M/S Durga Hotel Complex v. Reserve Bank of India (2007)

The banking ombudsman is the most-used and least-understood institution in Indian banking. It is not in the Banking Regulation Act. It exists because s. 35A of that Act empowers the Reserve Bank to give directions to banking companies, and the Reserve Bank has used that power to constitute a scheme. That is the whole of its statutory pedigree, and it explains both what the ombudsman can do and what he cannot.

This case decides two things about the office, and each is more general than it looks.

The jurisdictional point: an ombudsman is a non-adversarial adjudicator, and he loses his jurisdiction when the subject matter of the complaint is taken to an adversarial forum — even if the complaint was made first.

The competence point: his jurisdiction is confined to the matters the scheme lists, and he cannot order a bank to lend.

The appellant, a partnership firm, sought a loan from the third respondent bank to put up a hotel. In April 1997 a loan of Rs. 15 lakhs was sanctioned; the bank disbursed Rs. 11,58,750. The appellant sought an additional advance, and the proposal was not accepted. The bank recalled the loan after crediting Rs. 3,41,250 out of the original sanction.

The appellant complained to the Banking Ombudsman for the State of Bihar at Patna under clause 16 of the Banking Ombudsman Scheme 1995, which enabled any person with a grievance against a bank to complain in writing, accompanied by supporting documents, setting out the nature and extent of the loss and the relief sought, and a statement of compliance with the conditions of that clause.

The complaint was of unauthorised or fraudulent withdrawal from the appellant's account and non-credit of proceeds; it was said that the crediting of Rs. 3,41,250 or its withdrawal was unauthorised, and that the firm had suffered considerable loss through the bank's delay in advancing the loan and its refusal to permit the higher credit facility recommended in a Technical Cell Report said to bind the bank. The relief claimed was that the bank credit the remaining sanctioned loan.

The bank opposed the complaint and questioned the ombudsman's jurisdiction, contending that it was confined to specified matters and that the appellant's claims were outside it.

On 1 November 2000 the bank approached the Debts Recovery Tribunal under the Recovery of Debts Due to Banks and Financial Institutions Act 1993 for recovery of the amounts alleged to be due.

The ombudsman brushed aside both objections. He held that his jurisdiction had been invoked before the bank went to the Tribunal, so he was not precluded from adjudicating, and he rejected the objection to his competence. He made suggestions to settle, which the bank did not accept, and on 30 March 2002 he passed an award: disbursal of Rs. 3,41,250 to the complainant; further advances in terms of the recommendations of the concerned cell of the State Bank of India, maintaining a financing ratio of 75:25 between bank and complainant; a repayment period of seven years exclusive of one year of moratorium, the moratorium to be enhanced according to the Rules in view of non-disbursement; and interest to be charged strictly in accordance with the guidelines of the Reserve Bank of India.

The bank sought the Reserve Bank's permission to challenge the award. The firm, finding the award not complied with, moved the Patna High Court under Art. 226 for mandamus to enforce it; the bank filed its own writ petition challenging the award as one without jurisdiction. A single judge upheld the bank on both grounds: that the ombudsman's jurisdiction ended when the bank filed its claim before the Tribunal, and that he had exceeded his jurisdiction in making the award.

1. Does the subsequent filing of a claim by the bank before the Debts Recovery Tribunal oust the jurisdiction of an ombudsman before whom a complaint was earlier instituted?
2. Did the claims put forward fall within the ombudsman's jurisdiction under the Scheme, and were the directions issued within his province?

The appeal was dismissed. Both questions were answered against the appellant.

An ombudsman is a non-adversarial adjudicator

The Court's reasoning on the first question is conceptual rather than textual, and it is the part to learn.

Conceptually, an ombudsman is only a non-adversarial adjudicator of disputes. By definition he is an official appointed to receive, investigate and report on private citizens' complaints about the government, or a similar appointee in a non-governmental organisation. He serves as an alternative to the adversary system for resolving disputes, especially between citizens and government agencies; he is an independent and non-partisan officer dealing with specific complaints from the public against administrative injustice and maladministration.

It follows that when the subject matter of a complaint before the ombudsman is taken to a court, tribunal, arbitrator or other competent forum, the subject matter is taken away from his purview to an adjudicatory forum under an adversarial system. Clause 16, read with sub-clause 3(d), is therefore to be understood as meaning that on one of the parties approaching an adjudicatory forum on an adversarial system, the non-adversarial adjudicator must lose his power or authority to bring about a resolution of the complaint by non-adversarial adjudication.

The Court added the structural reason. An ombudsman is not defined in the Banking Regulation Act 1949 or in the Scheme as an adversarial adjudicator. Clause 12 of the Scheme constitutes him a facilitator, to bring about satisfaction of the complaint in one of the modes there referred to. An adversarial adjudication necessarily stands on a higher plane than a settlement of a complaint at the instance of an ombudsman. When a forum for adversarial adjudication takes seisin of the subject matter, the ombudsman loses jurisdiction over the subject matter and consequently over the complaint itself.

The High Court was therefore justified in interfering with the award on the ground of divestiture of jurisdiction.

The ombudsman cannot order a bank to lend

On the second question the Court turned to clause 13(b), which indicates the ombudsman's jurisdiction. As to loans and advances, he may entertain complaints only in so far as they relate to:

• non-observance of the directives of the Reserve Bank of India on interest rates;
• delays in sanction or non-observance of the prescribed time schedule for disposal of loan applications; and
• non-observance of any other directions or instructions of the Reserve Bank of India specified for the purpose of the Scheme from time to time.

There was no claim that the bank was guilty of non-observance of any Reserve Bank directive on interest rates, and no case that any other direction or instruction made for the purpose of the Scheme had not been observed. At best the firm could complain of delay in sanction or non-observance of the time schedule for disposing of its application for additional finance.

From that the Court drew a series of prohibitions which read as a list of what an ombudsman may not do:

• He has no authority to compel the bank to make further advances, which as a prudent banker it might not find feasible.
• He may not interfere with the agreement regarding the repayment schedule fixed by the parties, or the financing ratio maintained between bank and borrower.
• He may not direct an increase in the period of moratorium, nor fix a schedule of repayment of the loan.

None of the directions came within clause 13(b). The Court's summary is memorable: the jurisdiction of the banking ombudsman under the Scheme is cribbed, confined and cabined by clause 13 of the Scheme.

Having so held, the Court found it unnecessary to consider whether there can be specific performance of an agreement to lend, or a direction to lend more money than the bank was willing to lend, considering the creditworthiness of the borrower and his prior conduct on the loan already granted. That question is left open, and saying so is worth a mark.

An ombudsman under the banking ombudsman scheme is a non-adversarial adjudicator and a facilitator; when the subject matter of the complaint is taken by either party to a court, tribunal or other adversarial forum, he is divested of jurisdiction over that subject matter, whether or not the complaint was instituted first. His jurisdiction over loans and advances is confined to the heads the Scheme specifies, and he has no power to compel a bank to lend, to alter the agreed repayment schedule or financing ratio, or to extend a moratorium.