By : M.S.Yatnatti Editor and Video Journalist Bengaluru : It is held that "Securitisation and Reconstruction of Financial Assets and Enforcement of Security interest Act, 2002, Sections 2(1)(0), 13(2), 13(4), 17 - Constitution of India, Articles 226 - Classification of Account as NPA - Challenge against in writ jurisdiction - Invocation of jurisdiction under SARFAESI Act is pre-conditioned by account in question being classified as NPA - Classification of account as NPA must be in accordance with the directions or guidelines relating to assets classification issued by RBI - It would be open for the borrower to invoke writ jurisdiction of High Court seeking judicial review of such decision of creditor declaring his account as NPA, as such classification by itself leads to serious consequences of invocation of SARFAESI Act against the borrower - Classification and consequential invocation of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, by issuing notice under Section 13(2) of Act, cannot be redressed under Section 17 of that Act in absence of invocation of Section 13(4) - Therefore, the judicial review under Article 226 is the only remedy” Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Sections 2(1)(o), 13(2), 13(4), 17 - Classification of account as NPA - Satisfaction of requirement under prudential norms as framed under Master Circular of RBI - Mere statements in reply that Bank has considered the same cannot be said to fulfil obligation of Bank under Sections 13(2), 13(3)(A) of Act - Right of borrower to have due consideration of objections is an important right of borrower where Bank is bound to apply its mind and inform borrower of its reasons as to why and how account is classified as NPA - The decision of Bank in classifying an account as NPA must be fully in conformity with prudential norms of RBI - It is incorrect to presume that once an NPA is always an NPA - Clause 4.2(4) of prudential norms specifically states that if the interest and principal are paid by the borrower in the case of loans classified as NPA, said account should no longer be treated as NPA and may be classified as sub-standard account - Action under SRFAESI Act with regard to said account would not be tenable and insolation to Section 13(2) of the Act.
Reportedly several borrowers have been put under deep trouble and mental torture by issuing "demand notices” "possession notice” and "sale notice” violating SARFAESI Act and without classifying the loans as NPA under to Section 2(1) (o) of the SARFAESI Act. According to Section 2(1) (o) of the SARFAESI Act dealing with non-performing assets and according to SARFAESI Act an NPA is defined as'NPA is a loan which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset'. Further, a circular released by the Reserve Bank of India (the RBI) in 2014 states that a loan can be classified as sub-standard, doubtful or loss asset if the debtor has not paid its interest within 90 (ninety) days from the "due date”. This means that a loan account would be categorized as an NPA if its interest remains due for more than 90 days. And the interest becomes due only after one year as loan interest is per annum and "due date”is after one year (Banks and NBFC are not like loan sharks who take daily interest or weekly interest or monthly interest .Fact is interest rate is per annum ) and it becomes NPA only after one year and 90 days (No where in the SARFAESI Act it is said three EMIs) and then one year it remains in "substandard category” of NPA and then it remains further one year in "doubtful or loss asset” and after this only SARFAESI Act is applicable to issue "demand notices” "possession notice” and "sale notice”. The regime provided under the 2002 Act could not be triggered till such time the loan account is classified as a Non-Performing Asset (in short NPA).The Bank cannot issue "demand notices” "possession notice” and "sale notice”if loan is not declared inbooks of accounts ofBankas NPA in sub-standard, doubtful or loss asset Categoryfor invocation of provision of Section 13(2) of the SARFAESI Actas Section 2(o) defines "non-performing asset" as "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, please note thatas the declaration of an asset or account to be a non-performing asset is a condition precedent to invoke the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,. Reportedly The RBI's asset quality review in 2015 pushed up the level of gross NPAs to large industry from a little under Rs 1.2 lakh crore at the end of March 2015 to Rs 5.3 lakh crore at the end of last December a jump of four-and-a-half times in 33 months. Indiscriminate lending in boom years and the Reserve Bank of India's (RBI's) pressure on banks to recognise sticky assets on their books have resulted in some lenders having to classify over 40% of their loans to large industry as non-performing assets (NPAs), or bad debt, putting pressure on their profits.According to RBI's timelines :If the account does not reflect credits into the account, 90 days preceding the date of balance sheet of the firm. Temporary deficiencies like late/ non-submission of stock statements or balance outstanding exceeding the drawing power, non-renewal of limits should not get categorized as NPA. And If the borrower does not pay three instalments continuously after 90 days but up to 12 months the account becomes sub-standard and NPA. Section 13 (2) empowers the Bank/ FI to serve a notice to the borrower for taking possession of the assets held as security for the money lent by it. But there is precursor to this action: the Bank/FI shall serve notice to the borrower to discharge his full liabilities within 60 days from the date of notice that should also detail out the legal consequences and penal provisions. Going by these two directions under the Act, the borrower should be getting at least 17 months' time before the Bank could proceed against the defaulting MSMEs.The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002 is a powerful instrument in the hands of the banks and financial institutions (FIs) as secured creditors. This Act helps them enforce securities held as collateral to loans disbursed by them should such loans turn out as non-performing assets (NPAs) during the currency of the loan without interference from the Courts. Section 13 of the Act gives power to the secured creditor even to evict the tenant. It is our observation that the banks have been overenthusiastic in taking recourse to SAFRAESI Act provisions as a first resort of recovering the micro, small and medium enterprises (MSME) loans, mostly violating guidelines of Reserve Bank of India (RBI). Finance is the backbone of business.No trade or industry can run without adequate finance.The internal resources of a business organisation are often insufficient for meeting all its needs.It is also not always possible for the owners, promoters or the entrepreneurs to mobilize finance from their own resources.Therefore promoters raise capital through borrowings, keeping in view the short term, medium term or long term requirements of the trade or industry.Every industrial project requires finance in the form of risk capital, long term, medium term and short term or working capital and/or machinery on hire purchase/lease basis. All these types of financial assistance are provided by various institutional agencies, commercial banks, co-operative banks, Regional Rural Banks, State Financial Corporations and International FinancialInstitutions and Syndicated Loan Market and NSIC etc,. A great emphasis has been placed by the government to ensure that all viable projects are provided adequate finance (Capital) for a sustained growth of trade and industry.The borrowed funds have enabled many promoters to realise their dreams and to bring their project to an actual shape. Timely availability of Institutional and bank finance at reasonable rates is essential for successful implementation of any commercial project. This requires thorough and upto date knowledge of lending schemes of various financial institutions likeIDBI, IFCI, ICICI, IRBI, SCICI, Exim Bank, Commercial Banks, RCTC, SIDBI, UTI, LIC, SFCs etc., particularly with reference to the preparation of project report, appraisal by the lending institutions, assessment of financial requirements as per RBI norms, terms and conditions on which finance is available, procedure for filing application for finance, execution of documents and charging of securities.Besides the financing has to be done as per the RBI Credit Policy & Instructions contained in its various Circulars & Committee Recommendations. Special RBI instructions have also been issued on bank finance, for Leasing & Hire purchase Concerns, Diamond Exporters, Consortium Advances, Housing Finance, Priority Sector Advances, Export Credit, Commercial papers etc.