1. Definition under RBI

Doubtful Asset: An NPA that has remained in the sub-standard category for 12 months.

Sequence is:

Standard (0-90 days overdue) -> Sub-standard (NPA up to 12 months) -> Doubtful (Sub-standard + 12 months) -> Loss Asset

In other words, loan has been an NPA for more than a year, and the bank's confidence in full recovery is now seriously shaken.

As per RBI prudential norms:

• Sub-standard = remained NPA for period less than or equal to 12 months
• Doubtful = remained in sub-standard category for more than 12 months

2. Sub-classification and Provisioning (as of 2024-25)

RBI does not treat all doubtful assets equally. It is divided by duration of doubt:

Also:

• Income Recognition: Interest cannot be taken to P&L. Reversal of accrued interest required.
• No upgradation: Account cannot be upgraded from Doubtful to Sub-standard unless it pays full overdues. "Up gradation within NPA category is not permitted."
• Collateral: Value of security is heavily discounted after 3 years. If realizable value is zero, account must be classified as Loss.

3. Accounting Treatment under Spanish Law - For Comparison

Under Spanish Circular 4/2017 of Banco de España (IFRS 9 model):

• Doubtful = Stage 3 - Riesgo Dudoso. 90 days past due or unlikely to pay.
• Provisioning based on Expected Credit Loss (ECL) lifetime, not flat % like India.

4. Case Laws - Indian

This is the most litigated part of banking law.

Case 1: Transcore vs Union of India (2008) 1 SCC 125 - THE definition case
Principle: When NPA Act applies.
SC held:

It is only when these assets in the hands of bank become substandard, doubtful or loss then the account or the asset becomes classifiable as a non-performing asset and it is only then the NPA Act (SARFAESI) comes into operation.

And clarified:

Section 13(2) proceeds on the basis that borrower is under liability and his account in books of bank is classified as substandard or doubtful or loss.

This means bank cannot invoke SARFAESI unless asset is classified as Doubtful/Sub-standard/Loss.

Case 2: Mardia Chemicals Ltd. vs Union of India (2004) 4 SCC 311
Principle: Constitutional validity of SARFAESI.
Borrowers challenged that RBI cannot define what is doubtful asset - it is excessive delegation.
SC upheld SARFAESI Act but gave safeguards:

• Borrower can raise objection under Sec 13(3A)
• If classification as doubtful is wrong, DRT can interfere.
• RBI guidelines for classification have statutory force under Sec 21 and 35A.

Case 3: Keshavlal Khemchand & Sons vs Union of India (2015)
Principle: Delegation to RBI is valid.
Petition argued Sec 2(1)(o) does not define substandard, doubtful or loss asset and such essential legislative function has been delegated to banks/RBI in uncontrolled manner violating Article 19(1)(g).
SC rejected argument. RBI is expert body, its IRAC norms are not arbitrary.

Case 4: Sardar Associates vs Punjab & Sind Bank (2009)
Principle: Doubtful asset provisioning cannot be ignored for OTS.
Bank cannot offer OTS below RBI's provisioning for doubtful assets to show lower loss. RBI's provisioning norms are binding.

Case 5: M/s. Holystar Natural Resources Pvt. Ltd. vs Union of India - Bombay HC challenge
Same argument - SARFAESI does not define doubtful asset. Court upheld RBI's power to define via circulars.

Case 6: Parkash Foods vs Union Bank - NCLAT 2022
Account was Doubtful >3 years (D3). Resolution Professional argued bank had already provided 100%, so debt is extinguished. Tribunal held: Provisioning is for bank's balance sheet, it does not extinguish borrower's liability. Doubtful classification does not mean debt waiver.

Case 7: Spanish Case Law - STS 272/2021, Tribunal Supremo (Spain) on dudoso
Spanish Supreme Court on Bankia case: If bank classifies loan as dudoso without objective evidence of unlikely to pay, provision is not tax-deductible and director liability arises. Requires documented impairment triggers.

5. Practical Compliance Checklist for Doubtful Assets

For Bank:

1. System must auto-flag account on day 365 of sub-standard.
2. Security valuation: Fresh valuation every 3 years by approved valuer. If not done, provision as unsecured.
3. Unsecured portion - 100% provision immediately.
4. Cannot charge interest to P&L. Reverse.
5. Report to CRILC as Doubtful.
6. SARFAESI notice Sec 13(2) can now be issued - Transcore mandates this classification first.

For Borrower:
If you are classified as Doubtful wrongly:

• File representation under Sec 13(3A) of SARFAESI within 60 days challenging classification as not per RBI 90-day norm.
• Approach DRT under Sec 17 if bank does not consider.