The Supreme Court has ruled that banks and creditors must identify early signs of stress in the accounts of Micro, Small, and Medium Enterprises (MSMEs) before classifying them as non-performing assets.
A Bench led by Justice Bela Trivedi recently issued an order in a series of appeals filed by MSMEs, represented by advocate Mathews J. Nedumpara. The appeals centered on a notification titled ‘Instructions for the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises,’ issued on May 29, 2015, under Section 9 of the MSMED Act and revised by the Reserve Bank of India (RBI) in March 2016 under the powers granted by Sections 21 and 35(A) of the Banking Regulation Act.
The court ruled that the May 2015 notification carries “statutory force and is binding on all Scheduled commercial banks licensed to operate in India by the RBI.”
“The entire process outlined in the ‘Framework for Revival and Rehabilitation of MSMEs’ must be undertaken by banking companies before MSME accounts are classified as non-performing assets (NPA),” the court stated.
However, the Bench also directed that MSMEs must provide authenticated and verifiable documents to substantiate their claim of being an MSME before their account is classified as an NPA.
“If this is not done, and the account is classified as an NPA, the banks, as secured creditors, would be entitled to take recourse to Chapter III of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) Act for the enforcement of the security interest,” the two-judge Bench ordered.
The appellant MSMEs had contested a January 11 decision by the Bombay High Court, which dismissed their writ petitions. The High Court had ruled that banks and Non-Banking Financial Companies (NBFCs) were not required to adopt the restructuring process outlined in the May 2015 notification without specific applications from MSMEs.
Mr. Nedumpara argued that banks could not classify the loan accounts of MSMEs as NPAs without adhering to the procedure specified in the May 2015 notification.
“It was incumbent upon the banks/NBFCs to identify early signs of stress in the account and explore various options to resolve the stress as outlined in the May 2015 notification,” Mr. Nedumpara contended.