Banks await final judgment on loan portfolio trading

While banks are still reeling from the the recent collapse of the financial system, a recent decision from the Gujarat High Court serves an additional blow that has the potential of creating far-reaching implications for the overall banking industry in India.

In its judgment, arising from an appeal in Kotak Mahindra Bank and Others v M/S APS Star Ind Ltd, the Gujarat High Court held that the trading of debt through the buying and selling of loan portfolios was “illegal” and did not qualify as a permitted banking activity under the Banking Regulation Act, 1949.

Case background

The APS Star litigation stems from an inter-bank transfer of a pool of non-performing loans (NPAs) together with their underlying security. The transfer was contested in connection with the liquidation proceedings undertaken with respect to APS Star Industries – a borrower whose loan account formed part of the transferrred portfolio of loans.

Karan Singh is a partner and Ameya Khandge is a counsel at Trilegal in Mumbai. Trilegal is a full-service law firm that advises on corporate and commercial law in India and provides commercially oriented legal advice in relation to all sectors of the economy. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 100 lawyers, some with experience at law firms in the US, the UK and Japan.