Introduction
Overview of Non-Performing Assets and Borrower Rights in India Most individuals and organisations obtain loans from a bank or a financial institution as it is a part of the overall life process and a significant element for obtaining assets, expansion of business, or satisfying sudden financial needs. One of the primary functions of financial institutions or banks is to provide funds in the form of loans, which may include housing, vehicle, education, or even business and working capital loans. However, in cases of job loss, business setbacks, health crises, or uncertainty in the economic scenario, borrowers might face difficulties in meeting their repayment obligations, leading to their inability to pay loan instalments.
Once the non-payment period crosses a threshold, the account is marked as Non-Performing Asset (NPA), and recovery proceedings are initiated.
Most people and businesses feel that upon receiving the notification that their account has been marked as an NPA by the bank, it automatically means the bank can seize their property, and they lose all their rights. This is an entirely wrong misconception, as the bank not only needs to follow a specific process for such a situation, but as a borrower, you also have numerous rights that must be adhered to by the bank. Reserve Bank of India (RBI) issues prudential norms for income recognition, asset classification, and provisioning (IRACP) which are essential in deciding when a loan account becomes an NPA. The IRACP provides guidelines for bankers on how to determine an NPA based on certain criteria.
Once a loan account is identified as NPA, a bank can initiate various actions to recover the amount lent.
This may include recovery actions under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) for secured loans. The action, by the bank, must be taken in a proper way, following RBI rules, any statutory provisions and principles of natural justice. Even after an account is declared an NPA, as a borrower, you still have several legal rights, and failure to exercise these can lead to a lost opportunity.
We will understand what a Non-Performing Asset (NPA) under the Indian banking laws is, what triggers the classification of an account as NPA, the consequences and impact of such classification and what rights a borrower still possesses.
What Is Non – Performing Asset (NPA)?
An NPA is the loan or an advance that is unable to generate revenue for the lender as the borrower is unable to pay interest or the entire amount of the loan to the lender within the specified period in accordance with the prudential norms as defined by the Reserve Bank of India (RBI). In simpler words, a loan is called NPA when the borrower fails to pay the instalments of interest or principal of the loan.
A non-performing asset is an internal policy of banks for the recognition of loans that have defaulted and hence do not represent good credit quality.
NPA represents the quality of loans that have performed or under-performed under given circumstances and have made substantial provision by financial lending institutions. Generally, an account will be classified as NPA when the payment of an instalment of principal or interest thereon is due and remains overdue for more than 90 days in case of most term loans. In certain other categories of accounts such as cash credit, overdrafts, agricultural loans, other special loans and advances the criteria for NPA declaration vary as decided by theRBI from time to time. An overdue account and NPA are not the same.
Just because a single EMI has been missed does not immediately qualify as an NPA.
The account is first termed as overdue, and it is only when the delay in payment of instalments extends beyond 90 days that it qualifies to be termed as an NPA. This legal aspect is important as, when the bank decides to declare a loan account as NPA, it gets the right to proceed further with recovery under relevant laws such as under SARFAESI Act 2002 in case of secured loans, where banks can take possession of the secured asset, once proper legal procedure under the act is completed. It should not be considered as though a borrower losing all his rights after the loan account is classified as NPA, because Indian laws do not allow Banks to act above the laws or against the principles of equity and fairness, and borrowers are within their rights to challenge unlawful action, calculation of wrong amount and also can approach to the concerned court for help to seek for the remedy to solve the issues like loan re-structuring or loan settlement.
What Leads A Loan Account To Become NPA?
One of the commonest doubts in the minds of a borrower is whether one miss the EMI payments here and there, it means my loan account becomes an NPA. Well, the answer to the question is NO.
Banks cannot go about arbitrarily declaring an account of an NPA as under Indian law, an NPA classification is not on the whims and wishes of the Bank but by strict regulatory norms issued by the Reserve Bank of India.
As per RBI’s Income Recognition, Asset Classification and Provisioning (IRACP) Norms, a term loan account generally becomes an NPA when an instalment of principal or interest in respect of a term loan or a credit facility remains overdue for more than 90 days. Similarly, a cash credit and an overdraft account is treated as an NPA when it remains ‘out of order’ beyond the stipulated time. Different rules apply to agricultural loans, and different criteria for classifying other lending categories exist to factor in seasonal incomes, etc. In fact, before an account actually comes to this juncture of becoming an NPA, there are number of actions the Bank may take.
It would have its internal monitoring and risk management system working at its end and will surely follow-up through its collection mechanism by sending reminders for payment of EMIs, overdue notice, telephonic reminders and even emails so that before it crosses the 90 days threshold, your loan account is regularised.
The classification is not at the banks’ discretion but adherence to regulations. However, if no such payment happens despite the follow-ups and your loan is in overdue for 90 days or more then your loan account is then classified as NPA. Classification as NPA, on the other hand, is not an immediate trigger to initiation of proceedings for recovery of dues.
It signifies the point from which the Bank has the option to exercise such rights under the relevant laws. Depending on the loan, a Bank may initiate proceedings under the SARFAESI Act, file a suit before the DRT or take steps under any other relevant law or resort to compromise or settlement measures. As a borrower, this is a crucial stage where it will be beneficial to verify the bank’s calculations, have clarity on the exact dues, analyse the payment capacity, discuss restructuring possibilities, and work out some solutions before the formal steps for possession or sale are undertaken.
Acting proactively after being informed of the NPA status is always better than waiting till formal recovery proceedings have started.
Reasons For Classification Of Bank Loans To NPAs
As far as a borrower is concerned, classification of a loan account into an NPA is a type of punishment by the lender. But as far as the Indian Banking Law is concerned, classification of loan account as NPA has not been provided for penalizing borrowers, but as a rule by the Reserve Bank of India (RBI) which ensures fair and financial practices and the stability of the Banking Sector. Banks operate by lending the public money collected as deposit by it in the form of a loan.
When borrowers are unable to return bank loans for a number of days then there is a reduction in recycling of these moneys by Banks.
Therefore, RBI had required the Banks to disclose the quality of loans being issued by classifying accounts which do not stand up to the basic loan repayment criterion. Why Classify loan account into NPA The reasons behind classification of accounts as NPA is, Banks will get early warning about the possible losses, and they may create adequate provisions for possible bad loans and devise ways of their recovery. The Banking practice and also loan agreement are designed to facilitate efficient functioning of the banking industry. For the borrowers the classification of account as NPA in a bank’s books do not mean the lender would take over the secured assets immediately.
Instead, it means that the Bank’s credit policy has recognised this loan account as being a non-performing asset and the bank has started taking some steps to ensure recovery.
It also helps to develop sound credit policies and processes within the Banks. In our society as a whole, we must remember the importance of timely repayment for financial stability. Thus, while the law protects individual borrowers from unfair practices, it cannot do so to the detriment of the public money that has been invested through the Banking system.
After NPA Status, What Is The Recovery Process?
Declaring a loan account as an NPA (Non-Performing Asset) does not mean the bank will immediately take over and auction off your property. It just initiates a well-defined recovery procedure, which is to be followed as per the RBI guidelines, SARFAESI Act, 2002 (where applicable), and other prevailing banking laws.
The specific action depends on the type of loan you took, the collateral you provided to the bank, and the borrower’s behaviour during the recovery stages.
The below table details the recovery steps that usually happen after your loan gets an NPA status:
| Step | What Happens? | What Can The Borrower Do? |
| Recovery Communications | Once a loan account is classified as an NPA, banks typically start sending reminder letters, demand communications, e-mails or make phone calls reminding you to regularize your account. Usually, a bank would invite you to discuss solutions for restructuring or settlement. | You can communicate with the bank, seek clarification of the dues, discuss terms of repayment and request restructuring or a One-Time Settlement (OTS) (if available). |
| Initiation of Recovery Proceedings | If the default continues, the bank will initiate legal proceedings to recover dues. For a secured loan, it starts with a 13(2) demand notice under SARFAESI, wherein you get 60 days to clear dues. For other loans, proceedings may be initiated in a DRT. | You can examine the notice and challenge its claims with relevant arguments. |
| Enforcement of Security Interest | If you fail to clear your dues or resolve the dispute within the stipulated time, the bank can enforce its security interest through symbolic or physical possession of the security, appoint a manager or take other appropriate steps | You can challenge any discrepancy or wrongful possession before the DRT or the concerned court. |
| Valuation and Auction of the Secured Asset | The bank would then conduct a valuation of the security from an approved valuer and proceed to auction it as per procedures under law. | You can challenge a wrongful valuation, irregularities in the auction process, and even try to redeem your asset before it is sold. |
What Are Your Rights As A Borrower?
It is often thought that once the account of a borrower is classified as a NPA, all their rights are exhausted. It is true that the banks get statutory rights for the recovery of their dues. However, these rights are also counter-balanced by various statutory and judicial constraints on the exercise of these powers.
These obligations are derived from the Reserve Bank of India’s guidelines, SARFAESI Act, 2002 and various judgments by the Supreme Court of India and High Courts.
The law believes in ensuring fairness, transparency, and the rule of law in the recovery proceedings. Hence, borrower rights do exist and protect them from unfair practices.
- The Right to know: The borrower must be informed about the exact dues including principal, interest, penal charges, and other recovery costs claimed by the bank. The borrower can also demand account statements and documents to check and confirm the calculation of the bank. If any anomaly is noticed, the same must be notified in writing to the bank by the borrower.
- The Right to fair treatment: The banks have to deal with the borrower in a fair and prudent manner. Recovery actions by the banks cannot be in any manner arbitrary, oppressive or illegal. The RBI time and again has insisted that the recovery measures must be ethical, and banks should not indulge in undue harassment or intimidating behaviour while recovering dues.
- The Right to statutory notices: If the bank plans to initiate action under the SARFAESI Act, 2002, the borrower must be provided with the prescribed statutory notice. The said notices serve two purposes. One, they notify the borrower about the existing dues, and two, they give the borrower an opportunity to cure the default and regularise the loan account, besides being provided an opportunity to put forth any objections if they exist. Any lapse by the bank in complying with the mandatory notice requirements will lead to serious implications for the bank.
- The Right to object: if the borrower does not agree with the amount stated in the notice, is not in agreement with the calculation, or if they observe some procedural flaws, the borrower can file a written representation to the bank detailing the objections as per the applicable procedure prescribed under law. The bank is obliged to consider these objections and respond to them with valid reasons for rejection, if the case arises.
- The Right to explore Settlement: It is possible to negotiate with the bank for loan restructuring, extension of payment tenure or a one-time settlement, etc. Even when the loan account is classified as an NPA, depending upon bank policies and specific circumstances of each case. Many such settlements benefit both the borrower and lender by avoiding long legal battles.
How To Dispute Wrong NPA Classification?
Yes. As a borrower, you don’t have to take NPA Classification from the bank just as it is declared a loan account as NPA. As the bank is empowered to classify loan accounts as NPA as a policy measure, the classification made by it must necessarily adhere to the parameters stipulated by RBI in its Prudential Norms on Income Recognition, Asset Classification and Provisioning (IRACP) along with other legal provisions.
Any classification that does not satisfy those requirements on account of the following factors, would be subject to judicial review – Incorrect Factual Background Incorrect accounting entry Wrongful procedural lapse Failure to adhere to RBI’s Prudential Norms In case where the bank erroneously declared your account as an NPA on any of these counts, then as a borrower you have the legal right to challenge the bank’s decision.
In such a scenario, it has been held by the courts that any recovery initiated by the bank on account of unlawful classification of a NPA, is invalid in the eye of law. Nevertheless, every such case has to be substantiated with cogent documentary proofs, related financial accounts and provisions of the law. Hence, you must go through the calculations, statements of account, history of repayments and any correspondence in possession with regard to the loan before initiating a legal recourse.
When To Challenge An NPA Classification?
The legality of an NPA classification is heavily reliant on the facts of the individual case. However, in several cases, legal battles between borrowers and banks arise on similar grounds.
Violation of RBI prudential norms – Bank needs to classify loans rigidly based on RBI IRACP norms. If bank had not met the regulatory condition(s) prior to NPA classification, borrower could challenge classification.
Calculation Errors in dues – Errors in calculations in principle, interest, penal interest, etc. If bank have wrongly calculated amount, that might have affect the classification of loan account & subsequent steps.
Undoing Payments – Sometimes it so happened that payment made by Borrower did not appear in the account or appeared incorrectly, that result in normal loan become an NPA.
Procedural violations – before taking any action for recovery Bank must follow the prescribed rule, like notice requirement, compliance with basic safeguard, principle of natural justice etc. Nonadherence may be a good ground for recovery related action by Bank.
Arbitrary and malicious powers – Powers of recovery cannot be arbitrarily used or to use it for some extraneous purpose. If bank has wrongly used its powers on the borrower, then the case of Borrower can reach to court.
Legal fact- The facts that the loan account has become NPA is not a license for Bank to do whatever it wanted. Bank must act strictly according to the guidelines of RBI and procedure laid down in statue book.
Legal Remedies For Borrowers
Though the loan has been classified as an NPA and the recovery proceedings initiated, borrowers have several legal remedies under the Indian banking laws to defend their position and challenge illegal recovery measures taken by the banks:
On a case-to-case basis, borrowers can make a representation to the bank detailing the facts and procedures wrongly adopted. Borrowers can ask for corrections in the statements and recalculations of dues. Negotiate with the bank to restructure the loan or approach the One-Time Settlement (OTS) scheme of the bank.
Challenging the steps taken for recovery under the SARFAESI Act, 2002.
Approaching the DRT if measures have been taken under section 13(4) of the SARFAESI Act. Pursuing legal remedies if bank actions are illegal. It is imperative for the borrower to choose the appropriate legal remedy at the stage of the recovery process.
Functions Of The Debt Recovery Tribunal (DRT)
It is the primary forum constituted under the provisions of SARFAESI Act for hearing and disposing of all cases involving recovery of debt by banks and other financial institutions. It is responsible to ensure that all measures under the said act for recovery of the loan taken from any bank or financial institution are carried out as per law.
If the bank has initiated the steps like possession of secured asset or sale thereof under section 13(4) of SARFAESI Act then the dissatisfied borrower can approach DRT under section 17 for relief in the manner as prescribed. DRT will hear all arguments based on both law and fact in such matter like:
- Whether the bank has correctly classified the loan amount as non performing asset?
- Whether bank has strictly complied with the guideline provided by RBI and various other laws?
- Whether there is any valid reason not to issue statutory notice for demand of money under the Act?
- Whether the concern of the borrower was heard by the concerned bank before proceeding under section 13(3A) of the SARFAESI Act?
- Whether possession was taken as per the provisions of the SARFAESI Act and relevant rules and law?
- Whether sale has been done by following due process as per the Security Interest (Enforcement) Rules, 2002, including the manner of valuation and auction process?
- Whether natural justice has been observed by bank?
If the DRT opines that all the necessary statutory requirements were not met by the banks, then the DRT can set aside the same.
Common Borrowers’ Mistakes
It’s unfortunate but many borrowers undermine their legal position; not necessarily because the action taken by the bank is legally correct, but because the borrower does not take the correct action during the early stages of the recovery.
| Common Mistake | Why It Can Be Harmful |
| Not Responding to Bank Communications | By neglecting the communications, the recovery proceedings may continue unchecked without the borrower bringing their disputes to their notice and challenging them at an appropriate time. |
| Not Considering the possibility to challenge an NPA | A borrower may remain unaware of procedural lacunas or calculation errors that can potentially serve as legal grounds for obtaining appropriate relief. |
| Not Verifying the outstanding amount | Mathematical and calculation errors, incorrect charging of interest, penalty charges etc in account statements if not challenged, will automatically be considered valid by courts of law. |
| Acting on Verbal Promises | Unless confirmed in writing by the banking authorities through letters, communications, e-mails etc, promises or assurance made to borrower orally may not be legally binding and therefore hard to enforce. |
| Acting on Verbal Promises | Unless confirmed in writing by the banking authorities through letters, communications, e-mails etc, promises or assurance made to borrower orally may not be legally binding and therefore hard to enforce. |
Practical Legal Strategies To Protect Your Rights
The presence of financial difficulties does not guarantee the involvement of litigation. There are many instances where well-intentioned borrowers have taken correct steps in time, successfully addressed their financial woes, and prevented long protracted recovery processes by the bank.
1. Examine bank’s notice diligently: Borrower’s immediate step is to ensure that bank notices are thoroughly examined to confirm the correct outstanding amount and calculations. Ensure you maintain a meticulous record of all the relevant loan agreements, payments made and receipts received by the borrower; account statements of the loan; and any correspondence from bank.
2. Written Communications: A borrower should only address the bank through written statements, objections or official email address(s). Written communication forms your evidence, including all communications where an objection is registered or settlement is offered.
3. Negotiate for Restructuring/OTS: In situations where it is affordable to pay the sum back, approaching the bank to negotiate a One-Time Settlement (OTS) or restructure loan account at the earliest could offer a mutually beneficial solution.
4. Approach Lawyer/Legal Counsellor immediately: An expert lawyer specializing in debt and recovery laws can guide the borrowers with regards to the possible legal recourses available against the wrong classification of an account as an NPA, and the breach of guidelines laid down by RBI and/or any statutory provisions by the banks.
Early legal assistance has often proved to be a crucial factor in saving their property rights.
Important Judicial Decisions On NPA Classification And Borrowers’ Rights
The power of banks to recover loans has, since then, been brought into balance by a string of judgments passed by our higher courts, especially the Supreme Court of India, through various judgments clarifying the scope and contours of the SARFAESI Act, the procedural rights of the borrowers, and duties of secured creditors while exercising the rights of enforcement.
A few such important judgments are cited as under:
1. Mardia Chemicals Ltd. V. Union of India (2004) 4 SCC 311
The Supreme Court confirmed the constitutional validity of the SARFAESI Act, but also said that debtors cannot be denied of legal remedies. It acknowledged the need for banks to have efficient mechanisms to recover money, but stressed the protection of debtors from illegal recovery actions. The court mentioned that banks’ recoveries were subject to DRT scrutiny and required strict adherence to the act’s safeguards.
Significance: Banks’ powers were deemed not absolute and must follow fair processes.
2. Transcore v. Union of India (2008) 1 SCC 125
The SC clarified that the SARFAESI Act, 2002 and DRBA, 1993 are not mutually exclusive but complement each other. The bank was allowed to pursue recovery under SARFAESI without cancelling the DRT case if the respective laws’ conditions were met.
Significance: Lenders can use various recovery methods.
3. Mathew Varghese v. M. Amritha Kumar (2014) 5 SCC 610
The Court stressed strict compliance with SARFAESI procedures before asset sale. Buyers had to get notice and redemption opportunity; any sale breaching procedures was voidable.
Significance: Statutory procedures for possession and sale are mandatory.
4. Authorized Officer, Indian Overseas Bank v. Ashok Saw Mill (2009) 8 SCC 366
The SC broadened the DRT’s powers under Sec 17 of the SARFAESI Act, holding that it could review the legality of bank’s recovery actions and provide relief if guidelines were violated.
Significance: Strengthened DRT’s position in protecting debtors.
5. Harshad Govardhan Sondagar v. International Assets Reconstruction Co. Ltd. (2014) 6 SCC 1
The court clarified the protection of tenants in secured properties during SARFAESI recovery actions, noting that authentic tenancies may be protected, subject to case facts.
Significance: SARFAESI must respect legal third-party rights.
Conclusion
While declaring a loan account as a NPA may be serious, it is certainly not the death-knell for a borrowers’ legal rights. Yes, the banks are enabled to recover what they owe the public, in order to sustain financial order. But this right is restricted and defined by the regulations of Reserve Bank of India, the SARFAESI Act, 2002, as also numerous court judgements on the matter.
It is more than obvious that if one were aware of the legal nuances of being declared a NPA, then one could easily take recourse to what best suits him.
One is aware that when there is an improper declaration of NPA, or when there is a disagreement about the amount outstanding, or when the procedure is flawed or if the banks resorts to unlawful measures, it will certainly not help if one acts without understanding the underlying principles. We do not know how long this will be considered. If only one reacts, one would do himself better.
Your loan account has been classified as an NPA?
Classification as NPA doesn’t imply you’ve run out of options. Banks also must follow all relevant RBI guidelines, statutory provisions and well-accepted judicial precedents while taking recovery actions against debtors.
Meti Legal & Advisory serves individuals, corporations, co-borrowers and guarantors in case of NPA classification, banking litigation, SARFAESI action, Debt Recovery, One time Settlements(OTS) , debt restructure, and litigation before DRT and any appeal tribunals. We also assist co-borrowers/guarantors/promoters in corporate litigation in banks and other recovery proceedings in courts. Contact us to schedule a free confidential case review with our lawyer to get pragmatic legal advice on how best to secure your business and your personal interests and property from bank recovery actions, now.
Frequently Asked Questions (FAQs)
A Non-Performing Asset (NPA) refers to that loan or advance in respect of which interest payment remains overdue for a specified period as per guidelines laid down by RBI’s prudential norms and ceases to be a source of income for the bank.
Usually, a term loan account is treated as an NPA when it is not repaid for more than 90 days (subject to the applicability of such norms prescribed by RBI).
No, the classification of a loan as an NPA does not authorize the bank to take possession of or auction your property without first exhausting the statutory recovery process as prescribed under applicable law.
Yes, you can contest the bank’s action of classifying your loan account as an NPA if such classification is erroneous or the bank has not adhered to the statutory provisions or prudential norms issued by RBI.
Borrowers maintain various legal rights when their accounts are declared NPA. These rights include receiving statutory notices, challenging calculation errors, negotiating for settlement, seeking restructuring where available, and approaching the Debt Recovery Tribunal (DRT) against illegal recovery processes.
Yes, many banks entertain the option of restructuring loans, rescheduling repayment, or settling loans on a One-Time Settlement (OTS) basis for certain borrowers depending on their internal policy and the circumstances of the individual borrower.
The DRT handles legal proceedings initiated by banks and financial institutions for the recovery of money lent. It scrutinizes whether the lender has followed due process of law and can pass orders accordingly.
Not immediately. For initiating SARFAESI proceedings (security interest under SARFAESI Act), a bank is required to serve a demand notice on the borrower as stipulated under Section 13(2) of the Act and then follow the laid-down procedure.
An NPA account can be made regular if, in a particular case and subject to a bank’s policy, the overdue amount is cleared, the loan is restructured, or a settlement is reached. 10. Why do I need a legal expert after receiving an NPA notice? Seeking expert legal opinion can assist you in comprehending your rights and obligations, ascertaining whether the bank has complied with applicable legal provisions, identifying procedural violations, and strategizing the best course of action to safeguard your interests.
