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Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances–Commercial, Corporate & Institutional Banking

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:

  1. interest and/ or instalment of principal remains overdue for a period of more than 90 days in respect of a term loan,
  2. the account remains ‘out of order’ as indicated below in respect of an Overdraft/Cash Credit (OD/CC),
  3. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
  4. the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops,
  5. the instalment of principal or interest thereon remains overdue for one crop season for long duration crops.
  6. the regular / ad hoc credit limits have not been reviewed / renewed within 180 days from the due date / date of ad hoc sanction.
  7. Where loans / limits have been sanctioned against the security of Stock and Book Debts, and, in such cases, if the position of such Stock and Book Debts is not submitted to the lenders to determine the Drawing Power, the outstanding in the account based on the Drawing Power calculated from the Stock and Book Debts Statement older than three months would be deemed as ‘irregular’ and, if such irregularity exists for a continuous period of 90 days, the account will be classified as NPA.

‘Out of Order’ Status:
An account shall be treated as ‘out of order’ if:

  1. the outstanding balance in the CC/OD account remains continuously in excess of the sanctioned limit/drawing power for 90 days, or
  2. the outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but there are no credits continuously for 90 days, or the outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but credits are not enough to cover the interest debited during the previous 90 days period.

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:

  1. NPA classification is borrower wise and not account wise. Hence if one loan account of the borrower is classified as NPA, all other loan accounts of the borrower will also be classified as NPA.
  2. Credits received before the day-end process are considered for calculation of delinquency at the time of undertaking the asset classification process. Any credit received subsequently are treated as receipts of the subsequent day.
  3. As per the regulatory guidelines, Bank has to report Stress/Default /NPA to Central Repository Information of Large Credit (CRILC), Credit Information Companies etc. from time to time which impact the credit history of the borrowers and attendant repercussions.
  4. The aforesaid few examples are illustrative and not exhaustive in nature covering common scenarios and that the IRACP norms and clarifications provided by RBI on the subjects referred above will prevail.