Supreme Court: Banks Must Follow MSME Revival Framework Before Declaring NPAs

The Supreme Court has ruled that banks and NBFCs cannot classify MSME loan accounts as NPAs without adhering to the procedures outlined in the Centre's 2015 'Framework for Revival and Rehabilitation of MSMEs.' The ruling emphasizes the necessity of following statutory guidelines before taking such actions.

In a significant ruling, the Supreme Court on Thursday decreed that banks and Non-Banking Financial Companies (NBFCs) must adhere to the procedures outlined in the Centre's 2015 notification before classifying loan accounts of Micro, Small, and Medium Enterprises (MSMEs) as Non-Performing Assets (NPAs).

The bench, comprised of Justices Bela M Trivedi and R Mahadevan, stated that the 'Framework for Revival and Rehabilitation of MSMEs' mandated by the Centre and the subsequent directives by the Reserve Bank of India in 2016 carry statutory weight and must be followed by all commercial banks operating under RBI licenses.

The ruling overturned a previous decision by the Bombay High Court, emphasizing that banks are indeed required to follow a structured process before categorizing MSME loan accounts as NPAs. This includes identifying 'incipient stress' in MSME accounts and categorizing them under the 'Special Mention Account' categories to prevent premature classification as NPAs.