Interest In Suspense Account Can Be Recovered As Part Of Debt, Supreme Court Rules

The Supreme Court has ruled that interest accumulated after a loan account has been classified as a non-performing asset (NPA) and transferred to a suspense account can be recovered by the lending bank. The apex court has held that such interest forms part of the debt payable by the borrower and cannot be left out while calculating the total outstanding dues.

The case (Punjab National Bank versus M/s. Shree Jyoti Education and Management Trust World and Others) before the Supreme Court concerns whether interest recorded separately in a suspense account after an account has been classified as an NPA can still be treated as part of the borrower’s debt.

Interest In Suspense Account

When a loan account becomes an NPA, banks follow accounting practices under which interest that has accrued but has not been received is transferred to a suspense account. This interest is not recognised as income in the bank’s books in the same manner as interest from performing loans.

The dispute has centred on whether this accounting treatment means that the interest can be excluded from the amount recoverable from the borrower.

The Supreme Court has rejected this interpretation. It has held that the manner in which a bank records interest does not by itself remove the borrower’s liability for an amount that is legally due under the loan agreement and applicable law.

The Loan Account In Question

The case involves a loan account that was classified as an NPA. PNB had transferred the interest accruing after the NPA classification to a separate suspense account.

The main issue was the amount which the bank could recover from the borrower. The lower court did not include the interest kept in the suspense account while calculating the total outstanding dues. PNB challenged this decision in the Supreme Court, stating that the interest in the suspense account was also a part of the borrower's debt.

The Supreme Court accepted the bank’s position and held that PNB can claim the interest as part of the debt.

Ramifications Of The Judgement on Borrowers

The judgment has clarified that interest transferred to a suspense account cannot automatically be treated as waived or cancelled. If the interest is legally payable under the loan terms and applicable law, its separate accounting treatment does not by itself remove the borrower’s liability.

The ruling has also drawn a distinction between accounting treatment and legal liability. An amount may be recorded separately in a bank’s books, but that accounting entry alone does not determine whether the borrower owes the amount.

The Supreme Court has therefore allowed a qualifying interest maintained in a suspense account to be included while calculating the debt due from a borrower in recovery proceedings.