Section 29 of The National Bank for Agriculture and Rural Development Act, 1981
- (1)Any sums received by a borrowing institution in repayment or realisation of loans and advances refinanced either wholly or partly by the National Bank shall, to the extent of the accommodation granted by the National Bank and remaining outstanding, be deemed to have been received by the borrowing institution in trust for the National Bank, and shall accordingly be paid by such institution to the National Bank, as per the repayment schedule fixed by the National Bank.
- (2)Where an accommodation has been granted to a borrowing institution, all securities held, or which may be held, by such borrowing institution, on account of any transaction in respect of which such accommodation has been granted by the National Bank, shall be held by such institution in trust for the National Bank. 1[(3) Notwithstanding anything to the contrary contained in any law for the time being in force, where a liquidator is appointed for winding up a borrowing institution, it shall be the duty of the liquidator to forthwith pass on to the National Bank the sums recovered by the borrowing institution or the liquidator, as the case may be, in repayment or realisation of the loans and advances refinanced either wholly or partly by the National Bank to the extent the refinance is outstanding and the National Bank shall be entitled to enforce the securities held by the borrowing institution in trust for the National Bank as if every reference to the borrowing institution in any contract, security or other document obtained by borrowing institution is a reference to the National Bank and accordingly, the National Bank shall be entitled to recover the balance sums due under such loans and advances from the constituents of borrowing institution and any discharge given by the National Bank to such constituent shall be a valid discharge and the liquidator shall, on demand made by the National Bank, deliver to it all such contracts, securities and other documents, for due enforcement thereof by the National Bank. Explanation.--For the purposes of this sub-section, the word "liquidator" shall include liquidator or a provisional liquidator or any person or authority entrusted with the duty of liquidating the borrowing institution.]
Summary
- When the bank provides refinance to a borrowing institution, the money that institution collects from its own borrowers is legally held in trust for the bank.
- Any physical securities or property the institution holds for those loans are also held in trust.
- If the borrowing institution goes bankrupt and a liquidator takes over, the liquidator must immediately give the collected money to the bank.
- The bank is allowed to take direct control of the underlying securities and collect money straight from the original borrowers if the lending institution is being wound up.
Practical examples
FAQ
1. What does it mean that money is held in trust?
It means the borrowing institution does not own the money it collects from its borrowers; it belongs to the national bank to the extent of the outstanding loan, and must be paid on schedule.
2. What happens to the securities if the borrowing bank is shut down?
The liquidator shutting down the bank must hand over the contracts and securities so they can be enforced directly.
3. Can the money be collected directly from the people who borrowed from the failing bank?
Yes, the national bank can act as if it were the original lending bank and collect the money directly from those constituents.
Test yourself
Q1.Under Section 29 of The National Bank for Agriculture and Rural Development Act, 1981, how are the sums collected by a borrowing institution in repayment of refinanced loans treated?
Q2.Under Section 29 of The National Bank for Agriculture and Rural Development Act, 1981, what must a liquidator do with sums recovered for loans refinanced by the National Bank?
Q3.Under Section 29 of The National Bank for Agriculture and Rural Development Act, 1981, if a borrowing institution is being wound up, what right does the National Bank have regarding the securities held by that institution?
Q4.Under Section 29 of The National Bank for Agriculture and Rural Development Act, 1981, which of the following is included in the definition of a liquidator for the purposes of this rule?