The Apex Court finally decided on the position of cooperative banks with respect to other banks in terms of the applicability of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
It was specifically stated in the judgment that:
"Before we come to the amendments made, it is necessary to consider the Statement of Objects and Reasons. It was considered necessary to extend provisions of the BR Act, 1949 to State co operative banks, the central co-operative banks, and, more importantly, to primary non-agricultural credit societies, which were relatable to banking."
In the instant case titled Pandurang Ganpati Chaugule vs. Vishwasrao Patil Murgud Sahakari Bank Limited, two issues were raised before the Court for clarification, they are:
Whether under Entry 45 of List I, co-operative banks fall within the scope and purview of banking?
Whether the term ‘banking company’ in Section 5(c) of the BR Act considers cooperative banks within its ambit?
With regard to the first issue, of the Petitioners' alleged infringement of their fundamental rights, the Supreme Court of India concluded that any restriction on the freedom given by Article 19 (1) (g) of the Indian Constitution must pass the reasonableness test. The Petitioners argued that, because access to banking is analogous to the provision of oxygen in any contemporary economy, denying such access to people who engage in lawful trade is not a legitimate restriction and is grossly unfair. The Supreme Court considered the impact of Section 56(a) of the BR Act, which was enacted by the Banking Laws (Application to Co-operative Societies) Act, 1965 (1965 Act), on the definition of 'banking company' as defined under Section 5(c) of the BR Act, which states that a 'banking company' is any company that transacts the business of 'banking.'
The Supreme Court recognised that co-operative banks are defined individually under Section 56(cci) of the BR Act, rather than being included in the definition of a "banking firm" under Section 5 of the BR Act (c).
With regard to the second issue, the Supreme Court looked at the impact of Section 56(a) of the BR Act, which was enacted by the Banking Laws (Application to Co-operative Societies) Act, 1965 (1965 Act), on the definition of 'banking company' as defined under Section 5(c) of the BR Act, which states that a 'banking company' is any company that transacts the business of 'banking.' The Supreme Court recognised that co-operative banks are defined individually under Section 56(cci) of the BR Act, rather than being included in the definition of a "banking firm" under Section 5 of the BR Act (c). The legislature did this on purpose, according to the Court, to reconcile the applicability of the BR Act's requirements to cooperative banks and other banks and corporations.
The reason for not specifically amending the definition of 'banking company' and for providing separate provisions specifically applicable to co-operative banks was that certain provisions (such as incorporation, regulation, and winding up) needed to be kept in their current form because they applied to other banks and companies but not to co-operative banks. As a result, the Supreme Court used the 'incorporation by reference' approach to conclude that Section 56(a) becomes a component of Section 5(c) and that the term 'banking company' must be understood to encompass a cooperative bank.
The Court categorically held that:
"The co-operative banks under the State legislation and multistate cooperative banks are ‘banks’ under section 2(1)(c) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The recovery is an essential part of banking; as such, the recovery procedure prescribed under section 13 of the SARFAESI Act, legislation relatable to Entry 45 List I of the Seventh Schedule to the Constitution of India"
The Supreme Court has resolved a long-standing debate by recognising the applicability of the SARFAESI Act to co-operative banks, putting an end to the ambiguity. More importantly, the Pandurang Judgment removes the roadblocks imposed by previous inconsistent rulings on the matter, allowing cooperative banks to quickly recover their dues from defaulting borrowers without the need for court action.