Bombay HC Rules No Penal Restrictions After NPA Settlement Without Fraud, Relaxes 5-Year RBI Ban On Borrowers

The Bombay High Court has overturned a strict interpretation of RBI guidelines regarding borrowers who settle Non-Performing Accounts (NPAs). The court ruled that the standard five-year ban on accessing institutional finance, as outlined in the RBI’s 2015 Master Circular on Wilful Defaulters, should not automatically apply once a borrower has fully settled their debt with the lending bank. This ruling came in response to a petition by directors of International Mineral Trading Private Limited (IMTC), who, despite a full settlement and a ‘No Due Certificate’ from Bank of Baroda, continued to face restrictions. The court emphasized that continued penal measures are only justified when there is evidence of fraud, siphoning of funds, or similar misconduct. The judges noted that more recent RBI circulars (2024 and 2025) have adopted a more nuanced approach, acknowledging the impact of compromise settlements. The court clarified that the nature and degree of default must be considered, and that a blanket five-year embargo is unreasonable in the absence of fraudulent activity, ultimately removing the restriction on the petitioners’ access to institutional finance.

(Source：The Free Press Journal)