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Monday, December 06, 2021

RBI asks banks to standardise NPAs only on full interest, principal payments

As per the central bank, some lending institutions upgrade accounts classified as NPAs to ‘standard’ asset category upon payment of only interest overdues and partial overdues.

By: ENS Economic Bureau | Mumbai |
Updated: November 13, 2021 7:52:32 am
RBI, Banks, Bank NPA, NPA, loan account, India news, Indian express, Indian express news, current affairsOn NPA classification, the central bank said the lender must recognise incipient stress in a borrower account, immediately on default, by classifying it as SMA. (Representational)

The Reserve Bank of India (RBI) has directed banks that that loan accounts classified as non-performing assets (NPAs) should be upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by the borrower.

According to the central bank, some lending institutions upgrade accounts classified as NPAs to ‘standard’ asset category upon payment of only interest overdues and partial overdues.

“In the case of interest payments in respect of term loans, an account will be classified as NPA if the interest applied at specified rests remains overdue for more than 90 days,” the RBI said in a notification.

Lenders have also been asked to specifically mention in the loan agreements the exact due date of a loan and the breakup of the principal and interest, among others, instead of giving a description of the due dates, which leaves scope for interpretation. Henceforth, all lenders have to clearly mention the exact due dates for repayment, frequency of repayment, break up between the principal and interest, examples of SMA/NPA classification dates etc, it said.

The RBI said this should be clearly specified in the loan agreement and the borrower shall be apprised of the same at the time of loan sanction and also at the time of subsequent changes if any, and till full repayment of the loan is done. This will be applicable immediately for new loans or before December 31, 2021, and for the existing loan as and when changes occur.

In cases of a loan under moratorium, the exact date of commencement of repayment shall also be specified in the loan agreements, it added.

Sticking to its due by the end of the day/one-day default norms, which has given many large borrowers heartburns, the RBI further clarified that an account should be flagged as overdue as part of the lender’s day-end processes for the due date, irrespective of the time of running such processes, reiterating that all extant IRACP norms specify that an amount must be treated as overdue if it’s not paid on the due date fixed by the lender.

Similarly, classification of an account as SMA (special mention account) as well as NPA (non-performing assets) should be done as part of the day-end process and the SMA/NPA classification date shall be the calendar date for which the day-end process is run. Stated differently, the date of SMA/NPA shall reflect the asset classification status of an account at the day-end of that calendar date, the regulator stressed.

On NPA classification, it said the lender must recognise incipient stress in a borrower account, immediately on default, by classifying it as SMA. Without any ambiguity, it clarified that the intervals are intended to be continuous and accordingly, loans other than revolving facilities like cash credit/overdraft will become SMA if the principal or interest payment or any other amount wholly or partly become overdue or if the outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for 0-30 days as SMA, for 30-60 days as SMA-1 and over 60-90 days as SMA2/NPAs.

Stated differently, the date of SMA/NPA should reflect the asset classification status of an account at the day-end of that calendar date.

For instance, if the due date is March 31, and full dues are not received before the day-end process, the date of overdue shall be March 31. If it continues to remain overdue, then this account shall get tagged as SMA-1 on running the day-end process on April 30, on completion of 30 days of being continuously overdue.

Accordingly, the date of SMA-1 classification for that account should be April 30. Similarly, if the account continues to remain overdue, it shall get tagged as SMA2 on running day-end process on May 30 and if continued to remain overdue further, it shall get classified as NPA on running day-end process on June 29.

 

The central bank has said an account should be treated as ‘out of order’ if the outstanding balance in the CC or OD account remains continuously in excess of the sanctioned limit/drawing power for 90 days. The account should be treated as out of order if 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 or OD account is less than the sanctioned limit or drawing power but credits are not enough to cover the interest debited during the previous 90 days period, it said.

If loans with moratorium on payment of interest (permitted at the time of sanction of the loan) become NPA after the moratorium period is over, the capitalized interest corresponding to the interest accrued during such moratorium period need not be reversed, the RBI said.

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