It is very clear that the Banks should follow RBI guidelines on Asset-Classification before classifying any loan account as ‘Non-performing Asset (NPA)’. There were judgments saying that it is mandatory for the Banks to follow RBI guidelines while classifying an account as ‘Non-Performing Asset (NPA)’ and any deviation in this regard can vitiate the proceedings initiated under SARFAESI Act, 2002. While RBI guidelines are detailed when it comes to Asset Classification and related issues; the Bank officials or the Banks may have to make a subjective assessment of certain issues. It is understood from the reading of RBI guidelines on Asset-Classification that genuine borrowers facing temporary difficulties may be treated separately and based on reasonable assurance of recovery. Guideline 4.2.4 of RBI guideline deals with the issue of ‘accounts with temporary deficiencies’ and narration of few of the temporary deficiencies in the said guideline appear to be ‘inclusive’ in nature allowing the Bank to make certain subjective assessments on case-to-case basis. Obviously, no creditor and especially secured creditor want to harass a genuine borrower having a good track-record with the Bank for a considerable time. However, with constant emphasis on the issue of reduction of NPAs, it seems that the Banks are very strict while getting the accounts classified as ‘NPAs’. The most important thing about the issue of recovery by the Bank is that they are allowed to proceed against the borrower for default in any of the facilities availed by him when a borrower avails multiple credit facilities. Banks are asked to initiate recovery proceedings ‘Borrower-Wise’ and not ‘Facility-Wise’ and it is very clear in the RBI guideline 4.2.7. Again, Banks are not supposed to lay complete focus on the value of the security available with the Bank as such while initiating the recovery proceedings and it is very clear in RBI guideline 4.2.3. The extract of the said RBI guidelines are as follows:

4.2.7 Asset Classification to be borrower-wise and not facility-wise:

i) It is difficult to envisage a situation when only one facility to a borrower/one investment in any of the securities issued by the borrower becomes a problem credit/investment and not others. Therefore, all the facilities granted by a bank to a borrower and investment in all the securities issued by the borrower will have to be treated as NPA/NPI and not the particular facility/investment or part thereof which has become irregular.

4.2.3 Availability of security / net worth of borrower/ guarantor:

The availability of security or net worth of borrower/ guarantor should not be taken into account for the purpose of treating an advance as NPA or otherwise, except to the extent provided in Para 4.2.9, as income recognition is based on record of recovery.

Again, dealing with the issue of temporary deficiencies in adhering to the terms of the loan agreement, RBI guideline 4.2.4 says as follows:

4.2.4 Accounts with temporary deficiencies:

The classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on the due date, etc.

The problems for many borrowers or the Small Businessmen availing the loan facilities from the Bank comes from the issue that the Banks are asked to initiate recovery proceedings ‘borrower-wise’ and not ‘facility-wise’. Borrowers availing facilities from the Bank with the complex commercial arrangements and agreements face problems with this discretion available with the Banks or the Bank Officials. Many complain that there is no effective redressel mechanism to raise all these issues even when the borrower has a very good case for restructuring or for questioning the judgment of the Bank in classifying a particular account as a ‘Non-Performing Asset’. In most cases, the borrowers are driven either to approach the High Court under Article 226 of Constitution of India challenging the classification of an account as NPA or the borrower may have to inevitably file an Appeal before the Debt Recovery Tribunal under section 17 of SARFAESI Act, 2002. Even-though Banks can consider the proposal for restructuring of a loan account upon certain conditions and re-negotiating the terms, Banks do exercise great discretion in this regard.  Coupled with this situation, as the Banks can argue that the value of security has got nothing to do while classifying an account as NPA, genuine borrowers or borrowers/small businessmen with temporary/genuine/understandable problems face lot of pressure and problems. For example, an industry may have a very valuable property lying with the Bank as a security and may be facing some problems in its business with the obvious reasons which are beyond its control, and in such cases also, if the Bank is not convinced, the borrower becomes remediless.

Emphasis has always been laid on the issue of recovery and establishing an efficacious internal system by the Banks and Guideline 4.2.2 of RBI guidelines says as follows:

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4.2.2. Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels. The cutoff point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extant guidelines.

RBI guidelines on ‘Asset Classification’ are well-balanced and the Banks are asked to make many subjective decisions and RBI guidelines do focus on the issue of not harassing genuine borrowers while emphasizing at the need of speedy and efficacious recovery. Along with the provisions dealing with the restructuring of loans or advances, RBI guidelines also deal with the issue of up-gradation of loan accounts classified as NPAs and the relevant RBI guideline in this regard is as follows:

4.2.5 Upgradation of loan accounts classified as NPAs:

If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as nonperforming and may be classified as ‘standard’ accounts. With regard to upgradation of a restructured/ rescheduled account which is classified as NPA contents of paragraphs 11.2 and 14.2 in the Part B of this circular will be applicable.

On certain issues, RBI guidelines are very clear as to when an account should be treated as NPA. But, with regard to providing relaxation or understanding the temporary difficulties of the borrower while considering upgradation of loan account or regularizing the loan account, Banks do exercise lot of discretion. If at all the borrower feels that the Secured Creditor or the Banks are unfair in dealing with his loan account or loan accounts, he can do nothing except approaching superior officers, approaching Banking ombudsmen or approaching High Court under Article 226 of Constitution of India. Though, even the DRT (Debt Recovery Tribunal) can consider all objections raised by the borrower while entertaining an Appeal under section 17 of SARFAESI Act, 2002, DRT may not have power to analyze a particular case in the light of RBI guidelines in its entirety though DRT can certainly look into the guideline dealing with the criteria for classifying a particular loan account or accounts as ‘Non-performing Assets’. Normally, Banks do not commit any mistakes in classifying an Account as NPA applying the RBI guidelines strictly. Apart from the criteria, the DRT can look into the issue of ‘debt’, objections regarding debt and the correctness of the procedure followed by the Bank under SARFAESI Act, 2002. Normally, Banks do not commit mistakes in the procedure and the borrower will have objection to the classification on the basis that he is not a willful-defaulter and the deficiency in making payment is temporary in nature. However, these things are not considered by the DRT normally as I think and they may not have power to consider all these issues in-spite of various judgments of the Constitutional Courts from time to time emphasizing at the powers of the Tribunal under section 17. Only due to the judgments of the Courts, the borrowers are allowed to question every measure initiated by the Banks under SARFAESI Act, 2002 now and technicalities are normally ignored while entertaining appeals under section 17. It is also clear that they can look into all objections pertaining to the loan account or even raised by the third-party if he is connected. The Civil Court may be having limited jurisdiction to look into the issues connected to the SARFAESI proceedings and the jurisdiction of the High Court under Article 226 of Constitution of India is largely dependent on the facts of the case, and the discretion of the Court.

Now, if the Bank takes a decision to classify an account as NPA and rejects the objections or the request by the borrower, then, apart from writ remedy, the remedy available to the borrower is to file an appeal under section 17 of the SARFAESI Act, 2002. Based on the merits of the case, the DRT will grant interim relief and finally, only when it is established that there is a procedural irregularity, the DRT will allow the SARFAESI Appeal and can order the restoration of property if the physical possession has already been taken by the Bank pursuant to steps taken under section 13 (4) or by taking assistance of the police etc. using the mechanism provided under section 14 of SARFAESI Act, 2002. In many cases, DRT can insist on payment of some deposit while granting an interim-relief when the borrower approaches the Tribunal under section 17 of the Act challenging the proceedings initiated by the Bank under SARFAESI Act, 2002. If the Bank proceeds with the proceedings even during the pendency of the Appeal under section 17, then, it becomes further more complicated to the borrower and it is very often heard that the borrower is asked to file another appeal literally instead of looking into all developments in the pending Appeal itself by way of entertaining affidavits or petitions in the pending Appeal. Filing an Appeal against the order of the DRT to the DRAT under section 18 is another big process and many normally get discouraged to do this in-view of pre-deposit condition. In each and every step, the borrower is discouraged and made to run from pillar to post even in cases with some merit and it is the view of many of the professionals or the borrowers facing SARFAESI proceedings. There is no reason as to why Appeals can’t be speeded-up, additional Tribunals can’t be set-up. If Appeals are speeded-up and if sufficient Tribunals and Appellate Tribunals are constituted, then, at-least genuine borrowers seeking remedy may feel protected and at-present, every case of so-called default is treated in a same way.

The SARFAESI Act, 2002 (The Securitisation and Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002) seems to be proceeding on the basis that the Banks or the Bank officials do not commit any mistakes. It is quite possible to ensure speedy recovery through special legislations like SARFAESI Act, 2002 and also giving confidence to the borrower that he will be heard fairly especially when the borrower has got a very good track-record and long standing relation with the Bank along with having valuable and marketable security lying with the Bank. It is quite possible. Now, it seems that there is an amendment or the provision allowing the Authorized Officers to bid for the property when there were no bidders initially and the reason given for this step is that it will allow the Banks to clean-up their balance-sheets. But, this kind of provisions can harm the borrowers and already it has become extremely difficult for the borrowers to establish or state his case and coordinating with the Banks. If there is too much pressure from the Banks when the businesses are not doing well for the reasons beyond their control, then, small business may be suffering irreparable loss if the Bank doesn’t understand their concerns reasonably and sympathetically. Normally, at-times, taking note of industry specific problems, the Finance Ministry may come-up with some kind of directions to the Bank to be lenient or understandable while insisting on the speedy recovery in-respect of some specific industries and Banks also are asked at-times to post-phone the recovery process also.

Instead of discouraging the borrower to get any remedy or forum to advocate his problems, the legal frame-work governing recovery of secured loans can still be very fair, few more Tribunals and Appellate Tribunals can be constituted and well-drafted powers are to be conferred on the Tribunals to even give directions to the Bank when needed and in-favour of the borrower. For example, if the loan to be recovered is only 10 lakh and the security lying with the Bank is worth 50 lakh admittedly, and if the borrower seeks for payment of outstanding loan amount with interest and charges seeking regularization, then, DRT should be able to give direction to the Bank to accept the proposal. Delays in adjudication can certainly be curtailed and technicalities can be ignored while entertaining pleas from the Borrower.

Admittedly, on the issues of reduction of interest, acceptance of OTS etc., Banks will have their own internal systems and DRT may have little role in this regard.

With many more stringent provisions like allowing the Banks to file Caveats before Tribunals under SARFAESI Act, 2002, allowing the Banks to bid for the properties; discretion of the Banks or the Bank officials has grown like anything and the borrower increasingly feels that he can not state his case and get remedy.

RBI keeps updating or modifies the guidelines governing ‘Asset Classification’, but, borrowers feel that it has become so difficult for them to establish or advocate their case even when they are not clearly willful defaulters and even when a valuable and marketable security is lying with the Bank.

Whether it is a Public Sector Bank or Private Sector Bank, borrowers should have a forum providing speedy, effective and efficacious remedy.

Note: the views expressed are my personal, my own understanding and I can be wrong in my views.


V.DURGA RAO, Advocate, Madras High Court.


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