The Himachal Pradesh High Court has held that a bank's decision to extend a loan moratorium beyond the period prescribed under the Reserve Bank of India's COVID-19 relief measures cannot override RBI's prudential norms on classifying loan accounts as Non-Performing Assets (NPAs). The ruling came on a petition by M/s Nanal Hydro Power Consultancy Pvt. Ltd., a hydro power project developer, challenging the Himachal Pradesh State Co-operative Bank's classification of its loan account as NPA from November 2021 instead of November 2020.

Justice Sandeep Sharma directed the bank to consider the petitioner's One Time Settlement (OTS) proposal under the 2024 scheme, treating the loan account as NPA from November 2020, subject to the petitioner filing an application. The court observed that the bank could not use its extension of the moratorium after the RBI-prescribed period to argue that the borrower waived its right to proper NPA classification.

The Dispute Over NPA Classification

The petitioner had availed a term loan of ₹20.41 crore from the Himachal Pradesh State Co-operative Bank for developing a 3.30 MW small hydroelectric project in Chamba. The loan was to be repaid in 144 monthly installments of ₹36.69 lakh each, starting November 2019. In February 2020, two installments fell overdue, and by November 2020, the account had three continuous defaults. Despite this, the bank classified the account as NPA only on November 6, 2021.

The borrower contended that as per RBI's income recognition and asset classification (IRAC) norms, an account becomes NPA after 90 days of continuous default. It argued that since defaults occurred in September, October, and November 2020, the account should have been classified as NPA in November 2020 itself. The bank, however, claimed that after the RBI's moratorium from March to August 2020, the borrower requested an extension of the moratorium, which the bank granted, and therefore there was no occasion to declare the account NPA in November 2020.

Court Rejects Bank's Stance

Justice Sandeep Sharma rejected the bank's argument, holding that "Mere acceding to the request, if any made by the petitioner for extension of moratorium period after expiry of moratorium period granted by Reserve Bank of India vide circulars dated 27.03.2020 and 23.05.2020 cannot be a ground for the respondent-Bank to claim that petitioner by asking for a period of moratorium , itself waived off its right, if any, of its being declared as NPA in terms of instruction issued by RBI, which is the apex body as far as banking is concerned."

The court noted that the bank had no authority to extend the moratorium beyond the RBI's circulars, but even if it had such authority under its own policy, it could not override the mandatory RBI guidelines requiring NPA classification after 90 days of continuous default . "Once regulations issued by RBI clearly provide that loan account becomes irregular on account of continuous default for three months, coupled with the fact that petitioner herein failed to pay three installments for the month of September, October and November 2020 , it was bounden duty of the respondent-Bank to classify/mark the same as NPA," the court observed.

Statutory Auditor Opinion Prevails

A significant aspect of the case was the bank's handling of expert opinions. The statutory auditor of the bank, after examining the records, categorically opined that the loan account should have been classified as NPA in November 2020. However, the bank ignored this opinion and instead obtained an opinion from a private chartered accountant, which the court found to be "inconclusive." The court noted that the bank's own internal notings initially agreed with the statutory auditor, but the matter was later referred to the private CA for "totally unjustified reasons."

The court also relied on the OTS scheme's clause 2, which states that if there is a discrepancy in the NPA date between the Core Banking System (CBS) and the statutory auditor 's report, the auditor's report shall be deemed final. "However, in the instant case, respondent-Bank conveniently ignored aforesaid provision contained in the Scheme and proceeded to rely upon the opinion rendered by Private Chartered Accountant, which is otherwise inconclusive," the court remarked.

Operative Direction

The court clarified that while the petitioner is eligible for OTS even under the bank's incorrect NPA date of November 2021, classifying the account as NPA from November 2020 would reduce the interest burden for the borrower. "No doubt, on account of grant of relief as per the instant petition, respondent-Bank may lose interest of one year, but that cannot be a ground to reject the rightful claim of the petitioner," Justice Sharma held.

The court allowed the petition and directed the bank to consider the petitioner's case for OTS under the 2024 scheme, treating the loan account as NPA from November 2020. The bank must now process the petitioner's application, if filed, in accordance with the scheme's provisions, recognizing the correct date of classification as determined by the court.