Hon'ble Ashwani Kumar Mishra,J.
(Delivered by Hon. Ashwani Kumar Mishra, J) Petitioner had availed of a term loan for an amount of Rs. 14 lakhs on 12.8.2011, which was to be repaid in 84 monthly instalments alongwith 16.50% rate of interest. A sanction letter, in this regard, dated 12.8.2011 has been enclosed as Annexure-1 to the writ petition. It seems that the petitioner defaulted in payment of instalments, on account of which proceedings under Securitization & Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter called as 'SRFAESI Act'), were invoked. A notice under Section 13 (2) of the SRFAESI Act dated 22.5.2013 was issued to the petitioner, calling upon him to repay a sum of Rs. 16,91,305/-, which was stated to be due from the petitioner as on 30.3.2013. It is not in dispute that the petitioner actually deposited a sum of Rs. 17 lakhs on 29.8.2013 in the loan account. The petitioner, therefore, claims that he has already deposited the amount demanded by the bank and, therefore, the petitioner is not liable to pay a sum of Rs. 1.75 lakh further to the bank and that the petitioner is entitled to issuance of No Dues Certificate from the Bank. It is further claimed that the title deeds kept as mortgage in respect of immovable assets of petitioner is also liable to be returned.
While entertaining the writ petition a counter affidavit was called. Respondent Bank has filed an affidavit, stating therein, that the petitioner had defaulted in repayment of loan amount in instalments. The petitioner's loan account, consequently, was declared as ' Non Performing Assets' (hereinafter referred to as 'NPA') on 28.2.2013. According to the respondent-bank, the interest payable by the petitioner after 28.2.2013 had not been charged from the petitioner as the loan account itself has become NPA. It is, however, claimed that once the loan account got regularised, the petitioner is liable to pay upto date interest due, apart from the other miscellaneous expenses and only thereafter, the bank will issue a No Dues Certificate and would release the title documents.
We have heard Sri K.K. Tripathi, learned counsel for the petitioner and Sri Sanjay Singh, learned counsel for the respondent-Bank.
The short question, which arises for consideration in the present petition, is as to whether the Bank is entitled to charge interest on a loan after it is declared as NPA ?
The liability to make payment of interest by the borrower to bank arises strictly in accordance with the loan agreement. The liability to pay interest continues to subsist so long as the dues are not cleared by the borrower. The mere fact that a loan account has been declared as NPA would not absolve the borrower from its liability of payment of interest to the bank, unless the law forbids it.
Reserve Bank of India has been constituted under Section 3 of the Reserve Bank of India Act, 1934. Its jurisdiction and authority is to lay down police and directions relating to advances to be followed by banking Companies under Section 21 of the Banking Regulations Act, 1949. Under sub section 21(3) of the Act, every Banking Company is under obligation to comply with the directions given to it by the Reserve Bank of India. Reserve Bank of India has issued a Master Circular on 1.7.2013, prescribing Prudential Norms of Income Recognition, Assets Classification and Provisions pertaining to advances for all Commercial banks (excluding Regional Rural Banks). The definition of Non Performing Assets has been provided under Clause 2.1. which reads as Under:-
"2.1 Non performing Assets 2.1.1 An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank.
2.1.2 A non performing asset (NPA) is a loan or an advance where;
i. interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan, ii. the account remains ''out of order' as indicated at paragraph 2.2 below, in respect of an Overdraft/Cash Credit (OD/CC), iii. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, iv. the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops, v. the instalment of principal or interest thereon remains overdue for one crop season for long duration crops, vi. the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.
vii. in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.
Clause -3 of the Circular defines Income Recognition and lays down the policy in respect thereof. Clause-3.1 of the circular is reproduced below:-
" 3.1 Income Recognition Policy 3.1.1 The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non -performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA. This will apply to Government guaranteed accounts also".
Clause-3.3 and 3.4 of the Circular are also relevant for the present purposes and are thus reproduced:-
"3.3 Appropriation of recovery in NPAs 3.3.1 Interest realised on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned.
3.3.2In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner.
3.4 Interest Application On an account turning NPA, banks should reverse the interest already charged and not collected by debiting Profit and Loss account, and stop further application of interest. However, banks may continue to record such accrued interest in a Memorandum account in their books. For the purpose of computing Gross Advances, interest recorded in the Memorandum account should not be taken into account".
By another circular of the same date, Reserved Bank of India has provided guidelines for assets classification and NPA. According to it, an asset becomes Non Performing, when it ceases to generate income for the bank. Clause-2.1.7, 3.1.1, 3.3.3 and 4.5.1 of the circular are also relevant and are reproduced:-
" 2.1.7 Charging of Interest at monthly rests
(i)Banks should charge interest at monthly rests in the context of adoption of 90 days norm for recognition of loan impairment w.e.f. from the year ended March 31, 2004 and consequential need for close monitoring of borrowers' accounts. However, the date of classification of an advance as NPA as stated in preceding paras, should not be changed on account of charging of interest at monthly basis.
(ii) The existing practice of charging / compounding of interest on agricultural advances would be linked to crop seasons and the instructions regarding charging of interest on monthly rests shall not be applicable to agricultural advances.
(iii) While compounding interest at monthly rests effective from April 1, 2003, banks should ensure that in respect of advances where administered interest rates are applicable, they should re-align the rates suitably keeping in view the minimum lending rate charged by the bank (in view of the freedom given to them for fixing lending rates) so that they comply with the same. In all other cases also, banks should ensure that the effective rate does not go up merely on account of the switchover to the system of charging interest on monthly rests.
(iv) Banks should take into consideration due date/s fixed on the basis of fluidity with borrowers and harvesting / marketing season while charging interest and compound the same if the loan / installment becomes overdue in respect of short duration crops and allied agricultural activities".
"3.1.1 Banks should classify their assets into the following broad groups, viz. -
(i) Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may fix a minimum cut-off point to decide what would constitute a high value account depending upon their respective business levels. The cut-off point should be valid for the entire accounting year.
(ii) Responsibility and validation levels for ensuring proper asset classification may be fixed by the bank.
(iii) The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extant guidelines.
(iv) RBI would continue to identify the divergences arising due to non-compliance, for fixing accountability. Where there is wilful non-compliance by the official responsible for classification and is well documented, RBI would initiate deterrent action including imposition of monetary penalties.
4.5.1 In case of NPAs where interest has not been received for 90 days or more, as a prudential norm, there is no use in debiting the said account by interest accrued in subsequent quarters and taking this accrued interest amount as income of the bank as the said interest is not being received. It is simultaneously desirable to show such accrued interest separately or park in a separate account so that interest receivable on such NPA account is computed and shown as such, though not accounted as income of the bank for the period".
From a perusal of the aforesaid provision, it is clear that charging of interest on an asset declared as NPA does not cease rather, for the convenience of the bank and particularly for the accounting purposes the amount of interest due in the loan account declared NPA, is not shown in the loan account and details thereof are to be maintained in a separate account. Since the interest accrued to the bank is treated as income for the bank, therefore, after the loan is declared as NPA, the recovery of interest is not likely to take place, as such the amount of interest due is not reflected in the loan account. The interest in the loan account nevertheless remains payable under the loan agreement and the circulars of the Reserve Bank of India, and the bank would be clearly entitled to realise the interest from the borrower once the loan account is regularised.
In the present case, the bank had not calculated the amount of interest due from the petitioner, after 28.2.2013, when the loan account became NPA. However, substantial dues got cleared in the loan account with the deposit of Rs. 17 lakhs by the petitioner on 29.8.2013. The loan account got regularised and the bank is thereafter well within its right to claim interest as per the agreement for the period during which the loan account remained NPA i.e. 28.2.2013 to 29.8.2013. The petitioner is also liable to pay other miscellaneous charges actually incurred by the bank, towards the loan account.
In view of the above, since the petitioner has not paid outstanding interest and other miscellaneous expenses towards the loan account, the bank is fully justified in demanding the interest which had fallen due as per the loan agreement to it, from the borrower, apart from other actual expenses incurred by the bank. The claim of the petitioner that he is entitled to a No Dues Certificate and return of title documents of the property kept as mortgage, with the bank, cannot be accepted. The petitioner, in term of the loan agreement is under an obligation to pay the balance amount of interest which has fallen due in terms of the loan agreement and also actual expenses incurred by the bank, and only thereafter, the bank would be liable to issue No Dues Certificate to the petitioner and return the title documents.
In view of the discussions and observations made above, present writ petition for the relief sought fails, and is hereby dismissed.
Order Dated: 9.9.2014 n.u.