What are the important contents of Reserve Bank’s Master Circular on Prudential norms on Income Recognition, Asset classification and Provisioning pertaining to Advances (Non-Performing Assets)?

Answer:

Reserve Bank of India’s Master Circular No. RBI/2022-23/15 == DOR.STR.REC.4/21.04.048/2022-23 dated 01.04.2023 on Prudential norms on Income Recognition, Asset classification and Provisioning pertaining to Advances

Important contents:

1. Non-Performing Assets— Paragraphs 2.1.1 and 2.1.2 of the Master Circular

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;

1. interest and/ or instalment of principal remains overdue for a period of more than 90 days in respect of a term loan,
2. the account remains ‘out of order’ as indicated at paragraph 2.2 below, in respect of an Overdraft/Cash Credit (OD/CC),
3. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
4. the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops,
5. the instalment of principal or interest thereon remains overdue for one crop season for long duration crops,
6. the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 as amended from time to time.
7. 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.

2. Out of Order — Paragraphs 2.2.1 of the Master Circular

2.2.1 A CC/OD account shall be treated as ‘out of order’ if:

1. The outstanding balance in the CC/OD account remains continuously in excess of the sanctioned limit/drawing power for 90 days, or
2. The outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but there are no credits continuously for 90 days, or the outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but credits are not enough to cover the interest debited during the previous 90 days period1.

2.2.2 The definition of “out of order” as at paragraph 2.2.1 above shall be applicable to all loan products being offered as an overdraft facility, including those not meant for business purpose and/or which entail interest repayments as the only credits.

3. Income Recognition Policy — Paragraphs 3.1.1 to 3.1.5 of the Master Circular

3.1.1 The policy of income recognition has to be objective and based on the record of recovery. Therefore, the banks should not charge and take to income account interest on any NPA. This will apply to Government guaranteed accounts also.

3.1.2 However, interest on advances against Term Deposits, National Savings Certificates (NSCs), Kisan Vikas Patras (KVPs) and life insurance policies may be taken to income account on the due date, provided adequate margin is available in the accounts.

3.1.3 Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the renegotiated or rescheduled extension of credit.

3.1.4 In cases of loans where moratorium has been granted for repayment of interest, income may be recognised on accrual basis for accounts which continue to be classified as ‘standard’. This shall be evaluated against the definition of ‘restructuring’ provided in paragraph 16 of this Master Circular.

3.1.5 Income recognition norms for loans towards projects under implementation involving deferment of DCCO shall be subject to the instructions contained in paragraph 4.2.15 of this Master Circular and that for loans against gold ornaments and jewellery for non-agricultural purposes shall be subject to the instructions contained in circular DBOD.No.BP.BC.27/21.04.048/2014-15 dated July 22, 2014 on the subject, as updated from time to time.

4. Reversal of Income— Paragraphs 3.2.1 to 2.2.3 of the Master Circular

3.2.1 If any advance, including bills purchased and discounted, becomes NPA, the entire interest accrued and credited to income account in the past periods, should be reversed if the same is not realised. This will apply to Government guaranteed accounts also.

3.2.2 If loans with moratorium on payment of interest (permitted at the time of sanction of the loan) become NPA after the moratorium period is over, the capitalized interest, if any, corresponding to the interest accrued during such moratorium period need not be reversed.

3.2.3 In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed with respect to past periods, if uncollected.

5. Interest may be recoded in Memorandum account — Paragraphs 3.4 of the Master Circular

3.4 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.

6. Asset classification — Paragraphs 4.1 , 4.1.1, 4.1.2 and 4.1.3 of the Master Circular

4.1 Categories of NPAs

Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues:

• Substandard Assets

• Doubtful Assets

• Loss Assets

4.1.1 Substandard Assets

With effect from March 31, 2005, a substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. Such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

4.1.2 Doubtful Assets

With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, – on the basis of currently known facts, conditions and values – highly questionable and improbable.

4.1.3 Loss Assets

A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection, but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

7. Account with temporary deficiencies — Paragraphs 4.2.4 of the Master Circular

4.2.4 The classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on the due date, etc.

8. Upgradation of Loan accounts classified as NPAs — Paragraphs 4.2.5 of the Master Circular

4.2.5 The loan accounts classified as NPAs may be upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by the borrower. In case of borrowers having more than one credit facility from a bank, loan accounts shall be upgraded from NPA to standard asset category only upon repayment of entire arrears of interest and principal pertaining to all the credit facilities. With regard to upgradation of accounts classified as NPA due to restructuring, non-achievement of date of commencement of commercial operations (DCCO), etc., the instructions as specified for such cases shall continue to be applicable.

9. Asset classification to be Borrower – wise and not facility wise — Paragraphs 4.2.7.1 of the Master Circular

4.2.7.1 It is difficult to envisage a situation when only one facility to a borrower/one investment in any of the securities issued by the borrower becomes a problem credit/investment and not others. Therefore, all the facilities granted by a bank to a borrower and investment in all the securities issued by the borrower will have to be treated as NPA/NPI and not the particular facility/investment or part thereof which has become irregular.

Frequently Asked Questions (FAQ) and important Provisions of Law about Sale of Assets

What is the meaning of Reserve Price?
Answer: Reserve Price is the price with which the public auction starts and the auction bidders are not permitted to give bids below the said price, that is, the minimum bid at auction. State of Uttar Pradesh –Versus– Shiv Charan Sharma AIR 1981 Supreme Court 1722.

Whether Reserve Price is synonymous with valuation of the property?
Answer: Reserve Price is not synonymous with valuation of the property. Fixation of the Reserve Price does not preclude the claimant from adducing proof that the land had been sold for a low price. Anil Kumar Srivastava –Versus– State of Uttar Pradesh. AIR 2004 Supreme Court 4299.

Whether a sale can be set aside after confirmation?
Answer: It was held by the Supreme Court of India in the case of Valji Khimji –Versus– Official Liquidator of Hindusthan Nitro Projects reported in (2008)145 Company Cases Page 36 that entertaining objection after the sale is confirmed should not be allowed except on very limited grounds like fraud, otherwise no auction sale will ever be complete.

Whether sale can be set aside on the ground of irregularity in sale without proving substantial injury?
Answer: If a sale is challenged on the ground of irregularity, substantial injury must be proved. SBI –Versus– DRAT (2010)3 Banking Cases Page 38 Delhi High Court, Division Bench. However, Orissa High Court has held that it is not necessary to prove substantial injury. Swastik Agency –Versus– SBI. AIR 2009 Orissa 147.

Whether sale can be set aside on the ground of equity?
Answer: Bonafide sale cannot be set aside on the ground of equity. Sadashiv Prasad Singh –Versus– Harendra Singh (2014)1 Bankman 15.

If the Bank’s claim can be realized by sale of part of the property, whether the entire property can be sold?
Answer: If the Bank’s claim can be realized by sale of part of the property, the entire property cannot be sold.
S. Nariyappa –Versus– Sidappa (2005)10 Supreme Court Cases Page 235
Ram Krishun –Versus– State of Uttar Pradesh (2012)11 Supreme Court Cases Page 511

Is it the duty of the Court to see that the price fetched at an auction sale, is adequate?
Answer: It is the duty of the Court to see that the price fetched at an auction sale is adequate price even though, there is no suggestion of irregularity and fraud. — Divya Manufacturing Co. (P) Ltd. –Versus– Union of India. AIR 2000 Supreme Court 2346.

What are the important contents of Reserve Bank’s Master Directions on Frauds?
Answer:

Master Directions on Frauds – Classification and Reporting by commercial banks and select Financial Institutions No. RBI/DBS/2016-17/28 —DBS.CO.CFMC.BC.No.1/23.04.001/2016-17 dated 01/07/2016

Important Contents : 

1)Classification of Frauds — Paragraph 2.2.1 of the Master Circular on Frauds

2.2 Classification of Frauds

2.2.1 In order to have uniformity in reporting, frauds have been classified as under, based mainly on the provisions of the Indian Penal Code:

1. Misappropriation and criminal breach of trust.
2. Fraudulent encashment through forged instruments, manipulation of books of account or through fictitious accounts and conversion of property.
3. Unauthorised credit facilities extended for reward or for illegal gratification.
4. Cash shortages.
5. Cheating and forgery.
6. Fraudulent transactions involving foreign exchange
7. Any other type of fraud not coming under the specific heads as above

2)Filling of complaints with Law Enforcement Agencies in the case of Loan Frauds —. Paragraph 8.11 of the Master Circular on Frauds

8.11 Filing Complaints with Law Enforcement Agencies

8.11.1 Banks are required to lodge the complaint with the law enforcement agencies immediately on detection of fraud. There should ideally not be any delay in filing of the complaints with the law enforcement agencies since delays may result in the loss of relevant ‘relied upon’ documents, non-availability of witnesses, absconding of borrowers and also the money trail getting cold in addition to asset stripping by the fraudulent borrower.

8.11.2 It is observed that banks do not have a focal point for filing CBI / Police complaints. This results in a non-uniform approach to complaint filing by banks and the investigative agency has to deal with dispersed levels of authorities in banks. This is among the most important reasons for delay in conversion of complaints to FIRs. It is, therefore, enjoined on banks to establish a nodal point / officer for filing all complaints with the CBI on behalf of the bank and serve as the single point for coordination and redressal of infirmities in the complaints.

8.11.3 The complaint lodged by the bank with the law enforcement agencies should be drafted properly and invariably be vetted by a legal officer. It is also observed that banks sometimes file complaints with CBI / Police on the grounds of cheating, misappropriation of funds, diversion of funds etc., by borrowers without classifying the accounts as fraud and/or reporting the accounts as fraud to RBI. Since such grounds automatically constitute the basis for classifying an account as a fraudulent one, banks should invariably classify such accounts as frauds and report the same to RBI.

3) Penal Measures for Fraudulent Borrowers — Paragraph 8.12 of the Master Circular on Frauds

8.12 Penal measures for fraudulent borrowers

8.12.1 In general, the penal provisions as applicable to wilful defaulters would apply to the fraudulent borrower including the promoter director(s) and other whole time directors of the company insofar as raising of funds from the banking system or from the capital markets by companies with which they are associated is concerned, etc. In particular, borrowers who have defaulted and have also committed a fraud in the account would be debarred from availing bank finance from Scheduled Commercial Banks, Development Financial Institutions, Government owned NBFCs, Investment Institutions, etc., for a period of five years from the date of full payment of the defrauded amount. After this period, it is for individual institutions to take a call on whether to lend to such a borrower. The penal provisions would apply to non-whole time directors (like nominee directors and independent directors) only in rarest of cases based on conclusive proof of their complicity.

8.12.2 No restructuring or grant of additional facilities may be made in the case of RFA or fraud accounts. However, in cases of fraud/malfeasance where the existing promoters are replaced by new promoters and the borrower company is totally delinked from such erstwhile promoters/management, banks and JLF may take a view on restructuring of such accounts based on their viability, without prejudice to the continuance of criminal action against the erstwhile promoters/management.

8.12.3 No compromise settlement involving a fraudulent borrower is allowed unless the conditions stipulate that the criminal complaint will be continued.

8.12.4 In addition to above borrower- fraudsters, third parties such as builders, warehouse/cold storage owners, motor vehicle/tractor dealers, travel agents, etc. and professionals such as architects, valuers, chartered accountants, advocates, etc. are also to be held accountable if they have played a vital role in credit sanction/disbursement or facilitated the perpetration of frauds. Banks are advised to report to Indian Banks Association (IBA) the details of such third parties involved in frauds.

8.12.5 Before reporting to IBA, banks have to satisfy themselves of the involvement of third parties concerned and also provide them with an opportunity of being heard. In this regard the banks should follow normal procedures and the processes followed should be suitably recorded. On the basis of such information, IBA would, in turn, prepare caution lists of such third parties for circulation among the banks.

• Sarfaesi Action cannot be taken beyond the period of Limitation — Section 36 of Sarfaesi Act, 2002 

36. No secured creditor shall be entitled to take all or any of the measures under sub-section (4) of section 13, unless his claim in respect of financial asset is made within the period of limitation prescribed under the Limitation Act, 1963 (36 of 1963).

• Limitation Act 1963 applies to the Recovery of Debts and Bankruptcy Act,1993 —- Section 24 of the Recovery of Debts and Bankruptcy Act,1993

24. The provisions of the Limitation Act, 1963, (36 of 1963) shall, as far as may be, apply to an application made to a Tribunal.

• Bar of Limitation —- Section 3(1) of the Limitation Act, 1963

3(1) Subject to the provisions contained in sections 4 to 24 (inclusive), every suit instituted, appeal preferred, and application made after the prescribed period shall be dismissed although limitation has not been set up as a defence.

• Extension of prescribed period in certain cases –— Section 5 of the Limitation Act, 1963

5. Any appeal or any application, other than an application under any of the provisions of Order XXI of the Code of Civil Procedure, 1908 (5 of 1908), may be admitted after the prescribed period, if the appellant or the applicant satisfies the court that he had sufficient cause for not preferring the appeal or making the application within such period.

Explanation.-The fact that the appellant or the applicant was misled by any order, practice or judgment of the High Court in ascertaining or computing the prescribed period may be sufficient cause within the meaning of this section.

• Exclusion of time of proceeding bona fide in Court without jurisdiction –— Section 14(1) and Section 14(2) of the Limitation Act, 1963

14(1) In computing the period of limitation for any suit the time during which the plaintiff has been prosecuting with due diligence another civil proceeding, whether in a court of first instance or of appeal or revision, against the defendant shall be excluded, where the proceeding relates to the same matter in issue and is prosecuted in good faith in a court which, from defect of jurisdiction or other cause of a like nature, is unable to entertain it.

14(2) In computing the period of limitation for any application, the time during which the applicant has been prosecuting with due diligence another civil proceeding, whether in a court of first in- stance or of appeal or revision, against the same party for the same relief shall be excluded, where such proceeding is prosecuted in good faith in court which, from defect of jurisdiction or other cause of a like nature, is unable to entertain it.

• Effect of acknowledgment in writing –— Section 18(1) of the Limitation Act, 1963

18(1) Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed.

• Effect of payment on account of debt –— Section 19 of the Limitation Act, 1963

19. Where payment on account of a debt or of interest on legacy is made before the expiration of the prescribed period by the person liable to pay the debt or legacy or by his agent duly authorized in this behalf, a fresh period of limitation shall be computed from the time when the payment was made:

Provided that, save in the case of payment of interest made before the 1st day of January, 1928, an acknowledgment of the payment appears in the handwriting of, or in a writing signed by, the person making the payment.

Explanation. For the purposes of this section.-

(a) where mortgaged land is in the possession of the mortgagee, the receipt of the rent or produce of such land shall be deemed to be a payment;

(b) “debt” does not include money payable under a de- cree or order of a court.

• Period of limitation for a suit due on a mutual, open and current account, where there have been reciprocal demands between the parties —Article 1 of the Limitation Act, 1963

Article 1

• Period of limitation for a suit for money payable for money lent —Article 19 of the Limitation Act, 1963

Article 19

• Period of limitation for a suit for money lent under an agreement that it shall be payable on demand —Article 21 of the Limitation Act, 1963 

Article 21

• Period of limitation for a suit by a Mortgagor –— Article 61 of the Limitation Act, 1963

Article 61

• Period of Limitation for a suit to enforce payment of money secured by a mortgage or otherwise charged upon immovable property Mortgagor –— Article 62 of the Limitation Act, 1963

Article 62

• Period of Limitation for a suit by a mortgagee –— Article 63 of the Limitation Act, 1963

Article 63

(

• Period of Limitation for a suit for which no period of limitation is provided in the Limitation Act 1963 –— Article 113 of the Limitation Act, 1963

 Article 113

What are the meanings of Mortgage, Mortgagee, Mortgagor, Mortgage money, Mortgage Deed?
Answer: According to Section 58(a) of Transfer of Property Act, 1882, a mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability. The transfer is called mortgagor, the transferee a mortgagee, the principal money and interest of which payment is secured for the time being are called the mortgage-money, and the instrument (if any) by which the transfer is effected is called a mortgage-deed.

What is the most important feature of mortgage?
Answer: The most important feature of mortgage is a transfer of an interest in specific immovable property for the purpose of securing the payment of money advance or to be advance by way of loan, etc. In the case of Bank of India Versus Abhoy D. Narottam reported in (2005)11 Supreme Court Cases Page 520, Supreme Court held that without a transfer of interest, there is no question of there being a mortgage.

There are how many kinds of mortgages?
Answer: According to Section 58 of Transfer of Property Act, 1882, there are six kinds of mortgages, namely, simple mortgage, mortgage by conditional sale, usufructuary mortgage, English mortgage, mortgage by deposit of title deeds, and anomalous mortgage. Rashbihary Ghosh in his treatise -Law of Mortgage – has observed that the classification of mortgages in sec. 58 is not exhaustive. While mortgages are almost endless in form, the section describes the most common forms of mortgage in the country. Whenever any specific property is made answerable for the repayment of a debt or the performance of any other engagement which may give rise to a pecuniary liability, a mortgage is created in favour of the obligee which, unless it falls under any of the other classes mentioned in sec. 58, must be treated as an anomalous mortgage.

Whether an agreement to execute a mortgage of immovable property creates any interest upon the property?
Answer: An agreement to execute a mortgage of immovable property does not in India by itself constitute a mortgage or a charge upon the property – Hukum Chand Versus Radha Kishen, reported in AIR 1930 Privy Council Page 76.

Whether an agreement to execute a mortgage of immovable property can be specifically performed?
Answer: An agreement to execute a mortgage of immovable property cannot be generally specifically performed. However, where the mortgagee has advanced the money but the mortgagor refuses to execute a mortgage, the mortgagee can bring a suit for specific performance to compel the mortgagor to execute a deed of mortgage.

What is the meaning of Simple Mortgage?
Answer: According to Section 58(b) of Transfer of Property Act, 1882, where, without delivering possession of the mortgaged property, the mortgagor binds himself personally to pay the mortgage- money, and agrees, expressly or impliedly, that in the event of his failing to pay according to his contract, the mortgagee shall have a right to cause the mortgaged property to be sold and the proceeds of sale to be applied, so far as may be necessary, in payment of the mortgage-money, the transaction is called a simple mortgage and the mortgagee a simple mortgagee.

What is the meaning of Mortgage by conditional sale?
Answer: According to Section 58(c) of Transfer of Property Act, 1882, where the mortgagor ostensibly sells the mortgaged property on condition that on default of payment of the mortgage-money on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shall become void, or on condition that on such payment being made the buyer shall transfer the property to the seller, the transaction is called a mortgage by conditional sale and the mortgagee a mortgagee by conditional sale. Provided that no such transaction shall be deemed to be a mortgage, unless the condition is embodied in the document which effects or purports to effect the sale.

What is the meaning of Usufructuary Mortgage?
Answer: According to Section 58(d) of Transfer of Property Act, 1882, when the mortgagor delivers possession or expressly or by implication binds himself to deliver possession of the mortgaged property to the mortgagee, and authorizes him to retain such possession until payment of the mortgage money, and to receive the rents and profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of interest, or in payment of the mortgage-money or partly in lieu of interest or partly in payment of the mortgage-money, the transaction is called an usufructuary mortgage and the mortgagee an usufructuary mortgagee.

What is the meaning of English Mortgage?
Answer: According to Section 58(e) of Transfer of Property Act, 1882, where the mortgagor binds himself to repay the mortgage-money on certain date, and transfer the mortgage property absolutely to the mortgagee, but subject to a proviso that he will retransfer it to the mortgagor upon payment of the mortgage-money as agreed, the transaction is called an English mortgage.

What is the meaning of Mortgage by deposit of Title Deeds?
Answer: According to Section 58(f) of Transfer of Property Act, 1882, where a person in any of the following towns, namely, the towns of Calcutta, Madras and Bombay, and in any other town which the State Government concerned may, by notification in the official Gazette, specify in this behalf, delivers to a creditor or his agent documents of title to immovable property, with intent to create a security thereon, the transaction is called a mortgage by deposit of title deeds.

What is the meaning of Anomalous Mortgage?
Answer: According to Section 58(g) of Transfer of Property Act, 1882, a mortgage which is not a simple mortgage, a mortgage by conditional sale, an usufructuary mortgage, an English mortgage or a mortgage by deposit of title deeds within the meaning of the section is called an anomalous mortgage.

What is the meaning of the right of mortgagor to redeem or what is the meaning of right of redemption?
Answer:

 Section 60 of Transfer of Property Act, 1882 provides as follows :-

“ 60 Right of mortgagor to redeem.-At any time after the principal money has become due, the mortgagor has a right, on payment or tender, at a proper time and place, of the mortgage-money, to require the mortgagee 

(a) to deliver to the mortgagor the mortgage-deed and all documents relating to the mortgaged property which are in the possession or power of the mortgagee

 (b) where the mortgagee is in possession of the mortgaged property, to deliver possession thereof to the mortgagor, and

 (c) at the cost of the mortgagor either to re-transfer the mortgaged property to him or to such third person as he may direct, or to execute and where the mortgage has been effected by a registered instrument, to have registered an acknowledgement in writing that any right in derogation of his interest transferred to the mortgagee has been extinguished:

Provided that the right conferred by this section has not been extinguished by act of the parties or by decree of a Court.

The right conferred by this section is called a right to redeem and a suit to enforce it is called a suit for redemption.

Nothing in this section shall be deemed to render invalid any provision to the effect that, if the time fixed for payment of the principal money has been allowed to pass or no such time has been fixed, the mortgagee shall be entitled to reasonable notice before payment or tender of such money.

Redemption of portion of mortgaged property.-Nothing in this section shall entitle a person interested in a share only of of the mortgaged property to redeem his own share only, on payment of a proportionate part of the amount remaining due on the mortgage, except [only] where a mortgagee, or, if there are more mortgagees than one, all such mortgagees, has or have acquired, in whole or in part, the share of a mortgagor

Whether a mortgagor has a right to redeem separately or he can do so only simultaneously?
Answer:  According to Section 61 of Transfer of Property Act, 1882, a mortgagor who has executed two or more mortgages in favour of the same mortgagee shall, in the absence of a contract to the contrary, when the principal money of any two or more of the mortgages has become due, be entitled to redeem any one such mortgage separately, or any two or more of such mortgages together.

Who is entitled to accession to mortgaged property – whether mortgagor or mortgagee?
Answer: According to Section 63 of Transfer of Property Act, 1882, where mortgaged property in possession of the mortgagee has, during the continuance of the mortgage, received any accession, the mortgagor, upon redemption shall, in the absence of a contract to the contrary, be entitled as against the mortgagee to such accession.

A person mortgages a plot of land and thereafter, constructs a building on the plot of land. In case of default in repayment of the loan, whether mortgagee can sell the land also?
Answer: According to Section 70 of Transfer of Property Act, 1882, if, after the date of a mortgage, any accession is made to the mortgaged property, the mortgagee, in the absence of a contract to the contrary, shall, for the purposes of the security, be entitled to such accession.

Who is entitled to improvements to mortgaged property in the possession of mortgagee?
Answer: According to Section 63A(1) of Transfer of Property Act, 1882, where mortgaged property in possession of the mortgagee has, during the continuance of the mortgage, been improved, the mortgagor, upon redemption, shall, in the absence of a contract to the contrary, be entitled to the improvement; and the mortgagor shall not, save only in cases provided for in sub-section (2), be liable to pay the cost thereof.

Whether the mortgagor has right to give the mortgaged property on lease and whether such lease will be binding on the mortgagee?
Answer:

According to Section 65A(1) of Transfer of Property Act,1882, subject to the provisions of sub- section (2), a mortgagor, while lawfully in possession of the mortgaged property, shall have power to make leases thereof which shall be binding on the mortgagee.

Section 65A(2) of Transfer of Property Act,1882 is also very relevant and is quoted below:- 

“(2) (a) Every such lease shall be such as would be made in the ordinary course of management of the property concerned, and in accordance with any local law, custom or usage,

(b) Every such lease shall reserve the best rent that can reasonably be obtained, and no premium shall be paid or promised and no rent shall be payable in advance,

(c) No such lease shall contain a covenant for renewal,

(d) Every such lease shall take effect from a date not later than six months from the date on which it is made,

(e) In the case of a lease of buildings, whether leased with or without the land on which they stand, the duration of the lease shall in no case exceed three years, and the lease shall contain a covenant for payment of the rent and a condition of re-entry on the rent not being paid with a time therein specified.”

What is a suit for foreclosure?
Answer: According to Section 67 of Transfer of Property Act,1882, a suit to obtain a decree that a mortgagor shall be absolutely debarred of his right to redeem the mortgaged property is called a suit for foreclosure.

What is a suit for sale of the mortgaged property?
Answer:  According to Section 67 of Transfer of Property Act,1882, a mortgagee, at anytime after the mortgage money has become due and before a decree has been made for redemption of the mortgage property or before the mortgage money has been paid or deposited in accordance with law, has a right to obtain a decree that the property be sold.

What is the meaning of Hypothecation?
Answer:

The word Hypothecation is not defined in Transfer of Property Act, 1882. However, the word hypothecation is defined in Section 2(1) (n) of Sarfaesi Act, 2002 as follows:

2(n) “hypothecation” means a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor. as a security for financial assistance and includes floating charge and crystallization of such charge into fixed charge on movable property;

What is the meaning of Pledge?
Answer: Pledge is a kind of bailment. According to Section 148 of Indian Contract Act, 1872, a bailment is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. Thus, the word Pledge has been defined in Section 172 of Indian Contract Act, 1872 as a bailment of goods as security for payment of a debt or performance of a promise. The common examples of Pledge are pledge of ornaments or pledge of shares as security for the loan.

What is the meaning of Charge?
Answer:

The word Charge has been defined in Section 100 of Transfer of Property Act, 1882 as follows: 

“Where immovable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property; and all the provisions hereinbefore contain which apply to a simple mortgage shall, so far as may be, apply to such charge.

Nothing in this section applies to the charge of a trustee on the trust property for expenses properly incurred in the execution of his trust, and save as otherwise expressly provided by any law for the time being in force, no charge shall be enforced against any property in the hands of a person to whom such property has been transferred for consideration and without notice of the charge.”

• Contract of Guarantee 

• Surety 

• Principal debtor 

• Creditor 

—– Section 126 of the Indian Contract Act 1872

126. “Contract of guarantee”, “surety”, “principal debtor” and “creditor”.-A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.

• Surety’s liability — Section 128 of the Indian Contract Act 1872

128. Surety’s liability.-The liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise provided by the contract.

• Continuing Guarantee — Section 129 of the Indian Contract Act 1872

129. “Continuing guarantee”.-A guarantee which extends to a series of transactions, is called a “continuing guarantee”..

• Revocation of Continuing Guarantee — Section 130 of the Indian Contract Act 1872

130. Revocation of continuing guarantee.-A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.

• Discharge of surety by variance in terms of contract — Section 133 of the Indian Contract Act 1872

133. Discharge of surety by variance in terms of contract.-Any variance, made without the surety s consent, in the terms of the contract between the principal [debtor] and the creditor, discharges the surety as to transactions subsequent to the variance.

• Discharge of surety by release or discharge of principal debtor — Section 134 of the Indian Contract Act 1872

134. Discharge of surety by release or discharge of principal debtor.-The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.

• Discharge of surety when Creditor compounds with, gives time to, or agrees not to sue , principal debtor — Section 135 of the Indian Contract Act 1872

135. Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal debtor.-A contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharges the surety, unless the surety assents to such contract.

• Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy — Section 139 of the Indian Contract Act 1872

139. Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy.-If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.

• Rights of surety on payment or performance — Section 140 of the Indian Contract Act 1872

140. Rights of surety on payment or performance.-Where a guaranteed debt has become due, or default of the principal debtor to a guaranteed duty has taken place, the surety upon payment or performance of all that he is liable for, is invested with all the rights which perform the creditor had against the principal debtor.

• Surety’s right to benefit of creditor’s securities — Section 141 of the Indian Contract Act 1872

141. Surety’s right to benefit of creditor’s securities.-A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.

• Implied promise to indemnify surety — Section 145 of the Indian Contract Act 1872

145. Implied promise to indemnify surety. In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but, no sums which he has paid wrongfully.

What is the meaning of redemption and what is the procedure for redemption?
Answer: Section 60 of Transfer of Property Act, 1882 is relevant in this connection and is quoted below:

“60. Right of mortgagor to redeem.-At any time after the principal money has become due, the mortgagor has a right, on payment or tender, at a proper time and place of the mortgage-money, to require the mortgagee (a) to deliver to the mortgagor the mortgage-deed and all documents relating to the mortgaged property, which are in the possession of power of the mortgagee, (b) where the mortgagee is in possession of the mortgaged property, to deliver possession thereof to the mortgagor, and (c) at the cost of the mortgagor either to retransfer, the mortgaged property to him or to such third person as he may direct, or to execute and (where the mortgage has been effected by a registered instrument) to have registered an acknowledgment in writing that any right in derogation of his interest transferred to the mortgagee has been extinguished:

Provided that the right conferred by this section has not been extinguished by act parties or by decree of the Court.

The right conferred by this section is called a right to redeem and a suit to enforce it is called a suit for redemption.

Nothing in this section shall be deemed to render invalid any provision to the effect that, if the time fixed for payment of the principal money has been allowed to pass or no such time has been fixed, the mortgagee shall be entitled to reasonable notice before payment or tender of such.

Redemption of portion of mortgaged property. Nothing in this section shall entitle a person interested in a share only of the mortgaged property to redeem his own share only, on payment of a proportional part of the amount remaining due on the mortgage, except only where a mortgagee, or, if there are more mortgagees than one, all such mortgagees, has or have acquired, in whole or in part, the share of mortgagor.”

What is the provision for redemption under Sarfaesi Act, 2002 after the amendment in 2016?
Answer: Section 13(8) of Sarfaesi Act, 2002, as amended in 2016, is relevant in this connection and is quoted below:

“(8) Where the amount of dues of the secured creditor together with all costs, charges and expenses incurred by him is tendered to the secured creditor at any time before the date of publication of notice for public auction or inviting quotations or tender from public or private treaty for transfer by way of lease, assignment or sale of the secured assets,

(i) the secured assets shall not be transferred by way of lease, assignment or sale by the secured creditor; and

(ii) in case, any step has been taken by the secured creditor for transfer by way of lease or assignment or sale of the assets before tendering of such amount under this sub-section, no further step shall be taken by such secured creditor for transfer by way of lease or assignment or sale of such secured assets.”

What was the provision for redemption under Sarfaesi Act, 2002 before the amendment in 2016?
Answer: Section 13(8) of Sarfaesi Act, 2002, before its amendment in 2016, was as follows:

“13(8) If the dues of the secured creditor together with all costs, charges and expenses incurred by him are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset.”

What are the important contents of Reserve Bank’s Circular on framework for compromise settlements and Technical write off?
Answer: Reserve Bank of India’s Circular No. RBI/2023-24/40 == DOR.STR.REC.20/21.04.048/2023-24 dated 08.06.2023 on framework for compromise settlements and technical write off includes the following important contents:

• Regulated Entities (REs), including Commercial Banks (including SFBs, LABs, RRBs), UCBs, State/Central Co-operative Banks, All-India Financial Institutions, and NBFCs (including HFCs), must formulate Board-approved policies for compromise settlements and technical write-offs.
• Compromise settlement refers to a negotiated arrangement with the borrower to fully settle the claims of the RE in cash, involving some sacrifice by the RE and waiver of part of the claims.
• Technical write-off means the NPA remains on the borrower’s loan account, but is written off in RE’s books for accounting purposes without waiving recovery rights or claims.
• The Board policy must define clear procedures for both compromise settlements and technical write-offs, including conditions like minimum loan ageing, decline in collateral value, etc.
• The policy should include a structured accountability framework for staff handling such cases, with specified thresholds and timeframes.
• For compromise settlements, the policy should outline permissible sacrifice norms based on exposure categories and current realisable collateral value. The method to calculate such value must also be part of the policy.
• The goal of such settlements is to maximize recovery with minimal cost, in the RE’s best interest.
• These arrangements shall not prejudice any agreed future contingent recovery terms, but such claims must not appear in the RE’s balance sheet until realized. If recognized prematurely, it would be considered restructuring.

What are the important contents of Reserve Bank’s Master Circular on Wilful Defaulters?

Master Circular on Wilful Defaulters No. RBI/2015-16/100 -DBR.No.CID.BC.22/20.16.003/2015-16 dated 01/07/2015

Important Contents:

What is Wilful Default — Paragraph 2.1.3 of the Master Circular on Wilful Defaulters
2.1.3 Wilful Default: A ‘wilful default’ would be deemed to have occurred if any of the following events is noted:

• The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations.
• The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
• The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
• The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank / lender.

The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions / incidents. The default to be categorised as wilful must be intentional, deliberate and calculated.

What is Diversion of Funds —- Paragraph 2.2.1 of the Master Circular on Wilful Defaulters
2.2.1 Diversion of Funds: The term ‘diversion of funds’ referred to at paragraph 2.1.3(b) above, should be construed to include any one of the undernoted occurrences:

1. utilisation of short-term working capital funds for long-term purposes not in conformity with the terms of sanction;
2. deploying borrowed funds for purposes / activities or creation of assets other than those for which the loan was sanctioned;
3. transferring borrowed funds to the subsidiaries / Group companies or other corporates by whatever modalities;
4. routing of funds through any bank other than the lender bank or members of consortium without prior permission of the lender;
5. investment in other companies by way of acquiring equities / debt instruments without approval of lenders;
6. shortfall in deployment of funds vis-à-vis the amounts disbursed / drawn and the difference not being accounted for.

What is Siphoning of Funds — Paragraph 2.2.2 of the Master Circular on Wilful Defaulters
2.2.2 Siphoning of Funds: The term ‘siphoning of funds’ should be construed to occur if any funds borrowed from banks / FIs are utilised for purposes unrelated to the operations of the borrower, to the detriment of the financial health of the entity or of the lender. The decision as to whether a particular instance amounts to siphoning of funds would have to be a judgment of the lenders based on objective facts and circumstances of the case.

Penal Measures against Wilful Defaulter — Paragraph 2.5 of the Master Circular on Wilful Defaulters
2.5 Penal Measures The following measures should be initiated by the banks and FIs against the wilful defaulters identified as per the definition indicated at paragraph 2.1.3 above:

• No additional facilities should be granted by any bank / FI to the listed wilful defaulters. In addition, such companies (including their entrepreneurs / promoters) where banks / FIs have identified siphoning / diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance from the scheduled commercial banks, Financial Institutions, NBFCs, for floating new ventures for a period of 5 years from the date of removal of their name from the list of wilful defaulters as published/disseminated by RBI/CICs.
• The legal process, wherever warranted, against the borrowers / guarantors and foreclosure for recovery of dues should be initiated expeditiously. The lenders may initiate criminal proceedings against wilful defaulters, wherever necessary.
• Wherever possible, the banks and FIs should adopt a proactive approach for a change of management of the wilfully defaulting borrower unit.
• A covenant in the loan agreements, with the companies to which the banks / FIs have given funded / non-funded credit facility, should be incorporated by the banks / FIs to the effect that the borrowing company should not induct on its board a person whose name appears in the list of Wilful Defaulters and that in case, such a person is found to be on its board, it would take expeditious and effective steps for removal of the person from its board.
• It would be imperative on the part of the banks and FIs to put in place a transparent mechanism for the entire process so that the penal provisions are not misused and the scope of such discretionary powers are kept to the barest minimum. It should also be ensured that a solitary or isolated instance is not made the basis for imposing the penal action.

Mechanism for identification of Wilful Defaulters — Paragraphs 3(a), 3(b) and 3(c) of the Master Circular on Wilful Defaulters
Mechanism for identification of Wilful Defaulters
The mechanism should generally include the following:

3(a) The evidence of wilful default on the part of the borrowing company and its promoter / whole-time director at the relevant time should be examined by a Committee headed by an Executive Director or equivalent and consisting of two other senior officers of the rank of GM / DGM.

3(b) If the Committee concludes that an event of wilful default has occurred, it shall issue a Show Cause Notice to the concerned borrower and the promoter / whole-time director and call for their submissions and after considering their submissions issue an order recording the fact of wilful default and the reasons for the same. An opportunity should be given to the borrower and the promoter / whole-time director for a personal hearing if the Committee feels such an opportunity is necessary.

3(c) The Order of the Committee should be reviewed by another Committee headed by the Chairman / Chairman & Managing Director or the Managing Director & Chief Executive Officer / CEOs and consisting, in addition, to two independent directors / non-executive directors of the bank and the Order shall become final only after it is confirmed by the said Review Committee. However, if the Identification Committee does not pass an Order declaring a borrower as a wilful defaulter, then the Review Committee need not be set up to review such decisions.

Whether a non-promoter or a non-wholetime director can be declared a Wilful Defaulter — Paragraphs 3(d) of the Master Circular on Wilful Defaulters
(3)d) As regard a non-promoter / non-whole time director, it should be kept in mind that Section 2(60) of the Companies Act, 2013 defines an officer who is in default to mean only the following categories of directors:

1. whole-time director
2. where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;
3. every director, in respect of a contravention of any of the provisions of Companies Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings and who has not objected to the same, or where such contravention had taken place with his consent or connivance.

Therefore, except in very rare cases, a non-whole time director should not be considered as a wilful defaulter unless it is conclusively established that:

• he was aware of the fact of wilful default by the borrower by virtue of any proceedings recorded in the minutes of meeting of the Board or a Committee of the Board and has not recorded his objection to the same in the Minutes; or,
• the wilful default had taken place with his consent or connivance.

The above exception will however not apply to a promoter director even if not a whole time director.

(iv) As a one-time measure, Banks / FIs, while reporting details of wilful defaulters to the Credit Information Companies may thus remove the names of non-whole time directors (nominee directors / independent directors) in respect of whom they already do not have information about their complicity in the default / wilful default of the borrowing company. However, the names of promoter directors, even if not whole time directors, on the board of the wilful defaulting companies cannot be removed from the existing list of wilful default.