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Yes Bank could not have classified a firm as Non-Performing Asset for failing to pay loan instalment due to COVID-19 crisis: Delhi HC

Aditi Singh

The Delhi High Court today prima facie opined that in view of the measures rolled out by the Reserve Bank of India (RBI) to ease the financial stress on borrowers, Yes Bank could not have classified a real-estate company which failed to pay January loan instalment due to COVID-19 financial crisis, as a non-performing asset. (Anant Raj Ltd vs Yes Bank)

The order was passed by a single Judge Bench of Justice Sanjeev Sachdeva.

The Petitioner had moved the High court seeking a direction to Yes Bank not to take any coercive steps against it, including declaring the account of the Petitioner as a Non-Performing Asset (NPA).

Between 2016 – 2018, Yes Bank extended loan facilities to the Petitioner for a sum of Rs 1570 crores. Out of this sum, the Petitioner claimed to have repaid about Rs 1056 crores apart from interest which ran into hundreds of crores.

The case of the Petitioner was that due to outbreak of COVID-19 and spread of the same across the globe in December 2019, the economic condition of the real-estate industry was adversely affected.

Petitioner stated that it had been regularly servicing the loans till December 31, 2019 but the January 1, 2020 instalment for repayment could not be paid because of the adverse economic conditions brought about by the effects of COVID-19 pandemic.

Yes Bank informed the Court that in terms of the Income Recognition and Asset Classification Guidelines (IRAC Guidelines) of the RBI, if an instalment was overdue by a period of 30 days, the borrower’s account was classified as Special Mention Account – 1 (SMA-1) and if the instalment was overdue by 60 days, the same was classified as Special Mention Account – 2(SMA-2).

In case the instalment became overdue by a period of 90 days, the account was classified as Non-performing Asset (NPA), it was added.

In view of the above, the Bank submitted that since the instalment was not paid till March 31, 2020, the account of the Petitioner was liable to be classified as NPA.

It was further stated that in terms of the IRAC Guidelines, banks have an automated system whereby the accounts are automatically classified by the system in the event of default.

In response, the Petitioner brought the Court’s attention to several guidelines and advisories issued by the RBI to give benefit to the borrowers and to ease the financial crisis borne out of the COVID-19 pandemic.

The Petitioner relied on the Statement of Development Regulatory Policy dated March 27, 2020. It was stated that the object of the policy issued by the RBI was to, inter-alia, ease the financial stress caused by COVID-19 disruptions by relaxing repayment pressures and improving the functioning of markets in view of the high volatility experienced with the onset and spread of the pandemic.

It was added that the COVID -19 Regulatory Package issued by RBI provided for rescheduling of the payments – term loans and working capital facilities as well as pausing the classification of accounts as pursuant to the economic fallout.

Reliance was also placed on a Frequently Asked Questions (FAQs) issued by the Ministry of Finance with respect to the impact of the reliefs provided by RBI on borrowers.

Yes Bank argued that the relief package was not applicable to the Petitioner as it was already in default as on March 1, 2020, and the package was applicable only to those instalments which fell due on March 1, 2020.

After considering the submission made by the parties, the Court opined that the Statement on Development and Regulatory Policies as well as the Regulatory Package prima facie showed that the intention of the RBI was to maintain status quo as on March 01, 2020, with regard to the all the instalments payment which had to be made post March 1, 2020 till May 31, 2020.

The Regulatory Package with regard to Classification of Accounts also indicated that the intention of RBI was to maintain status quo with regard to the classification of accounts of the borrowers as they existed as on March 1, 2020, it said.

The Court observed that the restriction on change in classification showed that RBI had stipulated that the account which has been classified as SMA-2 could not further be classified as a non-performing asset in case the instalment was not paid during the moratorium period i.e. between March 1, 2020 till May 31, 2020 and status quo qua the classification as SMA-2 had to be maintained.

The effect of the same would be that for a period of three months there will be a moratorium from payment of that instalment. However, stipulated interest and penal charges shall continue to accrue on the outstanding payment even during the moratorium period. If post the moratorium period borrower fails to pay the said instalment, classification would then automatically change as per the IRAC guidelines.”, it further explained.

In view of the above, the Court ordered,

“Prima facie, I am of the view that the classification of the account of the petitioner as an NPA on 31.03.2020 could not have been done by the respondent. Accordingly, status quo ante is restored qua the classification of the account of petitioner and the account classification as it stood on 01.03.2020 shall stand restored.”
Delhi High Court

The Petitioner nonetheless added that without prejudice to its rights and contentions, it shall pay the due instalment along with interest accrued thereon on or before April 24, 2020, irrespective of the lockdown position.

The matter would be heard next on May 4.

The Petitioner was represented by Advocates Saket Sikri, Nikhil Singhvi, Mahesh Bansal, Dhruv Khanna.

Yes Bank was represented by Advocate Ashwini Chawla.

Read the Order:

Anant Raj Ltd vs Yes Bank.pdf
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