In terms of RBI guidelines on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, banks are required to recognise incipient stress in the borrower accounts and classify them as Special Mention Account (SMA) and, if required, subsequently classify them as Non-Performing Asset (NPA). Please find explanation on some of the aspects relating to SMA / NPA classification in the below Annexure.
Customers are requested to go through the same, ensure timely servicing of the interest and principal repayments (on or before the due date) to avoid classification of an account as SMA / NPA.
It may be noted that the examples quoted in the Annexure are illustrative, relate to common scenarios and not exhaustive in nature. In case of any further clarification, you may get in touch with your Relationship Manager.
Annexure relating to Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances
Concepts / clarifications / Illustrative examples on due dates and specification of SMA / NPA classification dates:
Dues:
mean, the principal / interest/ any charges levied on the loan account which are payable within the period stipulated as per the terms of sanction of the credit facility.
Overdue:
means, the principal / interest/ any charges levied on the loan account which are payable, but have not been paid within the period stipulated as per the terms of sanction of the credit facility. In other words, any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank.
Relevance of the Principle of ‘First In First Out’ (FIFO) in appropriation of payments into the borrowal account:
The Principle of FIFO i.e., ‘First In, First Out’ accounting method is relevant to arrive at the No. of days of overdue for determining the SMA / NPA status. The FIFO principle assumes that, the oldest outstanding dues in the loan account needs to be cleared first. The FIFO method thus requires that what is due first must be paid by the borrower first. For example:
if in any loan account as on 01.02.2021 there are no overdues and an amount of Rs. X is due for payment towards principal instalment/interest/charges, any payment being credited on or after 01.02.2021 in the loan account will be used to pay off the dues outstanding on 01.02.2021.
Assuming that nothing is paid /or there is partial payment (Rs. Y) of dues during the month of February, the overdue as on 01.03.2021 will be Rs. X-Y.
Additionally, an amount of Rs. Z becomes due as on 01.03.2021. Now any payment /partial payment into the account on or after 01.03.2021 will be first utilized to pay off the partial due of 01.02.2021 (Rs. X – Rs. Y) . If there is more recovery than the Rs. X – Rs. Y then after recovering dues of 01.02.2021, the remaining amount will be treated as recovery towards due of 01.03.2021.
Age of oldest Dues:
The age of oldest dues is reckoned in days from the date on which the oldest payment is due and continues to remain unpaid. In the aforesaid illustration, if the Dues relating to 1 February 2021 remain unpaid till 01.03 2021, the age of the oldest dues is reckoned as 29 days on 02.03.2021.
Classification as Special Mention Account (SMA) and Non-Performing Asset (NPA)
Lending institutions will recognize the incipient stress in loan accounts, immediately on Default, by classifying them as Special Mention Accounts (SMA). The basis of classification of SMA / NPA Category shall be as follows:
Loans in the nature of Term Loans | Loans in the nature of cash credit/overdraft | ||
SMA Sub-categories | Basis for classification — Principal or interest payment or any other amount wholly or partly overdue | SMA Sub-categories | Basis for classification —Outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for a period of |
SMA-0 | Upto 30 days | ||
SMA-1 | More than 30 days and upto 60 days | SMA-1 | More than 30 days and upto 60 days |
SMA-2 | More than 60 days and upto 90 days | SMA-2 | More than 60 days and upto 90 days |
Non-performing Asset:
Non-Performing Asset (NPA) is a loan or an advance where:
‘Out of Order’ Status:
An account shall be treated as ‘out of order’ if:
Illustration:
Date of debit of OD interest: 30 September 2021, 31 October 2021 and 30 November 2021. If there are no credits in the OD account from 2 September 2021 to 30 November 2021 (being 90 days period) or the sum of credits in the OD account is less than the sum of OD interest debited in the previous 90 days (i.e. during the period from 2 September 2021 to 30 November 2021), the account will be classified as NPA on 30 November 2021.
Upgrade of account from NPA to regular status:
A loan account, classified as NPA will be upgraded to Standard Asset only upon regularisation of all loan accounts of the borrower having arrears and rectification of attendant irregularities relating to Review/Renewal and Stock and Book Debts of the borrowal account.
Illustrative movement of an account to SMA category to NPA category based on delay / non-payment of dues and subsequent upgradation to Standard category at day end process:
Due date of payment | Payment Date | Payment covers | Age of oldest dues in days | SMA / NPA Categorisation | SMA since Date /SMA class date | NPA categorization | NPA Date |
01.01.2022 | 01.01.2022 | Entire dues upto 01.01.2022 | 0 | NIL | NA | NA | NA |
01.02.2022 | 01.02.2022 | Partly paid dues of 01.02.2022 | 1 | SMA-0 | 01.02.2022 | NA | NA |
01.02.2022 | 02.02.2022 | Partly paid dues of 01.02.2022 | 2 | SMA-0 | 01.02.2022 | NA | NA |
01.03.2022 | Dues of 01.02.2022 not fully paid 01.03.2022 is also due at EOD 01.03.2022 | 29 | SMA-0 | 01.02.2022 | NA | NA | |
Dues of 01.02.2022 fully paid, Due for 01.03.2022 not paid at EOD 01.03.2022 | 1 | SMA-0 | 01.03.2022 | NA | NA | ||
No payment of full dues of 01.02.2022 and 01.03.2022 at EOD 03.03.2022 | 31 | SMA-1 | 01.02.2022 / 03.03.2022 |
NA | NA | ||
Dues of 01.02.2022 fully paid, Due for 01.03.2022 not fully paid at EOD 1.03.2022 | 1 | SMA-0 | 01.03.2022 | NA | NA | ||
01.04.2022 | No payment of dues of 01.02.2022, 01.03.2022 and amount due on 01.4.2022 at EOD 01.04.2022 | 60 | SMA 1 | 01.02.2022 / 03.03.2022 |
NA | NA | |
No payment of dues of 01.02.2022 till 01.04.22 at EOD 02.04.2022 | 61 | SMA 2 | 01.02.2022 /02.04.2022 | NA | NA | ||
01.05.2022 | No payment of dues of 01.02.2022 till 01.05.22 at EOD 01.05.2022 | 90 | SMA 2 | 01.02.2022 /02.04.2022 | NA | NA | |
No payment of dues of 01.02.2022 till 01.05.2022 at EOD 02.05.2022 | 91 | NPA | NA | NPA | 02.05.2022 | ||
01.06.2022 | 01.06.2022 | Fully Paid dues of 01.02.2022 at EOD 01.06.2022 | 93 | NPA | NA | NPA | 02.05.2022 |
01.07.2022 | 01.07.2022 | Paid entire dues of 01.03.2022 & 01.04.2022 at EOD 01.07.2022 | 62 | NPA | NA | NPA | 02.05.2022 |
01.08.2022 | 01.08.2022 | Paid entire dues of 01.05.2022 & 01.06.2022 at EOD 01.08.2022 | 32 | NPA | NA | NPA | 02.05.2022 |
01.09.2022 | 01.09.2022 | Paid entire dues of 01.07.2022 & 01.08.2022 at EOD 01.09.2022 | 1 | NPA | NA | NPA | 02.05.2022 |
01.10.2022 | 01.10.2022 | Paid entire dues of 01.09.2022 & 01.10.2022 | 0 | Standard Account with No Overdues | NA | NA | STD from 01.10.2022 |
Please note: