February 09, 2009

The Indian banking industry just suffered a body blow. Buying and selling of loan portfolios has been declared illegal by a division bench of the Gujarat High Court. Hearing an appeal on questions relating to stamp duty and registration decided by the company court in Gujarat, the division bench opined that banks cannot be in the business of buying and selling loan assets.

In a nutshell, the division bench has ruled that assignment of loans by one bank to another is illegal. The court has ruled that such activity is not part of “banking activity” contemplated in the Banking Regulation Act, 1949 (the “Act”).