HC junks amendment, re-powers RBI to decide NPA periods

The Gujarat High Court today upheld the Reserve Bank of India's power to decide the period after which a bad loan can be called a non-performing asset (NPA).

"Section 2(1)(o) of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act is held unconstitutional," a bench of Chief Justice Bhaskar Bhattachrya and Justice J B Pardiwala ruled, adding that parliament was wrong in taking the power to decide NPA guidelines away from RBI.

A division bench headed by Chief Justice Bhaskar Bhattacharya ruled that a 2005 amendment to in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (Sarfaesi) Act, 2002 was illegal, unconstitutional and contrary to the object of the Act.

The amendment which defines NPAs under section 2(1)(O) classified different institutions (60 in total) under two groups – those under the purview of the RBI and those regulated by other agencies. A petition moved by a borrower through advocate Vishwas Shah and Masoom Shah had challenged the amendment.

The court observed that for the purpose of enforcing a statute like the Securitisation Act, which deviates from the ordinary laws of the land relating to attachment, sale and recovery of possession of the secured asset, the fate of a borrower cannot be left in the hands of the regulators of other financiers.

With the judgment, RBI can determine classification of NPAs by banks and various types of financial institutions like non-banking finance companies (NBFCs), the Life Insurance Corp (LIC), and state finance companies, among others.

At present, banks classify a borrower's (consumer or corporate) account as NPA after continuous non-payment of principal and interest for 90 days and make a provision in their for the same.

However, NBFCs, state finance companies (SFCs promoted by state governments) and other companies get a different period to determine whether the asset is NPA or not.

Certain housing finance companies, SFCs and companies like Power Finance Corporation are not under the regulation of RBI for NPA classification.

Before the amendment the Act, RBI was the regulator for the banking, non-banking institutions and securitization agencies for deciding the period after which the loans can be treated as NPA. Till 2004, RBI had set the NPA period for banks at 90 days, and at 180 days for NBFCs.