Orissa High Court holds that banks cannot classify a borrower’s cash credit account as a Non-Performing Asset (NPA) based purely on low turnover unless the objective 90-day “out of order” criteria under RBI guidelines are satisfied. This decision upholds established RBI norms, clarifies the limits of bank discretion, and is binding on all subordinate courts and persuasive for similar disputes nationwide, especially in MSME lending and asset classification contexts.
Summary
| Category | Data |
|---|---|
| Case Name | WP(C)/21112/2025 of PROCEKA TECHSOL PVT. LTD., KEONJHAR Vs GENERAL MANAGER, BANK OF INDIA, MAHARASHTRA |
| CNR | ODHC010527422025 |
| Date of Registration | 29-07-2025 |
| Decision Date | 17-10-2025 |
| Disposal Nature | Disposed Off |
| Judgment Author | Dr. Justice S.K. Panigrahi |
| Court | Orissa High Court |
| Bench | Single Judge |
| Precedent Value | Binding within Orissa; persuasive for other high courts and banking tribunals |
| Type of Law | Banking Law, Administrative Law, Constitutional Law |
| Questions of Law |
|
| Ratio Decidendi | Banks must classify cash credit and overdraft accounts as NPA only in strict accordance with RBI’s IRAC norms—specifically, where the account remains “out of order” for over 90 days. Low turnover or underutilization alone are not valid grounds. Internal policies or contractual covenants do not override RBI guidelines. The High Court can intervene under Article 226 when classification is arbitrary and ultra vires, causing palpable injustice. |
| Judgments Relied Upon |
|
| Logic / Jurisprudence / Authorities Relied Upon by the Court | Doctrine of arbitrariness (Article 14), RBI’s Master Circular-Prudential Norms on Income Recognition, Asset Classification and Provisioning, statutory character of RBI guidelines, paramountcy of public law obligations above contractual terms. |
| Facts as Summarised by the Court | Petitioner, a DPIIT-recognized start-up, availed cash credit from Bank of India, regularly renewed and operated within limits; despite compliance, the account was classified as NPA citing low turnover without meeting the 90-day “out-of-order” test; bank failed to provide justification or notice; suit filed after recall notice and account freeze; alternative remedies like Ombudsman pending. |
Practical Impact
| Category | Impact |
|---|---|
| Binding On | All subordinate courts and tribunals within Orissa; binding on public sector banks in state and persuasive elsewhere |
| Persuasive For | Other High Courts, Banking Ombudsman, Debt Recovery Tribunals, RBI, and financial regulators; persuasive nationwide for asset classification and MSME lending disputes |
| Follows |
|
What’s New / What Lawyers Should Note
- Affirms that classification of cash credit/overdraft accounts as NPA must strictly follow RBI IRAC norms—“low turnover” alone is insufficient.
- Clarifies internal bank policies, sales targets, or other contractual terms cannot override binding RBI guidelines on NPA tagging.
- Establishes that writ jurisdiction under Article 226 can be exercised against banks for breach of statutory directives, despite availability of alternative remedies (e.g., Ombudsman, DRT).
- Reinforces the importance of procedural fairness and transparency—even in absence of mandated pre-decision notice, strict adherence to objective RBI criteria is constitutionally required.
- Provides binding precedent for quashing arbitrary, non-system-driven NPA classifications—vital for MSMEs/startups and banking litigation.
- May be cited to challenge similar NPA classification actions based on subjective or non-statutory grounds.
Summary of Legal Reasoning
- Maintainability of Writ: The Court cited State of H.P. v. Gujarat Ambuja Cement Ltd., holding that exhaustion of alternative remedies is discretionary and writ petitions may be entertained if actions are arbitrary or ultra vires statutory obligations.
- Binding Force of RBI Norms: RBI’s instructions under the Banking Regulation Act are binding on all banks; Supreme Court in Mardia Chemicals emphasized these as the sole criteria for NPA designation.
- NPA Criteria Analysis: For cash credit/overdraft accounts, classification applies only if “out of order” for over 90 days—either the outstanding continuously exceeds sanction or drawing power, or credits are insufficient to cover interest; low turnover alone is not valid.
- Fact Application: The Bank failed to show the account was “out of order” for 90 days—recent credits and withdrawals evidenced operation, with no drawing power reduction or limit breach communicated.
- Limits of Internal/Contractual Clauses: Subjective risk assessments or internal policies cannot supplant the uniform standards prescribed by RBI.
- Procedural Fairness: Although pre-decision notice is not mandatory, non-transparency and failure to follow norms render the action arbitrary and violative of Article 14.
- Remedial Directions: NPA classification and recall quashed; bank directed to reassess strictly per RBI norms. Petition allowed to this extent.
Arguments by the Parties
Petitioner
- NPA tagging based only on low turnover is ultra vires RBI IRAC norms; account was not “out of order” for 90 days.
- Bank bypassed RBI automation mandate with manual intervention—violates system-driven process.
- Lack of prior demand, shifting document requisitions, and absence of quantifiable communication show procedural mala fides.
- Incorrect reliance on CIBIL score; credit profile wrongly reported.
- Unilateral insurance cancellation violated prudential standards.
- Bank’s internal circulars/audit advisories cannot override RBI’s statutory asset classification norms.
- Breach of natural justice: no meaningful notice or reasoning before action; wrongful deprivation of business rights.
- Writ maintainable despite Ombudsman/civil forum pendency, given arbitrariness and statutory breach.
- Pattern of conduct shows colorable exercise of power.
Respondent (Bank)
- Action triggered by RBI auditor’s Memorandum of Changes and internal inspections—statutorily empowered.
- Chronic under-utilization and breach of utilization thresholds/objectives; failure to get approval for PNB account.
- Inspections found no running unit or stock, justifying prudential concerns.
- Petitioner failed to provide renewal documents as repeatedly requested.
- Persistent low CIBIL, low turnover, and absence of required documentation supported asset downgrade.
- Bank entitled to discontinue facility under sanction letter for breach/misstatement.
- Alternate remedies available and matter of disputed facts—civil forum more appropriate.
- Actions justified given policy breaches and absence of functioning business unit.
Factual Background
The Petitioner, a DPIIT-certified start-up, availed a ₹10 lakh cash credit facility and term loans (since repaid) from Bank of India under MSME/CGTMSE schemes. The CC account was regularly renewed, last in December 2024. Despite document submission and ongoing account operation (credits and withdrawals in April 2025), the Bank, citing “low turnover” and internal assessments, unilaterally classified the account as NPA on 15.05.2025, issued a recall notice, and blocked operations. The Petitioner challenged this as arbitrary and contrary to RBI norms, filing a writ while a complaint remained before the RBI Ombudsman.
Statutory Analysis
- RBI Master Circular/Prudential Norms on Income Recognition, Asset Classification, and Provisioning Pertaining to Advances (IRAC): Mandates NPA classification for CC/OD accounts only if “out of order” for 90+ days—either outstanding exceeds sanction/drawing power, or no/few credits insufficient to cover interest.
- Sections 21 and 35A, Banking Regulation Act, 1949: RBI’s asset classification directions issued under these sections have statutory force and are binding on all banks.
- Article 226, Constitution of India: Provides for writ jurisdiction in cases of arbitrariness or ultra vires action by state instrumentalities, even where alternative remedies exist.
- No reading down or broadening of statutory text; strict interpretation and application of RBI’s binding circulars and constitutional standards of fairness.
Alert Indicators
- ✔ Precedent Followed – Judgment follows and reaffirms established Supreme Court and High Court precedents on RBI asset classification, writ maintainability, and procedural fairness in banking law.