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Declaring the accounts as NPA is unreasonable and in violation of RBI Circulars with statutory force

The Calcutta High Court Single Bench of Justice Moushumi Bhattacharya was hearing a petition of the borrower against the action taken by the bank under the SARFAESI Act and held that the petitioner was eligible for loan restructuring under Resolution Framework 2.0, and the respondent bank's failure to consider their applications and representations before declaring the accounts as non-performing assets (NPA) was unreasonable and in violation of RBI Circulars with statutory force.

The High Court observed that the petitioner, referred to as petitioner no. 1, was eligible for restructuring under both R.F. 1.0 and R.F. 2.0, as indicated in Clause 2(iv) of R.F. 2.0. The petitioner's accounts were classified as "standard assets" as of March 31, 2021, even though they were declared non-performing assets (NPA) on November 29, 2021.

The respondent bank's failure to consider the petitioner's applications contradicts the purpose of R.F. 2.0, which was designed as a one-time restructuring measure. The petitioner complied with the time limit specified in R.F. 2.0 for invoking restructuring, submitting their applications well within the specified timeframe, the HC noted.

The High Court noted that the respondent bank did not consider any of the representations made by the petitioner regarding R.F. 2.0 or the ECLGS Loan before declaring the accounts as NPA. Additionally, representations made between December 1, 2021, and February 10, 2022, were also not considered by the bank in accordance with R.F. 2.0.

It was also considered that the R.F. 2.0 is described as a "Circular" and was issued in response to the financial difficulties faced by MSMEs due to the COVID-19 pandemic. RBI Circulars, including R.F. 2.0, have statutory force and banks are obligated to comply with their provisions.

It is pertinent to mention that the respondent bank's claim that further credit facilities were rejected due to the non-perfection of the security interest is contradicted by the petitioner's circumstances, including the death of the petitioner's wife and subsequent legal proceedings to perfect the security interest.

Considering the facts presented, the High Court believes that both parties would benefit if the bank allows the petitioners to service their loans, given the changed circumstances. The court finds the bank's actions unreasonable and lacking proper application of mind and discretion.

As a result, the High Court granted relief to the petitioners. The impugned notice issued under the SARFAESI Act was quashed, and the bank was directed to reconsider the restructuring of the petitioner's loans under R.F. 2.0. The bank should also assess the petitioner's eligibility for the ECLGS Loan based on the changed circumstances. The bank was given a period of 10 weeks to complete these actions.

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