It has been ruled by the Apex Court of India that the procedures outlined in the Centre’s 2015 notification before classifying loan accounts of Micro, Small, and Medium Enterprises as non-performing assets should be carried out by banks as well as non-banking financial companies.
Supreme Court Affirms Statutory Force of 2015 MSME Framework and Documentation Requirements
The bench comprised of Justices Bela M Trivedi and R Mahadevan and they stated that the ‘Framework for Revival and Rehabilitation of MSMEs’, established by the Centre’s notification dated May 29, 2015, and further directives from the Reserve Bank of India in 2016, hold statutory force and are mandatory for all scheduled commercial banks licensed by the RBI.
The court further emphasized that the framework from 2015 requires the banks to identify ‘incipient stress’ in MSME accounts by creating specific sub-categories under the ‘Special Mention Account’ before categorizing it as NPA.
Under the Micro, Small, and Medium Enterprises Development Act, 2006, it is said that the banks must have authenticated documentation from MSMEs in order to verify their status.
Supreme Court Overrules Bombay High Court on MSME Loan Classification, Upholds 2015 Framework
The apex court also overturned a Bombay High Court ruling that had incorrectly stated that banks were not obligated to follow the restructuring process outlined in the 2015 framework.
Chastising the high court’s decision and calling it as “highly erroneous”, the SC bench clarified that MSMEs must provide verifiable documents to prove their status before an account is classified as NPA.
In case of MSMEs fail to present their status as such during the classification process, and the account is declared NPA, banks can proceed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
However, it warned that MSMEs could not later use their status to counteract actions taken under SARFAESI if they did not inform the bank in a timely manner.
