Customer Education Advisory

Consumer Education Literature: FAQs on Income Recognition, Asset Classification and Provisioning (IRACP) Norms related to Advances. 

Dues: mean, the principal /interest/any charges levied on the loan account which are payable within the period stipulated as per the terms of section of the credit facility.

Overdue: mean, 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 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.

Appropriation Principle: 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.500 (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 and/or there is partial payment (Rs.200 (Y)) of dues during the month of February, the overdue as on 01.03.2021 will be Rs. X-Y / Rs. 500 – 200 = Rs.300.

Additionally, an amount of Rs. 100 (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 (Rs X - Rs.Y+ Rs Z) / (Rs.500-200+100=400).

Age of oldest Dues (or Days-Past-Due - DPD): 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 1st February 2021 remain unpaid till 01.03.2021, the age of the oldest dues is reckoned as 29 days on 02.03.2021.

What is SMA? A Special Mention Account (SMA) is a loan account, showing the symptoms of stress as evidenced by a default in payment of the dues, and/or, in which principal or interest or both are overdue but for a period of less than 90 days.

SMA account categorization is a precautionary measure to recognize the financial stress early and therefore to take corrective action to contain that stress and prevent the loan account from turning into NPA.

Classification as Special Mention Account (SMA) and Non-Performing Asset

Lending institutions will recognize the incipient stress in loan accounts, immediately on default by classifying them as Special Mention Accounts (SMA) The boss of classification of SMA/NPA category shall be as follows:

 

Non-performing Asset: 

Non-Performing Asset (NA) 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 on 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.

‘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.

Illustrative movement of an account to SMA category to NPA category based on non-payment of dues at day-end process:

If due date of a loan account is March 31, 2021, and full dues are not received before the day-end process for this date, the date of overdue shall be March 31, 2021.

 

 

It is advised to maintain sufficient funds a day in advance in your bank account through which the loan is being serviced.

 

Upgradation of accounts classified as NPA

All the loan or credit facility accounts of a borrower will be classified as NPA, in case any one of the accounts get classified as NPA and will continue to remain classified as NPA unless the overdues of all the loan accounts or credit facilities are fully repaid by the customer.