Prior hearing required before NPA classification and reduction of drawing power; regularisation can restore standard status.

A bank cannot reduce a borrower's drawing power or classify the account as NPA without first giving notice and an opportunity to explain, because such action has civil consequences and must comply with audi alteram partem. Temporary deficiencies such as inadequate drawing power, delayed stock statements, excess outstanding, or pending renewal do not by themselves justify NPA classification under RBI prudential norms. An NPA classification is not irreversible; where arrears of principal and interest are cleared or deficiencies are regularised, the account may be restored to standard status. The impugned classification and consequential action were set aside and the matter was remitted for fresh decision in accordance with the applicable norms.

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Issues: (i) Whether the bank could alter or reduce the drawing power of the borrower and classify the account as non-performing asset without prior opportunity of hearing. (ii) Whether an account once classified as non-performing asset could be restored to standard status upon removal of deficiencies or payment of arrears.

Issue (i): Whether the bank could alter or reduce the drawing power of the borrower and classify the account as non-performing asset without prior opportunity of hearing.

Analysis: The SARFAESI framework defines default and non-performing asset and contemplates enforcement only after the account is classified as NPA. The Master Circular on prudential norms recognises that temporary deficiencies such as inadequate drawing power, excess outstanding, non-submission of stock statements, or delayed renewal do not by themselves justify NPA classification. Since reduction of drawing power and classification as NPA entail civil consequences, the borrower must be given notice and an opportunity to explain and produce supporting material in accordance with audi alteram partem.

Conclusion: The bank was bound to afford prior opportunity before reducing drawing power and classifying the account as NPA, and the action taken without such opportunity was not sustainable.

Issue (ii): Whether an account once classified as non-performing asset could be restored to standard status upon removal of deficiencies or payment of arrears.

Analysis: The RBI prudential norms provide that an account should not continue as NPA merely because of temporary deficiencies, and that if arrears of interest and principal are paid, the account may be upgraded to standard status. The legal position applied in the judgment is that an NPA classification is not irreversible, and the lender must consider regularisation in accordance with the applicable circulars and norms.

Conclusion: Yes. A borrower can have the account restored to standard status if the arrears are cleared or the temporary deficiencies are removed in terms of the RBI norms.

Final Conclusion: The impugned NPA classification and consequential action were set aside, and the matter was sent back for a fresh decision after giving the borrower an opportunity in accordance with RBI prudential norms.

Ratio Decidendi: A bank cannot classify a cash credit account as NPA or reduce drawing power in disregard of RBI prudential norms and without a prior opportunity to the borrower, and an NPA classification may be reversed where the prescribed deficiencies are regularised or arrears are cleared.

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