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NEW DELHI : The Supreme Court on Tuesday brought cooperative banks under a stringent 2002 law that empowers lenders to seize and sell defaulters’ assets, in a boost for these institutions that play a vital role in financial inclusion across large swathes of India.

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Act of 2002 (Sarfaesi Act) applies to cooperative banks as well, a five-judge Constitution bench headed by Justice Arun Mishra ruled. According to the judgement, cooperative banks come under the category of banks as defined under Section 2(1)(c) of the Sarfaesi Act, and the recovery procedures mentioned under that law apply to cooperative banks as well.

The bench, which also included justices Indira Banerjee, Vineet Saran, M.R. Shah and Aniruddha Bose, also upheld the legislative power of the Parliament to bring cooperative banks under the ambit of Sarfaesi Act. The bench also effectively upheld a 28 January 2003 notification issued under the Banking Regulation Act, 1949, that brought cooperative banks within the class of “banks" under the Act.

Sarfaesi Act allows secured creditors to take possession of the assets of a borrower who fails to pay dues within 60 days of demanding repayment. The 159-page unanimous judgement also stated that cooperative banks were bound by the provisions of the Banking Regulation Act, 1949, and all the other legislation applicable to banks under the RBI Act. As a result, cooperative banks will have to comply with these rules.

According to an RBI report, there were 1,551 urban cooperative banks as on 31 March 2018, and 96,612 rural cooperative banks as on 31 March 2017, with the latter accounting for 65.8% of the total asset size of all cooperative banks.

The recent crisis surrounding Punjab and Maharashtra Co-operative Bank Ltd and other such lenders exposed the vulnerability of cooperative banks, after the central bank superseded the lenders’ boards after uncovering several irregularities.

“Recognizing that cooperative banks can have Sarfaesi rights should enable cooperatives get better control over handling defaults and on the negotiation table with defaulters. It was an unnecessary handicap on an important part of the credit system," said Bikash Jhawar, partner, L&L Partners.

The Constitution bench decided on the issues after a series of conflicting decisions by earlier Supreme Court judgements in 2007 and 2002.

The court was also approached to decide on Parliament’s competence to amend the definition clause (provision in an Act where words are defined) to add multi-state co-operative banks under the Sarfaesi Act.

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