New Delhi : Commercial banks in consultation with the Reserve Bank of India are empowered to write off non-performing assets (NPAs) running to crores. One cannot draw an adverse inference of mismanagement against the bank concerned for doing so, the Supreme Court has held.

A Bench consisting of Justices B.P. Singh and Altamas Kabir said: "It is no doubt true that amounts advanced by banks must be recovered. Such debts should not be permitted to become NPAs. However, one cannot lose sight of the realities of the situation. Having regard to the nature of banking business, it is possible that the bank may commit an error of judgment in advancing funds to a particular party or industry."

Factors beyond control

Writing the judgment, Justice Singh said: "On account of other factors beyond its control, or even beyond the control of the borrowers, it may become difficult or even impossible to recover the loan in accordance with the schedule of repayment, or to recover the loan at all. These are risks inherent in the banking business though a wise banker with foresight and anticipation may reduce such risks to the minimum."

One could not, however, jump to the conclusion that just because some loans became bad debt there was lack of proper management of the bank or that its conduct was dishonest or mala fide.

Upholding the action of Development Credit Bank Ltd (DCBL) in writing off Rs.120 crore of NPAs, the Bench said: "Though some of the debts have been written off with little chance of substantial recovery, we cannot lose sight of the fact that the bank has generated considerable operating profits and built up a substantial general reserve over the years, against which the debts written off have been adjusted."

The judges said, "in a given case, there may be evidence of mismanagement or dishonest conduct, but in the absence of any such accusation one cannot draw an adverse inference against the bank."

Salim Akbarali Nanji, a DCBL shareholder, challenged the bank's decision to write off Rs. 120 crore of NPAs.

The Bombay High Court rejected his petition.

Dismissing his appeal, the Bench said: "The write-off is only an internal accounting procedure to clean up the balance sheet and it does not affect the right of the creditor to proceed against the borrower to realise his dues."

Nothing was produced on record that the RBI had acted in breach of its legal obligations in granting permission to DCBL to write off the debts.

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