To protect small and marginal account holders, it has been made mandatory for banks to insure each account up to Rs 1 lakh. The rider is: The insurance amount becomes payable only when the bank goes into liquidation. The Reserve Bank of India (RBI) tries to prevent the liquidation and winding up of the bank, and instead attempts to revive it by granting protection, which often runs into years. So, the account holder is left high and dry, in a catch-22 situation where he can neither access his money nor avail the insured amount. This is not justified, according to a ruling by the National Consumer Disputes Redressal Comm-ission in 2008 in the case of Reserve Bank of India v/s Eshwarappa & Anr in revision petition number 2528 of 2006 and other connected matters.
The Maratha Co-operative Bank Ltd (MCB), Hubli, had run into problems. The RBI granted protection to it by issuing a prohibitory order under section 35A of the Banking Regulation Act 1949. The order stated that from the close of business on 3.2.2004, MCB shall not, without prior approval in writing from the RBI, grant or renew any loans and advances, make any investment, incur liability, including borrowing of funds and acceptance of fresh deposits, disburse or agree to disburse any payment whether in discharge of its liabilities and obligations or otherwise, enter into any compromise or arrangement and sell, transfer or otherwise dispose of any of its properties or assets. Consequently, the account holders were not allowed to withdraw money from their own accounts. Feeling frustrated, several account holders filed complaints before the consumer fora against the MCB and the RBI.
Both MCB and RBI opposed the complaints, contending that the consumer fora would not have the jurisdiction in view of the prohibitory order issued by the RBI. Rejecting this objection, the National Commission observed that the Consumer Protection Act (CPA) provides an additional remedy and its provisions must be construed liberally, so as to bring the many cases under it for their speedy disposal. It held that the prohibitory order of the RBI would not prevent a depositor from filing a suit or a complaint under the CPA.
The Commission noted that the Deposit Insurance and Credit Guarantee Corporation Act (DICGC) provides insurance cover to small depositors, but this Act remains on paper because the it is framed in such a way that such insurance cover would come into operation only when there is a winding up or liquidation order. Since the RBI neither permitted the bank to operate nor it passed the order for liquidation, the purpose of extending insurance cover to the small depositors was frustrated in the hope of reviving the bank.
The Commission observed that bureaucracy attempts to delay proceedings at every stage and lamented that the authorities were trying to even stonewall the Commission's attempts to arrive at a reasonable solution to the problems faced by persons whose money was blocked.
The Commission noted that while the RBI's prohibitory order was binding on the bank, the pertinent question is whether it would be justifiable to continue the prohibitory order beyond reasonable time to the detriment of the depositors having small or limited means, thereby putting them to hardship. The Commission observed that the established law is that administrative powers are required to be exercised within a reasonable time in order that they are not abused. The RBI has a duty to act as a watchdog of the finance and economy of the nation. It has to act in public interest and prevent the affairs of any bank being conducted in a manner detrimental to the interests of the depositors. A failure to do so would constitute a deficiency in service.
Relying on various decisions of the apex court, the Commission held that where the law does not prescribe limitation, the court would import the concept of "reasonable time". If a bank cannot be revived within a reasonable time, the banking licence should be cancelled and the bank ordered to be wound up. The DICGC must pay the amount covered by the insurance as soon as such liquidation order is passed, without waiting for further orders from the liquidator. Otherwise, it would be torturous to the poor depositors who may have to wait for years for the cumbersome procedure whereby the liquidator crystallises the amounts due to each depositor.
The Commission, which had impleaded the DICGC as a party, directed it to pay the insured amount to the account holders. However, in case the bank was revived later, the amount paid by the DICGC could be recovered from the bank.
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This landmark judgement will help the small depositor to approach the consumer forum for recovering claims up to Rs 1 lakh from the insurance coverage provided by DICGC. It is also hoped that the RBI will do its duty, so that depositors do not suffer.
The author is a consumer activist