but we could not get that reference. But here is another interesting one in which the Supreme Court reinstates a time-barred Insurance Claim on ground of mistake of counsel:

The case is Concord of Indian Insurance Companies Ltd. vs Nirmala Devi and Others decided by the Supreme Court on 16.04.1979. The Accident Claims Tribunal had pronounced its verdict on 15th September 1976 and appeal , if any, had to be preferred by 19th January 1977 but the filing was delayed by 30 days, due to a mistake by the petitioners' counsel, in computing the date of limitation. The petitioners had made two prayers, one for restitution of the case and second, for the quantum of compensation.

The High Court had earlier held that a lawyer's ignorance was no ground for condonation of delay. The matter ultimately reached the Supreme Court, and the Honourable Court held that a legal advice honestly sought and actually given without any malafide intent or element of recklessness was ground for condonation of delay. Quoting another judgement, the SC said

" The law is settled that mistake of counsel may in certain circumstances be taken into account in condoning delay although there is no general proposition that mistake of counsel is by itself always a sufficient ground. It is always the question whether the mistake was bonafide or merely a device to cover an ulterior purpose such laches on part of the litigant or an attempt to save limitation in an underhand way.

"I am of the view that legal advice given by a member of the legal profession can go wrong even as pronouncements on the question of law by Courts sometimes go err is human and lay men such as litigants are, may legitimately lean on expert counsel.."

For my credit analyst friends, the lesson is that for a bonafide mistake in any field, be it law or commerce, there is always succor from senior practitioners and senior colleagues. A blow against 'staff accountability'. Amen...

Friday, November 23, 2012


The latest Guru we adopted and acknowledged is Arindam, so far as our writing habits are concerned. He's a colleague at Chabiwala Bank, and it happened while we were chatting over cabbages and Kings. It is alleged that there is an elusive thing called 'credit expertise' in Indian Banking, and worse, it is rumored that the writer possesses it in some measure. Start a page on Facebook, Arindam suggested, where you would share your views with us. But then Junior felt it had better be a blog  for better accessibility, and so this re-incarnation

1.33 is the figure the tribe swears by, a sort of holy badge or emblem and so the page was christened accordingly, the Fahrenheit prefixed on the analogy of Michael Moore's excellent documentary, for 1.33 alone looked bald.

We don't plan to emulate the King of Hearts from Alice in Wonderland ("Begin at the beginning,", the King said, very gravely, "and go on till you come to the end: then stop”). At the top of our mind is the Legal angle currently. How much does Law have to do with Credit? Basically to the extent it concerns contractual obligations of the Bank and the Borrower. Of course the Laws concerning recovery,like SARFAESI and the DRT mechanism also get a lot of attention. But we'd stick out our neck and assert that the intimacy of the connection is over-estimated, which happens because normally, to begin with, the Dealing Officer is a stranger both to Credit as well as to Law. One has frequently seen instances where Credit has indiscriminately made over matters to Law Department, on the slightest hint of a legal angle. For instance, the guarantor to a Cash Credit loan, alas, dies. The branch seeks guidance from the Controller as to what steps are required. There are legal angles, albeit of routine nature, but the file is commonly handed over to Law. The account, if of a moderate size, falls due for renewal, which is not done by anybody pending compliance of the legal requirements, and an otherwise good account, in due course, becomes an NPA and a good business run by good people falls a prey to the ignorance of the a distinction between the legal angle, and the commercial angle. The RBI requirement of a renewal should have been clearly distinguished and kept divorced from the legal side and a renewal or a continuation approved so as to allow to the business to run unhampered.

Fortunately in our DO days we had the good fortune of working with two excellent Law Officers. The moment a letter reached their hands, they would sniff it -whether it was a legal matter or an administrative matter, and if the latter were the case, throw back the file at you and castigate you for not knowing the difference. In the above-said hypothetical case, they wouldn't have touched the issue with a barge-pole. You'd have been told that these were very common issues on which the Bank had a host of circular instructions, which you should take the trouble of going through before rushing to us.

Well, we have picked up some Case Law on common misconceptions on legal matters, which always cause lot of inconvenience to Bank and Borrowers. (The issues are not connected to the above 'renewal' issue, mind you.)

1. A mortgage is not invalid in the absence of a 'Mutation'. We quote two High Court Judgements:

The first case is about the impact of a Mutation on a Title to a property and the Allahabad HC deals a judgement contrary to the view of the Lower Court:

" ...the Lower Court.. has been swayed away by the so called mutation in the revenue record in favor of Inder Kaur. Mutation of a property in the revenue record does not create or extinguish title nor has it any presumptive value on title. It only enables the person in whose favor mutation is ordered to pay the land revenue in question. The learned Additional District Judge was wholly in error in coming to a conclusion that mutation in favor of Inder Kaur conveys title in her favor. This erroneous conclusion has vitiated the entire judgment."

(Second Appeal No. 759 of 2009. Decided On: 24.05.2011-
Appellants: Nagar Palika Parishad Vs. Respondent: Zakir Hasan and Ors.)

Second case is of a similar nature wherein the Karnataka HC maintains the validity of an EM conflicting with Mutation in Revenue records:

"It is to be borne in mind that every revenue record maintained for whatever purposes cannot be treated as record of right. There are certain revenue records, which are maintained in the usual course of administration under the governmental orders issued from time to time. Such records are not maintained under any relevant provision of law. The entries made therein may not be after making necessary enquiry with due notice to the persons who are likely to be affected by the entries made in such revenue records. That a distinction is to be made between the revenue records which are maintained by the administration with reference to statutory enactments and such records, which are maintained under administrative instructions issued from time to time by the State and its agencies. For instance, every record of right prepared and maintained under the provisions of the A.P. Rights in Land and Pattadar Pass Books Act, 1971 shall be presumed to be true until the contrary is proved and until it is otherwise amended in accordance with the provisions of the Act. Every owner, pattadar etc., may apply for issue of passbook and the title deed and the title deed so issued duly certified by the competent authority shall be the title deed in respect of an owner/pattadar and it shall have the same evidentiary value with regard to the title for the purpose of creation of equitable mortgage under the provisions of the Transfer of Property Act, 1882 as a document registered..."

(Regular First Appeal No. 560 of 1987-Decided On: 21.04.1993
Appellants:State Bank of Mysore Vs. Respondent: M/s. S.M. Essence Distilleries Pvt. Ltd. and others)

'Evidentiary Value' has another interesting side-light. It is a common misconception that a valid EM cannot be created on basis of copies of documents. As we always tell our people, when an EM is created by the title holder, he or she creates charge on the property, and not on a set of papers, which have only an 'evidentiary value.'

(Statutory Warning: this dissertation does not purport merely to be 'the views of the author', but boldly asserts possession of Legal authenticity and rectitude... -to be continued...)