The issue of providing notice and opportunity of hearing before classifying a loan Account as a Non Performing Asset is one of the very common ground which is taken by the borrowers when raising challenge to SARFAESI action undertaken by a creditor.
The RBI master circular dated 01st April, 2025 in-line with its previous circulars on Asset Classification has maintained that a loan account can be classified as NPA if the principal and interest remained overdue continuously for a period of 90 (ninety) days.
The RBI circular on classification of NPA is silent on the requirement of giving notice to the borrower before making such classification, rather it gives absolute authority to banks and finance companies to declare loan accounts as Non Performing Asset based on repayment records through an automated system.
The question of providing opportunity of hearing before classifying a loan account as NPA has time and again been considered by the various High Courts of the country.
The Jharkhand High Court in the case of Stan Commodities Pvt. Ltd. vs. Punjab and Sind Bank (AIR 2009 Jhar 14) where the petitioner was not informed before declaring the loan account as NPA and no opportunity of settlement of controversy regarding classification of the asset was given for which petitioner was entitled under the provision of the guidelines for declaring the account as NPA, the declaration of the petitioner’s account as NPA was declare as unjustified by the Hon’ble High Court.
Similarly, the Punjab & Haryana High Court in the case of M/s Amar Alloys Pvt. Ltd. vs. State Bank of India (CWP No. 16490 of 2018 decided on 17.05.2019) was also pleased to observe that before classifying a loan as a non-performing asset (NPA), the bank must look into repayment record of the borrower. If there are only small or temporary issues like missing stock statements, limits not being renewed on time, or the account slightly going over the limit, it should not be treated as an NPA right away. The Reserve Bank of India (RBI), in its Master Circular dated July 1, 2015, clearly laid down steps that banks must follow to fix these temporary problems. Further, Clause 4.2.5 of the same circular says that if a borrower clears all the overdue interest and principal, the bank must treat the loan as a ‘standard’ (regular) account again. And accordingly, went on to declare that notice was required to be issued before classifying the loan account as NPA.
[The current RBI circular on Asset Classification dated 01.04.2025 contain similar provisions as were present in RBI master circular dated 01.07.2015]
On the other hand, the Madhya Pradesh High Court, in the case of M/S Neelam Beverages vs the State Of Madhya Pradesh (W.P. No. 12527 of 2020 decided on 23.11.2022), the Allahabad High Court in Writ C No. 44484 of 2017 (M/s Shiv Shakti Traders and others vs. Union of India and others decided on 03.11.2017) came up with a divergent view on the issue when it held that no notice or opportunity of hearing is required to be given to the borrower before classifying the loan account as NPA. The effect and operation of the judgment of the Punjab & Haryana High Court passed in M/s Amar Alloys Pvt. Ltd. vs State Bank has been also stayed by the Hon’ble Supreme Court and the matter is still pending consideration before the Supreme Court.
The Supreme Court of India, however, cleared all doubts on the subjection in the case of State Bank of India vs. Rajesh Agarwal (2023 SCC Online 342) declared that no opportunity of hearing is required to be given to the borrowers before classifying their accounts as NPA since neither the RBI circular on classification of NPA nor the provisions of SARFAESI Act, 2002 provide for such prior notice or opportunity of hearing to the borrowers.