Mandatory MSME revival framework must be followed before NPA classification and SARFAESI enforcement

The Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises notified on 29 May 2015 was mandatory and had to be followed before an MSME account was classified as a non-performing asset. The instructions under the MSMED Act and the Reserve Bank's directions under the Banking Regulation Act were stated to have statutory force, requiring banks to identify incipient stress and undertake the prescribed revival process at the pre-NPA stage. The availability of SARFAESI enforcement did not override these prior obligations, because the Framework operated before recovery action could begin. The contrary view of the High Court was stated to be incorrect.

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Issues: Whether the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises notified on 29 May 2015, as revised from time to time, was mandatory and binding on banks and NBFCs before classifying an MSME account as a non-performing asset and proceeding under the SARFAESI regime.

Analysis: The instructions issued under Section 9 of the Micro, Small and Medium Enterprises Development Act, 2006 were intended to facilitate the promotion and development of MSMEs. The Reserve Bank's directions issued under Section 21 and Section 35A of the Banking Regulation Act, 1949 were also binding on banking companies and had statutory force. The Framework required identification of incipient stress and adoption of the prescribed revival process before an MSME account turned into an NPA. The mere availability of the SARFAESI Act did not displace these prior obligations, because the Framework operated at the stage anterior to NPA classification and was to be complied with before enforcement action under the SARFAESI Act.

Conclusion: The Framework was mandatory and banks were bound to follow it before classifying an MSME account as an NPA; the contrary view of the High Court was incorrect.

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