1. Promoters of 60 firms move SC to challenge FIs’ power to define NPA

Promoters of 60 firms move SC to challenge FIs’ power to define NPA

Centre asked to give list of regulatory bodies & indicate classes of borrowers, specialised fields

By: | New Delhi | Published: November 13, 2014 1:22 AM
The Gujarat HC while striking down the powers of different regulators in defining NPAs has restored the power of the RBI to define NPA.

The Gujarat HC while striking down the powers of different regulators in defining NPAs has restored the power of the RBI to define NPA.

In a matter that will decide the period after which a bad loan can be called a non-performing asset (NPA) and whether the RBI can regulate all banking and non-banking finance companies in this regard, promoters of around 60 companies have moved the Supreme Court questioning every financial institution’s power to decide its own NPA period, saying it is a violation of right to equality.

During the hearing on Wednesday, a bench headed by justice J Chelameswar asked the Centre to give a list of the regulatory bodies and also indicate their classes of borrowers and the specialised fields in which they operate deal — like Exim Bank which deals with export/import transactions. It had earlier asked the parties to maintain status quo. The matter has been posted for hearing on Thursday.

The apex court is hearing two batch of petitions against high courts of Gujarat and Madras as both the HCs have differed on the issue. The Gujarat High Court while striking down the powers of different regulators in defining NPAs (under section 2(1)(o)(a) of the Securitisation Act, 2002) has restored the power of the RBI to decide the period after which the bad loan can be called an NPA.

However, the Madras High Court while rejecting petitions of various companies and individuals, including Deccan Chronicle Holdings and Marg, had upheld the constitutionality of Section 2(1)(o) of the Act and the guidelines issued by the RBI on the classification of assets as NPAs. Interestingly, Delhi HC has upheld this 2004 amendment in the securitisation law.

However, the Centre is yet to file an appeal on the issue.

Before the amendment in 2004 to the Act, RBI was the regulator for the banking, non-banking institutions and securitisation agencies for deciding the period after which the loans can be treated NPA. Till 2004, RBI had set the NPA period for banks at 90 days, and at 180 days for NBFCs. But after the amendment, the financial institutions had their own regulations for NPA and the period was decided separately by each of them.

A few such institutions are EXIM Bank, under Section 39 of the EXIM Act, National Housing Bank under the NHB Act, and so is the case with Power Finance, Nabard, Rural Electrification and Indian Railway Finance.

Challenging the Gujarat HC’s April order that termed the decision of Parliament to take away the power from the RBI as wrong, the promoters and companies have alleged that its prudential norms defy the right to equality under Article 14 of the Constitution of India.

Questioning the reason for the difference of NPA periods among finance firms, they argued that the 2002 Act should be applied uniformly across all borrowers and challenged the RBI guidelines on income recognition, provisioning and asset classification under prudential norms as being unconstitutional. The RBI guidelines are discriminatory, arbitrary, unreasonable and ultra vires the Securitisation Act and that the definition of the NPA as per RBI is contrary, distinct and contradictory to the definition of the NPA under the Central Act, and hence the same is unconstitutional, senior counsel Soli Sorabjee argued.

Debtors of various banks who have appealed against the Madra HC’s order said that issuing directions or guidelines relating to asset classification is essential legislative function and, therefore, it cannot be delegated.

They argued that the guidelines issued by the RBI cannot be used for defining NPAs and there should be a separate legislation in this regard.
Sarfaesi gives powers to seize and desist to the banks under which the banks need to send a notice in writing to the defaulting borrower requiring it to discharge its liabilities within 60 days. In case the borrower fails to comply with the notice, then the bank can take either take possession of the security for the loan, sell or lease or assign the right over the security or appoint any person to manage the same.

Periodic Tangle:

The apex court is hearing two batch of petitions against high courts of Gujarat and Madras as both the HCs have differed on the issue

The Gujarat HC while striking down the powers of different regulators in defining NPAs has restored the power of the RBI to define NPA

However, the Madras HC while rejecting petitions of various companies and individuals had upheld norms issued by the RBI on the classification of assets as NPAs

Before the amendment in 2004 to the Act, RBI was the regulator for the banking, non-banking institutions and securitisation agencies for deciding the period after which the loans can be treated NPA

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