Banks must follow statutory frameworks for classifying MSME loans as NPAs, ensuring adherence to regulations before taking coercive actions.

ORDER :

This matter is taken up through Hybrid arrangement (video conferencing/physical mode).

2. Mr. R.P. Kar, learned Senior Advocate files his appearance memo, which is taken on record.

3. Mr. D.K. Mohapatra, learned counsel and his associates files power for the State Bank of India, which is also taken on record.

4. This writ petition has been filed by the petitioners with the following prayer:

I. Quashing the action of classification of loan account as NPA by opp. party no.3 vide letter dated 02.05.2025;

II. Setting aside the SARFAESI recovery proceedings initiated under section 13 of the SARFAESI Act by State Bank of India against the petitioner through a demand notice issued on 29.05.2025 under section 13(2) of the said Act;

III. Declaring that the petitioner being an MSME within the meaning of sections 7 and 8 of the MSMED Act , 2006, it is entitled to the benefits of the said Act and, in particularly, the notification S.O.1432(E) dated 29.05.2015 issued by the opp. party no.8 under section 9 of the Act which provides for a mechanism of resolution of stress of MSMEs, as also, the circulars and guidelines;

IV. Directing the opp. parties Bank authorities to follow the prescribed framework for rehabilitation and revival of the stressed petitioner’s account in terms of the MSME Notification and RBI Circular and Master Directions, 2016;

V. Directing SBI to constitute a committee for the resolution of the stressed petitioner concern, an MSME, as contemplated in paragraph 2 of the ‘Framework’ dated 29.05.2015, and further to direct the committee to resolve the stress in accordance with the said notification and RBI Circular and Master Directions, 2016;

VI. Directing opp. parties no.8 to 10 to enforce the notification dated 29.05.2015 in its true letter and spirit and to ensure that recovery action initiated against the petitioners in violation of the mandate of the notification is recalled, and that the petitioners is compensated in full measure.

5. At the outset, learned counsel for the opp. parties brought to the notice of this Court that on 02.08.2025, the possession notice under section 13(4) has already been published in ‘The Times of India’ and he has filed the copy of the same, which is taken on record. He further submitted that prior to that the demand notice under section 13(2) was published and he has also filed the same, which is also taken on record.

6. Mr. Kar, learned Senior Advocate appearing for the petitioners submitted that the Bank authorities in stamping all the loan accounts of the petitioner as NPA vide demand notice dated 12.11.2024 and vide demand notice through paper publication dated 29.05.2025 was in clear violation of the Master Direction issued by the RBI as well as framing notified by MSME Department. He further submitted that the Central Govt. for the purpose of facilities in promotion and development of the Micro, Small and Medium Enterprises notified in gazette notification dated 29.05.2015, the framework before turning a loan account of MSME into non-performing asset (NPA) and the bank or the creditors are required to identify the incipient stress in the loan account by creating three sub-categories i.e. SMA-0, SMA-1 and SMA-2 and accordingly Mr. Kar submitted that the bank authorities acted in excess of jurisdiction as there are various statute mandated requirements as prescribed under the framework and Master Direction before proceeding against the account of the petitioner, which is a MSME registration firm and therefore, the action of the bank is violative of Article 14 of the Constitution of India and also illegally arresting the business operation violating Article 19(1)(g) of the Constitution of India. He further submitted that the Courts always insist upon disclosure of the reason in support of the administrative action and in the case in hand, the opp. party bank authorities have acted arbitrarily by not considering the petitioners case as per the framework and RBI Circular and Master Direction