It
is very clear that the Banks should follow RBI guidelines on
Asset-Classification before classifying any loan account as ‘Non-performing Asset (NPA)’. There
were judgments saying that it is mandatory for the Banks to follow RBI
guidelines while classifying an account as ‘Non-Performing Asset (NPA)’ and any
deviation in this regard can vitiate the proceedings initiated under SARFAESI
Act, 2002. While RBI guidelines are detailed when it comes to Asset Classification
and related issues; the Bank officials or the Banks may have to make a
subjective assessment of certain issues. It is understood from the reading of
RBI guidelines on Asset-Classification that genuine borrowers facing temporary
difficulties may be treated separately and based on reasonable assurance of
recovery. Guideline 4.2.4 of RBI guideline deals with the issue of ‘accounts with temporary deficiencies’
and narration of few of the temporary deficiencies in the said guideline appear
to be ‘inclusive’ in nature allowing the Bank to make certain subjective
assessments on case-to-case basis. Obviously, no creditor and especially
secured creditor want to harass a genuine borrower having a good track-record
with the Bank for a considerable time. However, with constant emphasis on the
issue of reduction of NPAs, it seems that the Banks are very strict while
getting the accounts classified as ‘NPAs’. The most important thing about the
issue of recovery by the Bank is that they are allowed to proceed against the
borrower for default in any of the facilities availed by him when a borrower
avails multiple credit facilities. Banks are asked to initiate recovery
proceedings ‘Borrower-Wise’ and not ‘Facility-Wise’ and it is very clear in the
RBI guideline 4.2.7. Again, Banks
are not supposed to lay complete focus on the value of the security available
with the Bank as such while initiating the recovery proceedings and it is very
clear in RBI guideline 4.2.3.
The extract of the said RBI guidelines are as follows:
4.2.7 Asset
Classification to be borrower-wise and not facility-wise:
i) It is difficult to envisage a situation when
only one facility to a borrower/one investment in any of the securities issued
by the borrower becomes a problem credit/investment and not others. Therefore,
all the facilities granted by a bank to a borrower and investment in all the
securities issued by the borrower will have to be treated as NPA/NPI and not
the particular facility/investment or part thereof which has become irregular.
4.2.3
Availability of security / net worth of borrower/ guarantor:
The availability of security or net worth of
borrower/ guarantor should not be taken into account for the purpose of
treating an advance as NPA or otherwise, except to the extent provided in Para
4.2.9, as income recognition is based on record of recovery.
Again, dealing with the issue of temporary deficiencies in adhering to
the terms of the loan agreement, RBI guideline 4.2.4 says as follows:
4.2.4
Accounts with temporary deficiencies:
The classification
of an asset as NPA should be based on the record of recovery. Bank should not
classify an advance account as NPA merely due to the existence of some deficiencies
which are temporary in nature such as non-availability of adequate drawing power
based on the latest available stock statement, balance outstanding exceeding
the limit temporarily, non-submission of stock statements and non-renewal of
the limits on the due date, etc.
The
problems for many borrowers or the Small Businessmen availing the loan
facilities from the Bank comes from the issue that the Banks are asked to
initiate recovery proceedings ‘borrower-wise’ and not ‘facility-wise’.
Borrowers availing facilities from the Bank with the complex commercial
arrangements and agreements face problems with this discretion available with
the Banks or the Bank Officials. Many complain that there is no effective
redressel mechanism to raise all these issues even when the borrower has a very
good case for restructuring or for questioning the judgment of the Bank in
classifying a particular account as a ‘Non-Performing Asset’. In most cases,
the borrowers are driven either to approach the High Court under Article 226 of
Constitution of India challenging the classification of an account as NPA or the
borrower may have to inevitably file an Appeal before the Debt Recovery
Tribunal under section 17 of SARFAESI Act, 2002. Even-though Banks can consider
the proposal for restructuring of a loan account upon certain conditions and
re-negotiating the terms, Banks do exercise great discretion in this regard. Coupled with this situation, as the Banks can
argue that the value of security has got nothing to do while classifying an
account as NPA, genuine borrowers or borrowers/small businessmen with temporary/genuine/understandable
problems face lot of pressure and problems. For example, an industry may have a
very valuable property lying with the Bank as a security and may be facing some
problems in its business with the obvious reasons which are beyond its control,
and in such cases also, if the Bank is not convinced, the borrower becomes
remediless.
Emphasis
has always been laid on the issue of recovery and establishing an efficacious
internal system by the Banks and Guideline 4.2.2 of RBI guidelines says as
follows:
4.2.2. Banks
should establish appropriate internal systems to eliminate the tendency to
delay or postpone the identification of NPAs, especially in respect of high
value accounts. The banks may fix a minimum cut off point to decide what would constitute
a high value account depending upon their respective business levels. The
cutoff point should be valid for the entire accounting year. Responsibility and
validation levels for ensuring proper asset classification may be fixed by the
banks. The system should ensure that doubts in asset classification due to any
reason are settled through specified internal channels within one month from
the date on which the account would have been classified as NPA as per extant
guidelines.
RBI guidelines on ‘Asset Classification’ are well-balanced and the Banks
are asked to make many subjective decisions and RBI guidelines do focus on the
issue of not harassing genuine borrowers while emphasizing at the need of
speedy and efficacious recovery. Along with the provisions dealing with the
restructuring of loans or advances, RBI guidelines also deal with the issue of
up-gradation of loan accounts classified as NPAs and the relevant RBI guideline
in this regard is as follows:
4.2.5
Upgradation of loan accounts classified as NPAs:
If arrears of interest and principal are paid by
the borrower in the case of loan accounts classified as NPAs, the account
should no longer be treated as nonperforming and may be classified as
‘standard’ accounts. With regard to upgradation of a restructured/ rescheduled
account which is classified as NPA contents of paragraphs 11.2 and 14.2 in the
Part B of this circular will be applicable.
On certain issues, RBI guidelines are very clear as to when an account
should be treated as NPA. But, with regard to providing relaxation or
understanding the temporary difficulties of the borrower while considering
upgradation of loan account or regularizing the loan account, Banks do exercise
lot of discretion. If at all the borrower feels that the Secured Creditor or
the Banks are unfair in dealing with his loan account or loan accounts, he can
do nothing except approaching superior officers, approaching Banking ombudsmen
or approaching High Court under Article 226 of Constitution of India. Though,
even the DRT (Debt Recovery Tribunal) can consider all objections raised by the
borrower while entertaining an Appeal under section 17 of SARFAESI Act, 2002,
DRT may not have power to analyze a particular case in the light of RBI
guidelines in its entirety though DRT can certainly look into the guideline
dealing with the criteria for classifying a particular loan account or accounts
as ‘Non-performing Assets’. Normally, Banks do not commit any mistakes in
classifying an Account as NPA applying the RBI guidelines strictly. Apart from
the criteria, the DRT can look into the issue of ‘debt’, objections regarding
debt and the correctness of the procedure followed by the Bank under SARFAESI
Act, 2002. Normally, Banks do not commit mistakes in the procedure and the borrower
will have objection to the classification on the basis that he is not a
willful-defaulter and the deficiency in making payment is temporary in nature.
However, these things are not considered by the DRT normally as I think and
they may not have power to consider all these issues in-spite of various
judgments of the Constitutional Courts from time to time emphasizing at the
powers of the Tribunal under section 17. Only due to the judgments of the
Courts, the borrowers are allowed to question every measure initiated by the
Banks under SARFAESI Act, 2002 now and technicalities are normally ignored
while entertaining appeals under section 17. It is also clear that they can
look into all objections pertaining to the loan account or even raised by the
third-party if he is connected. The Civil
Court may be having limited jurisdiction to look
into the issues connected to the SARFAESI proceedings and the jurisdiction of
the High Court under Article 226 of Constitution of India is largely dependent
on the facts of the case, and the discretion of the Court.
Now, if the Bank takes a decision to classify an account as NPA and
rejects the objections or the request by the borrower, then, apart from writ
remedy, the remedy available to the borrower is to file an appeal under section
17 of the SARFAESI Act, 2002. Based on the merits of the case, the DRT will
grant interim relief and finally, only when it is established that there is a
procedural irregularity, the DRT will allow the SARFAESI Appeal and can order
the restoration of property if the physical possession has already been taken
by the Bank pursuant to steps taken under section 13 (4) or by taking
assistance of the police etc. using the mechanism provided under section 14 of
SARFAESI Act, 2002. In many cases, DRT can insist on payment of some deposit
while granting an interim-relief when the borrower approaches the Tribunal
under section 17 of the Act challenging the proceedings initiated by the Bank
under SARFAESI Act, 2002. If the Bank proceeds with the proceedings even during
the pendency of the Appeal under section 17, then, it becomes further more
complicated to the borrower and it is very often heard that the borrower is
asked to file another appeal literally instead of looking into all developments
in the pending Appeal itself by way of entertaining affidavits or petitions in
the pending Appeal. Filing an Appeal against the order of the DRT to the DRAT
under section 18 is another big process and many normally get discouraged to do
this in-view of pre-deposit condition. In each and every step, the borrower is
discouraged and made to run from pillar to post even in cases with some merit
and it is the view of many of the professionals or the borrowers facing
SARFAESI proceedings. There is no reason as to why Appeals can’t be speeded-up,
additional Tribunals can’t be set-up. If Appeals are speeded-up and if
sufficient Tribunals and Appellate Tribunals are constituted, then, at-least
genuine borrowers seeking remedy may feel protected and at-present, every case
of so-called default is treated in a same way.
The SARFAESI Act, 2002 (The
Securitisation and Reconstruction of Financial Assets & Enforcement of
Security Interest Act, 2002) seems to be proceeding on the basis that the Banks
or the Bank officials do not commit any mistakes. It is quite possible to
ensure speedy recovery through special legislations like SARFAESI Act, 2002 and
also giving confidence to the borrower that he will be heard fairly especially
when the borrower has got a very good track-record and long standing relation
with the Bank along with having valuable and marketable security lying with the
Bank. It is quite possible. Now, it seems that there is an amendment or the
provision allowing the Authorized Officers to bid for the property when there
were no bidders initially and the reason given for this step is that it will
allow the Banks to clean-up their balance-sheets. But, this kind of provisions
can harm the borrowers and already it has become extremely difficult for the
borrowers to establish or state his case and coordinating with the Banks. If
there is too much pressure from the Banks when the businesses are not doing
well for the reasons beyond their control, then, small business may be
suffering irreparable loss if the Bank doesn’t understand their concerns
reasonably and sympathetically. Normally, at-times, taking note of industry
specific problems, the Finance Ministry may come-up with some kind of
directions to the Bank to be lenient or understandable while insisting on the
speedy recovery in-respect of some specific industries and Banks also are asked
at-times to post-phone the recovery process also.
Instead of
discouraging the borrower to get any remedy or forum to advocate his problems,
the legal frame-work governing recovery of secured loans can still be very
fair, few more Tribunals and Appellate Tribunals can be constituted and
well-drafted powers are to be conferred on the Tribunals to even give
directions to the Bank when needed and in-favour of the borrower. For example,
if the loan to be recovered is only 10 lakh and the security lying with the
Bank is worth 50 lakh admittedly, and if the borrower seeks for payment of
outstanding loan amount with interest and charges seeking regularization, then,
DRT should be able to give direction to the Bank to accept the proposal. Delays
in adjudication can certainly be curtailed and technicalities can be ignored
while entertaining pleas from the Borrower.
Admittedly,
on the issues of reduction of interest, acceptance of OTS etc., Banks will have
their own internal systems and DRT may have little role in this regard.
With many
more stringent provisions like allowing the Banks to file Caveats before
Tribunals under SARFAESI Act, 2002, allowing the Banks to bid for the
properties; discretion of the Banks or the Bank officials has grown like
anything and the borrower increasingly feels that he can not state his case and
get remedy.
RBI keeps
updating or modifies the guidelines governing ‘Asset Classification’, but,
borrowers feel that it has become so difficult for them to establish or
advocate their case even when they are not clearly willful defaulters and even
when a valuable and marketable security is lying with the Bank.
Whether it
is a Public Sector Bank or Private Sector Bank, borrowers should have a forum
providing speedy, effective and efficacious remedy.
Note: the views expressed are my personal, my own understanding
and I can be wrong in my views.