TaxTMI 
TaxTMI 
2009 (9) TMI 1027
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....itioner questions the classification of its account, by the first respondent bank, as a Non-Performing Asset (NPA). The foundation of the writ petition and the basic contention of the petitioner, therefore, is that the declaration of the petitioner's account as NPA is not justifiable and consequently the jurisdictional fact necessary for invocation of Section 13 of the SARFAESI Act is non-existent in this case. The sole question that falls for consideration in this case is whether the first respondent bank is justified in classifying the petitioner's account as NPA. 3. The facts, in brief, are as follows: (a) The petitioner is a company incorporated in the year 2002 under the Companies Act, 1956 and is engaged in the business of finishing work of Dal products, which has been enjoying the credit facilities, such as Cash Credit (Hypothecation) to the extent of Rs. 96,60,000/- and a term loan of Rs. 41,12,000/-, from the first respondent bank from 2002 onwards. The term loan is against mortgage of immovable properties and thus, the overall exposure of the petitioner is to the tune of Rs. 1,37,72,000/- and the said loans are said to have been granted by the first re....
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....ation under the 'Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances'. 6. As mentioned above, the respondent filed a counter affidavit stating that the operation of the petitioner's account was not satisfactory and not in accordance with the terms of sanction and due to non-service and defaults, the same was classified as NPA on 31.05.2006 and that no requests for One Time Settlement (OTS) was made by the petitioner and that the management of the petitioner had addressed a letter dated 27.02.2007 admitting the liability and requesting time till 03.03.2007 for liquidating the outstanding debt along with a proposal. It also mentions that the petitioner has made part payment of Rs. 66,50,000/- on various dates and on the date of filing of the counter affidavit, after giving credit to the said payments, outstanding amount payable is Rs. 83,31,258/- with interest thereon. It is also contended that the writ petition is not maintainable since adequate relief can be obtained from the appellate authority under the SARFAESI Act and consequently, the petitioner be relegated to the said appellate remedy. 7. We have heard Smt. C....
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....riod not exceeding two years. With effect from 31 March 2001, a sub-standard asset is one, which has remained NPA for a period less than or equal to 18 months. In such cases, the current net worth of the borrower/guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. With effect from 31 March 2005, a sub-standard asset would be one which has remained NPA for a period less than or equal to 12 months. 4.1.2 Doubtful Assets A doubtful asset was one, which remained NPA for a period exceeding two years. With effect from 31 March 2001, an asset is to be classified as doubtful, if it has remained NPA for a period exceeding 18 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub- standard, with the added characteristic that the weaknesses make collection or liquidation in full, - on the basis of curren....
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....onditions there under are satisfied. She placed strong reliance on Clause 2.1.3 which requires 90 days overdue norm is essential for identification of NPA, which in other words, means that the interest and or instalment of principal remains overdue for a period of more than 90 days in respect of a term loan. She, further, contends that the policy of income recognition and asset classification has to be objective and based on record of recovery. The account, therefore, cannot be classified as NPA unless it satisfies the prudential norms. Further, the said NPAs may be of various categories where the account remains NPA for less than or equal to 18/12 months, it is broadly classified as sub-standard asset, if in such cases, the current net worth of the borrower or the guarantor or the current market value of the security is not enough to ensure recovery of dues to the bank in full. Further, such assets, which remain NPA for a period exceeding 18 months to 12 months of the loan is already classified as doubtful and the recovery is highly questionable and improbable, it is classified as doubtful asset. Further, such NPA account is identified by the bank, as uncollectible and of such lit....
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....of, which are extracted hereunder: 37. Next we come to the question as to whether it is on whims and fancies of the financial institutions to classify the assets as non-performing assets, as canvassed before us. We find it not to be so. As a matter of fact a policy has been laid down by the Reserve Bank of India providing guidelines in the matter for declaring an asset to be a non-performing asset known as "RBI's prudential norms on income recognition, asset classification and provisioning - pertaining to advances" through a Circular dated August 30, 2001. It is mentioned in the said Circular as follows: 1.1 In line with the international practices and as per the recommendations made by the Committee on the Financial System (Chairman Shri M. Narasimham), the Reserve Bank of India has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks so as to move towards greater consistency and transparency in the published accounts. 2.1 Non-performing Assets: 2.1.1 An asset, including a leased asset, becomes non-performing when it ceases to generate income fo....
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....erms and conditions and circumstances in which the debt is to be classified as non-performing asset as early as possible. Therefore, we find no substance in the submission made on behalf of the petitioners that there are no guidelines for treating the debt as a non- performing asset. 44. As a matter of fact, the Narasimham Committee also advocates for a legal framework which may clearly define the rights and liabilities of the parties to the contract and provisions for speedy resolution of disputes, which is a sine qua non for efficient trade and commerce, especially for financial intermediation. Even the guidelines of the Reserve Bank of India in relation to classifying the NPA's while stressing the need of expeditious steps in taking a decision for classifying and identification of NPA's says, a system be evolved which should ensure that the doubts in asset classification are settled through specified internal channels within the time specified in the guidelines. It is thus clear that while recommending speedier steps for recovery of the debts it is envisaged by all concerned that within the legal framework, such provisions may be contained which may curtail the ....
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....ch is extracted hereunder: 12. In the instant case I find that the authorities of the bank had issued notice dated 3rd November, 2003 classifying the account as non-performing asset as per RBI guidelines. Whether there is any doubt or question that under the guidelines of the RBI the accounts are non-performing assets or not, is a matter to be settled through the internal specified channels of the bank. Once bank authorities under Section 13(2) classifies the account as non-performing asset and issues notice, as has been done in the instant case, the writ Courts have little or no role to play in deciding such issue. Therefore, since it is clear from a reading of the judgments in Mardia Chemicals (supra) and Transcore (supra) that Apex Court had approved the concept of greater or complete autonomy of the banks and financial institutions in setting doubts in asset classification and in recovery of their dues without the intervention of the Court or Tribunal and had stressed on the appropriate internal mechanism for speedy resolution of disputes, the law laid down in the judgments in Whirlpool AIR 1999 SC 22 (supra). Appropriate Authority and Anr. v. Sudha Patil AIR 1999 SC 1....
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....n-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under Sub-section (4). It is categorically mentioned in the aforesaid provision that jurisdiction to issue notice under Section 13(2) would arise when an account of a borrower is classified as NPA. 16. The classification of asset as NPA is defined under Section 2(1)(o), which is as follows: 2(1)(o) "non-performing asset" means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, [doubtful or loss asset, - (a) in case such bank or financial institution is administered or regulated by any authority or body established, constituted or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to assets classifications issued by such authority or body; (b) in any other case, in accordance with the directions or guidelines relating to assets classifications issued by ....
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.... the jurisdiction of DRT under Section 17 of the SARFAESI Act. Thus, the grievance of a borrower regarding asset classification and consequential invocation of the SARFAESI Act by issuing notice under Section 13(2) of the SARFAESI Act, cannot be redressed under Section 17 of the SARFAESI Act in the absence of invocation of Section 13(4) of the SARFAESI Act and judicial review under Article 226 is the only remedy. 18. Learned Counsel for the respondents has placed reliance on para 37, extracted as above, of the judgment in Mardia Chemicals's case (supra) and he contends that the classification is an internal matter of the bank. He, therefore, submits that as per para 44 of the said judgment the disputes regarding classification of NPAs should be considered and resolved by some internal mechanism, which will provide enough safeguards to the borrower. He also submits that essential questions of fact may have to be considered and according to him, the expeditious remedy in such situation is only under Section 17 of the SARFAESI Act. 19. We are, however, not persuaded to accept the said submission of the learned Counsel for the respondents for the reason that a serious civil c....
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....institutions in dealing with their borrowers to apprise them of the reason for not accepting the objections or points raised in reply to the notice served upon them before proceeding to take measures under Sub-section (4) of Section 13. Such reasons, overruling the objections of the borrower, must also be communicated to the borrower by the secured creditor. It will only be in fulfillment of a requirement of reasonableness and fairness in the dealings of institutional financing which is so important from the point of view of the economy of the country and would serve the purpose in the growth of a healthy economy. It would certainly provide guidance to the secured debtors in general in conducting the affairs in a manner that they may not be found defaulting and being made liable for the unsavoury steps contained under Sub-section (4) of Section 13. At the same time, more importantly we must make it clear unequivocally that communication of the reasons not accepting the objections taken by the secured borrower may not be taken to give an occasion to resort to such proceedings which are not permissible under the provisions of the Act. But communication of reasons not to accept the ob....
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....of the borrower in the books of bank/ FI, which is an asset of the bank/FI, has become non-performing... 23. The right of the borrower to have a due consideration of objections is, therefore, an important right of the borrower where the bank is bound to apply its mind and inform the borrower of its reasons as to why and how the account is classified as NPA, particularly, when the borrower raises specific objections in that regard. The reply of the bank must indicate application of mind by the bank that the decision of the bank in classifying the account as NPA was fully in conformity with the prudential norms of RBI. Non-consideration of the said objection by mere statements in the reply that the bank has considered the same cannot be said to be the fulfillment of the obligation of the bank under Sections 13(2) and 13(3)(A) of the SARFAESI Act. It also cannot be disputed that even assuming that particular had become NPA, the subsequent payments by the borrower entitled a borrower to upgrade the said account and may come out of the said classification of his account as NPA. Therefore, it is incorrect to presume that once an NPA is always an NPA and it is precisely for the said re....