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TMI Blog2009 (9) TMI 1027X X X X Extracts X X X X X X X X Extracts X X X X ..... ming 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 ₹ 96,60,000/- and a term loan of ₹ 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 ₹ 1,37,72,000/- and the said loans are said to have been granted by the first respondent bank after satisfactorily fulfilling the due documentation and securities required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ₹ 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. Ch. Veda Vani, learned Counsel for the petitioner and Sri Siva Reddy, learned C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 currently known facts, conditions and values - highly questionable and improbable. With effect from March 31, 2005, an asset would be classified as doubtful if it remained in the sub-standard category for 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od 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 little value that its continuance as a bankable asset is not warranted is classified as a loss asset. Learned Counsel, therefore, asserts that there was never a default where the interest or instalment remained overdue for 90 days and in any case, as admitted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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 for the bank. A 'non-performing asset' (NPA) was defined as a credit facility in respect of which the interest and/or instalment of principal has remained 'past due' for a specified period of time. The specified period was reduced in a phased manner as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arasimham 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 delays. Nonetheless dues or disputes regarding classification of NPAs should be considered and resolved by some internal mechanism. In our view, the above position suggests the safeguards for a borrower, before a secured asset is classified as NPA. If there is any difficulty or any objection pointed out by the borrower by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 181 (supra), Chaube Jagdish Prasad AIR 1959 SC 492 (supra). ABL International Limited (supra), Binapani Dei AIR 1967 SC 1269 (supra) and Srikant Kashinath Jituri AIR 1995 SC 288 (supra) relied on by the petitioner are not applicable. The argument on behalf of the petitioner that the notice dated 3rd November, 2003 is vague as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision 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 the Reserve Bank;] Thus, from the above, it is clear that the classification of an account as NPA must be in accordance with the directions or guidelines relating to asset classification issued by the RBI. The said aspect of classification of the account as NPA, therefore, assumes any amount of importance and is the first step that is necessary to be satisfied by the credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned 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 consequence will flow against the borrower, the moment his account is classified as NPA and thereafter, the proceedings are taken demanding entire outstanding amount by issuing a notice under Section 13(2) of the SARFAESI Act. The appropriate adjudicatory internal mechanism as envisaged by the Supreme Court is not evolved as is evident from the present case. In fact, the only reply which the bank gave to the objections of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... airness 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 objections of the borrower, would certainly be for the purpose of his knowledge which would be a step forward towards his right to know as to why his objections have not been accepted by the secured creditor who intends to resort to harsh steps of taking over the management/business of viz. secured assets without intervention of the court. Such a person in respect of whom steps under Section 13(4) of the Act are likely to be taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply 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 reason that the Clause 4.2.4 of the prudential norms specifically states that if interest and principal are paid by the borrower in case of loans classified as NPA, the said account should no longer be treated as NPA and may be classified as sub-standard account. Consequently, therefore, the action under the SARFAESI Act with regard to the said account would not be tenable, as jurisdictional fact under Section 13(2) of the SARFAESI Act would ..... X X X X Extracts X X X X X X X X Extracts X X X X
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