Banks Must Follow 2015 Guidelines Before Declaring MSME Loans as NPAs: Supreme Court

New Delhi, Aug 2 (KNN) In a significant ruling, the Supreme Court of India has mandated that banks and Non-Banking Financial Companies (NBFCs) must adhere to the government's 2015 framework before classifying loans to Micro, Small, and Medium Enterprises (MSMEs) as Non-Performing Assets (NPAs).

The court ruled that the 'Framework for Revival and Rehabilitation of MSME' from 2015 and subsequent Reserve Bank of India (RBI) directions have statutory force. This means that all scheduled commercial banks licensed to operate in India by the RBI are bound by these regulations.

According to the ruling, banks must identify "incipient stress" in MSME accounts before classifying them as NPAs. This process involves creating three sub-categories under the "Special Mention Account" to detect early signs of financial distress.

The court emphasised that MSMEs must provide authenticated documents to prove their status under the Micro, Small and Medium Enterprises Development (MSMED) Act.

This requirement is crucial for MSMEs seeking to avail themselves of the protections offered by the framework.

Notably, this verdict overturns a previous Bombay High Court order that deemed the 2015 framework non-mandatory.

The Supreme Court termed the High Court's finding as "highly erroneous," reinforcing the binding nature of the framework.

However, the court also clarified that if MSMEs fail to declare their status before NPA classification, banks can proceed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act.

This caveat ensures that enterprises cannot misuse the legal process by belatedly claiming MSME status.

This ruling aims to protect MSMEs while ensuring due diligence by financial institutions. It underscores the importance of early stress identification and rehabilitation efforts in the MSME sector, a crucial component of India's economy.

The verdict is expected to have far-reaching implications for both the banking sector and MSMEs, potentially altering the landscape of small business financing in India.

(KNN Bureau)