Introduction
On August 1, 2024, the Supreme Court of India gave an important judgment in the case of M/S. Pro Knits vs. The Board of Directors of Canara Bank & Others. This ruling clarifies the responsibilities of banks and Non-Banking Financial Companies (NBFCs) towards Micro, Small, and Medium Enterprises (MSMEs) under the MSMED Act, 2006, and the SARFAESI Act, 2002.
Background
The appellants, a group of MSMEs, were unhappy with the Bombay High Court's decision. The High Court had said that banks did not have to follow the MSME restructuring process unless the MSMEs applied for it. The MSMEs wanted the banks to follow the restructuring process outlined in a government notification from May 29, 2015, even without their application.
Key Issues
The main issue in this case was whether banks and NBFCs must follow the MSME restructuring process automatically or only when MSMEs apply for it.
Supreme Court's Ruling
The Supreme Court, led by Justices Bela M. Trivedi and R. Mahadevan, ruled in favor of the MSMEs and reversed the High Court's decision. The key points of the ruling are:
1. Binding Nature of MSME Framework: The Court said that the instructions for helping MSMEs recover, as issued by the government and RBI, are mandatory for all banks.
2. Mandatory Compliance by Banks: Banks must identify early signs of stress in MSME accounts and follow the restructuring process before declaring these accounts as Non-Performing Assets (NPAs).
3. Banks' Duties: Banks need to create specific categories to identify and manage stress in MSME accounts, ensuring that MSMEs get support to recover financially.
4. MSMEs' Responsibilities: MSMEs must provide proper documents to prove their status under the MSMED Act, which helps them get the benefits of the restructuring process.
Implications
This judgment strengthens the support system for MSMEs in India. It ensures that banks must help MSMEs recover from financial difficulties before taking severe actions like declaring them NPAs and recovering debts. This support is crucial for the growth and stability of MSMEs, which play a vital role in India's economy.
Conclusion
The Supreme Court's decision in M/S. Pro Knits vs. The Board of Directors of Canara Bank & Others on August 1, 2024, is a significant step in protecting MSMEs. It mandates banks to follow a structured process to support MSMEs in distress, promoting their recovery and competitiveness.
