For the past few years, India’s banking sector has been burdened by an overhang of stressed assets in the system, as well as a liquidity crisis (which can largely be seen as a consequence of the former) within the system. The focus has been on bank recapitalization and strengthening the resolution framework for stressed assets to allow the sector to limp back to normalcy.

Fears that business disruptions due to the spread of COVID-19 and a 40-day lockdown across the nation could lead to a surge in bad loans has prompted the Reserve Bank of India to provide relief to lenders. While doing so, the regulator has guaranteed that banks set aside sufficient funds and conserve capital in order to deal with the expected rise in stressed assets that will occur as the economy weakens.


The Reserve Bank of India (RBI) has given lenders as also their borrowers, struggling to service their loans, more breathing space before their accounts are categorized as non-performing assets (NPA). They will not have to fear action from lending banks for a longer period, beyond the standard 90-day NPA recognition norm.

Easing NPA norms

The announcement by RBI Governor Shaktikata Das on Friday aims to increase liquidity, improve credit flow, and simplify the classification of non-performing assets (NPAs). The 90-day NPA norm shall omit the moratorium period for all accounts for which lending institutions opt to grant moratorium and which were standard as of March 1, 2020, i.e., there would be an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020.

In practice, this implies that the three-month moratorium period will not be used for calculating the number of days past due for repayment. If a loan account has been overdue for more than 90 days, it is designated as a nonperforming asset (NPA). Lenders can take steps to recover the debts after this time limit has passed. For example, starting the process for repossessing your mortgaged house under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act after giving a 60-day notice. After taking into account the three-month freeze, banks will have 180 days, or six months, to take action.

While the measure primarily benefits banks, it will also offer borrowers more time to get their EMI payments in order. It essentially delays NPA classification for accounts that were on the verge of becoming NPA between March and May.

Banks benefit the most

This strategy will assist all banks because the number of problematic loans will not increase immediately. To be sure, a decline in asset quality could occur in the second and third quarters of the current fiscal year. Retail lenders, which are concerned about higher defaults owing to lost revenue and wages across customer sectors, may benefit the most from this alleviation. Equally banks with large MSME and mid-sized corporate exposure may stand to benefit as those industry segments are considered to be most vulnerable. To offset these risks, banks will have to add an additional 10% provisioning to their balance sheets.

Muted benefit for NBFCs

Non-banking financial organizations, such as housing finance companies, can also provide similar flexibility to their borrowers if their boards establish guidelines in accordance with applicable accounting standards and the Institute of Chartered Accountants of India’s (ICAI) advises on loan recognition.


  • Debt Recovery Tribunal: Where a bank or financial institution has to recover any debt from any person, it makes an application called Original Application (OA) to the Debt Recovery Tribunal against such person.
  • Order 37 of Code of Civil Procedure: This remedy is available to lenders and it helps to file an ordinary money suit for recovery against the defaulting borrower for the outstanding amounts or to file a summary suit.
  • The Negotiable Instruments Act, 1881: Section 138 casts a criminal liability punishable with imprisonment or fine or with both on a person who issues a cheque towards discharge of a debt or liability as a whole or in part and the cheque is dishonored by the bank on presentation. Section 138 was designed to penalize unscrupulous check drawers who, despite claiming to discharge their liability by issuing a check, do not intend to do so. However, in order to avoid unnecessarily prosecuting an honest check drawer and to allow him a chance to make amends, the prosecution under Section 138 of the Act has been made subject to specific conditions. These conditions are:  
  • The cheque ought to have been presented to the bank within a period of 6 months from the date on which it is drawn or within the period of its validity, whichever is earlier.
  • The payee or the holder in due course of the cheque, as the case may be, ought to make a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within 30 days of the receipt of information by him from the bank regarding the return of the cheque as unpaid.
  • The drawer of such a cheque should have failed to make payment of the said amount of money to the payee or as the case may be, to the holder in due course of the cheque within 15 days of the receipt of the said notice.

An offence under Section 138 can only be said to have been committed by the person issuing the check if all three conditions stated in the proviso to Section 138 as clauses (a), (b), and (c) are met.

  • The Arbitration and Conciliation Act, 1996: Matters can also be settled in an outside court settlement i.e. through Arbitration, under the Arbitration and Conciliation Act.


  1. Negotiable Instruments Act, 1881
  2. Preeti Kulkarni, RBI offers bad loan classification relief to borrowers and banks, Money Control

3. Ashish Pandey, RBI changes NPA classification period to 180 days from 90 days, Business Today

Aishwarya Says:

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