The Calcutta High Court set aside a bank's notice declaring an MSME borrower’s account as a non-performing asset, holding that the RBI’s Master Circular of 2 April 2024 requires a continuous 90-day default before an account can be treated as ‘out of order’ under the SARFAESI Act.
Background & Facts
The Dispute
The petitioners, Benimadhab Construction Private Limited and another, are MSME borrowers who obtained a cash-credit facility from respondent no.2 (the bank) in 2012. The facility was periodically renewed, the last renewal extending the sanction up to 31 December 2024 for a limit of Rs. 150 lakhs.
Key Facts
- 2012: Original loan availed from the bank.
- 29 December 2023: Sanction letter issued, fixing the cash-credit limit at Rs. 150 lakhs and providing that the limit would be reduced by Rs. 1 lakh each month.
- Monthly reductions: The limit fell to Rs. 1.37 crore in September 2024, Rs. 1.35 crore in November 2024, and Rs. 1.36 crore in October 2024.
- 30 October 2024 - 28 January 2025: Petitioners deposited a total of Rs. 9,14,000 (Rs. 3,19,000 in Oct 2024, Rs. 45,000 in Dec 2024, Rs. 50,000 on 9 Jan 2025, Rs. 1,00,000 on 28 Jan 2025, and other payments amounting to Rs. 9,14,000).
- 29 January 2025: Bank emailed the petitioners demanding a deposit of Rs. 7,00,000, warning that failure would result in the account being declared NPA.
- 28 January 2025: The bank declared the account as NPA, prior to the email of 29 January 2025.
- 19 June 2025: Bank issued a notice under Section 13(2) of the SARFAESI Act demanding full repayment.
- 6 August 2025: Petitioners replied to the notice, seeking regularisation and revocation of the NPA status in line with RBI guidelines.
- RBI Master Circular dated 2 April 2024 defines an account as ‘out of order’ only if the outstanding balance exceeds the sanctioned limit for 90 consecutive days or there are no credits for 90 days, among other criteria.
- Bank’s claim: Non-submission of monthly stock and book-debt statements constituted a default, leading to reduction of the drawing limit and eventual NPA status.
- Petitioners’ contention: No statutory notice of default was served; deposits were made regularly; the account never met the 90-day default condition.
Procedural History
- W.P.A. No. 23190 of 2025: Writ petition filed in the High Court at Calcutta (date of filing not specified in the judgment).
- 27 July 2026: Hearing concluded.
- 12 August 2026: Judgment delivered and uploaded.
Relief Sought
The petitioners prayed for a mandamus directing respondent no.1 (RBI) to ensure respondents nos.2 and 3 comply with RBI guidelines, and for the cancellation of the notices dated 19 June 2025 and the NPA declaration dated 28 January 2025.
The Legal Issue
Whether the bank’s declaration of the petitioners’ cash-credit account as a non-performing asset and the subsequent notice under Section 13(2) of the SARFAESI Act were valid, given the RBI’s Master Circular of 2 April 2024 and the fact that no amount was overdue for more than 90 days.
Arguments Presented
For the Petitioners
- The bank breached RBI guidelines by declaring the account NPA without a 90-day default, contrary to Clause 2.1.2(i) of the Master Circular.
- No statutory notice of default was issued before the NPA declaration on 28 January 2025.
- The petitioners had deposited Rs. 9,14,000 between 30 October 2024 and 28 January 2025, satisfying the requirement that interest and principal not be overdue for 90 days.
- The bank’s reliance on non-submission of stock statements was unsupported by the sanction letter, which only imposed a 2 % penalty over the prevailing rate for irregular periods.
For the Respondents (Bank)
- The sanction letter stipulated a monthly reduction of the cash-credit limit by Rs. 1 lakh and required submission of stock and book-debt statements by the 10th of each month.
- Failure to submit the statements in September 2024 led to a reduction of the drawing limit by Rs. 4 lakhs, indicating a breach of the borrowing conditions.
- The bank argued that the non-submission constituted a default, justifying the NPA classification and the SARFAESI notice.
The Court's Analysis
The Court began by interpreting the Master Circular dated 2 April 2024, which defines an account as ‘out of order’ only when either (i) the outstanding balance exceeds the sanctioned limit for a continuous period of 90 days, or (ii) there are no credits for 90 days, or the credits are insufficient to cover interest for 90 days. The Court noted that the circular expressly requires a continuous default period of ninety days before an account can be treated as NPA.
"Neither any amount was overdue more than 90 days, neither the account of the petitioners can be treated as ‘NPA’ or ‘out of order’."
The Court examined the timeline of deposits. From 30 October 2024 to 28 January 2025, the petitioners deposited a cumulative Rs. 9,14,000, which covered both interest and principal obligations. Consequently, the condition of a 90-day overdue balance was not satisfied.
The Court also scrutinised the bank’s reliance on the alleged non-submission of stock statements. The sanction letter, as admitted by the bank, only imposed a 2 % penalty over the prevailing rate for irregular periods and did not stipulate that failure to submit statements would automatically trigger an NPA status. Moreover, the bank’s own communications dated 29 October 2024, 5 November 2024, and 21 March 2025 indicated that the stock statements had been processed and the drawing power adjusted accordingly, undermining the claim of a material default.
Regarding the notice under Section 13(2) of the SARFAESI Act, the Court observed that the bank declared the account as NPA on 28 January 2025, before issuing the email of 29 January 2025 demanding a Rs. 7 lakhs deposit. The notice of 19 June 2025 was therefore issued after the NPA status had already been improperly effected, rendering it ultra vires.
In light of the above, the Court held that the bank failed to comply with the RBI’s Master Circular and the statutory requirements of the SARFAESI Act. The NPA declaration and the subsequent notice were set aside.
The Verdict
The writ petition is allowed. The order dated 19 June 2025 issued by respondents nos. 2 and 3 is set aside and quashed. The bank is directed to treat the petitioners’ account as regular and to act in accordance with the Master Circular dated 2 April 2024. No monetary award is granted; the parties must comply with the directions forthwith.
What This Means For Similar Cases
RBI Guidelines Are Controlling
- Banks must verify that a 90-day continuous default exists before classifying an account as NPA under the SARFAESI Act.
- Any deviation from the Master Circular’s criteria renders the NPA declaration vulnerable to judicial review.
Evidentiary Burden on Banks
- The onus is on the bank to produce concrete evidence of default, such as statutory notices of overdue amounts, rather than relying on internal procedural lapses like delayed stock statements.
- Agreements must expressly link non-submission of statements to default consequences; otherwise, the penalty is limited to the stipulated interest surcharge.
Timing of SARFAESI Notices
- A notice under Section 13(2) SARFAESI cannot be issued after an NPA status has already been improperly declared.
- Courts will scrutinise the chronological order of declarations and notices to ensure procedural regularity.
Practical Takeaways for Practitioners
- When advising MSME borrowers, verify the exact dates of deposits and compare them against the 90-day default threshold.
- Counsel banks to maintain clear, dated communications evidencing compliance with RBI circulars before invoking SARFAESI provisions.
- Draft loan agreements with explicit clauses linking specific defaults (e.g., non-submission of statements) to penalties, and ensure such clauses are consistent with RBI guidelines.
