A bank cannot defer NPA classification beyond RBI’s 90-day default threshold by extending a moratorium.

The petitioner, a small hydroelectric project company, had a term loan from the respondent Bank, repayable through monthly instalments.

Following COVID-19-related RBI moratoriums from March to August 2020, the Bank applied amounts received in the escrow account to earlier dues.

The petitioner defaulted on instalments for September, October and November 2020, but the Bank classified the account as an NPA only on 6 November 2021.

The Bank’s statutory auditor subsequently opined that the account should have been classified as an NPA in November 2020 and fell within the D2 category; the Bank relied instead on a private chartered accountant’s opinion, which the Court considered inconclusive.

The petitioner challenged the NPA date and the rejection of its request to be considered under the Bank’s 2024 One Time Settlement Scheme (OTS).

1. Whether the petitioner’s loan account should have been classified as an NPA in November 2020, following three consecutive months of default, rather than in November 2021.

2. Whether the Bank could disregard its statutory auditor’s opinion on the NPA classification and rely on the opinion of a private chartered accountant.

The Court applied RBI prudential norms on income recognition, asset classification and provisioning, under which an account that remains overdue for the prescribed 90-day period is to be classified as an NPA.

It held that the COVID-19 moratorium did not authorise the Bank to disregard those norms, and that extending a moratorium after the RBI-prescribed period did not waive the classification requirement.

Under the Bank’s OTS Scheme, 2024, where the NPA date or category in the Core Banking System differed from that in the statutory auditor’s report/MOC, the statutory auditor’s report/MOC was to be treated as final; the Scheme was also described as non-discretionary and non-discriminatory.

The Court noted the principles in Bijnor Urban Cooperative Bank Ltd. v. Meenal Aggarwal, (2023) 2 SCC 805, and State Bank of India v. Arvindra Electronics Pvt. Ltd., (2023) 1 SCC 540, that a borrower has no automatic right to an OTS benefit, but held those decisions did not prevent determination of the disputed NPA date in this case.

The Bank admitted that the petitioner had not paid the September, October and November 2020 instalments, and the amounts recovered from the escrow account between March and August 2020 had been applied to dues arising before September 2020.

The Court therefore found that the earlier recoveries did not cure the later consecutive defaults.

It rejected the Bank’s reliance on the extended moratorium and revised half-yearly instalment schedule, reasoning that neither displaced the RBI classification norms once the account had remained in default for the requisite period.

The statutory auditor’s opinion supported NPA classification in November 2020, whereas the private accountant’s opinion was inconclusive and did not displace it.

The Bank had also failed to apply the OTS Scheme’s express rule giving the statutory auditor’s report/MOC precedence over the CBS record in case of a discrepancy.

The Court accordingly treated November 2020 as the proper NPA classification date, while leaving the petitioner’s access to OTS subject to the Scheme and an application by the petitioner.

It directed the respondent Bank to consider the petitioner’s case for settlement under the OTS Scheme, 2024, on the basis that the account was declared/marked as an NPA in November 2020, subject to the petitioner making an application under the Scheme.