NPA definition constitutional: SC

In an important decision, the Supreme Court of India upheld the constitutional validity of amended definition of “non-performing assets” under The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“Act”) stating that the function of prescribing norms for classifying a borrower’s account as “non-performing assets” is not an essential legislative function and can be delegated.

Borrowers challenged the constitutional validity of the amended definition of “non-performing assets” (“NPA”) on the main grounds of excessive delegation by legislature and being violative of Article 14 of the Constitution.

The Court said that it is not necessary that legislature should define every expression it employs in a statute. “…the function of prescribing the norms for classifying a borrower’s account as a NPA is not an essential legislative function. The laying down of such norms requires a constant and close monitoring of the financial system demanding considerable amount of expertise in the areas of public finance, banking etc., and the norms may require a periodic revision. All that activity involves too much of detail and promptitude of action,” the Court observed.

“The borrower cannot be heard to complain that defining of the conditions subject to which the creditor could classify the account as NPA, is part of the essential legislative function,” the Court said.

The Court also rejected the argument that by authorizing different bodies to prescribe different norms for the identification of a NPA with reference to different creditors amount to unreasonable classification for the reason that all the creditors do not form a uniform/homogenous class. The Court said there are innumerable differences among the creditors based on the legal structure of the creditors’ organization, upon the nature of the loan advanced by them, and on the terms and conditions subject to which such loans or advances are made.

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