Calcutta High Court Rules: ‘NPA Classification Must Be Borrower-Wise, Not Account-Wise

The Calcutta High Court has upheld the State Bank of India’s (SBI) classification of Atibir Industries Co. Ltd.’s accounts as non-performing assets (NPA), rejecting the borrower’s challenges. The judgment, delivered by a bench comprising Justices Debangsu Basak and Md. Shabbar Rashidi, underscores the principle that the classification of a borrower’s account as NPA should be borrower-wise and not limited to individual accounts.

Atibir Industries Co. Ltd., engaged in the manufacture of sponge iron and pig iron, availed various credit facilities from a consortium of banks led by SBI. These facilities included cash credit and term loans. Due to financial difficulties, the borrower defaulted on repayments. SBI classified the accounts as NPA, leading to a legal challenge by Atibir Industries, which argued against the classification and subsequent sale of its loan accounts to CFM Asset Reconstruction Company (ARC).

The court emphasized that the classification of an account as NPA should be done borrower-wise. This means that if one account within a borrower’s portfolio is classified as NPA, all other accounts under the borrower are similarly classified. The court noted:
“The learned Single Judge failed to appreciate that, when one account in the bunch of credit facilities enjoyed by a borrower becomes a non-performing asset, then, the entirety of the credit facility is treated as NPA”.

The court reinforced the Reserve Bank of India’s (RBI) guidelines, stating that asset classification must be consistent across all accounts of the borrower. The judgment referenced the RBI’s Master Circular on Prudential Norms on Income Recognition, Asset Classification, and Provisioning .

“The account had been correctly classified as NPA by SBI. In any event, the account had been SMA on the date of assignment for the borrower to successfully invite the writ Court to interdict the assignment” .
“Viewed from such a perspective, the action of SBI in putting up the financial assets for sale and ultimately assigning the same in favour of the ARC cannot be faulted. It did not violate any binding Directions of RBI in doing so” .
Conclusion:
The Calcutta High Court’s judgment upholding SBI’s classification of Atibir Industries’ accounts as NPA reinforces the regulatory framework for asset classification, underscoring that the assessment should be borrower-centric. This decision is expected to have significant implications for how banks classify NPAs and handle stressed assets, ensuring uniformity and adherence to RBI guidelines.

Date of Decision: July 25, 2024