The banking industry, which has been realising its debts by assigning a value, said the practice is being followed in the international market.

The Gujarat High Court held on January 12 that it was not permissible under the Banking Regulation Act, 1949.

The High Court said the executed contracts of assigning debts were illegal and the assignee banks are not entitled to be substituted for original lenders (assignor bank) in proceedings related to sick companies pending before courts.

The banks alleged that the High Court order has undone the proactive efforts of the Reserve Bank of India (RBI) to enable the banking sector to deal with the negative

fallout of increasing non-performing assets (NPA) by opening a regulated secondary market for NPAs under the guidelines issued by the RBI in 2005.

They said they identify sick loans (NPAs) and assign them for realisation at a value.

This is a form of recovery and is common practice in the international market. They say they are permitted by the RBI to sell debts with underlying securities.

“Such an interpretation is also likely to render the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, redundant. This has created serious financial, accounting, legal and commercial complications in the banking sector ...,” the petitions read.

The situation is likely to be exploited by defaulting companies, as they try to delay discharging their obligations, the petitions added.

The High Court had failed to appreciate the fact that when a bank assigns debt with underlying securities, it transfers its assets at a price agreed upon, and is no longer entitled to recover anything from the borrower, they submitted.

The High Court had passed the order on a petition filed by Kotak Mahindra Bank, which sought a portfolio of debts with underlying securities on the basis of an assignment deed from ICICI Bank.

However, a bench headed by Chief Justice K G Balakrishnan had refused to give interim relief to the banks, who had sought a stay on the High Court judgment.