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dishonor of cheques
Whether 'Dishonor of cheques' due to insufficient funds can be a ground under Other Reasons for NPA (Non Performing Assets). Explain with the help of a recent ruling.
Non-Performing Asset (NPA) defined under The Securitisation and Reconstruction of Financial Asset and Enforcement of Security Interest Act, 2002 (SARFAESI) means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset,- (a) in case such bank or financial institution is administered or regulated by any authority or body established, constituted or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to assets classifications issued by such authority or body; (b) in any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank. As such the SARFAESI Act does not specify the dishonour of cheque due to insufficient funds to be covered under “in any other case” under sub-clause (b) of section 2(o) of the act written above. But in 2014 itself Reserve Bank of India (RBI) issued the Special Mention Accounts (SMA) guidelines whose aim is early recognition of financial distress, prompt steps for resolution and fair recovery for lenders. According to these guidelines before a loan account turns into an NPA, Non-Banking Financial Companies (NBFC’s) will be required to identify the incipient stress in the account by creating a sub-asset category viz. ‘SMA’ with three sub-categories which are: 1. SMA-0 2. SMA-1 3. SMA-2  An illustrative list of signs of stress for categorising an account as SMA-0 was also given in the circular. One of the signs which was given was Return of 3 or more cheques (or electronic debit instructions) issued by borrowers in 30 days on grounds of non-availability of balance or return of 3 or more bills / cheques discounted or sent under collection by the borrower. Therefore, it is clear from the guidelines issued by RBI that dishonor of cheque can be considered as a sign of stress for declaring an account as NPA. But whether it is covered directly under ‘any other case’ under Section 2(o) of the SARFAESI Act or not is not clear from the circular. Also there has been no ruling by the Supreme Court in this regard.  Section 2(o), The Securitisation and Reconstruction of Financial Asset and Enforcement of Security Interest Act, 2002  RBI Circular No.RBI/2013-14/528, March 21, 2014, available at www.rbi.org.in (last visited on 13 October 2014)  Annexure I, RBI Circular No.RBI/2013-14/528, March 21, 2014, available at www.rbi.org.in (last visited on 13 October 2014)
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