Serving a blow to borrowers, especially in the industrial sector, the Supreme Court upheld a 2004 amendment in law enabling banks to follow different guidelines for declaring bad loans as 'non-performing assets'.
Noting that quick recovery of bad loans was essential to keep the financial health of the country intact, a Bench of Justices J. Chelameswar and S.A. Bobde upheld an amendment in Section 2, which defined 'non-performing assets' (NPA), of the Securitisation and Re-constitution of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002.
The Act allowed a secured creditor bank to determine a bad debt as NPA and proceed to seize and sell the assets to recover the amount due to it as loan.
The amendment in 2004 classified borrowers into two. One, those who got secured loans from institutions which followed RBI guidelines framed on the declaration of NPAs. Two, those who borrowed from institutions governed by guidelines set by their own regulators in this regard.
The Supreme Court was deciding a batch of petitions filed by borrowers, contending that the amendment discriminated between two classes of borrowers. Especially, when RBI guidelines gave only 60 days before a bad debt can be declared an NPA, while individual regulators allowed up to 180 days to lapse before the secured loan is declared an NPA.
In the judgment, Justice Chelameswar, who authored it, upheld the validity of the 2004 amendment and dismissed any notion that the classification of the borrowers was "unreasonable". The apex court reasoned that borrowers cannot expect creditor banks to function as a "homogenous" unit, all guided by the same set of guidelines for determining NPA.
“There are innumerable differences among creditors. Differences based on the legal structure of the creditor organisation, differences based upon the nature of the loan advanced by them, and differences based on the terms and conditions subject to which such loans or advances are made by each of those creditors, etc,” it explained.
Giving an example, the judgment observed how "Exim Bank loans are generally in foreign currencies. Similarly, loans granted by Housing Finance creditors which are in turn regulated by the National Housing Bank are loans which are term loans for relatively longer periods than other loans. There is nothing uniform about these creditors or their activities".
It said how "recovery of money from a debtor by resorting to the filing of a suit takes painfully long time in this country, for various reasons. Huge amounts of money are lent by various banks and other financial institutions".
"Speedy recovery of the monies due to such institutions is an important element determining the efficiency not only of such institutions but also becomes an important factor for the financial health of the country,” the judgment, pronounced on Wednesday, observed.
The court further ordered the borrowers who filed the petitions to pay one percent of their outstanding amounts as costs to the creditor banks and other non-banking financial institutions.
