Misclassification of NPA – How to Challenge Banks

The banking system in India follows strict guidelines set by the Reserve Bank of India (RBI) to classify loan accounts as Non-Performing Assets (NPA). An NPA classification allows the bank to initiate aggressive recovery actions, including notices under the SARFAESI Act, loan recall, or even property auctions.
However, wrongful NPA classification is not uncommon. Many borrowers face financial stress because their accounts are marked as NPA prematurely or incorrectly, often due to procedural lapses or calculation errors by the bank.

If you believe your loan account has been misclassified, Indian law provides strong legal remedies to challenge the bank’s actions.

🔎 What is NPA Classification?

Under RBI guidelines, a borrower’s account is declared as a Non-Performing Asset (NPA) when:

  • Principal or interest remains overdue for 90 days or more in a term loan;

  • Overdraft/Cash Credit account remains “out of order” for 90 days; or

  • Any other credit facility shows continuous default as per the norms.

Once classified as an NPA, the bank can:

  • Issue a loan recall notice,

  • Start recovery under SARFAESI Act, 2002,

  • Initiate proceedings before the Debt Recovery Tribunal (DRT), and

  • Report the default to credit bureaus, affecting your credit score.

⚠️ Common Grounds for Wrongful NPA Classification

Banks sometimes fail to follow RBI-mandated procedures, leading to wrongful or premature NPA tagging. Some common issues include:

  • ❌ Miscounting the 90-day period (e.g., not considering partial payments).

  • ❌ Ignoring RBI’s Restructuring/Relief Guidelines during COVID-19 or natural calamities.

  • ❌ Classifying the account without proper notices or communication.

  • ❌ Errors in interest calculation or EMI posting.

  • ❌ Declaring NPA despite valid dispute on loan terms.

Such actions can be challenged before appropriate forums.

⚖️ Legal Remedies to Challenge Misclassification

If you believe your account is wrongly declared as NPA, you can take the following steps:

1️⃣ Seek an Internal Review

  • Write to the Branch Manager and Nodal Officer of the bank, explaining the discrepancy.

  • Attach proof of payments, correspondence, and account statements.

  • Request a written clarification and rectification.

2️⃣ Approach the RBI Ombudsman

  • File a complaint under the Integrated Ombudsman Scheme, 2021, if the bank fails to resolve your grievance within 30 days.

  • The Ombudsman can direct the bank to reverse wrongful actions.

3️⃣ File an Application Before DRT (Debt Recovery Tribunal)

  • Under Section 17 of the SARFAESI Act, borrowers can directly challenge the bank’s action of classifying an account as NPA or issuing a demand notice.

  • The DRT has the power to quash wrongful NPA classification, stay recovery, and restrain property auctions.

4️⃣ High Court Writ Petition

  • If there is a clear violation of RBI guidelines or principles of natural justice, you may approach the High Court under Article 226 of the Constitution seeking urgent relief, including a stay on coercive action.

🛡 Role of a DRT Lawyer

Challenging a bank is not easy. A skilled DRT lawyer can:

  • Examine loan documents and identify RBI guideline violations.

  • Draft and file a Section 17 SARFAESI application for stay of possession or auction.

  • Represent you in Debt Recovery Tribunal and negotiate settlements.

  • File writ petitions in the High Court if the bank acts illegally.

Timely legal intervention can prevent irreversible damage such as loss of property or negative credit history.

💡 Practical Tips for Borrowers

  • Keep all repayment proofs (NEFT, RTGS, cheques, emails) safely.

  • Regularly monitor account statements to catch irregularities early.

  • Never ignore 13(2) or 13(4) SARFAESI notices—these have strict deadlines for challenge.

  • Engage an experienced DRT advocate immediately upon receiving any bank notice.

✅ Conclusion

A wrongful NPA classification can lead to property auctions, legal notices, and financial loss. Borrowers have every right to challenge a bank that fails to follow RBI norms.
If your account has been wrongly marked as NPA, quick legal action is critical to protect your rights.

About the Author

Advocate Ayush S. Jain is a practicing lawyer at the High Court of Gujarat and Debt Recovery Tribunal (DRT), specializing in banking disputes, SARFAESI matters, and financial recovery cases.
📞 +91 7440772911
📧 [email protected]

If you believe your account is wrongly classified as NPA, contact me for a consultation and take the right legal steps before it’s too late.

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