Apex Court Mandates Adherence To 2015 Framework Before Declaring MSME Loans As NPAs

The Supreme Court ruled on Thursday that banks and non-banking financial companies must follow the procedures outlined in the Centre’s 2015 notification before classifying loan accounts of Micro, Small, and Medium Enterprises as non-performing assets.

Justices Bela M Trivedi and R Mahadevan stated that the 'Framework for Revival and Rehabilitation of MSMEs', established by the Centre's notification dated May 29, 2015, and further directives from the Reserve Bank of India in 2016, hold statutory force and are mandatory for all scheduled commercial banks licensed by the RBI.

The court emphasised that the framework requires banks to identify 'incipient stress' in MSME accounts by creating specific sub-categories under the 'Special Mention Account' before declaring these accounts as NPAs. It was noted that banks must have authenticated documentation from MSMEs to verify their status under the Micro, Small, and Medium Enterprises Development Act, 2006.

The Supreme Court overturned a Bombay High Court ruling that had incorrectly stated that banks were not obligated to follow the restructuring process outlined in the 2015 framework. The bench criticised the high court’s decision as "highly erroneous" and clarified that MSMEs must provide verifiable documents to prove their status before an account is classified as NPA.

The court also outlined that if MSMEs fail to present their status as such during the classification process, and the account is declared NPA, banks can proceed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

However, it warned that MSMEs could not later use their status to counteract actions taken under SARFAESI if they did not inform the bank in a timely manner.

(With inputs from PTI)