In its landmark judgment passed in the case of Pro Knits v. Board of Directors of Canara Bank & Ors., the Hon’ble Supreme Court addressed the appeals preferred by several Micro, Small, and Medium Enterprises (MSMEs) challenging the process adopted by the financial institutions, particularly banks, in classifying the accounts of such MSMEs as Non-Performing Assets (NPAs).
The ground for challenge was non-compliance of the restructuring process outlined in the ‘Instructions for Framework for Revival and Rehabilitation of MSMEs’ issued vide the notification dated 29.05.2015 by the Ministry of MSME (MSME Notification).
The parties argued between the impacts of the NPA classification on business operations, creditworthiness, and overall financial health of a MSME and overriding effect of SARFAESI Act over those of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). Further, section 9 of MSMED Act was also relied upon by them to submit that the framework given under the MSME Notification is merely directory and not mandatory.
The Supreme Court, in setting aside the decision of the Bombay High Court, observed that the instructions and directions issued under the MSMED Act and by the Reserve Bank of India (RBI) have statutory force and are binding on all scheduled commercial banks. The Hon’ble Apex Court also clarified that the provisions of the SARFAESI Act do not override the MSME Act in the context of loan restructuring and NPA classification. Consequently, the actions of the banks in classifying the Appellants’ accounts as NPAs without following the restructuring process were held to be in violation of the MSMED Act and the RBI guidelines.
The present judgment comes as a respite to the MSMEs struggling to run their operations, especially due to the after effect of COVID – 19. As the MSMEs contribution in the GDP is almost 30%, it is important that an environment is established which would support and address the financial challenges faced by the MSMEs. This judgment acts just the right step towards the promotion of a progressive environment towards the MSMEs by establishing the mandatory implementation of the MSME restructuring framework.