No Court in the country has ever thought or looked upon the other side of the banks, claiming heavy dues before the Tribunals and settling the same claims outside the Tribunals/Courts on amounts much lower than those claimed before the Tribunals or the Courts.
What could be the possible reason for this?
And the answer is tax evasion by the banks.
To understand how, the following are to be taken into consideration-
- Interest charged is the earning/income of the banks and is taxable.
- Interest due to be collected against the loans can be looked upon as the profit anticipated by the banks.
- When a loan account defaults in repayments, it falls under the guidelines of the RBI, for banks to follow.
- As per the RBI, a defaulting loan account becomes sticky after three consecutive defaults in repayment and becomes an NPA after six consecutive defaults in repayment.
- Once a loan account falls under the category of NPA, it is not further burdened with the interest, which is charged in a separate head/account at a simple rate of interest and not compounded, to appear as the principal amount due, because under compound interest charging, the principle and the interest, if not paid, become the principal due for next cycle of interest calculation.
- So to avoid the swelling of the account due to interest charging, the interest, as per RBI guidelines in respect of NPA loan accounts, is charged at a simple rate of interest and the same is recorded separately.
- But the banks keep burdening the NPA loan account with the interest on compounding the principle along with the late payment fines, repayment bouncing charges and other incidentals also compounded to become the principle for the next cycle of interest calculation because this process helps the banks to swell the defaulting loan account beyond feasible limits of repayments and the debtor becomes a permanent defaulter gradually.
- Taking advantage of the “gradually becoming permanent defaulter stage of the debtors”, the bank as a creditor invokes the provisions under the SARFAESI Act, 2002 and starts acquiring the assets mortgaged, without moving the Courts for the permission to do so, at the very first stage.
- Banks thereafter file the suits for recovery of the amount already swollen to the impractical limits of repayment for the debtor.
- Being aware of this fact banks still obtain the Recovery Certificates from the Tribunals/Courts on one hand and the other hand, approach the debtor for a settlement outside the Court/Tribunal and in doing this, the banks are never on the losing side because the difference between the settlement amount and the Recovery Certificate of the Court/Tribunal is claimed as a loss in the balance sheet by the banks which is then offset against the profits earned by the banks and finally the tax stands evaded.
- All of the above clarifies how banks prepare the grounds for evading Tax payments through adjustments of the book losses against the actual incomes because they know the defaulter shall not be able to pay and the amount awarded by the Court/Tribunal shall be put as losses in the balance sheet against the bank’s profit and the tax rebate shall be availed, which in other words is nothing but the Tax evasion by the banks through the management of their accounts in the balance sheet.
Now the question remains, why and how the Courts/Tribunals go wrong and do not question banks-
An individual debtor is always under a poor state of mind because of his weak financial position and is not able to fight the case because the Courts/Tribunals under their pre-set states of mind look upon a debtor as a cheat, defaulting deliberately to evade repayments.
Banks are still looked upon by the Courts/Tribunals as an institution dealing with public money and their accounts are considered to be an honest reproduction of the transactions maintained under the existing banking norms as per the RBI rules and guidelines.
The Courts/Tribunals fail to realize that today the banks are commercial institutions and are no longer public service institutions in nature, as they were in the past, with fewer products to offer and little charges to recover from their depositors for the banking services extended, because today for every activity of the depositor the banks impose service charges and also the service tax is collected. Even for a signature for verification, the banks charge something between Rs.300 to Rs.500 from their account holders.
The Courts/Tribunals have also failed to realize that the interest claimed by the banks after a loan account becoming an NPA is nothing but the claim of the anticipated profit by the banks from the debtor.
A question remains- Can any commercial institution claim anticipated profit from the buyer of its product who has failed to repay the purchase price as per the terms of sale? And the answershall be a big no!
Banks are also commercial institutions and their services are now called products. Loans– home, personal, educational, car, overdraft facilities, credit cards, bank guarantees, letters of credit, Foreign Exchange Services, insurance services, de-mat services, account maintenance and much more are all today treated as products of a bank. So, they also cannot claim their anticipated profits from the buyers of their products in the event of default of repayment of the product price as per the terms of agreement which fixes a total price to be given within a stipulated time. This fact if understood, will bring the banks in the dock in Courts and the debtors will get relieved from being crippled under deceptive accounting practices, swollen claims and unfair recovery practices of the banks.
Now, it is high time for the Courts/Tribunals to realise this fact and start treating bank cases as any other case of a commercial enterprise and save the debtors.
Banks are indeed a vital sector of the economy and pretty much they are the main supporters and fuel for the various activities. But, we need to also focus upon the ground realities of these institutions and understand how they slyly evade the tax and also, harass the defaulters. Only strict vigilance and measures by the various regulatory bodies, Constitutional Courts and the Government may stop this.
Author is a Policy Research Associate and Team Lead at Prastaav