RBI Regulations: Quashing of SARFAESI Proceedings for Non Compliance
The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court, in accordance with the guidelines issued by the Reserve Bank of India (RBI Regulations).
Mrs.R.Premalatha vs State Bank Of India
In this case, the Madras High Court quashed the demand notice and sale notice issued by the bank under Section 13(2) and Section 13(4) of the SARFAESI Act, respectively. The court held that the bank had wrongly classified the borrower’s account as NPA without considering the temporary deficiencies and had not given any concession or relief to the borrower as per the RBI norms.
M/s. K. P. Namboodiri’s Sons vs. State Bank of India & Ors.
In this case, the Kerala High Court quashed the demand notice and possession notice issued by the bank under Section 13(2) and Section 13(4) of the SARFAESI Act, respectively. The court directed the bank to reconsider the borrower’s request for restructuring.
Andhra Bank vs. M/s. Ramesh Chandra Agarwal & Ors.
In this case, the Supreme Court upheld the validity of the SARFAESI proceedings initiated by the bank against a borrower who had defaulted on his loan. However, the court also observed that if a borrower can show that there is a violation of RBI guidelines by the bank in classifying his account as NPA or in issuing demand notice or possession notice, then he can challenge such action before the Debt Recovery Tribunal or High Court under Section 17 or Article 226 of the Constitution, respectively.
RBI Regulations on NPA Classification
The RBI has issued various circulars and master circulars on income recognition, asset classification, provisioning and other related matters for different types of lending institutions, such as commercial banks, urban co-operative banks, non-banking financial companies, etc.
The RBI has also specified the criteria and objectives of investment policy, the classification of investments into different categories, the valuation and measurement of investments, the income recognition and provisioning norms for investments, and the penal consequences for non-compliance with the guidelines.
The RBI has also laid down a prudential framework for resolution of stressed assets, which requires the lenders to identify incipient stress in borrower accounts, immediately on default, by classifying them as special mention accounts (SMA), and to implement a resolution plan within 180 days from the end of the review period.
Upgradation of Loan Accounts Classified as NPAs
One of the methods for upgrading loan accounts classified as NPAs is through the payment of arrears of interest and principal by the borrower. If these arrears are paid, the account should no longer be treated as nonperforming and may be classified as ‘standard’ accounts1 2 3 . This is apart from other methods like restructuring and rescheduling of the account.
Difference between Restructuring and Rescheduling of Loan Accounts
Restructuring of loans means changing the type or structure of the existing loan to help the borrower improve their current cash flow. An example of this can be converting an overdraft into term loans4 5 6 7 . On the other hand, rescheduling of loans means to extend or add extra time to your existing loan tenure, resulting in a revision of your monthly instalment amount so that you may be able to pay a lesser amount each month4 5 6 7 .
|Type of Loan||Criteria for NPA Classification|
|Commercial Loans||More than 90 days past due8|
|Consumer Loans||More than 180 days past due8|
|Agricultural Loans||Interest and/or installment of principal remain unpaid for two harvest seasons8|
Conclusion about RBI Regulations
The SARFAESI Act and the RBI guidelines provide a comprehensive framework for the recovery of non-performing assets. However, it is important for banks and financial institutions to strictly adhere to these guidelines in order to ensure fair and transparent recovery proceedings. Failure to do so may result in the quashing of SARFAESI proceedings, as seen in the cases discussed above.