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RBI Guidelines (Abstract) for Revival of Sick Industries

RBI Guidelines and Interest Rate circulars:- As per law and Supreme Court judgments, the RBI (Reserve Bank of India) Guidelines are statutory and mandatory. The violations of RBI (Reserve Bank of India) Guidelines by banks constitute an important defense for the borrowers and guarantors. 

Actual application of the said RBI (Reserve Bank of India) Guidelines in the drafting of the counter-claim requires in-depth knowledge and experience of law of pleadings, torts, banking and procedural laws etc.

Copy of the circular issued by the RBI (Reserve Bank of India) in Dec. 2002 is reproduced below. This circular, being one of the RBI (Reserve Bank of India) Guidelines  is quite useful in dealing with the bank litigations and in framing the counter-claims. The extract from the other RBI (Reserve Bank of India) guidelines is given just after this circular :-

'Fair Practices Code on Lenders' Liability' 

Ref.DBOD.No.Leg.BC. /09.07.007 / 2002-03       December 2002 

To

All Scheduled Commercial Banks/All India Financial Institutions
(excluding RRBs and LABs) 

Dear Sir, 

Fair Practices Code on  Lenders' Liability 

We advise that on the basis of the recommendations of the Working Group on Lenders’ Liability Laws constituted by the Government of India to study legislative proposals suitable for Indian conditions, we have examined the feasibility of introducing the Fair Practices Code on lenders' liability for the use of banks and Financial Institutions in consultation with select banks and Financial Institutions.  We have, now, prepared the following broad guidelines to be adopted by banks and Financial Institutions for framing the Fair Practices Code with the approval of their Boards.  

2. Guidelines on Fair Practices Code 

(i)                Loan Application forms shall be comprehensive to include information about rate of interest (fixed / floating) and manner of charging (monthly / quarterly / half-yearly / yearly rests), process fees and other charges, penal interest rates, pre-payment options and any other matter which affects the interest of the borrower, so that a meaningful comparison with that of other banks can be made and informed decision can be taken by the borrower. 

(ii)              Banks and Financial Institutions should devise a system of giving acknowledgement for receipt of all loan applications.  Banks / Financial Institutions should verify the loan applications within a reasonable period of time. If additional details / documents are required, they should intimate the borrowers immediately. If all the requirements are complied with by borrowers, banks / Financial Institutions should acknowledge for the same and state the specific time period from the date of acknowledgement within which a decision on the loan request will be conveyed to the borrowers.

(iii)             Acknowledgement should also state the amount of process fees paid or to be paid and the extent to which such fees shall be refunded in the event of rejection of any application for loan. 

(iv)            In the case of rejection of any loan application, lenders should convey in writing the specific reasons therefor. 

(v)              Lenders should ensure that there is proper assessment of credit requirement of borrowers. The credit limit, which may be sanctioned, should be mutually settled.   

(vi)            Terms and conditions and other caveats governing credit facilities given by banks/ Financial Institutions arrived at after negotiation by the lending institution and the borrower should be reduced in writing duly witnessed and certified by the authorised sanctioning authority; in respect of advances sanctioned by the Board of Directors or its committee the document of understanding should be certified by the authorised signatory preferably at Company Secretary level. A copy of such agreement should be made available to the borrowers for their record. 

(vii)           Lenders should ensure timely disbursement of loans sanctioned. 

(viii)         Stipulation of margin and security should be based on due diligence and credit worthiness of borrowers. 

(ix)            Lenders should keep the borrowers apprised of the state of their accounts from time to time and shall give notice of any change in the terms and conditions including interest rates, service charges etc.  Lenders should also ensure that changes in interest rates and charges are effected only prospectively.  To ensure the above, Banks / Financial Institutions should create appropriate information dissemination mechanism. 

(x)              The loan agreement should clearly specify the liability of lenders to borrowers in regard to allowing drawings beyond the sanctioned limits, honouring the cheques issued for the purpose other than agreed, disallowing large cash withdrawals and obligation to meet further requirements of the borrowers on account of growth in business etc. without proper revision and sanction in credit limits, and disallowing drawings on a borrowal account on its classification as a non- performing asset or on account of non-compliance with the terms of sanction. 

(xi)            Lenders should give reasonable notice to borrowers before taking decision to recall / accelerate payment or performance under the agreement or seeking additional securities. 

(xii)           Lenders should release all securities on receiving payment of loan or realisation of loan subject to any legitimate right of lien for any other claim lenders may have against borrowers. If such right of set off is to be exercised, borrowers shall be given notice about the same with full particulars about the remaining claims and the documents under which lenders are entitled to retain the securities till the relevant claims are settled / paid. 

3. Banks and Financial Institutions will have the freedom of drafting the Fair Practices Code enhancing the scope of the guidelines but in no way sacrificing the spirit underlying the above guidelines. For this purpose, the Boards of banks and Financial Institutions will also lay down clear policy as regards time frame, reasonableness of parameters indicated in the Fair Practices Code, etc.   

4. The Board of Directors should also lay down the appropriate grievance redressal mechanism within the organization to resolve disputes arising in this regard. Such a mechanism should ensure that all disputes arising out of the decisions of a bank’s functionary are heard and disposed of at least at the next higher level. The Board of Directors should also provide for periodical review of the compliance of the Fair Practices Code and the functioning of the grievances redressal mechanism at various levels of controlling offices with a consolidated report of such reviews submitted to the board at regular intervals as prescribed by it for this purpose. 

5. Separate instructions would be issued by Reserve Bank of India regarding resolution of disputes between the banks/Financial Institutions and the borrowers remaining unresolved at the banks / Financial Institutions level. 

6. Banks and Financial Institutions should take steps to have the ‘Fair Practices Code’ drawn so as to be in place by April 1, 2003. The adoption of the Code, printing of necessary loan application forms and circulation among the branches and controlling offices should also be completed latest by end of March 2003. The Fair Practices Code, which may be adopted by banks and Financial Institutions, should also be put on their website and given wide publicity.  A copy may also be forwarded to the Reserve Bank of India.   

7. Please acknowledge receipt.

Yours faithfully,

(M.R. Srinivasan)
Chief General Manager-in-Charge

Extracts from other RBI (Reserve Bank of India) guidelines issued since 1976 are reproduced below:-

RBI (Reserve Bank of India) Guideline :- Sick Industrial Undertakings – Relaxation of margin, interest and inventory requirements–Dated September 30, 1978, which is having reference of following :-

(i)             (i) RBI (Reserve Bank of India) Guideline - On margins – dated the 14^th January 1977.

       (ii) RBI (Reserve Bank of India) Guideline - On penal interest, margins, freezing of limits, rate of interest, rephasement – dated 12^th May 1978 

II    RBI (Reserve Bank of India) Guideline - Rehabilitation of Sick Industrial Units by the Banks :- Decision of High Power Committee – December 14, 1978 which is having following references :-

     (i) RBI (Reserve Bank of India) Guideline - Setting up of special cells – Dated 26^th  November 1976 and 12^th May 1978

//-if revival not possible for the bank, the case should be referred to IDBI

//-difficulty of the sick unit should not be compounded by charging penal interest.

//-SSI sick units and their entrepreneurs need special attention.

//-need for providing consultancy services to SSI units.

//-use of consultancy cells as banks also participate in their share capital.

III.RBI (Reserve Bank of India) Guideline - Rehabilitation package–prior authorization–approval of RBI (Reserve Bank of India)-August 20, 1979

//-if greater relieves are to be given, case be referred to RBI (Reserve Bank of India). 

IV.RBI (Reserve Bank of India) Guideline - Involvement of Banks in Rehabilitation of Sick Industrial Units-December 4, (1979) also refers following circulars:-

(i)   dated 3^rd January 1979 calling for progress reports on the implementation of the various decisions of the High Power Committee on the problems of sick units. – quarterly report on large sick units having aggregate credit limits of Rs. 1 crore and above.

(ii) RBI (Reserve Bank of India) Guideline - // advised in 1976 to setup appropriate machinery at various levels to provide monitoring and counseling assistance to sick units, - use system to detect incipient sickness for preventive measures. – evaluate viability and prepare nursing program – chief executives of the banks to give this matter their personal attention so that machinery is toned up for monitoring with a view to restore the sick units to health. – review quarterly with the Board of Directors. 

Gist of the Discussions of Standing Co-ordination Committee (SCC) to secure on-going co-ordination between banks and term lending institutions on rehabilitation of sick units – November 6, 1980 – this referred following circular :-

(i)  RBI (Reserve Bank of India) Guideline - dated the 4^th September 1979 regarding constitution of the committee and scope of its functions.

//-viability of unit be assessed on realistic basis

//-Reckoning of cash losses

//-Financing of cash losses – losses already incurred to be borne by the banks – rehabilitation package to be prepared by IDBI and in that case RBI (Reserve Bank of India)’s credit authorization for proposal would be deemed automatic.

//-Sharing of cash surplus

//-Sharing of securities

//The above decisions are generally on the lines of Bhuchar Committee’s Recommendation

//-appraisal by IDBI, lead bank/other participating banks should be invariably involved

//-form of legal document taken by the lead institution from the borrowing unit might be accepted by other consortium members. 

VI. RBI (Reserve Bank of India) Guideline - Expeditious disposal of rehabilitation package by the Banks/RBI (Reserve Bank of India) – July 15, 1981- it referred to following circular :-

(i) RBI (Reserve Bank of India) Guideline - dated 6^th November, 1980

Credit authorization by RBI (Reserve Bank of India) automatic in case of IDBI’s appraisal.

//-need to avoid delays in implementing the rehabilitation packages which should be based on provisions of RBI (Reserve Bank of India) Guidelines. – for proposal needing prior authorization/clearance of RBI (Reserve Bank of India), duplicate copy of the proposal be sent to RBI (Reserve Bank of India) sufficiently in advance say a month before the date of the joint meeting by IDBI for finalization – RBI (Reserve Bank of India) may depute its representative or send its views in writing.

//-similar procedure where other all-India term lending institutions (other than IDBI) are the lead institutions.

//-grant of further concessions would need prior approval of RBI (Reserve Bank of India) 

VII. RBI (Reserve Bank of India) Guideline - Industrial Sickness :- Report to RBI (Reserve Bank of India) September 1981 //- cases of incipient sickness be promptly reported to RBI (Reserve Bank of India) and Central Govt. in case of units employing more than 1000 workers. 

VIII. RBI (Reserve Bank of India) Guideline - Government of India’s Policy for Sick Industries – Revised Guidelines –  April 28, 1982

//-Govt. of India, Min. of Industry formulated a policy on 6^th October 1981 which was modified on 15^th February 1982

//- if banks and financial institutions feel that revival not possible, they should submit detailed report to Central Govt./Deptt of Industrial Development to decide whether to nationalize or could be revived by other scheme. 

//-Govt. desired that there is no complacency or lack of efforts on the part of banks/financial institutions to restore such units to a healthy state and they exercise their commercial judgment in time.

Extract from the said enclosed Govt. circular ;-

// Policy for Sick Industries – Partial Modification

//Pivotal role of Administrative Ministries,  //Monitoring Arrangements, //Remedial Action,  //Government Assistance,  // Nationalization, //Existing sick Units. 

IX. RBI (Reserve Bank of India) Guideline - Sick Industrial Undertakings – Submission of Cases to IRCI instead of IDBI 2 May 8, 1982 – has a reference of following circular :-

(i) dated 14^th December 1978 regarding referring to IDBI where term lending institutions are involved otherwise the cases are to be referred to IRCI. 

X. RBI (Reserve Bank of India) Guideline - Method and Mechanism to Diagnose sickness April 12, 1983 – has a reference to following circulars :-

(i)     RBI (Reserve Bank of India) Guideline - dated the 28^th April, 1982

(ii)    RBI (Reserve Bank of India) Guideline - dated 7^th August 1982

(iii)   RBI (Reserve Bank of India) Guideline - dated 23^rd September 1981 and revised guidelines of 28^th April 1982 as mentioned in (i) above – dealing with sending reports to Deptt. Of Industrial development.

//- RBI (Reserve Bank of India) Guideline - Finance Minister’s meeting with Banks on 6^th July 1982 – Govt. desires that banks should evolve methods and mechanisms to diagnose sickness in industrial units as soon as it occurs and bring it to the notice of the Administrative Ministries concerned immediately, if no response, then to Finance Ministry.

//- RBI (Reserve Bank of India) Guideline - setting up of cells at both the H.O. and Regional Offices of banks for handling various problems relating to the identification of sickness, undertaking viability studies, drawing up nursing programs etc. expeditiously.- the administrative delays in these cells should be minimum. – services of TCO’s/State Level Inter-institutional Committees be utilized to maximum for undertaking viability studies, discussing problems, monitoring performance of sick units at frequent intervals emphasized.

//RBI (Reserve Bank of India) Guideline - Sickness hurts the units, their owners and employees and also the banks as well. Finance Minister’s impression was that even though banks had been assisting sick units for a long time the desired objective of nursing them has not yet been achieved.

//viability study relating to all sick units should be undertaken quickly, and nursing program designed for such units should be accepted only if there was reasonable possibility of reviving the unit 

XI. RBI (Reserve Bank of India) Guideline - Sick Industrial Undertakings - Policy for protection of dues of Banks & the Financial Institutions – July 19, 1984 - // Banks/financial institutions should closely monitor the working of industrial units which were showing the signs of sickness or which had already become sick. The response should be quick and based on commercial judgment.

XIII. RBI (Reserve Bank of India) Guideline - Role of Industrial Reconstruction Bank of India (IRBI (Reserve Bank of India)) in the rehabilitation/ revival of sick industrial units. –

//-Central Govt. has set up a new bank, Industrial Reconstruction Bank of India (IRBI (Reserve Bank of India)) in terms of IRBI (Reserve Bank of India) Act, 1984 wef 20^th March 1985 according to which IRCI has been transferred to IRBI (Reserve Bank of India). – preamble – IRBI (Reserve Bank of India) will function as the principal credit and reconstruction agency for industrial revival.

XIV. RBI (Reserve Bank of India) Guideline- Aspects Concerning Industrial Sickness – October 7, 1985 – it has reference to following circulars :-

(i)   RBI (Reserve Bank of India) Guideline - dated 3 May, 1976 – concerning setting up cells, to detect early warning signals

(ii)   RBI (Reserve Bank of India) Guideline - dated 14 July, 1976

(iii)  RBI (Reserve Bank of India) Guideline - dated 23 September, 1981 – concerning identifying and reporting sickness at the incipient stage.

(iv)   RBI (Reserve Bank of India) Guideline - dated 15 July, 1981

//The growing sickness in industry has been a matter of grave concern not only to the commercial banks and the financial institutions which have a direct stake in such units but also to the Government of India as well as the RBI (Reserve Bank of India). Following the seminar on sick industrial undertakings organized by RBI (Reserve Bank of India) in Bombay in April 1976, the RBI (Reserve Bank of India)  has been writing to banks time and again on various aspects concerning industrial sickness.

//The paramount need for (i) detection of sickness at the incipient stage itself, and (ii) proper co-ordination between banks and term lending institutions in the formulation and implementation of rehabilitation program was considered in the meeting of the Standing Coordination Committee held on 14 August, 1985 and accordingly, in this circular are stated existing instruction/ issued further instructions

//-banks should review accounts of borrowers to identify those units which are already sick or prone to sickness so that corrective action could be taken without loss of time.

//- from 1976 onwards, banks have been advised to strengthen their organizational arrangements for early detection of sickness as also to review the adequacy of the information system and the administrative set-up for detecting incipient sickness.

//- Whatever be the cause of sickness, symptoms appear in the borrowal accounts which tend to become irregular in one way or another. It is felt that sickness in a sizable number of the units could have been prevented by timely action on the part of banks had the warning signal been recognized at an early stage, because sickness in an  unit does not appear suddenly but develops over a period of time.

//-RBI (Reserve Bank of India) Guideline - warning signals – (i) non-submission or incorrect submission of stock  statements and other control statements, (ii) inability to maintain the stipulated margin on a continuous basis, (iii) widening difference between the outstanding balance and drawing power/sanctioned limit, (iv) periodical interest debited remaining unrealized rendering the account irregular, (v) attempt to divert sale proceeds through accounts with other banks (vi) frequent return of cheques or bills.  

//Early warning signals of developing sickness could also be had from the audited accounts of the borrower and other financial statements submitted by the borrower and from the banker’s periodic visits to the place ot the borrower’s activity as also from other sources. – illustrative list of the causes of sickness and other symptoms (besides, those enumerated above) is given in Annexures I and II. Based on an examination of the symptoms, the banks can put themselves on guard about the onset of sickness and initiate prompt remedial action including a dialogue with the borrower to arrest the trend by elimination of the factors causing sickness.

//-RBI (Reserve Bank of India) Guideline - The SCC also stressed the need for introduction of the concept of accountability at the branch level. The borrowal accounts should be under an obligation to identify the early warning signals as indicated above and report the irregularities noticed to the controlling offices within a specified time frame so as to enable the bank to initiate corrective steps promptly before the situation worsens. 

//-RBI (Reserve Bank of India) Guideline - Banks should also strengthen their technical appraisal/inspection machinery at various levels suitably, so that they are also able to identify technical deficiencies, if any, in the operation of assisted units and suggest/initiate timely corrective action.

// The term lending institutions engaged in the formulation of rehabilitation packages are being addressed regarding association of the major banks/leader of the consortium even from the stage of viability study.

//- RBI (Reserve Bank of India) Guideline - Banks to depute sufficiently senior persons to the consortium meetings, banks should not go back on the decisions taken during such meetings.

// RBI (Reserve Bank of India) Guideline - The RBI (Reserve Bank of India) attaches very great importance to the speedy preparation of viability studies and expeditious drawing up and implementation of agreed packages in the case of units considered potentially viable. The RBI (Reserve Bank of India) will view seriously lapses on the part of banks which do not adhere to these instructions scrupulously.

CAUSES OF SICKNESS (Annexure I)

A.      Internal Causes

(2)  Implementation

        Cost overruns resulting from delays in getting licenses/sanctions etc.

        Inadequate mobilization of finance

(3)(d) Financial management

        Deficiency of funds

        Inadequate working capital           

B.     External Causes

(b)   Financial bottlenecks

       Non availability of adequate finance at the right time

(c)    Government controls and policies, etc.

       Procedural delays on the part of the banks, licensing authorities etc.

Source : Report of the Tiwari Committee

(a)   Continuous irregularity in cash credit accounts,

(f)    Failure to pay statutory liabilities,

(i)    Constant utilization of cash credit facilities to the hilt and failure to pay timely installment of principal and interest on term loan and installment credits

(k)   Financing capital expenditure out of funds provided for working capital purposes,

Note :- The above is just an illustration of the seriousness emphasized by the Govt. and RBI (Reserve Bank of India) through RBI (Reserve Bank of India) Guidelines since 1976 which the banks and the financial institutions are not paying attention. There are several other such important RBI (Reserve Bank of India) guidelines which are statutory and mandatory. You should visit the website of RBI and go through all the relevant RBI Guideliens and include them in your SA. As per law of torts, the violations of these statutory RBI (Reserve Bank of India) guidelines amount to injury for which the party is entitled for compensation for the said injury, loss and damages. We have an expertise to locate relevant and material facts and then apply relevant RBI (Reserve Bank of India) guidelines with full references to prove legally the injury. Then we calculate the quantum of injury based on which the counter-claim is prepared. We need only the documents based on which the entire counter-claim is prepared.

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