NPA/SARFAESI: Is it correct to say that "once NPA is always NPA" under SARFAESI Act, 2002?

It true that the Banks suffer a lot in recovering the outstanding dues from the borrowers in the absence of special enactment like SARFAESI Act and the object of the enactment is really laudable. It is a procedural change basically to enable the Banks to recover the loans speedily and in my opinion, it is not the intention of the legislature to put the borrower remediless if they are really aggrieved at the action initiated by the Banks under SARFAESI Act, 2002. The validity of the enactment was challenged before the Constitutional Courts and the validity is upheld. Many issues like the jurisdiction of the High Court to interfere at the stage of issuance of notice under section 13 (2), the powers of Debt Recovery Tribunal, the grounds on which the action initiated by the Bank can be agitated, the approach to be adopted by the Banks while entertaining objections from the borrower to the notice issued under section 13 (2) etc, were discussed by the Courts from time to time and many issues are now settled though there still exist ambiguity and complication on certain issues.

If we keep other complicated issues in the course of proceeding against the borrowers under SARFAESI Act apart, it is indeed interesting to deal with the issue of ‘NPA’, classifying an account as ‘NPA’, the procedure to be followed to classify an account as NPA and the approach to be adopted by the Bank when an account is classified as ‘NPA’ technically by applying the guidelines prescribed by the Reserve Bank of India. Even the Courts refer to the guidelines prescribed by the Reserve Bank of India in this regard. The problem with the classification of an account as NPA is that once the Bank classifies an account as NPA, then, it will proceed with taking action against the borrower under the provisions of the SARFAESI Act, 2002 when there is ‘secured asset’. Though, it is emphasized again and again that the Bank is supposed to give a considered reply to the objections raised by the borrowers in response to the notice under section 13 (2) of the SARFAESI Act, 2002, in many cases the reply by the Bank is based on technicalities. In my opinion, the stand of the borrower that his account can not be classified as NPA by strictly applying the guidelines issued by the Reserve Bank of India requires special consideration by the Bank both before contemplating action under SARFAESI Act and even after initiating steps under the Act by issuing notice under section 13 (2) of the Act. This approach will be fair to the borrowers and, the Bank, in no way gets prejudiced by listening to the borrower when he claims that his account can not be classified as ‘NPA’ and he is willing to remit all the pending installments with interest etc. This is a very important issue in the course before contemplating action against the borrowers under the provisions of the SARFAESI Act, 2002. I have recently read of a judgment of the High Court of Andhra Pradesh between M/s. Sravan Dall Mill P. Limited, Rep. by its Managing Director Vs. Central Bank of India reported in 2010 (1) ALT 321 (DB), 2010 AIR(AP) 35, 2009 (6) ALD 615 which has observed as follows:

“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 account had become NPA, the subsequent payments by the borrower entitles 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 remain unsatisfied”.

Note: I am not dealing with the binding law on the issue and I have just exposed a point of view.