The Reserve Bank of India has now become the sole regulator of borrowing and lending in the country.

The Gujarat High Court in a ruling on Thursday took away powers to determine whether asset is NPA or not and the period of non-payment that would make an asset NPA from all regulators except the RBI.

A division bench headed by Chief Justice Bhaskar Bhattacharya has ruled that a 2005 amendment to in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (Sarfaesi) Act, 2002 was illegal, unconstitutional and contrary to the object of the Act.

The amendment which defines NPA under section 2(1)(O) classified different institutions (60 in total) under two groups – those under the purview of the RBI and those regulated by other agencies. A petition moved by a borrower through advocate Vishwas Shah and Masoom Shah had challenged the amendment.

The court observed that for the purpose of enforcing a statute like the Securitisation Act, which deviates from the ordinary laws of the land relating to attachment, sale and recovery of possession of the secured asset, the fate of a borrower cannot be left in the hands of the regulators of those financiers.

With the judgment, RBI can determine classification of NPAs by banks and various types of financial institutions – NBFCs, LIC, state finance companies among others.

At present, banks classify a borrower's (consumer or corporate) account as NPA after continuous non-payment of principal and interest for 90 days and make necessary provision for the same.

However, NBFC, state finance companies (SFCs promoted by state governments) and other companies get a different period to determine whether the asset is NPA or not.

Certain housing finance companies, SFCs and companies like Power Finance Corporation are not under the regulation of RBI for NPA classification, they are governed by respective laws and regulators.

Meanwhile, the High Court in the same judgment has rejected the argument of the petitioner that para 2.1 of the guidelines of the RBI that classify various number of days for various types of banks and financial institutions.

The petitioner has prayed that all borrowers should be treated equally and one should not get less number of days compared with other borrower of NBFC. The court has ruled that the guidelines were dealt with in the 2004 judgment of the apex court.