Archive for the ‘Banking and Finance’ Category.

Fee on loan pre closure

The Reserve Bank of India on 7-5-14 gave a directive to banks not to levy any penalty for pre-paying floating loans. The floating loans include housing, corporate, vehicle and personal loans.

THE PRIZE CHITS AND MONEY CIRCULATION SCHEMES [BANNING] ACT, 1978

Prize chit means any transaction under which a person collects monies in one lump sum or in installments by way of contributions or subscriptions in respect of any savings, mutual benefit, thrift, or any other scheme or arrangement or the income accruing from investment or other use of such monies for all or any of the following purposes, namely:-
(i) giving or awarding periodically or otherwise to a specified number of subscribers as determined by lot, draw or in any other manner, prizes or gifts in cash or in hand, whether or not the recipient of the prize or gift is under a liability to make any further payment in respect  of such scheme or arrangement ;
(ii) refunding to the subscribers or such of them as have not won any prize or gift, the whole part of the subscriptions, contributions or other monies collected, with or without any bonus, premium interest or other advantage by whatever name called, on the termination of the scheme or arrangement, or on or after the expiry of the period stipulated therein, but does not include a conventional chit.

The act bans prize chits and money circulation schemes or enrolment as members or participation therein. If any body indulges in such activities they shall be punishable with imprisonment for a term which may extend to three years, or with fine which may extend to five thousand rupees, or with both.

If an offence under this Act is committed by a Company, every person who, at the time the offence was committed was in charge of and was responsible to the  company for conduct of business of company as well as the company shall be liable for prosecution. The offences punishable under this act shall not be tried by a court inferior to that of a Chief Metropolitan Magistrate. All offences punishable under this act are cognizable offences

A police officer not below the rank of an officer in charge of a Police Station has the power to enter any premises connected with the promotion / conduct of any price chit or money circulation scheme, in contravention of provisions of this act. The Police Officer has also the power to search the said premises and the persons present there. He has the power to take into custody persons found in such premises and produce them before judicial magistrate. The Police Officer has also power to seize things used for such price chits or money circulation schemes.

If a newspaper contains any material connected with any price chit or money circulation scheme, the State Government has the power to forfeit the same.

Nothing contained in this act applies to price chits or money circulation schemes promoted by the Central Government, Company owned by a State Government, Banking Company and Charitable or Educational Institutions notified in this behalf by the State Government.

HOW TO DECLARE YOURSELF A BANKRUPT/INSOLVENT?

The provincial Insolvency Act, 1920, deals with the matters pertaining to insolvency in areas outside the presidency towns. As per this Act, the District courts have jurisdiction in matters pertaining to insolvency.

A debtor is said to have committed an act of insolvency in the following cases:

a. If he makes a transfer of all or substantially all his property to a third person, for the benefit of his creditors generally;

b. If he makes a transfer of his property to defeat or delay his creditors.

c. If he makes any transfer of his property, which would be void as fraudulent if he were adjudged as an insolvent.

d. If he departs or remains out of India with an intent to defeat or delay his creditors.

e. If he departs from his dwelling house or usual place of business or otherwise absents himself with intent to defeat or delay his creditors.

f. If he secludes himself so as to deprive his creditors of the means of communicating with him with intent to defeat or delay his creditors.

g. If any of his property has been sold in execution of the decree of any court for the payment of money.

h. If he petitions to be adjudged as an insolvent.

i. If he gives notice to any of his creditors that he has suspended payment of his debts.

j. If he is imprisoned in execution of the decree of any court for the payment of money.

k) If a creditor who has obtained a decree or order against a debtor for the payment of money, has served on him a notice, and the debtor has not complied with that notice within the period specified therein.

If a debtor commits an act of insolvency, an insolvency petition may be presented either by the creditor or by the debtor and the court may adjudge the debtor to be an insolvent.

A debtor is entitled to present an insolvency petition only if he satisfies the following conditions:
a. He should be unable to pay his debts and
b. His debts amounts to minimum five hundred rupees or
c. He is under arrest or imprisonment in execution of the decree of any court for the payment of any money or
d. an order of attachment in execution of such a decree has been made and is subsisting against his property.

After filing and admission of an insolvency petition, the court will issue notice to the respondents. The court while admitting an insolvency petition has the power to appoint an interim receiver for the property of the debtor or any part thereof and the interim receiver may take immediate possession of the property or part of the same.
 
The Court has the power to make interim proceedings against a debtor at the time of admitting an insolvency petition. These include:-
1) Ordering the debtor to give security for this appearance.
2) Order attachment of property in possession or under control of debtor.
3) Order a warrant for the arrest of debtor.

     The debtor shall on the admission of petition produce all books of  accounts, inventories of his property, list of creditors and debtors as may be required by the court.

In case of an insolvency petition presented either by the Creditor or the debtor, the court may dismiss the petition, if it finds suitable grounds for the same.If the court does not dismiss the petition, it shall make an order of adjudication and also shall specify in such order, the period within which the debtor shall apply for his discharge.

On the making of order of adjudication, the insolvent shall help in the realization of his property & distribution of proceeds among his creditors. The whole of the property of insolvent shall become divisible among creditors. An order of adjudication will be effective from the date of presentation of petition on which it is made.

DISADVANTAGES OF INSOLVENCY:
a.Social stigma to an insolvent.
b.Cannot become partner of a firm or director of a company.
c.Cannot enter into legal contracts.
d.The insolvent may not get credit until he is discharged.
e.Cannot contest elections or hold public offices.

THE KARNATAKA PROTECTION OF INTEREST OF DEPOSITORS IN FINANCIAL ESTABLISHMENTS ACT, 2004

In recent years many financial establishments not covered by the RBI Act 1934, have cropped up in various parts of India and especially Karnataka. Many of them received deposits from the public on the promise of high rates of interest and easy gains. Most of them have defaulted to return the deposits on maturity and thus cheated the public. Against this background the state of Karnataka enacted this piece of legislation.As per this act the government or the district Magistrate are empowered to attach properties of financial establishments on default of return of deposits. The district magistrate suo moto or on receipt of any complaint may cause investigation on fraudulent transaction done by a financial establishment.

The government may attach money or property acquired by a financial establishment or personnel assets of the promoters, partners, directors, managers etc of the said financial establishment if the government is satisfied that
a. the financial establishment has failed to return the deposit after maturity or on demand by depositors or
b.to pay interest or other assured benefits or
c. if the government is satisfied that such financial establishment is not likely to return deposits or to pay interest to the depositors.

After the attachment, such properties shall vest in the competent authority appointed by the government, who shall be an officer not below the rank of an assistant commissioner, pending further order from the special court. The competent authority shall within 30 days from the date of receipt of order apply to the special court for further order of attachment to make it absolute. The competent authority has vast powers in dealing with the assets under its custody.The Competent authority can even sell the movable and immovable properties of the Financial Establishment by Public auction or with the prior approval of the Special Court by private arrangements. Within 30 days from the date of its appointment, the Competent Authority shall assess the deposit liabilities and assets of the Financial Establishment and submit a report thereof to the special Court. It shall also issue notice to secured creditors and depositors to submit their claims with proper proof. The secured creditors and depositors shall submit their claim before the Competent Authority within 30 days from the date of notice. The Competent Authority shall thereafter make an application to the Special Court seeking permission to make payments to the depositors from out of the money realized.

If any Financial establishment fraudulently defaults any repayment of deposit on maturity along with any benefit, or fails to render service assured, every person responsible for the management of the business of such Financial establishment, shall on conviction be punished with imprisonment for a term which may extend to 6 years and with fine which may extend to one lakh of rupees and such Financial Establishment is also liable for a fine.For the purposes of this Act, the government may constitute one or more special courts. The Special court has vast powers regarding realization of assets and payment to the depositors. The acts of the competent authority are supervised and guided by the Special court. The special court has the powers to attach property malafidely transferred by the Financial Establishment.Any person, including the competent authority, if aggrieved by an order of the Special court may appeal to the high court within 30 days form the date of the order.

THE KARNATAKA PROHIBITION OF CHARGING EXORBITANT INTEREST ACT 2004

This is an interesting piece of legislation about which the general public does not have much awareness. The Act has a noble intention of prohibiting the charging of exorbitant interest by financiers and money lenders. An exorbitant interest is an interest at a rate more than what is fixed under section 28 of the Karnataka money lenders Act 1961. This amount to 15 % in case of secured loans and 18% in case of unsecured loans. Hence anybody charging interest more than the above rate is said to charging exorbitant interest.

As per the Act whoever charges exorbitant interest on any loan advanced by him shall be punishable with imprisonment for a term of which may extend to 3 years and also with a fine which may extend to Rupees 30,000/- .
A debtor may deposit the money due in respect of a loan received by him  from any person together with interest thereon into the court along with the petition to record that amount deposited is in full or part satisfaction of the loan including the interest thereon. The Court may after inquiry, pass order recording the satisfaction of the loan and interest therefore in full or in part as the case may be. The Court may, on a petition filed by the debtor for settlement of loan including the interest therefor, pass an order for the adjustment of the interest, if any, paid by the debtor, over and above the rate of interest fixed by the State Government towards the loan.

Where a debtor or any member of his family commits suicide and if it is shown that immediately prior to such suicide the debtor or any member of his family was subjected to molestation by any person, the person who has advanced loan shall, unless the contrary is proved, be deemed to have abetted the commission of such suicide

Karnataka Money Lending Act 1961 and Rules

The Karnataka Money Lender’s Act, 1961 & Rules, 1965 prescribes fair rules of business for money lenders. According to this Act, no person shall carryon the business of money lending in Karnataka except by holding a license and by payment of a security deposit made under the said Act.Every Money lender shall file an application for license to the Assistant Registrar of the area. Along with the application, the money lender need to pay the license fee which may come to about Rs 5,000/- and Rs 250/- for each of the other places where the business will be carried on. The Assistant registrar will forward the application to the Registrar of the area, who will after necessary enquiry grant the license. A license is valid for a term of 5 years.

The money lenders are also required to pay a security deposit which may range from Rs 5000/- to Rs 50,000/-, at the time of applying for the license. The Registrar is entitled to forfeit the above said security deposit if (a)the money lender carries on the business in contravention of any provisions of the  act or the rules (b) is convicted of an offence under the Act, (c) maintains false accounts. If a money lenders does not hold a valid license at the time of advancing a loan, he is no entitled for a decree from a civil court in his favor. Every money lender shall keep and maintain a cash book and ledger in Kannada or in English. Further every money lender shall deliver to the debtor within 30 days from the date on which the loan is made a statement showing the details of the loan. If the money lender has given a pass book to the debtor, then it is not necessary to furnish the above statement.

Every money lender is supposed to deliver every year to each of his debtors a legible statement of such debtor’s accounts, signed by the money lender of any amount that may be outstanding against such debtor. No such statement is required to be delivered to a debtor, if he is supplied by the money lender, with a passbook which shall be in the prescribed form, and shall contain an up to date account of the transactions with the debtor. The money lender shall deliver a copy of the statement to the Assistant registrar.No court will order a decree, on account of the interest of a loan, for a sum more than the principal of the said loan. Even if there is an agreement between the money lender and the debtor, the decree for interest can never be more than the principal amount of the loan.

Every money lender shall exhibit his name with the word money lender, over his shop or place of business. Further no money lender shall take any promissory note, acknowledgement, bond or other writing which does not state the actual amount of the loan. No money lender shall execute any instrument in which blanks are left to be filled after execution. Whoever molests or harass or troubles a debtor for the recovery of a debt due by him to a creditor shall on conviction be punished with imprisonment which may extend to six months or fine which may extend to five thousand rupees or with both.

All about NBFCs

With many fly by night finance companies raking in moolah, at the cost of innocent investors offering them dream interest rates for their deposits, it is ideal to see what are the legal requirements for an NBFC.

NBFC stands for Non Banking Financial Company.

Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by Government or local authority or other securities, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.

 An RNBC (Residuary Non-banking Company) is a non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner and not being an Investment, Asset Financing, Loan Company.

 An NBFC cannot operate without obtaining a certificate of registration from the Reserve bank Of India. The said company shall have a net owned fund of Rs 2,00,00,000/-. 

NBFCs registered with RBI have been reclassified as
(i) Asset Finance Company (AFC)
(ii) Investment Company (IC)
(iii) Loan Company  (LC).

All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid Certificate of Registration with authorization to accept Public Deposits can accept/hold public deposits. Further there is a ceiling on acceptance of Public Deposits.

The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand. The deposits with NBFCs are neither insured nor their repayment guaranteed by RBI.

Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest may be paid or compounded at rests not shorter than monthly rests.

If an NBFC defaults in repayment of deposit, the depositor can approach Company Law Board or Consumer Forum or file a civil suit in a court of law to recover the deposits. However there is no Ombudsman for hearing complaints against NBFCs

Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi Companies, Insurance companies and Chit Fund Companies are NBFCs but they have been exempted from the requirement of registration with RBI.

Any person who is an individual or a firm or unincorporated association of individuals cannot accept deposits except by way of loan from relatives, if his/its business wholly or partly includes loan, investment, hire-purchase or leasing activity or principal business is that of receiving of deposits under any scheme or arrangement or in any manner or lending in any manner.

Tackling Recovery Agents

The Reserve Bank of India has issued guidelines dated 24-04-08 to Commercial banks with respect to the employment of recovery agents by them for the purpose of loan recovery. These include:

a. Banks should inform the borrower the details of recovery agency while forwarding default cases to the recovery agency.

b. The agent shall carry a copy of the notice and the authorization letter from the bank along with the identity card issued to him by the bank or the agency.

c. Banks should ensure that there is a tape recording of the calls made by recovery agents to the customers, and vice-versa. Banks shall intimate the customer that the conversation is being recorded.

d. The details of the recovery agency engaged by banks may also be posted on the bank’s website.

e. Where a complaint has been lodged by a borrower, banks should not forward cases to recovery agencies till they have finally disposed of the complaint.

f. In cases where the subject matter of the borrower’s dues is pending before courts, banks should exercise utmost caution, in referring the matter to the recovery agencies.

g. Each bank should have a mechanism whereby the borrowers’ grievances with regard to the recovery process can be addressed. The details of the mechanism should also be furnished to the borrower.

h. All recovery agents shall undergo a certificate course introduced by Indian Institute of Banking and Finance (IIBF).

i. In case of complaints against the Recovery agents, the Reserve Bank may consider imposing a ban on a bank from engaging recovery agents in a particular area. Similar supervisory action could be attracted when the High Courts or the Supreme Court pass strictures or impose penalties against any bank or its agents with regard to the recovery process.
 

Grievance Redressal for Credit Card Holders

From the initial days of Credit Card operations in India, there have been reports of tussle between Card issuing banks and credit card holders regarding the debt repayment. The reserve Bank of India has issued several guidelines to the card issuing institutions for the reddressal of grievances of the card holders. These include:

a.A time limit of 60 days needs to be given by the bank to the customers to prefer their complaints.

b.The card issuing bank shall constitute Grievance redressal machinery within the bank and the name and contact number of the designated officer shall be mentioned on the credit card bills.

c.The grievance redressal procedure of the bank/NBFC and the time frame for responding to the complaints shall be placed on the bank’s website. There should be a system of acknowledging customer’s complaints for follow up such as complaint number /docket number even if the complaints are received on phone.

d.If the customer does not get a satisfactory response from the bank, within 30 days period, then he has the right to approach the concerned banking ombudsman to redress his grievances. The bank shall be liable to compensate the customer for the loss of his time, expenses, financial loss etc.

Apart from the above RBI guidelines the customers have the right to file criminal complaints against the banks and the recovery agents if their acts amount to criminal offenses like intimidation, abuse, use of force assault etc. Also the customer can approach the consumer courts to redress his grievance.

Defences under SARFAESI ACT

With the introduction of SARFAESI Act 2002, it has become easy for banks and other financial institutions to recover loans advanced from defaulting borrowers. If a borrower has taken a loan by giving some collateral security and if he defaults in the repayment of the said loan, then the bank or the financial institution can take the possession of the collateral security, in most cases an immovable property and then manage or even sell the same to recover the debt after issuing a 60 days notice. The borrower is forbidden form approaching the civil court or other authorities against any such actions. However, after the said action by the bank, the aggrieved party can approach the Debt Recovery Tribunal against such an action.
Some of the defenses against the action of banks under the SARFAESI Act include:
a) Non-issuance of 60 days notice
b) Non-classification of the account as Non Performing Asset.
c) If the collateral security is an agricultural land, then   proceedings under SARFAESI Act is not permitted.
d) Action of the bank  barred by Limitation Act, 1963
e) Non delivery of Possession notice to the borrower.
f) Non publication of Possession notice in the news paper.
g) Non service of notice of 30 days, for sale of the secured assets after taking possession of the same.
h) If the amount due is less than 20 percent of the principal amount and interest thereon.