The Bombay High Court has clarified a critical threshold for access to India’s formal MSME debt restructuring framework, holding that eligibility is determined by the sanctioned loan limit, not the outstanding dues. This ruling resolves a long-standing ambiguity in banking practice and has immediate implications for lenders and distressed enterprises alike.
Background & Facts
The Dispute
Vardhan Agro Processing Limited, a registered Micro, Small and Medium Enterprise under the Micro, Small and Medium Enterprises Development Act, 2006, sought judicial intervention to compel Union Bank of India to refer its stressed loan account to the RBI’s Framework for Revival and Rehabilitation of MSMEs. The petitioner claimed eligibility under the Framework, arguing that its outstanding exposure of approximately Rs.19.75 crores fell below the Rs.25 crore threshold. The bank, however, rejected this claim, asserting that the term loan facility extended to the petitioner was Rs.30 crores - exceeding the eligibility limit.
Procedural History
- March 2022: Petitioner first requested loan restructuring citing pandemic-related stress.
- July 2023: Loan account declared Non-Performing Asset (NPA) after repeated defaults.
- July - October 2023: Bank issued notices under Section 13(2) and 13(4) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
- September 2024: Bank offered alternative restructuring via a Trust Retention Account (TRA) with 15% revenue deduction, which the petitioner failed to comply with.
- May 2025: For the first time, petitioner explicitly invoked the RBI Framework in email communications, after the bank had initiated proceedings under the Insolvency and Bankruptcy Code, 2016.
Relief Sought
The petitioners sought a direction to the bank to refer their account to the RBI-mandated Committee for restructuring under the Framework, and to stay all proceedings under the Securitization Act and IBC.
The Legal Issue
The central question was whether eligibility for the RBI’s Framework for Revival and Rehabilitation of MSMEs is determined by the sanctioned loan limit or the outstanding exposure, and whether the bank was obligated to initiate restructuring proceedings suo moto despite the borrower’s failure to substantiate eligibility with documentation.
Arguments Presented
For the Petitioner
The petitioners relied on Pro Knits v. Board of Directors of Canara Bank (2024) and Shri Shri Swami Samarth v. NKGSB Co-op. Bank (2025), arguing that banks must proactively assess MSME eligibility before declaring an account NPA. They contended that the term ‘exposure’ under RBI’s Master Circular dated 01.07.2015 refers to outstanding dues, not sanctioned limits. Since the outstanding amount was below Rs.25 crores, they claimed automatic entitlement to the Framework. They further argued that the bank’s failure to communicate its interpretation of eligibility until litigation amounted to procedural unfairness.
For the Respondent
The bank and RBI countered that the Framework’s eligibility clause explicitly refers to ‘loan limits up to Rs.25 crores’, and that the definition of ‘exposure’ in the Master Circular pertains to prudential norms for asset classification, not eligibility criteria. They emphasized that the petitioner’s total sanctioned facilities - including Covid loans, pledge loans, and guarantees - amounted to Rs.87.51 crores, clearly exceeding the Framework’s scope. They also highlighted the petitioner’s non-compliance with the TRA facility, demonstrating bad faith and undermining any claim to equitable relief.
The Court's Analysis
The Court undertook a detailed textual and contextual analysis of the RBI’s Framework dated 17.03.2016, the Master Circular on Exposure Norms dated 01.07.2015, and the Union Government’s Notification dated 29.05.2015. It found that while the Master Circular defines exposure as the higher of sanctioned limit or outstanding amount, the Framework’s eligibility clause unambiguously ties access to the loan limit, not the outstanding balance.
"The eligibility of an MSME under the Framework is determined by the loan limit and not by the outstanding amount. To interpret exposure as outstanding dues would render the specific eligibility clause of the Framework redundant and contrary to its stated purpose."
The Court distinguished the Supreme Court’s rulings in Pro Knits and Shri Shri Swami Samarth, noting that those cases applied only to eligible MSMEs. The Court held that the duty to examine eligibility arises only when the borrower qualifies under the Framework’s criteria. Since the petitioner’s sanctioned loan exceeded Rs.25 crores, the bank was under no obligation to invoke the Framework.
The Court further rejected the petitioner’s argument that the bank’s silence on eligibility until litigation constituted waiver. It emphasized that the petitioner never submitted an affidavit or detailed documentation as required under the Framework, and instead delayed asserting its claim until after the bank had initiated recovery proceedings. The Court noted that the petitioner’s conduct - particularly its failure to route revenue through the TRA Account - demonstrated a lack of bona fides.
The Verdict
The petitioners’ writ petition was dismissed. The Court held that eligibility for the RBI’s MSME revival framework is determined by the sanctioned loan limit, not the outstanding exposure, and that banks are not obligated to initiate restructuring for borrowers who exceed the Rs.25 crore loan limit. The bank’s actions under the Securitization Act and IBC were upheld as lawful.
What This Means For Similar Cases
Loan Limit Is the Sole Eligibility Criterion
- Practitioners must now assess sanctioned loan amount, not outstanding dues, when advising MSME clients on restructuring eligibility.
- Any claim under the RBI Framework must be grounded in the original loan facility limit, not subsequent repayments or restructuring offers.
- Banks may lawfully deny Framework access if the sanctioned limit exceeds Rs.25 crores, regardless of current outstanding balance.
Documentation and Timeliness Are Non-Negotiable
- MSMEs must submit affidavits and detailed financials at the first sign of stress to invoke the Framework.
- Delayed assertions, especially after NPA declaration or IBC filing, will not be entertained.
- Courts will view non-compliance with alternative restructuring offers (e.g., TRA accounts) as evidence of bad faith.
Banks May Proceed Without Sua Sponte Review for Ineligible MSMEs
- Banks are not required to conduct a suo moto eligibility review for borrowers whose sanctioned loans exceed Rs.25 crores.
- Once an account is classified as NPA, banks may proceed under Securitization Act or IBC without violating Pro Knits, provided the borrower is not eligible under the Framework.
- The burden of proving eligibility rests squarely on the borrower, not the lender.
