In a significant ruling regarding the revival of Micro, Small, and Medium Enterprises (MSMEs), the Supreme Court has clarified that banks cannot classify MSME loan accounts as Non-Performing Assets (NPAs) without adhering to the mandatory procedures set out in the “Framework for Revival and Rehabilitation of MSMEs.”
Key Points from the Ruling:
- Mandatory Procedures:
The Supreme Court, led by Justices Bela M. Trivedi and R. Mahadevan, emphasized that banks must follow specific procedures before designating an MSME loan account as an NPA. This includes adhering to the “Framework for Revival and Rehabilitation of MSMEs” issued by the Ministry of MSME. - Background of the Framework:
The Ministry of MSME introduced the “Framework for Revival and Rehabilitation of Micro, Small, and Medium Enterprises” on May 29, 2015. This framework was designed to offer a streamlined process to address financial stress in MSME accounts and support their development. - Identification of Incipient Stress:
Banks are required to identify early signs of financial distress in MSME accounts by categorizing them under three sub-categories in the “Special Mention Account” before declaring them as NPAs. The Reserve Bank of India (RBI) reiterated this requirement in its Master Circular dated July 21, 2016. - Statutory Binding Force:
The Supreme Court confirmed that these guidelines, issued under the MSMED Act and revised by the RBI, have statutory binding force. Therefore, all scheduled commercial banks licensed by the RBI must comply with these instructions. - Enforcement of Security Interests:
If banks or Non-Banking Financial Companies (NBFCs) fail to follow these procedures and proceed with actions under the SARFAESI Act without proper categorization of stress, such actions are deemed impermissible. The Court noted that MSMEs must provide verifiable proof of their status to benefit from the framework. If they do not, banks can pursue enforcement of security interests under the SARFAESI Act. - Obligations of MSMEs:
MSMEs are required to produce authenticated documents proving their eligibility under the MSME framework to avoid their accounts being classified as NPAs. Failure to do so, especially after the classification as NPA, will not prevent banks from enforcing security interests. - Banks’ Restructuring Obligations:
The Court rejected the High Court’s view that banks are not required to initiate the restructuring process on their own. The Supreme Court clarified that banks must adopt the restructuring process as outlined in the framework, regardless of whether an application is made by the MSMEs.
This ruling underscores the importance of adhering to established guidelines in managing MSME loans and reinforces the rights and obligations of both banks and MSMEs in the process of debt recovery and revival.
