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Supreme Court: Interest Accumulated in After NPA Classification Remains Recoverable Debt
In a significant ruling for the banking sector, the on Wednesday held that interest transferred to a separate after a loan account is classified as a continues to form part of the "debt" recoverable by banks. A bench of Justice Sanjay Kumar and Justice Sanjeev Sachdeva allowed Punjab National Bank's (PNB) appeal against the 's decision that had directed the bank to accept a lower amount as full settlement, ignoring the interest component maintained in the .
A Battle Over a ₹5 Crore Loan
The dispute traces back to , when (now amalgamated with PNB) sanctioned a ₹5 crore loan to M/s. Shree Jyoti Education and Management Trust World for construction of a college building. The loan account was classified as an NPA on , and recovery proceedings were initiated before the . The DRT allowed recovery of only ₹1.83 lakh, but on appeal, the recalculated the dues at ₹54.90 lakh, along with simple interest at 9% per annum.
The Trust challenged the DRAT's order before the , which relied heavily on a certificate issued by PNB on stating that the outstanding amount stood at ₹31.99 lakh. The High Court directed the bank to accept ₹29.55 lakh as , overlooking the interest that had accumulated in a separate since the NPA classification.
The Core Legal Question
The key issue before the Supreme Court was whether interest credited to a after NPA classification—which is not reflected in the regular loan account statement—remains recoverable as part of the debt. The Court answered in the affirmative, relying on , which defines "debt" to include any liability "inclusive of interest".
The Court observed that the banking accounting system requires interest to be transferred to a
once an account becomes an NPA, but this does not extinguish the liability.
"The Trust and its trustees cannot blithely ignore the accounting system followed by banks and come up with different calculations at different points of time to suit their own interests,"
the Court remarked.
Rejecting the High Court's Oversimplification
The Supreme Court found the High Court's approach fundamentally flawed. The certificate dated
, which the High Court treated as the final word, did not include the interest component held in the
.
"Oversimplification of calculation by the High Court with respect to the amount payable, ignoring the existence of the
for the interest component since the date of classification of the loan account as a non-performing asset, and giving effect only to the figure mentioned in the PNB's certificate... is clearly unsustainable,"
the Court held.
The Court also noted that the Trust had taken inconsistent positions—before the DRT it had admitted a higher liability, but before the High Court it sought to rely on the certificate to reduce its dues. Such self-serving calculations, the Court said, were "patently erroneous and mischievous".
Restoring the DRAT's Decision
The Supreme Court set aside the High Court's orders dated and , and restored the DRAT's order of . PNB is now entitled to recover the of ₹54,90,413, along with simple interest at 9% per annum from till realisation, after giving credit to any payments made by the Trust after that date.
The judgment also cites the Constitution Bench decision in Central Bank of India v. Ravindra (2002), which affirmed that interest can be capitalised and treated as part of the principal sum due. The Court underscored that the mere placement of interest in a does not alter its character as an .
Key Observations
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"PNB is entitled to claim the interest due, which was calculated and maintained in a separate , in addition to the outstanding principal loan amount."
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"The Trust and its trustees cannot blithely ignore the accounting system followed by banks and come up with different calculations at different points of time to suit their own interests."
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"Oversimplification of calculation by the High Court... is clearly unsustainable."
Implications
This ruling provides clarity for banks recovering dues from NPA accounts—interest in suspense accounts remains legally recoverable. Borrowers cannot rely on certificates that reflect only the principal component to claim a reduced settlement. The decision reinforces the statutory definition of "debt" under the and aligns with the 's accounting guidelines, ensuring banks are not short-changed in recovery proceedings.
