Introduction:

In Canara Bank v. M/s Karishma Enterprises & Ors., W.P.(C) 6494/2016, the Delhi High Court examined a significant question concerning the classification of a loan account as a Non-Performing Asset (NPA) under the Reserve Bank of India’s prudential norms on Income Recognition, Asset Classification and Provisioning. These norms, having statutory force under Sections 21 and 35A of the Banking Regulation Act, 1949, mandate strict compliance by all banks, requiring the declaration of an Overdraft (OD) or Cash Credit (CC) account as NPA when the outstanding balance remains continuously in excess of the sanctioned limit or drawing power for more than 90 days. Canara Bank, the Petitioner, asserted that it had declared the Respondents’ OD and CC accounts as NPA strictly upon expiry of the stipulated 90-day period on 31.03.2013, arguing that the accounts had become irregular on 31.12.2012 and that the continuous excess over the sanctioned limit triggered the mandatory classification. The Respondents, however, contended that the Debt Recovery Appellate Tribunal (DRAT) rightly held that the Bank prematurely classified the accounts before the expiry of more than 90 days. The High Court undertook a detailed analysis of the computation of the 90-day period, the RBI guidelines, and the material placed on record to determine whether the Bank’s action was premature or whether it was in accordance with statutory norms.

Arguments of the Petitioner-Bank:

Canara Bank submitted that the 90-day period of continuous irregularity began on 01.01.2013, the day immediately following the Respondents’ account becoming irregular due to the outstanding balances exceeding the sanctioned limits. It argued that the prudential norms stipulate that an account must be classified as NPA if the irregularity continues for more than 90 days, meaning that the Bank was required, not merely permitted, to classify the account immediately upon completion of the 90-day period. The Bank stressed that as of 31.12.2012, the Respondents’ accounts had become significantly irregular, with high excess amounts persisting throughout the relevant period. It argued that the excess was neither trivial nor temporary but substantial, continuous, and undisputed. Therefore, when the statutory 90-day period ended on 31.03.2013, the Bank duly discharged its regulatory obligation by declaring the accounts NPA on the same date. The Bank emphasised that RBI norms do not permit banks to postpone or delay classification once the mandatory threshold is reached. Furthermore, it argued that the borrowers had failed to demonstrate any effort toward regularisation, repayment, servicing of interest, or bringing the accounts within sanctioned limits during the entire period. Canara Bank contended that once it produced evidence of continuous irregularity, the burden shifted to the borrower to prove incorrect classification, a burden the Respondents completely failed to discharge.

Arguments of the Respondents:

The Respondents contended that the DRAT had correctly held that the Bank classified the accounts as NPA prior to the expiry of “more than 90 days” of irregularity. They argued that the Bank’s computation of the period was flawed and that the accounts had not remained continuously irregular for more than 90 days at the time of classification. According to the Respondents, the requirement is not merely the completion of the 90th day but the surpassing of it, and the Bank’s declaration on 31.03.2013 was therefore premature. They asserted that the Bank had acted mechanically without verifying whether there were any improvements or fluctuations in the account during the relevant period. The Respondents relied upon the DRAT’s interpretation that the Bank ought to have classified the account on a date after the 90th day rather than on the 90th day itself. They argued that principles of fairness and reasonableness required the Bank to give borrowers an opportunity to regularise the account, particularly where minor fluctuations could have temporarily pulled the account within limits. They further submitted that the Bank had failed to produce sufficient documentation to conclusively establish that the accounts remained continuously over the sanctioned limits for the entire period and that the Bank rushed to classify without allowing time for rectification.

Court’s Judgment:

The Delhi High Court, after examining the record, rejected the Respondents’ arguments and held that the Bank’s action was neither premature nor unlawful. The Court found that as of 31.12.2012, the Respondents’ OD and CC accounts had unquestionably become irregular, with outstanding balances far exceeding sanctioned limits. This irregularity, the Court noted, was not marginal, accidental, or temporary but persistent and undisputed. The Court held that the RBI norms require classification of an account as NPA when it remains irregular “for more than 90 days,” and the accepted understanding is that this period must be computed starting from the day immediately succeeding the date on which the account becomes irregular. Thus, the Court clarified that the first day of irregularity was 01.01.2013, making 31.03.2013 the 90th day. The Court held that classification on the very day of completion of the statutory 90-day period cannot be labeled premature, because the prudential norms intend that classification must occur immediately when the prescribed period lapses. The Court emphasised that banks cannot defer or postpone NPA classification beyond the statutory period, as doing so would undermine prudential regulation and encourage unhealthy banking practices. The Court further noted that the Respondents had not placed any material to show that the accounts were ever regularised or that any payments were made to bring the outstanding balances within sanctioned limits. The High Court reiterated that once the Bank demonstrated continuous irregularity, the burden shifted to the borrower to show incorrect classification, a burden the Respondents utterly failed to discharge. The Court concluded that the Bank’s act of classification was in perfect conformity with the RBI framework and regulatory requirements. Accordingly, the High Court held that the declaration of the Respondents’ accounts as NPA on 31.03.2013 was valid and not premature, setting aside the findings of the DRAT and upholding the regulatory obligation of banks to classify accounts immediately upon the expiry of the 90-day period.