Court holds bank's delay in classifying loan as Non-Performing Asset contrary to RBI norms; mandates bank to honor statutory auditor's opinion in OTS Scheme consideration
Shimla, September 25, 2026 - The Himachal Pradesh High Court has passed a significant judgment in the case of M/s Nanal Hydro Power Consultancy Pvt. Ltd. versus Himachal Pradesh State Co-operative Bank, mandating the bank to classify the petitioner's loan as a Non-Performing Asset (NPA) from November 2020, instead of November 2021, for the purpose of eligibility under the One Time Settlement (OTS) Scheme, 2024.
The petitioner, engaged in the development of a 3.30 MW run-of-the-river Small Hydro Electric Project in Chamba district, had taken a term loan from the respondent bank in 2012, which was sanctioned for Rs. 20.41 crores and later enhanced. The loan repayment was scheduled over 144 months starting November 2019, with equated monthly installments (EMIs) of Rs. 36.69 lakh.
Due to the COVID-19 pandemic, the Reserve Bank of India (RBI) issued moratoriums during March to August 2020, temporarily suspending EMI payments. Despite these moratoriums, the petitioner defaulted on three consecutive installments in September, October, and November 2020. The bank, however, classified the loan as NPA only in November 2021, a year later than required by RBI prudential norms.
The petitioner challenged this delay, relying on the statutory auditor's report of the bank, which confirmed that the loan should have been classified as NPA in November 2020. The bank, conversely, ignored this report and sought an opinion from a private Chartered Accountant, whose conclusion was inconclusive on the matter. The bank subsequently rejected the petitioner's OTS application, citing the later NPA classification date.
Justice Sandeep Sharma, hearing the case under Article 226 of the Constitution, examined the relevant RBI guidelines, the moratorium provisions, and the loan repayment history. The Court observed that the moratorium only provided a temporary deferment and did not regularize pre-existing defaults. Since the petitioner had defaulted on three continuous EMIs after the moratorium ended, RBI norms mandated classification of the loan as NPA by November 2020.
Further, the Court criticized the bank for disregarding its statutory auditor's conclusive report in favor of an inconclusive opinion from a private expert. The OTS Scheme, 2024 clearly states that where there is a discrepancy between the Core Banking System (CBS) records and the statutory auditor's report regarding the NPA date, the auditor's report is to be considered final.
The Court held that although no borrower has an absolute right to claim OTS benefits, the bank has a non-discretionary duty to consider eligible cases in accordance with scheme guidelines. Since the petitioner's loan qualifies as NPA from November 2020, the bank must consider the petitioner's OTS proposal on that basis.
The judgment directs the Himachal Pradesh State Co-operative Bank to reclassify the petitioner's loan as NPA effective November 2020 and to consider the petitioner's application under the OTS Scheme, 2024, subject to the petitioner making a formal application by the stipulated deadline. This decision also protects the petitioner from the additional interest liability that would have accrued had the NPA date remained November 2021.
This ruling underscores the judiciary's insistence on strict adherence to RBI prudential norms and internal bank policies, ensuring fairness in loan asset classification and settlement schemes. It also emphasizes the binding nature of statutory auditor reports in resolving discrepancies within banking operations.
Bottom Line:
Banking - One Time Settlement - Where borrower committed continuous default of three months after expiry of RBI moratorium, loan account was liable to be classified as NPA in November 2020 and not November 2021 - Bank could not ignore its own OTS Scheme clause making Statutory Auditor's report final in case of discrepancy in NPA date and rely upon inconclusive opinion of private Chartered Accountant - Borrower held entitled to consideration under OTS Scheme, 2024 on basis of NPA date of November 2020.
Statutory provision(s):
Article 226 of the Constitution of India, Reserve Bank of India Prudential Norms on Income Recognition and Asset Classification, One Time Settlement Scheme, 2024 (Himachal Pradesh State Co-operative Bank policy), SARFAESI Act, 2002 (referenced)
