“Banks Are Dealing With Public Money”: Karnataka High Court Calls for Strict Adherence To RBI Guidelines

The Karnataka High Court recently observed that banks dealing with public money must exercise utmost caution while conducting their business and strictly follow RBI guidelines and internal circulars.

The court warned that departures from prescribed procedures can adversely affect a bank's financial operations, create chaos in the banking system, and ultimately impact the country's economy.

A Division Bench of Justice D.K. Singh and Justice T.M. Nadaf made the observation while setting aside an appellate tribunal's order in a dispute between Canara Bank and Texport Overseas Pvt. Ltd. The Bench restored the dismissal of the Bank's recovery claim arising from alleged losses on 48 Forward Purchase Contracts (FPCs).

Highlighting the responsibilities that accompany the handling of public funds, the court observed:

“We try to emphasize here on record that as stated supra as the Banks are dealing with public money, they should take all caution and care while dealing in their official transaction business. Any exception or diversion may cause hazardous to the financial business of the Bank and create chaos and reflect on the economy of the Country. The Bank and its officials are expected to adhere to the Rules, Guidelines issued time to time by the RBI and the internal Circulars issued by the Head Office to the Branch Offices of the said Bank while dealing with their official business with the customers.”

The Bench further cautioned that exceptions to established rules and procedures can create opportunities for misuse by those seeking to take advantage of lapses in banking systems. Such departures, it observed, can result in financial losses and have a wider economic impact.

On that aspect, the court observed:

“An exception to the said Rules may pave way to several sinisters who are just waiting and projecting to take advantage of such a situation causing loss in financial business, which ultimately having effect on the economy of the Country. It is high time for the Bank to adhere strictly to the Rules by giving proper directions to the employees without taking any diversion or exception to the prescribed Guidelines, Rules, Circulars in their official transaction or business, and any exception taken by any of the employees be dealt with iron hands, keeping in mind that they are owning fundamental duty towards the public money and accounted for each penny.”

The observations were made while the Court was examining Canara Bank's claim for recovery of about ₹19.41 crore. The Bank sought to recover about ₹14.55 crore towards alleged losses and about ₹4.85 crore as interest after cancelling 48 FPCs that it claimed had been booked in 2008 by Nisha Designs and later assumed by Texport Overseas Pvt. Ltd.

The Debt Recovery Tribunal had dismissed the Bank's claim after concluding that the disputed transactions had not been proved through the evidence on record. An appellate tribunal later reversed that decision and partly allowed the Bank's appeal. Texport Overseas and other parties challenged that order before the High Court.

While examining the record, the Bench noted that the borrowers had specifically denied booking the disputed contracts. In those circumstances, it held that the burden rested on the Bank to establish that the FPCs had in fact been booked on the borrowers' instructions.

The court found that the Bank had failed to produce the concluded contracts or documents authorising the person allegedly acting on behalf of the company. It also noted that the Bank had not examined key individuals connected with the disputed transactions.

“In the case on hand, the Bank neither produced the concluded contract nor produced any authorization letter or resolution in favor of said Mr.Dinesh Singh to deal with the Bank on behalf of the petitioner for booking FPCs. The Bank has not taken any pain to examine Mrs.Vijaya Kamath, who was the employee of the Bank managing the official business of the Bank at Overseas Branch, nor the said Mr.Dinesh Singh”

The bench also found that the appellate tribunal had wrongly shifted the burden onto the borrowers by requiring them to establish that Dinesh Singh was not their employee.

“The DRAT without considering these aspects of the matter, has casted a reverse burden on the petitioners holding that the petitioners have failed to prove that said Mr.Dinesh Singh is not their employee.”

Ultimately, the High Court restored the Tribunal's dismissal of the Bank's recovery claim and set aside the appellate tribunal's order.

The bench was also critical of the appellate tribunal's reasoning. Stressing that reasons are the "heart and soul" of a judgment, it held:

“The reasons are considered as heart and soul of the Judgment. The said, we neither find heart nor soul in the order of DRAT, except muted words without any legs to stand.”