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Sajjan Bank (Private) Ltd. v. Reserve Bank of India AIR 1961 Mad. 8

Sajjan Bank (Private) Ltd. v. Reserve Bank of India AIR 1961 Mad. 8

FACT-

  • Sajjan Bank (Private) Ltd., originally a money-lending business, applied for a banking license under Section 22 of the Banking Companies Act, 1949.
  • The Reserve Bank of India (RBI) inspected the bank twice, in 1952 and 1956, revealing operational defects and non-compliance with regulations.
  • Despite efforts to rectify these issues, the RBI declined to grant the banking license, citing concerns about the bank's financial stability and compliance.
  • The contention of the petitioner is that s.22 is unconstitutional as it violates the fundamental right and not granting the banking license is arbitrary in nature.
  • Hence, the present petition against the order of refusal of grant of license.

ISSUE-

  • Whether the refusal of the banking license by the RBI was valid under Section 22 of the Banking Companies Act, 1949.

RULE-

  • The RBI has the authority to grant or refuse licenses based on the financial condition and compliance of the banking company.
  • The refusal of a license does not necessarily mean a stoppage of business but may restrict certain banking activities.

HELD-

  • The court acknowledged that a system of licensing, which aims to regulate trades, is not repugnant to Article 19(1)(g) of the Constitution. This means that while individuals have the right to carry on trade or business, the government can impose reasonable restrictions to ensure public welfare and orderly conduct of business activities.
  • The power to grant or refuse banking licenses under Section 22 is vested in the Reserve Bank of India (RBI), a statutory body. The court recognized that the RBI was established to foster banking businesses and that its powers under Section 22 were not arbitrary but rather regulated by the statute.
  • The RBI conducted inspections and provided opportunities for the bank to rectify its deficiencies. Despite efforts, the bank failed to demonstrate sound banking practices and attract sufficient deposits.
  • The paid-up capital was only Rs. 50,000. Its reserves were found to be poor and the establishment charges had absorbed more than 50 percent of the gross income. The Reserve Bank gave more than one opportunity to the petitioner to show cause against the refusal of the license. 
  • The action of the RBI in refusing to grant the banking license was within its jurisdiction and properly exercised.
  • The petition was dismissed with costs, the court upheld the RBI's decision to refuse the banking license for Sajjan Bank (Private) Ltd., citing concerns about the bank's financial stability and compliance.

 

COMMENTARIES RATIO/NOTE-

 

  • It was also laid down that the powers vested in the Reserve Bank of India under Section 22 of the Banking Companies Act, 1949 are not vested with a mere officer of the Reserve Bank [Apex Co-operative Bank v. M.S. Co-operative Bank Ltd., AIR 2004 SC 141].

In Shivabhai Zoverbhai Patel v. Reserve Bank of India, it has been laid down that the Reserve Bank of India has full right to refuse or grant a licence and if a licence is refused on irrelevant material Court would not look into it. Refusal to grant licence does not mean stoppage of business as other type of business like that of a money lender can be carried on.

 

Under scheme of Banking Regulation Act a co-operative society registered under Kerala Co-operative Societies Act is entitled to carry on banking business only if it is a Co-operative Bank having licence and only by using any one of the words bank, banker or banking. A primary credit society, a co-operative society formed for the protection of mutual interests of the co-operative banks or co-operative laid mortgages banks and any society formed by the employees of certain Banking Companies are the exception [Muhammed Usman v. Registrar of Co-operative Societies, (2003) 1 BC 580].