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Important RBI NPA Classification Update – What Every Borrower, Co-Borrower and Co-Obligant Must Know

Important RBI NPA Classification Update

What Every Borrower, Co-Borrower and Co-Obligant Must Know

By Advocate Nazim Khan
For ChandrapurLawyer.com

Introduction

In light of recent communications issued by Federal Bank regarding updates to Non-Performing Asset classification, it is essential for borrowers, co-borrowers, and co-obligants to clearly understand the Reserve Bank of India regulatory framework governing these changes.

The applicable rules have been formally consolidated and reiterated by the RBI through its latest master circular. Misunderstanding these norms can result in serious financial and legal consequences.

RBI Master Circular on IRACP Norms

The Reserve Bank of India has consolidated the prudential norms relating to Income Recognition, Asset Classification and Provisioning through the following circular:

  • Circular Number: RBI/2024-25/12
  • Reference: DOR.STR.REC.8/21.04.048/2024-25
  • Date: April 2, 2024
  • Subject: Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances
  • Applicability: All Commercial Banks excluding Regional Rural Banks

This master circular consolidates all RBI instructions issued up to March 31, 2024 and clearly reiterates that asset and NPA classification shall be borrower-wise and not facility-wise.

Meaning of Borrower-Wise NPA Classification

  • If a borrower has multiple loan or credit facilities with the same bank
  • If any one of those facilities becomes a Non-Performing Asset
  • All other loan accounts of that borrower are also classified as NPAs
  • The classification continues until all arrears across all linked accounts are fully cleared

This rule applies equally to principal borrowers, co-borrowers, and co-obligants.

Legal Implications for Borrowers and Co-Borrowers

Joint and Several Liability

  • All borrowers are legally responsible for repayment
  • Default by one borrower affects all linked borrowers
  • The bank may recover dues from any or all borrowers
  • Individual repayment discipline does not override borrower-wise classification

Impact on Credit Reports and Credit Score

Once an account is classified as NPA, the status is reported to Credit Information Companies. The consequences may include:

  • Significant reduction in credit score
  • Reduced eligibility for future loans
  • Higher interest rates or loan rejections
  • Long-term adverse credit impact until full regularisation

Recovery and Legal Proceedings

After NPA classification, banks are legally entitled to initiate recovery action, including:

  • Issuance of demand and recall notices
  • Proceedings under the SARFAESI Act
  • Cases before Debt Recovery Tribunals
  • Civil recovery suits against borrowers and co-borrowers

Upgradation from NPA to Standard Asset

As per RBI IRACP norms:

  • All arrears across all linked accounts must be fully paid
  • This includes principal, interest, penal charges, and fees
  • Partial settlement of a single account is not sufficient

Practical Guidance for Borrowers

  • Assess financial exposure before becoming a co-borrower or co-obligant
  • Regularly monitor repayment status of all linked loans
  • Act immediately on early signs of default
  • Maintain clear written arrangements among co-borrowers

Conclusion

The borrower-wise NPA classification norm, reaffirmed by the RBI Master Circular dated April 2, 2024, places significant responsibility on all borrowers, particularly co-borrowers and co-obligants.

A single default can impact multiple loan accounts, credit history, and future financial opportunities. Timely legal awareness and proactive action are essential.

Author

Advocate Nazim Khan
ChandrapurLawyer.com

Website Disclaimer

This article is published for informational purposes only and does not constitute legal advice, solicitation, or an attorney-client relationship.

The legal position discussed is based on RBI regulations applicable on the date of publication and may change due to amendments or judicial interpretations.

Advocate Nazim Khan and ChandrapurLawyer.com shall not be responsible for any loss or consequence arising from reliance on this information. Readers should seek independent legal advice before taking any action.

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