Top court upholds definition of non-performing asset

By Vivek Vashi and Tanaya Shah, Bharucha & Partners

Akey aim of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, is to facilitate the recovery of amounts due to secured creditors, without the intervention of civil courts and/or tribunals.

To seek enforcement of a security interest under the act, three conditions specified under section 13(2) of the act must be satisfied. One of these is that the account of the borrower must be classified by the secured creditor as a non-performing asset (NPA).

Vivek Vashi
Vivek Vashi

Section 2(1)(o) of the act, prior to an amendment in 2004, stated that an account which had been classified by a bank or financial institution (FI) as a substandard, doubtful or loss asset, in accordance with the directions or under guidelines issued by the Reserve Bank of India (RBI), was to be termed as a NPA.

By the amendment of 2004, secured creditors may follow guidelines defining NPA set by their administering or regulating authority. Banks/FIs not regulated by any other authority must follow the RBI directions and/or guidelines.

Judicial developments

In Ionic Metallics v Union of India, Gujarat High Court held that the amended definition of NPA is discriminatory and in violation of article 14 of India’s constitution. In contrast, in M/s Deccan Chronicles Holding Ltd v Union of India & Ors, Madras High Court, emphasizing the RBI’s role and power, upheld the constitutional validity of the amended definition.

Such contrary high court decisions put the recovery machinery of the banks and FIs in limbo. The unsettled position of law has now been settled by the Supreme Court’s judgment in Keshavlal Khemchand and Sons Pvt Ltd v Union of India & Ors.

The main contentions were: (a) the amended definition, by enabling different secured creditors to adopt different guidelines setting different standards for concluding that the account of a borrower is a NPA, amounts to class legislation, in violation of article 14; and (b) the parliament, by authorizing various bodies to frame guidelines for classification of a NPA, abdicated its essential legislative function by making an excessive delegation in favour of the RBI.

For the respondents, the RBI submitted that under the prior definition, an asset that did not qualify as a NPA as per the specifications of a regulator would fall within the definition of a NPA for the purposes of the act or vice versa. The amendment resolved this discrepancy.

The government and various secured creditors also submitted that the amended definition creates a constitutionally permissible classification having regard to the nature of the different credit facilities extended by the various secured creditors to different categories of borrowers and on different terms and conditions.

Tanaya Shah
Tanaya Shah

Holding that the amended definition does not violate article 14, the Supreme Court stated: “To make any attempt to define the expression ‘non-performing asset’ valid for the millions of cases of loan transactions of various categories of loans and advances, lent or made by different categories of secured creditors for all time to come would not only be an impracticable task but could also simply paralyse the entire banking system thereby producing results which are counterproductive to the object and the purpose sought to be achieved by the Act.”

The court further held that leaving an expert body to define an expression like NPA does not amount to delegated legislation because: (1) if an act provides that a word used in the act shall have the same meaning as is assigned to it by a body which is an expert in the field, that does not amount to a delegation of legislative powers; (2) the RBI under sections 21 and 35A of the Banking Regulation Act, 1949, has the statutory right to prescribe norms for various aspects of banking; and (3) by issuing regulatory guidelines to banks/FIs, the RBI is merely exercising regulatory and supervisory powers and not legislative powers.


For secured creditors regulated by RBI guidelines, financial assets will fall in the category of NPA if the interest remains overdue for 90 days, while for those regulated by the National Housing Bank guidelines (among others), assets will fall in this category if the interest remains overdue for six months. It is this difference that the borrowers challenged as being discriminatory.

The judgment comes at a time when a uniform framework for speedy recovery of loans could be an important element in promoting steady economic growth. Such uniformity will enable banks/FIs to put in action the rigorous recovery mechanism envisaged under the act, and deter defaulting borrowers. Further, the Supreme Court has interpreted the definition of NPA in a purposive way and expanded the scope of delegated legislation by saying that the legislature need not define all the terms in a statute and regulators can be given wide powers to come out with guidelines from time to time. The judgment has given a dynamic interpretation to a piece of socio-economic legislation.

Vivek Vashi is the mainstay of the litigation team at Bharucha & Partners, where Tanaya Shah is an associate.


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