I. Introduction

A Non-Performing Asset (NPA) signifies a loan or advance for which the principal or interest payment has remained overdue for a specified period. In the Indian banking sector, NPAs represent a significant concern, impacting the financial health of lending institutions and, by extension, the national economy. The Reserve Bank of India (RBI) defines an NPA as "an asset or account of a borrower which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset in accordance with the guidelines, relating to asset classifications, issued by the Reserve Bank of India."^[12] The accumulation of NPAs has been described as a "drag on the economy,"^{[11, 13]} necessitating robust legal and regulatory frameworks for their identification, management, and resolution. This article provides a comprehensive analysis of the legal principles governing the declaration of accounts as NPAs in India, drawing upon statutory provisions, RBI guidelines, and judicial pronouncements. It examines the regulatory framework, the legal basis for NPA classification, the consequences of such declaration, procedural safeguards for borrowers, and recent developments in this critical area of law.

II. The Regulatory Framework for NPA Classification

The Reserve Bank of India, as the country's central banking institution, plays a pivotal role in prescribing prudential norms for income recognition, asset classification, and provisioning for advances. These norms are binding on banks and financial institutions and aim to ensure transparency, objectivity, and consistency in the identification and treatment of NPAs.

A. RBI Prudential Norms and Master Circulars

RBI periodically issues Master Circulars on "Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances." These circulars consolidate instructions and guidelines for banks. Historically, the specified period for an account to be classified as NPA due to overdue interest or principal was reduced in a phased manner, moving from four quarters in 1993 to 90 days from March 31, 2004, to align with international best practices and ensure greater transparency.^{[17, 18]} The Supreme Court in Mardia Chemicals Ltd. And Others v. Union Of India And Others acknowledged these RBI guidelines, rejecting contentions that NPA classification was arbitrary by noting the existence of "RBI's Prudential Norms On Income Recognition, Asset Classification and Provisioning-Pertaining To Advances."^{[3, 14, 15]} These guidelines mandate banks to establish appropriate internal systems to prevent delays in identifying NPAs.^{[14, 15]}

B. The 90-Day Overdue Norm

A cornerstone of NPA identification is the '90 days overdue' norm. According to RBI guidelines, a non-performing asset (NPA) is a loan or an advance where: (i) interest and/or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan.^{[17, 18]} The Madras High Court in Cynthia K. Theleepan v. Reserve Bank Of India And Another reiterated that a loan account can be classified as an NPA only if there is default in paying interest or an installment of the principal for a period of more than 90 days.^[16] Furthermore, banks are directed to classify an account as NPA if the interest due and charged during any quarter is not serviced fully within 90 days from the end of that quarter.^{[9, 12]}

C. 'Out of Order' Status for OD/CC Accounts

For Overdraft/Cash Credit (OD/CC) accounts, an account is treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power for 90 days. Even if the outstanding balance is within the sanctioned limit/drawing power, if there are no credits continuously for 90 days as on the date of the Balance Sheet, or if credits are not enough to cover the interest debited during the same period, the account is deemed 'out of order' and consequently classified as an NPA.^{[9, 12]}

D. Asset Classification Categories

Once an asset is identified as non-performing, banks are required to further classify it into one of three categories based on the period for which it has remained non-performing and the realisability of the dues:

• Sub-standard Assets: An asset which has remained NPA for a period less than or equal to 12 months.
• Doubtful Assets: An asset which has remained in the sub-standard category for a period of 12 months.
• Loss Assets: An asset which is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.^{[9, 12, 14, 15, 17, 18]}

III. Legal Basis and Judicial Scrutiny of NPA Classification

A. The SARFAESI Act, 2002: A Paradigm Shift

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, was enacted primarily to address the issue of rising NPAs and empower banks and financial institutions to recover their dues expeditiously without court intervention.^{[3, 11, 13]} The Act allows secured creditors to enforce their security interests once an account is classified as NPA. As noted in Transcore v. Union Of India And Another, the NPA account is an asset in the hands of the bank, representing an amount receivable and realisable.^{[8, 13]} The SARFAESI Act proceeds on the basis that the asset is created in favour of the bank, and its provisions come into force if the borrower is under a liability and their account is classified as sub-standard, doubtful, or loss.^[10]

B. Judicial Interpretation of "NPA" and Classification Challenges

The judiciary has generally upheld the RBI's framework for NPA classification. In Mardia Chemicals, the Supreme Court affirmed the validity of the SARFAESI Act and, by implication, the underlying NPA classification mechanism based on RBI guidelines.^[3] Courts have negatived contentions that assets are classified as NPAs on the mere whims and fancies of financial institutions, pointing to the detailed RBI prudential norms.^{[14, 15]} While borrowers can object to NPA classification,^[16] the scope for judicial interference in the classification itself is limited if the bank has adhered to RBI guidelines. Challenges typically arise concerning the procedural aspects of enforcement actions post-NPA classification.

C. Crystallized Liabilities and Non-Adjudicatory Process

The SARFAESI Act operates on the premise that the liability of the borrower has crystallized and the account has become non-performing. Section 13(2) of the Act, which allows a secured creditor to issue a demand notice, presupposes an existing liability and an NPA classification.^[10] The Act provides for the recovery of possession by a non-adjudicatory process, aiming for expeditious enforcement of security interests.^[10]

IV. Consequences of an Account Being Declared NPA

A. Implications for the Borrower

Declaration of an account as NPA has severe repercussions for the borrower. It adversely affects their creditworthiness, making it difficult to access further finance. More significantly, it triggers the lender's right to initiate recovery proceedings under various statutes, including the SARFAESI Act, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act), and the Insolvency and Bankruptcy Code, 2016 (IBC).^[5] In certain circumstances, borrowers, especially promoters or directors, may also be classified as 'wilful defaulters' if conditions stipulated by RBI, such as diversion or siphoning of funds, are met.^[2] Such a classification carries further stringent consequences, including debarment from accessing institutional finance.

B. Implications for the Lender

For lenders, an NPA classification necessitates higher provisioning from their profits, impacting their financial statements. However, it also opens avenues for recovery. Lenders can enforce security interests under the SARFAESI Act,^[3] file recovery suits before Debt Recovery Tribunals (DRTs),^[22] or initiate Corporate Insolvency Resolution Process (CIRP) under the IBC.^[5] Furthermore, the Supreme Court in ICICI Bank Limited v. Official Liquidator Of Aps Star Industries Limited And Others upheld the legality of inter se transfer of NPAs among banks, viewing it as a legitimate asset management and restructuring tool permissible under the Banking Regulation Act, 1949, especially when supported by RBI guidelines.^[1] This allows banks to manage their NPA portfolios more effectively.

V. Procedural Safeguards and Borrower's Rights

A. Right to Represent and Challenge Classification

While RBI guidelines form the bedrock of NPA classification, borrowers are not entirely without recourse. Upon classification of an account as NPA, borrowers can make representations to the bank.^[16] However, the right to legal representation before in-house committees deciding on 'wilful defaulter' status has been held by the Supreme Court not to be an absolute right unless statutorily provided.^[2] The primary avenue for challenging the lender's actions, including the measures taken post-NPA declaration, is through the DRT.

B. Recourse under the SARFAESI Act: Section 17

Section 17 of the SARFAESI Act allows any person aggrieved by measures taken by the secured creditor under Section 13(4) (e.g., taking possession of secured assets) to file an application before the DRT. The Supreme Court in Mardia Chemicals struck down Section 17(2) of the Act, which mandated a pre-deposit of 75% of the claimed amount for an appeal to be entertained by the DRT, as unconstitutional.^[3] In Hindon Forge (P) Ltd. v. State Of U.P., the Court clarified that an application under Section 17(1) can be filed by the borrower when a possession notice is issued under Rule 8(1) of the SARFAESI Rules, even before actual physical possession is taken, ensuring timely access to redressal.^[6] However, High Courts are generally discouraged from entertaining writ petitions against Section 13(4) notices when an efficacious alternative remedy before the DRT is available, as observed in cases like Phoenix Arc Private Limited (S) v. Vishwa Bharati Vidya Mandir And Others (S).^[21]

C. The Doctrine of Election and Parallel Remedies

The Supreme Court in Transcore v. Union Of India And Another held that remedies under the NPA Act (SARFAESI) and the DRT Act are complementary and not mutually exclusive. A bank or financial institution can invoke the SARFAESI Act even if proceedings under the DRT Act are pending, without the doctrine of election being applicable, as the remedies are not inconsistent.^{[8, 13]}

D. Protection for Third Parties: The Case of Lessees

The enforcement of security interests over mortgaged properties can affect third-party rights, such as those of lessees. In Harshad Govardhan Sondagar v. International Assets Reconstruction Company Limited And Others, the Supreme Court clarified that lessees with valid leases made prior to the mortgage or in compliance with the Transfer of Property Act, 1882, retain their possession rights and cannot be summarily dispossessed under SARFAESI proceedings.^[4] The SARFAESI Act, while empowering secured creditors, does not automatically override the fundamental property rights of bona fide lessees.^{[4, 11]}

VI. Special Contexts and Recent Developments

A. NPA Management during Unprecedented Events: The COVID-19 Moratorium

The COVID-19 pandemic led to significant financial stress for borrowers. The RBI announced moratoriums on loan repayments. The Supreme Court, in Small Scale Industrial Manufactures Association (Regd.) v. Union Of India And Others, intervened to direct that no interest on interest (compound interest) or penal interest should be charged during the moratorium period for loans up to a certain limit, and any amount already recovered should be refunded or adjusted.^[7] This provided substantial relief to borrowers. Courts also considered the impact of such moratoriums on the NPA declaration timeline, suggesting that the moratorium period should be excluded for calculating the 90-day overdue period.^{[24, 25, 26]} However, these reliefs were generally not extended to accounts that were already NPAs prior to the pandemic or where defaults were pre-existing and unrelated to COVID-19 induced stress.^[20]

B. Wilful Defaulters: Identification and Consequences

The framework for declaring a borrower as a 'wilful defaulter' is stringent, given the severe consequences. As affirmed in State Bank Of India v. Jah Developers Private Limited And Others, while principles of natural justice must be followed, this does not automatically entitle the borrower to legal representation by a lawyer of their choice before the in-house committees of banks making such declarations.^[2] The RBI's Master Circulars on Wilful Defaulters lay down the criteria and procedure for such classification.

C. Transparency and Information Disclosure regarding NPAs

The issue of transparency in NPA data has been subject to public and judicial scrutiny. The Right to Information Act, 2005 (RTI Act) has been invoked to seek information on NPAs. The Central Information Commission (CIC) has, in cases like Manoj Sharma v. State Bank of India and Anoop Singh Parihar v. Central Bank, directed disclosure of aggregate NPA data or information pertaining to the appellant's own NPA account, while often exempting individual third-party defaulter details under privacy clauses of the RTI Act.^{[19, 23]} This reflects a balancing act between transparency and confidentiality.

D. Inter-Bank Transfer of NPAs

The Supreme Court's decision in ICICI Bank Limited v. Official Liquidator Of Aps Star Industries Limited And Others provided significant clarity on the legality of inter se transfers of NPAs among banks.^[1] The Court held that such transfers are permissible under the Banking Regulation Act, 1949, particularly Sections 6(1)(a) and 6(1)(n), and are supported by RBI guidelines. This facilitates better asset management and risk mitigation for banks.

VII. Conclusion

The declaration of an account as an NPA is a critical event in the lender-borrower relationship, governed by a complex interplay of RBI's prudential norms, statutory frameworks like the SARFAESI Act and IBC, and judicial interpretations. While the regulatory regime aims to ensure timely recognition and resolution of stressed assets to maintain financial stability, the legal system also provides avenues for borrowers to seek redressal against arbitrary or unlawful actions. The judiciary has consistently emphasized adherence to RBI guidelines for NPA classification and has sought to balance the interests of lenders in speedy recovery with the procedural rights and protections afforded to borrowers and affected third parties. Recent developments, particularly in response to economic shocks like the COVID-19 pandemic, demonstrate the adaptive nature of this legal framework. Continuous refinement of these norms and effective enforcement are essential for fostering a sound credit culture and a resilient financial ecosystem in India.

VIII. References

1. Icici Bank Limited v. Official Liquidator Of Aps Star Industries Limited And Others (2010 SCC 10 1, Supreme Court Of India, 2010)
2. State Bank Of India v. Jah Developers Private Limited And Others (2019 SCC 6 787, Supreme Court Of India, 2019)
3. Mardia Chemicals Ltd. And Others v. Union Of India And Others (2004 SCC 4 311, Supreme Court Of India, 2004)
4. Harshad Govardhan Sondagar v. International Assets Reconstruction Company Limited And Others (2014 SCC 6 1, Supreme Court Of India, 2014)
5. Swiss Ribbons Private Limited And Another v. Union Of India And Others (2019 SCC ONLINE SC 73, Supreme Court Of India, 2019)
6. Hindon Forge (P) Ltd. v. State Of U.P. (2019 SCC 2 198, Supreme Court Of India, 2018)
7. Small Scale Industrial Manufactures Association (Regd.) v. Union Of India And Others (2021 SCC ONLINE SC 246, Supreme Court Of India, 2021)
8. Transcore v. Union Of India And Another (2008 SCC 1 125, Supreme Court Of India, 2006)
9. Amar Alloys Pvt. Limited (Regd.) v. State Bank Of India . (Punjab & Haryana High Court, 2019)
10. K.R Chandrasekaran v. Union Of India, Rep. By The Secretary To Government, Finance Department, New Delhi. 2. The State Bank Of India, Rep. By The Branch Manager, Sri Rangapalayam Branch, Salem-7. 3. The Assistant General Manager, State Bank Of India, Stressed Assets Recovery Branch (Sarb), Santhi Plaza, I Floor, 1/5, Brindavan Road, Fair Lands, Salem-4. 4. The Chief Judicial Magistrate, Salem-7. (Madras High Court, 2012)
11. Vishal N. Kalsaria v. Bank Of India And Others (Supreme Court Of India, 2016)
12. M.J.Betty v. Union Bank Of India (Kerala High Court, 2007)
13. Transcore v. Union Of India And Another (Supreme Court Of India, 2006) [Note: This is the same case as Ref 8, but the provided material might be a different excerpt or citation style, hence listed as potentially distinct input]
14. Gaurav Lubricants Private limited v. Tamilnadu Mercantile Bank Limited (Telangana High Court, 2022)
15. Veer Petroleum Private limited v. Tamilnadu Mercantile Bank Limited and another (Telangana High Court, 2022)
16. Cynthia K. Theleepan v. Reserve Bank Of India And Another (Madras High Court, 2020)
17. Sravan Dall Mill P. Limited v. Central Bank Of India (Telangana High Court, 2009)
18. Sravan Dall Mill P. Limited v. Central Bank Of India (Andhra Pradesh High Court, 2009) [Note: Similar to Ref 17, potentially different court or specific aspect]
19. MANOJ SHARMA v. State Bank of India (Central Information Commission, 2025)
20. Amit Khaneja And Others v. Il & Fs Financial Services Ltd. . (2020 SCC ONLINE DEL 1634, Delhi High Court, 2020)
21. Phoenix Arc Private Limited (S) v. Vishwa Bharati Vidya Mandir And Others (S). (2022 SCC ONLINE SC 44, Supreme Court Of India, 2022)
22. HDFC BANK v. BAHADUR SINGH (Debts Recovery Tribunal, 2018)
23. Anoop Singh Parihar v. Central Bank (Central Information Commission, 2023)
24. Shiv Singh v. Punjab National Bank And Others . (Rajasthan High Court, 2021)
25. Shiv Singh v. Punjab National Bank And Others . (Rajasthan High Court, 2021) [Note: Appears to be a duplicate or very similar case reference]
26. Shri Shyam Printers v. Reserve Bank Of India . (Rajasthan High Court, 2021)