Can NPA Be Declared During COVID for Non-Financial Reasons?

In the midst of the COVID-19 pandemic, many borrowers faced unprecedented challenges due to lockdowns, business disruptions, and economic uncertainty. A common question arose: Can NPA be done during COVID for non-financial reasons? In other words, could banks classify loan accounts as Non-Performing Assets (NPAs) based solely on external factors like pandemic restrictions, without evidence of repayment default?

This blog post delves into the legal framework, RBI guidelines, and judicial precedents to provide clarity. While external events like COVID-19 influenced regulatory relief measures, they did not fundamentally alter the criteria for NPA classification. Note: This is general information based on available legal documents and is not specific legal advice. Consult a qualified professional for your situation.

Main Legal Finding

Generally, non-financial reasons such as the COVID-19 pandemic or lockdown restrictions do not, in themselves, constitute grounds for declaring a loan account as NPA. The classification primarily hinges on default in repayment obligations and adherence to prescribed asset classification norms, rather than external circumstances. 2021 0 Supreme(Jhk) 453 2021 0 Supreme(Jhk) 480

RBI circulars and court judgments emphasize that NPA status is determined by overdue periods and recovery records, not pandemics or similar events. For instance, accounts become NPAs if they remain out of order or overdue beyond specified periods, such as 90 days for cash credit facilities. 2021 0 Supreme(Jhk) 480

Key Points on NPA Classification

• Core Criterion is Default: NPA classification relies on factual default in repayment, not external factors. 2021 0 Supreme(Jhk) 453
• RBI Focus on Overdues: Regulations prioritize overdue status and borrower-wise classification, irrespective of non-financial reasons. 2021 0 Supreme(Jhk) 480
• Judicial Stance: Courts have ruled that NPA must comply with RBI norms based on default, even during COVID-19. 2022 0 Supreme(Raj) 128 2021 0 Supreme(Jhk) 480
• Pandemic Relief, Not Reclassification: COVID measures suspended classifications temporarily but did not base NPAs on lockdowns alone. 2021 0 Supreme(Jhk) 453

Detailed Analysis of Asset Classification Norms

1. Fundamental Principles of NPA

Under RBI's Master Circular on Prudential Norms, asset classification depends on the record of recovery and overdue amounts. An account is typically classified as NPA if interest or principal remains overdue for more than 90 days. This borrower-wise approach ignores facility-specific issues unless specified otherwise. 2021 0 Supreme(Jhk) 453 2021 0 Supreme(Jhk) 480

As noted in key documents, the account becomes NPA if the account remains out of order or overdue beyond specified periods (e.g., 90 days for cash credit). 2021 0 Supreme(Jhk) 480

2. RBI's Response to COVID-19

The RBI issued circulars on 27.03.2020, 17.04.2020, and 23.05.2020, granting moratoriums and suspending fresh NPA classifications during the period. These measures preserved the asset status as on 01.03.2020, provided no new defaults occurred post-moratorium. 2021 0 Supreme(Jhk) 453

The circulars explicitly mention that the classification of accounts as NPA would be maintained as on 01.03.2020 or as per the existing norms, unless there was a default in repayment. 2021 0 Supreme(Jhk) 453

Judgments affirm this: During COVID, regulatory intent was to maintain status quo absent repayment defaults. 2022 0 Supreme(Raj) 128 2021 0 Supreme(Jhk) 480

3. Judicial Precedents and Non-Financial Reasons

Courts consistently hold that external factors do not justify NPA without default. In one case, asset classification hinges on overdue periods and default status, not external or non-financial reasons. 2022 0 Supreme(Raj) 128 2021 0 Supreme(Jhk) 480

For example, in 2023 0 Supreme(Raj) 2295, a borrower challenged NPA declaration amid pandemic hardships and a restructuring application. The court dismissed the writ petition, noting statutory remedies under SARFAESI Act and Debt Recovery Tribunal, and reiterated that High Courts intervene only in exceptional cases. The court found no extraordinary circumstances to entertain the writ petition given the existence of a statutory remedy before the Debt Recovery Tribunal. 2023 0 Supreme(Raj) 2295

Similarly, 2024 0 Supreme(Cal) 1217 upheld NPA classification where borrowers failed to respond to notices, validating asset transfers. The court established that non-response to NPA classification notices implies acceptance, validating subsequent asset transfer actions by lenders under the SARFAESI Act. 2024 0 Supreme(Cal) 1217

In 2026 Supreme(Online)(NCLT) 558, it was held that upon classification of account as Non Performing Asset, the whole of the debt is due and payable. Thus, the date of NPA can be taken as the date of default as the default persisting 90 days prior to the classification. This underscores default as the trigger, not external events.

Other cases like 2025 0 Supreme(Ori) 699 highlight procedural fairness but affirm NPA based on non-compliance and irregularity, not solely non-financial stress.

4. Exceptions, Limitations, and Tax Implications

While COVID prompted restructuring, it did not convert non-defaulted accounts to NPAs. External factors like Covid-19 can influence the decision to grant restructuring or relief but do not, by themselves, convert a non-defaulted account into NPA. 2021 0 Supreme(Jhk) 453

Tax-related judgments reinforce RBI norms' primacy. In 2018 0 Supreme(P&H) 4489 and 2018 0 Supreme(Del) 382, RBI directions override other principles for income recognition on NPAs, ensuring true and correct profits by disclosing NPAs properly. They force the NBFCs to disclose the amount of NPA in their financial accounts. 2018 0 Supreme(P&H) 4489

Interest on NPAs is taxable on receipt, not accrual, per Section 43D of the Income Tax Act, aligning with RBI guidelines to preserve liquidity. 2018 0 Supreme(P&H) 4489

Cases like

GEOMAX MINES AND MINERALS PVT LTD THROUGH ITS MANAGING DIRECTOR CHAVA VENUGOPAL vs UNION OF INDIA THROUGH SECRETARY MINISTRY OF FINANCE

Practical Recommendations for Borrowers and Lenders

• For Banks: Strictly follow RBI norms; base NPA on overdues and defaults, documenting compliance. 2021 0 Supreme(Jhk) 453
• For Borrowers: Challenge NPA by proving no default; leverage statutory remedies like DRT before writs. 2023 0 Supreme(Raj) 2295
• Documentation: In crises like COVID, record restructuring requests and delays, but recognize default triggers classification. 2024 0 Supreme(Cal) 1217
• Restructuring: Pandemic-era proposals were considered, but non-response led to upheld NPAs. 2025 0 Supreme(Ori) 699

Conclusion and Key Takeaways

In summary, NPA classification during COVID-19 cannot rely solely on non-financial reasons. It requires proven repayment default per RBI norms. While moratoriums offered relief, they preserved pre-existing statuses without excusing ongoing obligations.

Key Takeaways:- Default, not pandemics, drives NPA. 2021 0 Supreme(Jhk) 480- Courts prioritize RBI compliance and statutory remedies. 2023 0 Supreme(Raj) 2295- External factors aid restructuring but not reclassification.

Borrowers facing similar issues should review account status meticulously and seek expert guidance. Stay informed on evolving RBI circulars for prudent financial management.

References:1. 2021 0 Supreme(Jhk) 453 - RBI Circulars on COVID relief.2. 2022 0 Supreme(Raj) 128 - Judicial views on classification.3. 2021 0 Supreme(Jhk) 480 - Default criteria affirmed.4. 2023 0 Supreme(Raj) 2295, 2024 0 Supreme(Cal) 1217, and others as cited.