Apex court upholds a 2004 amendment
Dealing a blow to borrowers, especially in the industrial sector, the Supreme Court upheld a 2004 amendment 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 to Section 2, which defines non-performing assets (NPA) under 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 2004 amendment classified borrowers into two categories. 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.
The court was deciding a batch of petitions filed by borrowers, contending that the amendment discriminated against 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 were allowed up to 180 days to lapse before the secured loan is declared an NPA.
The judgment, authored by Justice Chelameswar, 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 could not expect creditor banks to function as a “homogenous” unit, all guided by the same set of guidelines for determining NPA.
It cited 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.”
‘Quick recovery of bad loans essential for the financial health of the country’
Dealing a blow to borrowers, especially in the industrial sector, the Supreme Court upheld a 2004 amendment 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 to Section 2, which defines non-performing assets (NPA) under 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 2004 amendment classified borrowers into two categories. 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.
The court was deciding a batch of petitions filed by borrowers, contending that the amendment discriminated against 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 were allowed up to 180 days to lapse before the secured loan is declared an NPA.
The judgment, authored by Justice Chelameswar, 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 could not expect creditor banks to function as a “homogenous” unit, all guided by the same set of guidelines for determining NPA.
It cited 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.”
‘Quick recovery of bad loans essential for the financial health of the country’
Source - The Hindu
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