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Petitioner: SAHIBZADA FAISAL ALI KHAN VS Respondent: FEDERATION OF PAKISTAN and others
Court Name: Lahore High Court Judge(s): Shams Mehmood Mirza Title: SAHIBZADA FAISAL ALI KHAN vs FEDERATION OF PAKISTAN and others Case No.:W. P. No, 23690 of 2011,Writ Petition No, 1353 of 2014 ,Special Civil Application
JUDGMENT
Reported As: 2017 CLD 463 Result: Petition dismissed Judgment JUDGMENT SHAMS MEHMOOD MIRZA, J.---This writ petition calls into question the placing of the name of the petitioner on the list of Credit Information Bureau (CIB) maintained by State Bank of Pakistan as a defaulter of respondent No,4. 2. Relevant facts of the case are that the petitioner availed a finance facility from respondent No,4 for the purchase of six Hino buses. On account of default by the petitioner in his repayment obligations, respondent No,4 filed a suit seeking recovery of Rs,12,897,319/-. On the contest by the petitioner, he was granted leave to defend the suit. The said suit is still pending adjudication before the banking court. Notwithstanding the fact that the application for leave to defend the suit was allowed, the petitioner's name was placed on the CIB by the State Bank of Pakistan. Feeling aggrieved, the petitioner filed Writ Petition No,11792 of 2009 which was disposed of with a direction to the State Bank of Pakistan to pass a decision thereon. In the meantime, the credit card of the petitioner obtained from Habib Bank Limited was blocked on account of his name being on the CIB. The petitioner once again approached this Court by filing Writ Petition No,23966 of 2010 which was disposed of on 10.11.2010 with a direction to the State Bank of Pakistan to hear the petitioner. As a result of the direction given by this Court, the petitioner was afforded an opportunity of hearing by the State Bank of Pakistan and vide order dated 21.03.2011 his name was declined to be removed from the CIB, hence this writ petition. 3. The learned counsel for the petitioner contended that none of the provisions of the Banking Companies Ordinance, 1962 (the Ordinance) confer any power upon State Bank of Pakistan to impose a penalty relating to a particular conduct of the borrower. It was further submitted that
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section 25-A of the Ordinance conferred unbridled powers upon the banks/financial institutions to decide the status of a customer as a defaulter and makes them a judge in their own cause. It was also the case of the petitioner that the mechanism of CIB presupposes a default, which is otherwise required to be proved in accordance with the provisions of Financial Institutions (Recovery of Finances) Ordinance, 2001 (Financial Institutions Ordinance). In furtherance of this submission, it was stated that the questions whether any finance exists and whether the petitioner is liable to repay the same are required to be proved by the bank before the banking courts constituted under the Financial Institutions Ordinance. It was submitted that section 25-A of the Ordinance seeks to delegate the function of making a judicial inquiry and issue a declaration regarding the default on the part of the customer on the financial institutions and State Bank of Pakistan, which inquiry is essentially judicial in nature as it involves adjudication of a lis. The petitioner placed reliance upon a judgment reported as Messrs Yousaf Sugar Mills v. Trust Leasing Corporation and others 2006 CLD 1191 to support his case. 4. The learned counsel for the State Bank of Pakistan opposed the contentions of the petitioner and stated that the State Bank of Pakistan being one of the watchdogs of finance and economy derives the power from the provisions of section 25-A of the Ordinance to gather information from the banking companies and financial institutions. For this purpose, CIB database has been set up and a transparent procedure for supply of credit information has been established. The power to call for information and to collect data regarding the status of finance facilities of the customers falls squarely within the statutory ambit of the State Bank of Pakistan in order to equip the banking companies and financial institutions to make better lending decisions. The learned counsel for the State Bank of Pakistan sought support for his contentions in a judgment reported as Messrs Abdul Aziz Nawab Khan and Company v. Federation of Pakistan, Ministry of Finance and others 2006 CLD 55 and an unreported judgment of this Court passed in Writ Petition No,1353 of 2014 titled Messrs J.S. Developers and another v. State Bank of Pakistan and another. 5. Certain facets of the regulatory regime introduced by the State Bank of Pakistan over which there does not appear to be any dispute and which are duly noted in judgments relied upon by the parties need to be introduced at the outset. a . The power to call for information and collect data vests in the State Bank of Pakistan under section 25-A of the Ordinance; b. The CIB has been set up by the State Bank of Pakistan to collect and assemble financial data of the customers of the financial institutions, which is aggregated in the system and the said information (in the form of credit reports) is made available on the request of financial institutions for the purposes of credit assessm ent, credit scoring and credit risk management. The major purpose of this database is to enable the financial institutions to know the credit history of their prospective customers thus enabling them to make a more prudent decision; c. The Non-Banking Finance Companies (NBFC) are obliged to send the data (information, returns and statements) of their customers to the State Bank of Pakistan in terms of Circular No,2 dated 21.01.2004 issued by the Securities and Exchange Commission of Pakistan; d. In terms of Part-II of Circular No,2 dated 21.01.2004, the NBFC's can extend financial facilities exceeding one million rupees to persons whose names appear in CIB but after recording reasons. 6. It has been noted that the State Bank of Pakistan brought about fundamental changes in the scope of financial system in the year 1992 by putting in place a prudent regulatory framework by introducing Prudential Regulations. Over the years, these Regulations have been reviewed and the latest version covers the areas of Corporate, Small and Medium Enterprises (SME's) and Consumers financing. The purpose of the Prudential Regulations is to ensure safety and soundness of the financial system and they are applicable to banks and Development Financial Institutions. Securities and Exchange Commission of Pakistan has also introduced its own Prudential Regulations for NBFC's. The Prudential Regulations, apart from others, provide classification of loans
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based on time periods at which the repayments have not been made by the borrowers. Apart from objective criteria (based on timeframe of the default), subjective criteria is also used for classification of a loan, which may include inadequate cash flow patterns of the borrower, inadequacy of the security and other market conditions relevant for the particular business of the borrower etc. The criterion of classification for different loans (both short term and long term) is similar in case of corporate and SME lending but in case of consumer lending the criteria is somewhat different. The short term loans, under the corporate and SME financing, are classified into "loss" category after a default period of 1 year whereas a consumer loan is classified as "loss" after a default period of 6 months only. It has been taken note of that relaxations from the rigors, of Prudential Regulations are given by the State Bank of Pakistan to the customers of the financial institutions and development financial institutions when a specific request is made by them. The request so made by the financial institutions and development financial institutions is based on the following information provided to the State Bank of Pakistan as per the Prudential Regulations. i. Nature of Facility (funded / non-fund based etc.) ii. Existing Exposure iii. Proposed Exposure iv. Total Exposure v. Existing Waivers vi. Net Exposure vii. Per Party Limit viii. Breach ' The documents that must accompany the request include (i) Latest audited financials of the borrower along with latest un-audited position if any; (ii) Copy of previous relaxation letters if any; (iii) Latest CIB Report. Of the party; (iv) Details of securities accepted by the bank/DFI; (v) Brief history of the borrower's relationship with the bank along with bank's recommendation in clear terms; and (vi) Any other information/document relevant to the bank's request. ' Similarly, Regulation-5 also requires the following set of documents (i) latest audited financials of the borrower along with latest un-audited position if any; (ii) copy of previous relaxation letters if any; (iii) latest CIB report of the party; (iv) details of securities accepted by the bank/DFI; (v) brief history of the borrower's relationship with the bank along with bank's recommendation in clear terms; (vi) details of financing facilities obtained by the borrowers from other banks/DFIs; and (vii) any other information/document relevant to the bank's request. 7. The State Bank of Pakistan has thus taken a whole range of measures to regulate the financial and banking system. There are objective and subjective criteria set up in the Prudential Regulations to classify the loans granted by the banks and development financial institutions. The information regarding the loans obtained by the customers of the banks/DFI's is required to be sent to the State Bank of Pakistan. The main objective of the CIB appears to be to part knowledge regarding the classification of loans to the other banks and financial institutions in respect of the customers who have approached them seeking finance facilities. These measures have the backing of sections 25 and 25-A of the Ordinance, the relevant portions whereof read as under:- 25. Power of State Bank to control advances by banking companies.- (1) Whenever the State Bank is satisfied that it is necessary or expedient in the public interest so to do, it may determine the policy in relation to advances to be followed by banking companies generally or by any banking company in particular, and, when the policy has been so determined, all banking companies or the banking company concerned, as the case may be, -shall be bound to follow the policy as so determined (2) Without prejudice to the generality of the power conferred by subsection (1), the State Bank may give directions to banking companies either generally or to any banking company or group of banking companies in particular.- (a) as to the credit ceilings to be maintained, credit targets to be achieved for different purposes, sectors and regions, the purposes for which advances may or may not be made, the margins to be maintained in respect of advances, the rates of interest, charges or mark-up to be applied on advances and the maximum or minimum profit sharing ratios; and
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(b) prohibiting the giving of loans, advances and credit to any borrower or group of borrowers on the basis of interest, either for a specific purpose or for any purpose whatsoever; and each banking company shall be bound to comply with any direction so given. (3) .................................. (4) .................................. (5) ................................ (6) ................................ 25A. Power of the State Bank to collect and furnish credit information.- (1) Every banking company shall furnish to the State Bank credit information in such manner as the State Bank may specify, and the State Bank may, either of its own motion or at the request of any banking company, make such information available to any banking company on payment of such fee as the State Bank may fix from time to time: ' Provided that, while making such information available to a banking, company, the State Bank shall not disclose the names of the banking companies which supplied such information to the State Bank: ' Provided further that, a banking company which proposes to enter into any financial arrangement which is in excess of the limit laid down in this behalf by the State Bank from time to time shall, before entering into such financial arrangement, obtain credit information on the borrower from the State Bank. (2) Any credit information furnished by the State Bank to a banking company under subsection (1) shall be treated as confidential and shall not, except for the purposes of this section or with the prior permission of the State Bank, be published or otherwise disclosed. (3) No court, tribunal or other authority, including an officer of Government shall require the State Bank or any banking company to disclose any information furnished to, or supplied by, the State Bank under this section. A reading of the above provisions show that the State Bank of Pakistan can formulate policies and give directions to the banks/DFI's regarding the finance facilities extended or to be extended to their customers and can even prohibit grant of finance facilities to any particular customer or a group of customers and that every banking company/DFI is bound to give credit information of its customers to the State Bank of Pakistan which in turn can be shared with other banks and financial institutions. 8. The credit information by the banks/other financial institutions is based on the guidelines provided for by the Prudential Regulations. In this regard, it may be beneficial to reproduce Prudential Regulation No,8(1) hereunder, which regulation is relevant to the controversy a) Banks/DFIs shall observe the prudential guidelines given at Annexure-V in the matter of classification of their asset portfolio and provisioning there-against on time based criteria. b) In addition to the time-based criteria prescribed in Annexure-V, subjective evaluation of performing and non-performing credit portfolio shall be made for risk assessment and, where considered necessary, any account including the performing account will be classified, and the category of classification determined on the basis of time based criteria shall be further downgraded. Such evaluation shall be carried out on the basis of credit worthiness of the borrower, its cash flow, operation in the account, adequacy of the security, inclusive of its realizable value and documentation covering the advances. Annexure-V reads as under: - GUIDELINES IN THE MATTER OF CLASSIFICATION AND PROVISIONING FOR ASSETS (REGULATION R-8) All Financing Facilities (including Short, Medium and Long Term) ClassificationDeterminant Treatment of Income Provisions to be made
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1. SubstandardWhere mark- up/interest or principal is overdue by 90 days or more from the due dateUnrealized mark- up/interest to be kept in Memorandum Account and not to be credited to Income Account except when realized in cash. Unrealized mark up/interest already taken to income account to be reversed and kept in Memorandum Account.Provision of 25% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law and Forced Sale Value (FSV) of pledged stocks, plant and machinery under charge, and mortgaged residential, commercial and industrial properties (land and building only) to the extent allowed in Para 2 of the Regulation R-8 2. Doubtful Where mark- up/interest or principal is overdue by 180 days or more from the due date.As above Provision of 50% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law and FSV of pledged stocks, plant and machinery under charge, and mortgaged residential, commercial and industrial properties (land and building only) to the extent allowed in Para 2 of the Regulation R-8 . 3. Loss. (a) Where markup/interest or principal is overdue by one year or more from the due dateAs above Provision of 100% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law and FSV of pledged stocks, plant and machinery under charge, and mortgaged residential, commercial & industrial properties (land and building only) to the extent allowed in Para 2 of the Regulation R-8 Where Trade Bills (Import/ Export or Inland Bills) areas above as above
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not paid/adjusted within 180 days of the due date 9. With the background knowledge about the statutory framework put in place by the State Bank of Pakistan, the facts of the present case may be considered. This Court in Writ Petition No,23966 of 2010 directed the State Bank of Pakistan to pass a decision on the application filed by the petitioner through a speaking order. Complying with the directions of this Court, the State Bank of Pakistan passed order dated 21.03.2011, which has been impugned in this writ petition. The perusal of the said order shows that the State Bank of Pakistan rightly did not go into the merits of the case and confined itself to the legitimacy of the reporting by respondent No,3 to the CIB database. The relevant portion of the said order reads as under:- ' In terms of section 25 (A) of the Banking Companies Ordinance, 1962, it is mandatory for all banks, Development Finance institutions (DFIs) and Microfinance Banks (MFBs) to place entire credit records with eCIB database. As far as date sharing with other financial institutions is concerned, which are being regulated by the Securities and Exchange Commission of Pakistan (SECP), they are governed through information sharing arrangements between the two regulatory authorities. Being the member of the eCIB database in a manner prescribed for the purpose. As regard the reporting of the Complainant's name in the eCIB database in concerned, the examination of all relevant record and discussion with parties revealed that the Complainant was extended financing facility towards lease of six Hino Buses. The Bank is justified in reporting outstanding as well as past overdue liabilities with specific reporting in "Liabilities" under Litigation in eCIB reporting database as the same stands outstanding against the Complainant's account. We are unable to opine about the authenticity and validity of agreement between the Complainant and Mr. Shahid Waseer as the same has no significance in deciding the issue. 10. The credit report of the petitioner is placed on record by the State Bank of Pakistan with its parawise comments as Annex R/1. The said report simply shows the outstanding dues in terms of the requirements of Prudential Regulation-8. The reporting requirements under section 25-A of the Ordinance, by the banks and other financial institutions to the CIB database thus cannot be termed as illegal or without jurisdiction. The assertion that by placing the name of the petitioner in CIB makes him a defaulter whereas this is the prerogative of the banking court constituted under Financial Institutions Ordinance has no valid basis. The information provided to CIB database by the financial institutions in respect of a customer does not ipso facto make him a defaulter in the eyes of law. The determination of liability of a customer by a court of competent jurisdiction and placing of his name in CIB database have no nexus with each other and, therefore, ought not to be equated. The reporting requirements by the financial institutions is mandated by section 25-A of the Ordinance and has to be based on the record of the financial institution. This was so held by a learned Division bench of the learned Sindh High Court in a judgment reported as Messrs Abdul Aziz Nawab Khan and Company v. Federation of Pakistan, Ministry of Finance and others 2006 CLD 55. 11. Moreover, these credit reports have no evidentiary value and only serve the purpose of informing the other financial institutions about the credit history of a particular customer who intends to borrow loans/finances from the said other financial institutions. Absent the challenge to the constitutionality of section 25-A of the Ordinance, the reporting requirements cannot be impugned by a customer on the ground that a suit is pending adjudication before a court of competent jurisdiction. The learned counsel for the petitioner did not address any arguments on the constitutionality of section 25-A of the Ordinance. It can furthermore also not be asserted that passing of a decree by a court of competent jurisdiction is a sine qua non for placing the name of the judgment debtor in CIB database. Such a contention, if accepted, would have the effect of reading something into section 25-A of the Ordinance which the legislature did not intend. Yousaf Sugar Mills case on which much reliance was placed by the learned counsel for the petitioner itself
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accepts as self-evident the compliance of the mandatory requirements of section 25-A of the Ordinance by the financial institutions. The relevant passage reads as under:- ' From the bare perusal of section 25 (ibid) it is evident that State Bank of Pakistan can collect credit information from the Banking Company only. A leasing Company does not fall within the definition of Banking Company. A Banking Company is under the control of the State Bank of Pakistan while leasing Company, as against a Banking Company, is under the control of Securities and Exchange Commission of Pakistan. The Securities and Exchange Commission of Pakistan has control over all companies including the Leasing Company and any direction by SECP is binding on the leasing Company exactly in the same manner as the direction of the State Bank of Pakistan is binding on the Banking Company. The SECP can call for information and statement from the Leasing Companies and can collect and maintain such data either with itself or with any other organization. The prudential regulations for NBFCs were issued vide Circular No,2 of 2004 bearing No,SE/NBFC/PR2004 dated 21.01.2004, wherein it was clarified that all NBFCs, House Building Finance Corporations and Investment Corporation of Pakistan shall continue to submit the return and statements etc, to SECP and Credit' Information Bureau (CIB) of State Bank of Pakistan in the same manner and format as previously prescribed. The regulating authority of a Leasing Company i,e, SECP is empowered to direct for the submission of information through prescribed returns and statements, to State Bank of Pakistan, so as to introduce a uniform set of regulations to improve effective management capabilities. The information called by SECP and submitted to State Bank of Pakistan at the instance of SECP cannot be avoided. The State Bank of Pakistan collects credit information from all the banks under section 256 (ibid) while from NBFCs on the direction of SECP and by virtue of provisions of section 3-A of the Banking Companies Ordinance, 1962. The directions of SECP are binding in nature and there is no illegality of furnishing information by a leasing Company to the State Bank of Pakistan. ' What however tipped the balance in favour of the petitioner in Yousaf Sugar Mills case were its peculiar facts as an arbitration award between the parties had been announced and payments through cheques had been made by the petitioner therein to the leasing company which were encashed by it but the name of the petitioner was not removed from the CIB. No doubt, it was observed in the said judgment that an entry in the database of CIB was akin to blacklisting a company from entering into lawful relation with the bank for the purpose of gain. This Court is, however, not ready to accept that placing the name of an individual in D CIB under the Prudential Regulations and section 25-A of the Ordinance results into his blacklisting. Such a parallel cannot be drawn in view of the mandatory language of section 25-A of the Ordinance. As can be seen from the Prudential Regulations of both the banks/DFI's and NBFC's, the financial institutions have the discretion of granting loans W persons whose name figure in the CIB database by seeking exemption from the State Bank of Pakistan on fulfillment of the conditions mentioned therein. The availability of exemption does not justify the drawing of parallel between placing of one's name in CIB database with that of blacklisting. 12. Although the learned counsel for the petitioner did not address arguments on the constitutionality of section 25-A of the Ordinance, it is clear that a loan from a financial institution cannot be sought as of right. It must also be kept in mind that the loan making process by the financial institutions is not entirely codified or follows pre-defined rules. It is simply the prerogative of the financial institutions to grant or not to grant a loan to a particular borrower. Ordinarily, a financial institution has to take into account a lot of factors while making a decision to…
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