Allahabad HC Caps U.P. Cooperative Bank Recovery at Twice Principal, Orders Expert Committee on Cooperative Reforms
A Rs. 50,000 farm loan ballooned to Rs. 3,49,862. Justice Vinod Diwakar has capped recovery at double the principal and directed the Chief Secretary to constitute a structural reform committee for U.P.'s ailing cooperative banking sector.
Justice Vinod Diwakar, sitting singly at the High Court of Judicature at Allahabad, delivered a detailed judgment on 22 July 2026 in a batch of sixteen writ petitions filed by farmers against the Uttar Pradesh Sahkari Gram Vikas Bank Ltd. and the State of U.P. The lead petition, filed by a farmer named Baijanth, arose from a Rs. 50,000 loan taken in 2009 to purchase two buffaloes, which the Bank sought to recover as Rs. 3,49,862 — nearly seven times the original principal — by auctioning his mortgaged land. The court found prima facie non-compliance with statutory rules, recorded serious dissatisfaction with the affidavits filed by both the Bank's Managing Director and the Principal Secretary of the Cooperative Department, took suo-motu cognizance of the systemic problem, and issued an interim direction that the Bank shall not recover any amount exceeding double the principal loan from any borrower until an expert committee submits its recommendations. The Chief Secretary, Government of Uttar Pradesh, has been directed to constitute that committee.
The Dispute Before the Court
Baijanth borrowed Rs. 50,000 from the Kulpahar branch of the Uttar Pradesh Sahkari Gram Vikas Bank Ltd., District Mahoba, under a loan agreement dated 5 November 2009. The loan was sanctioned at 13% per annum, disbursed in two instalments of Rs. 25,000 each, and was repayable over five years. He mortgaged 0.882 hectares of agricultural land as security. The loan was also insured, with coverage running from 23 December 2009 to 22 December 2012.
Repayments were minimal — the Bank's own counter affidavit contained a discrepancy, recording either Rs. 3,000 or Rs. 2,500 in repayments. Recovery notices were issued from 2017 onwards. A One Time Settlement Scheme operative from 2018 to 30 September 2022 was offered but not availed. Recovery proceedings began in 2022, a recovery certificate was issued in 2025, and a notice dated 5 January 2026 announced that Baijanth's land would be auctioned on 10 March 2026. He approached the court before the auction could take place.
Fifteen other petitioners filed connected writ petitions raising the same core complaint: loans ranging from Rs. 30,000 to Rs. 5,00,000, taken between 2004 and 2017, had multiplied to amounts between Rs. 1,62,055 and Rs. 22,00,299 by the time of litigation. The court clubbed all sixteen matters for a common hearing.
The Legal Issue
The court identified two intersecting issues. The immediate issue was whether the Bank had complied with Chapter V of the Uttar Pradesh Sahkari Gram Vikas Bank Rules, 1971, and whether the interest rate and recovery mechanism were consistent with the objects of the Uttar Pradesh Sahkari Gram Vikas Bank Act, 1964. The wider issue was whether the Bank's practice of charging 13–14% per annum on agricultural loans — while nationalized banks offer Kisan Credit Card loans up to Rs. 3,00,000 at an effective 4% per annum after subvention — is consistent with the State's stated cooperative banking policy.
The court also examined whether the functioning of the Bank, as actually observed, aligned with its publicly proclaimed mandate of freeing farmers from the exploitation of moneylenders and raising their socio-economic status.
How the Bench Reasoned
Justice Diwakar directed the local Branch Manager to appear in person on the first date of hearing. The Branch Manager, Kulpahar, District Mahoba, appeared with the original loan file. When queried on five specific points — non-compliance with Chapter V of the 1971 Rules, the basis for the interest rate, the cause of the escalation, the reasons for proceeding to auction, and the objectives of the 1964 Act and the 1971 Rules — the Branch Manager cited Rules 25 and 26 of the 1971 Rules but did not answer the remaining questions.
The court then directed the Managing Director of the Bank, Shri Rajesh Kumar Kulshreshtha, to appear and file personal affidavits. He did so on 21 April 2026, but the court found both his affidavit and that of the Branch Manager, Fatehabad, District Agra, to be inadequate responses to the specific queries previously raised.
The Principal Secretary, Cooperative Department, Government of Uttar Pradesh, was then directed to file a comprehensive counter affidavit. The affidavit was filed, but the court's order dated 5 May 2026 recorded serious dissatisfaction: the affidavit was silent on whether the Principal Secretary was satisfied with the Bank's earlier compliance, and it took no clear position on whether cooperative banking in the State aligned with government policy. The court directed the Principal Secretary to appear virtually on the next date.
On 12 May 2026, Shri Ajay Kumar Shukla, Principal Secretary, and the Managing Director appeared via video conferencing. Additional Advocate General Shri Kartikeya Saran appeared for the State. The State was granted one week to place a detailed response on record. On the next date, instructions dated 23 May 2026 were produced, disclosing that a committee constituted on 16 May 2026 had been recalled because its members were not considered adequately equipped to address the complex issues involved.
The court then examined the Bank's structural position in depth. The Bank, established in 1959 and registered under the Sahkari Samiti Adhiniyam, 1912, is outside the purview of the Banking Regulation Act, 1949. It cannot accept public deposits. It borrows almost entirely from NABARD at around 8% per annum on State Government guarantee, and after loading administrative costs, risk costs, and margin, lends to farmers at 11.50–14%. The court noted an NPA average of 75% over the preceding three years, with fresh lending shrinking from Rs. 408 crore in 2023–24 to Rs. 363 crore in 2025–26, even as total loan outstanding grew from Rs. 2,408 crore to Rs. 2,600 crore.
A statement of dues as on 1 July 2025 placed before the court showed 2,74,166 borrowers in default. The outstanding principal stood at approximately Rs. 1,567.87 crore, but total outstanding inclusive of interest had swollen to approximately Rs. 7,061.22 crore — nearly four and a half times the principal. In the oldest category, dues outstanding for more than twenty years related to 24,150 borrowers whose principal of approximately Rs. 92.12 crore had grown to approximately Rs. 857.56 crore, more than nine times the principal amount.
The court identified specific structural pathologies: politically influenced lending, weak appraisal systems, poor recovery mechanisms, delayed elections, board supersessions, non-computerisation of branches, fragmented regulatory oversight among the Registrar of Cooperative Societies, the State Government, NABARD, the Reserve Bank of India, and audit authorities, and the absence of institutional separation between the Bank's banking objective and its welfare objective.
Against this backdrop, the court observed that the Bank's stated public commitment — expressed on its own website under the Managing Director's message — to Atmanirbhar Uttar Pradesh and to freeing farmers from moneylender exploitation was rendered hollow by lending practices that imposed a rate nearly three and a half times the effective rate available under nationalized banking schemes. The court concluded that such practices operated as an instrument of oppression and defeated the institutional mandate.
Constitution of the Expert Committee
Taking suo-motu cognizance of the systemic issues, the court requested three bodies to suggest expert names: the Chairman of the Economic Advisory Council to the Prime Minister (EAC-PM), the Secretary General of the IIT Alumni Council, and the Director of the Vaikunth Mehta National Institute of Cooperative Management and CICTAB (VAMNICOM & CICTAB).
The EAC-PM Chairman suggested Dr. K.K. Tripathi, a 1999-batch Indian Economic Service officer and Joint Secretary at EAC-PM with experience in economic policy, governance, and cooperative sector reforms. The IIT Alumni Council suggested Shri Satish Mehta, an IIT Bombay and Jamnalal Bajaj Institute alumnus with sixteen years at A.F. Ferguson & Co. (now part of Deloitte) and involvement in the creation of SEBI, SIDBI, TRAI, the Competition Commission of India, and BSNL.
No response was received from VAMNICOM & CICTAB despite communication from the Registrar (Compliance) of the court. The court expressed its displeasure and directed that this be communicated to the Additional Secretary (Cooperation), Ministry of Cooperation, Government of India, who also holds the office of Chairman of VAMNICOM's Management Committee.
The court directed the Chief Secretary, Government of Uttar Pradesh, to constitute a committee comprising Dr. K.K. Tripathi, Shri Satish Mehta, Shri Yogesh Kumar (Commissioner and Registrar, Cooperative Department, Uttar Pradesh), and Shri Rajesh Kumar Kulshreshtha (Managing Director, U.P. Sahkari Gram Vikas Bank Ltd.). The Chief Secretary may co-opt additional members as he considers fit. The committee's findings are to form the basis for a comprehensive legislative framework for the regulation and monitoring of cooperative affairs in the State.
The committee's assigned scope is wide. It is to examine institutional, financial, legal, and operational loopholes through which funds and member assets are being misappropriated; assess governance failures, political interference, and weak audits; determine whether cooperative institutions are functioning in the interest of their members; recommend legal, administrative, regulatory, and technological reforms; and prepare a five-year Strategic Action Plan with measurable Key Performance Indicators covering governance, financial performance, recovery efficiency, digitisation, transparency, and institutional sustainability.
Specific reform areas identified by the court include: restoring cooperative autonomy through regular democratic elections; introducing fit-and-proper criteria for directors, CEOs, and senior management; developing integrated digital land records and a Rural Credit Registry to prevent duplicate financing; mandating transparent disclosure of effective interest rates; aligning repayment schedules with harvesting cycles; and consolidating non-functional PACS societies.
The Interim Recovery Cap
Pending the committee's work, the court imposed a direct interim restraint on the Bank. The Bank is directed not to recover from any borrower any amount exceeding double the principal loan amount until the committee's proceedings are concluded and its recommendations are submitted to the Government.
If a borrower approaches the local branch requesting payment in instalments, the Bank is directed to consider such requests sympathetically in the interest of smooth recovery. Once the committee's exercise is complete, the Bank may proceed in accordance with the committee's recommendations.
In Baijanth's specific case, the court directed that he may approach the Kulpahar branch, District Mahoba, to pay dues in instalments, subject to the cap that recovery shall not exceed double the principal amount. The recovery proceedings against him remain stayed for the pendency of the petition.
Outcome
The lead petition, Writ-C No. 10013 of 2026 (Baijanth v. State of U.P. and 3 Others), is listed for reporting compliance on 8 September 2026. The fifteen connected petitions have been disposed of with liberty to each petitioner to approach the concerned branch of the Bank for instalment-based repayment, subject to the same interim cap that recovery shall not exceed double the principal until the committee reports.
The Registrar (Compliance) has been directed to transmit a copy of the judgment forthwith to the Chief Secretary, Government of Uttar Pradesh, the Secretary of the Cooperative Department, and the Additional Secretary, Cooperation, Government of India.