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Rahul D (Executive )     22 December 2011

Writ to challenge NPA classification prior to sarfaesi 13(2)

Hi Friends, 

I am looking into a specific file. Suppose a borrower have been classified as NPA, but has not been handed the demand notice yet u/s 13(2) of SARFAESI. 

  • Can the borrower now file a writ application questioning the NPA classification itself?
  • Can the borrower claim that the restructuring was done at excessive interest rates & unrealistic repayment schedules (though the borrower had accepted both in writing in sanction letters) and hence the NPA? How strong would this ground be?
  • Or would the above be dismissed with a view of alternate remedy being present in the form of DRT, even though the SARFAESI actions i.e. demand notice has not been served yet?

Look forward to your views and discussion on this interesting topic. 


 19 Replies

N.K.Assumi (Advocate)     23 December 2011

Although the availability of alternate remedy is no ground to entertain writ petition, in such case it is better to exhaust the proceures laid down under SARFAESI read with DRT.

DEFENSE ADVOCATE.-firmaction@g (POWER OF DEFENSE IS IMMENSE )     23 December 2011

Why bother for writ it will take lot of time and no locus standi.

Instead wait for notice , create as many objections as possible and obstruct physical possession for which you can go lower courts also bypassing DRT.


One account is classifed as NPA itself will not start the SARFAESI Proceedings.  The SARFAESI Proceedings will start from the 13 (2) notice only.  Whileso, prior to the notice, the DRT has no power under SARFAESI Act.

Rahul D (Executive )     24 December 2011

JSDN, thanks for your response. After getting the notice, isn't it the normal practice for any court to dismiss the writ and pass the case to DRT on the grounds that an alternative remedy exists. 

Rahul D (Executive )     24 December 2011

Mr. Kamraj, Thanks for your response. So I understand that it is good to file a writ before sarfaesi notice has been produced by the financial institutioin. In that case, would like to know about my second point:

"Can the borrower claim that the restructuring was done at excessive interest rates & unrealistic repayment schedules (though the borrower had accepted both in writing in sanction letters) and hence the NPA? How strong would this ground be?"


Nadeem Qureshi (Advocate/     25 December 2011

Dear Rahul

you can file a writ p[etition before HC & send a complaint/application to RBI in relation with your second query. RBI is the concerned authority who take action against the banks/fi.

feel free to call

narendra.s.p (Chief Manager(Law))     26 December 2011

Hi Rahul,

To challenge clasification of NPA definition in RBI circular, there is no requirement that the Bank should have initiated action under SARFAESI. Even on the basis demand notice issued to you, you can question the virus of RBI circular. It is a ground ground to establish your locus standi to maintain Writ Petition. Grounds for challenging the defination of NPA as per RBI Circular is attached.

narendra.s.p (Chief Manager(Law))     26 December 2011

Grounds to challenge NPA Defination:



The classification of Loan account as NPA in SARFAESI Act is of paramount importance for initiating action for recovery of loans by the Banks for enforcement of its "security interest" under the provision chapter III of the Act.


Section 2(p) of SARFAESI Act prescribes publication in Official Gazette.

Under sub section (o) of section 2 of the SARFAESI Act,2002, the authority to define NPA is delegated to RBI. RBI has defined NPA at clause 2 of its Master Circular NoRBI/2011-12/66 : DBOD.No.BP.BC.12/21.04.048/2011-12 dated. July 1, 2011

Thus RBI is a delegated authority for defining NPA.


RBI has issued Master circular defining NPA. This circular is not published in Official gazatte. In such a situation: Whether the ratio laid down by the Honourable Supreme Court in Harala Vs. State of Rajasthan reported in AIR 1951 SC 467 is applicable in respect of the RBI Masater circular. 



Does the definition of NPA in the RBI master circular satisfy the rigor of law?


1. The delegated legislation requires to be published in the Gazzette of India


The Supreme Court has settled the issue by holding that publication in Official Gazette is a mandatory requirement in Harla v. State of Rajasthan, AIR 1951 SC 467. The sub-delegate should not act beyond the scope of the power delegated to him, the sub-delegation should not be vague and should be canalized, and sub-delegated legislation should be mandatorily published to be operative. (Narendra Kumar v. Union of India, AIR 1960 SC 430)



2. The delegated legislation should be consistent and uniform in its application.


Skeletal Legislation: Skeletal legislation’ denotes a statute which delegates legislative power without laying down sufficient policy for the guidance of the delegatee. While such legislation should be invalid as it violates the principles of delegation, in modern practice there are a number of statutes which lay down only the barest possible policy guidance and leave enormous discretion to the delegatee not only on matters of detail, but also on matters of policy choice. Courts sometimes uphold skeletal legislation, which can only be justified on the ground of expediency.


The delegated authority must only implement stated policy, but if there is abdication of legislative power by transferring policy formulation role to the delegate, then there is excessive delegation, which will be invalidated by the court. (Mahe Beach Trading Co. v. Union Territory of Pondicherry, (1996) 3 SCC 741)


Put simply, the test is to examine whether the policy has been fixed by the legislature, and the delegated authority has been given sufficient guidance and channeliation for exercise of power of delegated legislation (Consumer Action Group v. State of Tamil Nadu, (2002) 7 SC 425). This guidance may be found in the enabling provision which permits delegation, subject-matter, scheme, other provisions of the Statute including its preamble, and the facts and circumstances in the background of which the Statute is enacted.


The stated purpose of NPA in the master circular of RBI is to implement prudential norms. Since the comming into force of the SARFAESI Act, RBI has been modifying its prudential norms by issuing master circulars from time to time. The treatment of NPA differs in its application depending on the nature of loan. The master circular provides guidelines for classification of “asset” as NPA, which is used by the Banks to enforce their security interest.

Eg. For a same amount of loan granted to an agriculturist, the date of NPA would differ if the loan were to be granted for Trading activity.


The present definition of NPA in master circulars issued by RBI lacks an element of certainty required for adopting it as a delegated legislation for the purpose of SARFAESI Act.    


Conclusion: NPA defined by RBI in its master circular would be a skeletal legislation for the purpose of SARFAESI Act.


Also Refered :

Law Commission Of India Report:

The 16th Report on the General Clauses Act, 1897


Chapter 12 (pages from 76 to 86)


1 Like

Saibal Guha Roy (Advocate)     28 December 2011

I do not think that the alibi of faulty restructuring will hold good. Courts usually do not get into contracts between Bank and borrower unless fraud, violation of law etc. is involved. There are many judgements regarding non - interference by Courets into such contracts.

Rahul D (Executive )     29 December 2011

Mr. Saibal,

Thanks for your response. I understand your point. Surely there wasnt any fraud here, but I believe there was "violation"  of  the RBI guidelines as in "Prudential Guidelines on Restructuring of Advances by Banks" Dt. 27.08.08 which states that:

"3.1.4 No account will be taken up for restructuring by the banks unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package. The viability should be determined by the banks based on the acceptable viability benchmarks determined by them, which may be applied on a case-by-case basis, depending on merits of each case. The accounts not considered viable should not be restructured and banks should accelerate the recovery measures in respect of such accounts. Any restructuring done without looking into cash flows of the borrower and assessing the viability of the projects / activity financed by banks would be treated as an attempt at ever greening a weak credit facility and would invite supervisory concerns/action."

As such the said resyrtucturing was done by bank at exorbitant interest rates without looking into the actual cash flows of the company which dint justify such rates & repayment terms. Hence the resulting NPA classification due to such wrong restructuring done, not as per RBI guidelines. 

Would the court now interfere based on this violation of RBI guidelines by the bank?

RAJU O.F., (Advocate)     30 December 2011

You may try your luck before High Court by preferring Writ.  Till possession notice u/S. 13(4) is issued under SARFAESI Act you cannot approach DRT. 

1 Like

Saibal Guha Roy (Advocate)     30 December 2011

I can understand the point you are trying to make. As I do not have the requisite papers, I will reply on the basis of certain assumptions;

a) TEV study was done OR company prepared the restructuring proposal including cash flows.

b) Discussions were held withe Company with documentary evidence prior to finalisation.


If you look at the operative part of the paragraph, RBI has left the determination of viability benchmarks to the discretion of the Banks and further relaxation on CASE TO CASE BASIS. The Bank will say that the projections were made on the basis of TEV study and data provided by Borrower. The Banks contention would in all probability be that u are now questioning the same data/projections which were made on the basis of your past records and future projections made by u. 

I can understand ur predicament. The fact is that restructuring is a farce in most cases. The packages are made by reverse calculation. The EBIDTA level at which bank is happy is first determined and the figures are reverse engineered to make the projections. The Borrower is given a take it or leave it and face recovey measures options. Of course this are not documented. The problem lies with the fact that while SARFAESI Act has been enacted, the Lenders Liability Bill is nowhere in sight.

However, if my assumptions are not correct, or u need more clarifications, please feel free to contact me on +919830605742

1 Like

Siddharth Kulkarni (Legal Advisor)     02 January 2012

Exactly Mr.Roy, the courts are reluctant to interfere into the recovery proceedings initiated under the Securitisation Act unless the petitioners availed all the alternative remedies and unless there is gross irregularity on the part of secured creditor. The law is very much clear on this issue. You can refer to the Mardia Chemicals Vs Union of India. Further classification of an account as NPA is internal matter of the Bank. Thus the possibility of getting relief under writ jurisdiction from any High Court is remote. Better you should wait for the notice u/s 13 (2) and raise as many objections as you can.

1 Like

subodhkumar (proprietor)     23 January 2012

hello'rahul d

from above all suggestions and discussion on the subject matter it would really better to write a letter to the bank itself and mark copies to the rbi and your points are valid you need not wait till notice of 13(2) of sarfeasi act is served no, you write to the bank all your say and it is there duty to respond to the issue and clarify upto your satisfaction only then they will proceed even if they proceed you will have good waitage to your issue at later stage which will be good and better option than filing writ in hc since it is the inner mechanisim of the bank has to come clean on th issue first.



1 Like

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