Calcutta HC Quashes NPA Classification of CC Account for Failure to Meet 90-Day Test

Benimadhab Construction Private Limited & Another Vs Reserve Bank of India & Ors. (Calcutta High Court)

Summary: The Calcutta High Court allowed WPA No. 23190 of 2025 filed by Benimadhab Construction Private Limited & Another and set aside the order dated 19th June, 2025 issued by the respondent bank. The petitioners had availed a loan in 2012, last renewed for one year till 31st December, 2024 with a sanctioned amount of Rs. 150 Lakhs. The bank classified the account as NPA on 28th January, 2025 and subsequently issued a notice under Section 13(2) of the SARFAESI Act on 19th June, 2025. The petitioners contended that the account did not satisfy the RBI’s NPA classification requirements. The bank relied, among other things, on the reduction of the drawing limit and alleged non-submission of monthly stock statements. The Court considered Clause 2.1.2 and Clause 2.2 of the RBI Master Circular dated 2nd April, 2024 and found that the petitioners had deposited a total of Rs. 09,14,000/- between 30th October, 2024 and 28th January, 2025. Consequently, the Court found that neither any amount was overdue for more than 90 days nor could the account be treated as ‘out of order’. The Court also considered the bank’s correspondence concerning stock statements and found its case inconsistent with that correspondence. The order dated 19th June, 2025 was therefore set aside and quashed, with the bank directed to act in accordance with the Master Circular dated 2nd April, 2024.

Relevant TaxGuru Resources

• RBI Master Circular on Income Recognition and Asset Classification provides the corresponding prudential norms concerning NPA classification and ‘out of order’ status.
• TaxGuru has also published the RBI’s clarifications on prudential norms, including the clarification concerning the ‘out of order’ test for CC/OD accounts.
• The TaxGuru publication of the RBI (Commercial Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025 also contains the framework concerning ‘out of order’ status of CC/OD accounts.
• TaxGuru has also published the RBI Master Circular 2024 on Prudential Norms, containing the relevant NPA and ‘out of order’ provisions.
• TaxGuru has also reported the RBI’s clarification concerning determination of the ‘out of order’ status of CC/OD accounts, including the requirement relating to the 90-day period. RBI clarification on CC/OD ‘out of order’ status.

FULL TEXT OF THE JUDGMENT/ORDER OF CALCUTTA HIGH COURT

1. The petitioners have filed the present writ petition praying for a mandamus commanding the respondent no.1 to forthwith directing the respondent nos.2 and 3 to comply with the guidelines and directions issued by the Reserve Bank of India and to withdraw/ cancel/ rescind the notices dated 19^th June, 2025.

2. The petitioners have availed loan from the respondent no.2 in the year 2012 and the same was renewed from time to time and was lastly renewed for a period of one year till 31st December, 2024 with the sanctioned amount of Rs. 150 Lakhs. On 29t^h January, 2025 by an email, the respondent bank has advised the petitioner no. 1 to deposit an amount of Rs. 7,00,000/- with the bank failing which the account of the petitioners would be declared as Non-Performing Account (hereinafter referred to as “NPA”). As per the advice of the bank, the petitioners have deposited an amount of Rs. 9,25,000/- in the bank account from 30^th January, 2025 to 27^th February, 2025. The petitioners had paid Rs. 1,00,000/- per month till May, 2025 towards the cash credit facilities.

3. In the month of June, 2025, the petitioners came to know that the account of the petitioners declared as NPA. On 19t^h June, 2025, the bank has issued notice under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as “SARFAESI Act”). On 6th August, 2025, the petitioners have sent a reply to the notice under Section 13(2) of the SARFAESI Act calling upon the bank to review and renew/regularize the bank account and to revoke the NPA status in terms of the RBI and MSME guidelines.

4. Mr. Chayan Gupta, Learned Advocate representing the petitioners submits that the bank has a duty and obligation to ensure that all scheduled commercial bank act in compliance with the guidelines and directions but the respondent nos. 2 and 3 have acted in blatant breach and violation of the guidelines of the Reserve Bank of India and declared the account of the petitioners as NPA.

5. Mr. Gupta submits that the petitioner company is not a defaulter and had made payments to the bank regularly, whether it is interest or penal interest. He submits that the bank has never sent any notice of default that the account of the petitioners becomes NPA on 28t^h January, 2025. He submits that accounts of the petitioners were having enough amount to suggest that the petitioners have not committed any default for continuous 90 days. He submits that the Petitioner Company has made regular monthly interest payments to the bank and a significant amount has already been paid to the bank but despite of the same, the bank has declared the account of the petitioners as NPA.

6. Ms. Soni Ojha, Learned Advocate representing the respondent nos. 2 and 3 bank, submits that last renewal sanction letter dated 29^th December, 2023, the cash limit of Rs. 150 lakhs was mutually agreed to be reduced by Rs. 1 lakh per month during the entire period of renewal and the writ petitioner was obliged to utilize the amount as per the reducing cash credit limit and to serve interest regularly without any default. She submits that till the month of September, 2024, the limit continued to be reduced by Rs. 1 lakh as per agreed terms of sanction.

7. Ms. Ojha submits that as per the terms and conditions of the sanction, the borrower was obliged to submit the stock and book debts and creditor’s statements on a monthly basis containing details of the debtors and stocks or WIP to be received preferably by 10^th of every month and in the event of non-deposit of such stock statement within the stipulated period, the same would also affect the credit limit under the agreement. She submits that the petitioners failed to submit monthly stock statement within the stipulated period which is a pre¬requisite for maintaining the regular status in the account resultantly causing the drawing limit to be reduced by Rs. 4 lakhs in the month of September, 2024, alone. She submits that in the month of September, 2024, the drawing power was of Rs. 1.37 crores which was further reduced to Rs. 1.35 crores in the month of November, 2024.

8. Ms. Ojha submits that during the period of October, 2024, the drawing limit was only 1.36 crores, the account was overdrawn during most of the period and further dipped to a debit balance of Rs. 1,37,26,522.02 as on 31^st October, 2024, on account of application of interest for the month of October, 2024 to the tune of Rs. 1,26,585.00 as on 31^st October, 2024 as per the statement of the account. She submits that the overdrawn status continued for the month of November, 2024, December, 2024 and January, 2025 wherein no further payment was received to maintain regularity in the account.

9. Ms. Ojha submits that since the account of the petitioners was liable to be classified as NPA, a last opportunity was granted to the petitioners by an email dated 29^th January, 2025, but the petitioners failed to pay the requisite amount within the date and accordingly, the loan account was classified as NPA. She further submits that subsequent to classification of the loan acount as NPA, the bank has issued a notice on 19^th June, 2025, under Section 13(2) of the SARFAESI Act, calling upon the petitioners to pay the entire outstanding but inspite of receipt of notice, the petitioners failed to pay the said amount.

10. Heard the Learned Counsel for the respective parties and perused the materials on record. Admittedly, the petitioner no. 1 is a MSME. As per Clause 2.1.2.(i) of the Master Circular dated 2^nd April, 2024, issued by the RBI, interest and/or installment of principal remains overdue for a period of more than 90 days in respect of a term loan, the account will be declared as NPA. As per Clause 2.1.2.(ii) the account remains ‘out of order’ as indicated at paragraph 2.2 below, in respect of an Overdraft/ Cash Credit (OD/CC). Clause 2.2 defines ‘Out of Order’ status. Clause 2.2.1 of the Master Circular reads as follows :

“2.2.1. A CC/OD account shall be treated as ‘out of order’ if:

i. The outstanding balance in the CC/OD account remains continuously in excess of the sanctioned limit/drawing power for 90 days, or

ii. The outstanding balance in the CC/OD account is less than the sanctioned limit/ drawing power but there are no credits continuously for 90 days, or the outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but credits are not enough to cover the interest debited during the previous 90 days period.”

11. On 29^th January, 2025, the bank has advised the petitioners to deposit Rs. 7 lakhs failing which the account would be declared as “NPA”. But as per the notice dated 19^th June, 2025, the bank has already declared the account of the petitioners as NPA on 28t^h January, 2025, i.e. prior to issuance of email dated 29^th January, 2025. The petitioners have deposited the total amount of Rs. 3,19,000/- in the account in the month of October, 2024. In the month of December, 2024, the petitioners have further deposited an amount of Rs. 45,000/-. In the month of January, 2025, the petitioners have deposited an amount of Rs. 50,000/- on 9^th January, 2025, and Rs. 1,00,000/- on 28^th January, 2025, total amounting to Rs. 1,50,000/-.

12. The bank has declared the account of the petitioners as NPA on 28t^h January, 2025, but the petitioners have deposited total amount of Rs. 9,14,000/-, from 30^th October, 2024 to 28^th January, 2025, thus no interest and/or installment of the principal remains overdue for a period of 90 days. As the petitioners have deposited the amount of Rs. 9,14,000/- on and from 30^th October, 2024 to 28^th January, 2025, thus it cannot be said that the status of the account of the petitioners was ‘out of order’.

13. The bank in their supplementary affidavit, made out a case that in the event of non-deposit of stock statement within the stipulated period, the same would also affect the credit limit under the agreement. As per the Clause 4 of the terms and conditions of the sanction letter, reckoning of default of stock and book debits statement, the default interest rate per annum is 2% over and above, prevailing rate for irregular period. The case made out by the bank is contrary to the correspondence made by the bank with the petitioners. The bank by an email dated 29t^h October, 2024, informed the petitioners that the stock statement of the petitioners has been processed and the drawing power is now Rs. 4,20,86,250/-. By an email dated 5^th November, 2024, it was informed to the petitioners that the stock statements of the petitioners is processed and the drawing power is Rs. 40,612,500/- and by an email dated 21st March, 2025, the bank has informed the petitioners that the stock statements of the petitioners has been processed and the drawing power is Rs. 47,137,500/-. There is no agreement produced by the bank that in the event of non-deposit of stock statements within the stipulated period, the same would affect the credit limit under the agreement. As per Clause 4 of the sanction letter, the bank can only charge 2% over and above, the prevailing rates for the irregular period for the stock and book debits statement.

14. Considering the above, this Court finds that the bank has declared the account of the petitioners as NPA on 28^th January, 2025, but on 29^th January, 2025, the bank has advised the petitioners to pay Rs. 7 lakhs. From the statement of accounts relied by the petitioners, it is found that from 30^th October, 2024 to 28^th January, 2025, the petitioners have deposited the total amount of Rs. 09,14,000/- and as per the Master Circular dated 2^nd April, 2024, neither any amount was overdue more than 90 days, neither the account of the petitioners can be treated as ‘NPA’ or ‘out of order’.
15. In view of the above, the order dated 19t^h June, 2025, issued by the respondent nos. 2 and 3 are set aside and quashed. The bank is directed to act in accordance with the Master Circular dated 2^nd April, 2024.

16. WPA No. 23190 of 2025 is allowed.

Parties shall be entitled to act on the basis of a server copy of the Judgment placed on the official website of the Court.

Urgent Xerox certified photocopies of this judgment, if applied for, be given to the parties upon compliance of the requisite formalities.