Pro Knits v Canara Bank: why MSME borrowers must claim the 2015 revival framework before their account turns NPA

On 1 August 2024, a two-judge bench of the Supreme Court of India (Bela M. Trivedi and R. Mahadevan JJ) decided M/s Pro Knits v Board of Directors of Canara Bank, reported as 2024 INSC 565. The judgement settles a question that had split borrowers and lenders for nearly a decade: is the Framework for Revival and Rehabilitation of MSMEs, notified by the Ministry of MSME on 29 May 2015, binding on banks before they classify a small business loan as a non-performing asset (NPA)? The answer was yes, but with a sting in the tail that every MSME promoter facing a SARFAESI notice needs to understand.

This playbook explains what the 2015 framework requires, where it sits alongside the 60-day notice under Section 13(2) of the SARFAESI Act, 2002, and why the Supreme Court refused relief to the borrowers in the very batch in which it declared the framework mandatory. The short version: an MSME that wants the protection must claim it, with documents, before the account turns NPA. Waiting until possession is taken is too late.

The batch before the Court included four connected matters, which shows how widely the issue had spread across lender types:

The Statutory Position

The 2015 framework was issued by the Ministry of MSME as Notification S.O. 1432(E) dated 29.05.2015, in exercise of powers under Section 9 of the Micro, Small and Medium Enterprises Development Act, 2006. Alongside it sit RBI directions to banks issued under Sections 21 and 35A of the Banking Regulation Act, 1949, which the Supreme Court treated as part of the same binding scheme.

In Pro Knits, the Supreme Court held (paras 15 and 18) that directions under Section 9 of the MSMED Act and RBI directions under Sections 21 and 35A of the Banking Regulation Act have statutory force and bind banks. The Bombay High Court, in its order of 11.01.2024 in WP (L) 20100 of 2023, had taken the opposite view: that banks and NBFCs were not obliged to adopt the restructuring mechanism unless the borrower applied for it. The Supreme Court set that finding aside.

The framework sits upstream of SARFAESI enforcement. The table below maps the statutory sequence an MSME borrower faces, with the provision governing each stage:

The framework classifies incipient stress in three buckets. These are the trigger points at which an MSME borrower's leverage is highest:

Section 31 of the SARFAESI Act separately excludes certain cases from the Act altogether, including agricultural land and financial assets below Rs 1 lakh. An MSME whose security falls within Section 31 has a jurisdictional objection independent of the 2015 framework.

Procedure Step by Step

The framework gives the MSME two routes into the revival process: the bank can identify stress itself, or the enterprise can initiate the process voluntarily. Pro Knits makes the voluntary route the one a careful borrower should use, because paras 16 and 17 put the burden of proving MSME status on the borrower. The sequence below follows the framework as summarised in the judgement.

1. Register on Udyam and keep the certificate current. The Supreme Court held at paras 16-17 that the MSME must produce authenticated, verifiable documents of its MSME status before NPA classification. Udyam registration is the most direct evidence of that status.
2. Watch the overdue count from day 1. The 30, 60 and 90-day thresholds that separate SMA-0, SMA-1 and SMA-2 run from the due date of each instalment. A missed EMI on the 5th of a month puts the account in SMA-1 on the 31st day.
3. Check the net-worth trigger. The voluntary application must be made before accumulated losses reach half of the enterprise's net worth. If audited accounts for the last financial year already show erosion close to 50%, the window is narrowing.
4. Write to the bank with proof of MSME status. Send the Udyam certificate and a covering letter to the branch and the controlling office, by a mode that produces a dated acknowledgement. Keep copies; this letter is the evidence the Court found missing in the 2024 batch.
5. File the affidavit-backed application. The framework allows the MSME to initiate the process by an application verified by an affidavit of an authorised person. The affidavit should state the date of the application, the overdue position and the net-worth position.
6. Insist on SMA-0 processing and a committee. Once a valid voluntary application is made, the account is processed as SMA-0 and a committee is formed to examine the account and decide the corrective course.
7. Engage with the committee's options on numbers. Model the restructured repayment schedule before the meeting. Oquilia's business loan EMI calculator and debt consolidation calculator let you test what a longer tenor or a merged facility would cost each month.
8. If a Section 13(2) notice still arrives, reply within the 60 days. Use the Section 13(3A) representation to put the 2015 application on record. The creditor must reply with reasons within 15 days.
9. Challenge any Section 13(4) measure within 45 days. The securitisation application under Section 17 is filed before the DRT having jurisdiction. The section-brief notes that a deposit is not mandatory at this stage, though the tribunal may direct one.

Borrower Defences Available

Pro Knits creates a real defence, but only for the borrower who has laid the groundwork. The table below sets out the main grounds an MSME can raise, where each is raised and what it costs to raise it.

Ground 1: Non-compliance with the framework. After 1 August 2024, a borrower can argue that an NPA classification made without running the SMA process is contrary to directions that the Supreme Court has held to be binding. The argument is strongest when the borrower's Udyam certificate and written application pre-date the NPA date.

Ground 2: Defective 13(3A) reply. Section 13(3A), added by the 2004 amendment, requires the secured creditor to consider the borrower's objection and reply with reasons within 15 days. A representation that pleads the 2015 framework and receives a non-speaking reply gives the borrower a second, procedural ground before the DRT.

Ground 3: Section 31 exclusions. Where the secured asset is agricultural land, or the financial asset is below Rs 1 lakh, SARFAESI does not apply at all. This ground is independent of MSME status.

What will not work. The Supreme Court was explicit at paras 16-17: an MSME that allows SARFAESI enforcement to conclude, or that has challenged it and lost, cannot raise the MSME plea belatedly to thwart the action. The defence is a shield to be raised at the SMA stage, not a sword to unwind a completed sale.

Cost of delay. The DRAT pre-deposit under Section 18 is 50% of the debt due, which the appellate tribunal can reduce to no less than 25%. On a Rs 2 crore outstanding, that is Rs 1 crore at the default rate, or Rs 50 lakh at the minimum. Raising the framework at the SMA-1 stage costs the price of a letter and an affidavit. Borrowers weighing a lump-sum exit instead can use the loan foreclosure calculator to compare closure cost against restructuring.

Recent Tribunal/HC Position

The judgement under discussion, M/s Pro Knits v Board of Directors of Canara Bank, 2024 INSC 565 (decided 1 August 2024), is available on Indian Kanoon. It arose from the Bombay High Court's order of 11.01.2024 in WP (L) 20100 of 2023, which had held that banks and NBFCs need not adopt restructuring under the 2015 notification without an application from the borrower.

The Supreme Court's reasoning has three parts. First, at paras 15 and 18, it held that the framework must be followed before an MSME loan is classified as NPA, because directions under Section 9 of the MSMED Act and RBI directions under Sections 21 and 35A of the Banking Regulation Act carry statutory force and bind banks. The High Court's finding that the framework was not mandatory was set aside.

Second, at paras 16 and 17, the Court placed a matching obligation on the borrower: the MSME must produce authenticated, verifiable documents of its MSME status before NPA classification. A bank cannot be faulted for failing to treat an account as an MSME account when it was never shown proof that it was one.

Third, the Court declined to apply its ruling retrospectively to the appellants. Because possession of the secured assets had already been taken, it did not remand the matters. The appellants were left to pursue their other remedies under law. In practical terms, the four borrowers in the batch won the legal point in 2024 and still lost their assets.

That outcome is the core lesson. Read with Section 17's 45-day limit and Section 18's 50% pre-deposit, the 2024 ruling rewards early, documented action and gives little to a borrower who first mentions MSME status after a Section 13(4) possession notice. The statutory text of the SARFAESI Act, 2002 can be checked on India Code, and RBI's MSME circulars are published on the Reserve Bank of India website.

FAQ

Is the 2015 MSME revival framework mandatory for banks after Pro Knits?

Yes. In Pro Knits, 2024 INSC 565, decided 1 August 2024, the Supreme Court held at paras 15 and 18 that the framework notified on 29.05.2015 must be followed before an MSME loan is classified as NPA, and set aside the Bombay High Court's contrary finding of 11.01.2024.

What must an MSME borrower prove to get the protection?

Under paras 16-17 of the judgement, the MSME must produce authenticated, verifiable documents of its MSME status before the account is classified as NPA. A current Udyam registration, sent to the bank in writing, is the practical way to meet that requirement.

Can I raise the MSME framework after the bank has taken possession under Section 13(4)?

Generally not. The Supreme Court said an MSME that lets SARFAESI enforcement conclude, or that has challenged it and lost, cannot raise the plea belatedly. In the 2024 batch itself, no remand was ordered because possession had already been taken.

What are SMA-0, SMA-1 and SMA-2?

They are the special mention account stages under the framework. SMA-0 covers accounts not overdue for more than 30 days but showing stress; SMA-1 covers 31-60 days overdue; SMA-2 covers 61-90 days overdue. All three come before NPA classification.

Is there a deadline for the MSME's own application?

Yes. The voluntary application, verified by an affidavit of an authorised person, must be made before the enterprise's accumulated losses reach half of its net worth. Once made, the account is processed as SMA-0 and a committee is formed.

How long do I have to challenge SARFAESI action before the DRT?

Section 17 of the SARFAESI Act, 2002 allows a securitisation application to the DRT within 45 days of the Section 13(4) measure. A deposit is not mandatory at that stage, though the tribunal may direct one. An appeal to the DRAT under Section 18 lies within 30 days, with a 50% pre-deposit reducible to 25%.

Does the framework apply to NBFC lenders as well as banks?

The Bombay High Court order of 11.01.2024 under appeal had addressed banks and NBFCs together, and the Supreme Court set aside its finding that the framework was not mandatory. The binding force the Court identified, however, rests on Section 9 of the MSMED Act and RBI directions under Sections 21 and 35A of the Banking Regulation Act, 1949, so an NBFC borrower should check which RBI directions apply to their specific lender.

This article is general information prepared by the Oquilia Research Desk from the Supreme Court's judgement of 1 August 2024 and the text of the SARFAESI Act, 2002. It is not legal advice; consult a qualified advocate on the facts of your account.