Borrower Financial Awareness
Borrower Financial Awareness - Understanding NPA Classification (As per RBI Guidelines)
At Akme Fintrade (India) Limited, we believe in helping our customers stay financially aware and informed. As per the RBIs Prudential Norms on Income Recognition, Asset Classification, and Provisioning (dated November 12, 2021), certain updates have been made regarding NPA (Non-Performing Asset) classification.
Here is a simplified explanation to help you understand what it means for borrowers.
Key Highlights of NPA Norms
- The timelines for Special Mention Account (SMA) categorization have been modified. The overdue timeline for SMA-0, SMA-1, and SMA-2 shall be up to 30 days, more than 30 and up to 60 days, and more than 60 and up to 90 days, respectively. Please refer to the note below for details.
- The classification of borrower accounts as Special Mention Account (SMA) as well as Non-Performing Asset (NPA) shall be done as part of the day-end process for the relevant date. The SMA or NPA classification date shall be the calendar date for which the day-end process is run. The said SMA classification of borrower accounts is applicable to all loans (except agricultural advances), including retail loans, irrespective of the size of exposure.
- Loan accounts classified as NPAs may be upgraded to standard assets only if the entire arrears of interest and principal are paid by the borrower.
- In cases of loans where a moratorium has been granted for repayment of interest, lending institutions may recognize interest income on an accrual basis for accounts that continue to be classified as ‘standard’.
- If loans with a moratorium on the payment of interest (granted at the time of sanctioning the loan) become NPA after the moratorium period is over, the capitalized interest corresponding to the interest accrued during such a period need not be reversed.
The counting of DPD (Days Past Due) will be based on the oldest payment due date, and the number of days overdue shall be counted to classify the loan account as NPA.
As per circular DBR.No.BP.BC.45/21.04.048/2018-19 dated June 7, 2019 by RBI on Prudential Framework for Resolution of Stressed Assets, lenders will recognize early signs of stress in borrower accounts immediately on default by classifying them as Special Mention Accounts (SMA). The SMA categories shall be as follows:
Loans other than Revolving facilities
| SMA Sub-categories | Basis for classification - Principal or interest payment or any other amount wholly or partly overdue |
|---|---|
| SMA-0 | Upto 30 days |
| SMA-1 | More than 30 days and upto 60 days |
| SMA-2 | More than 60 days and upto 90 days |
Example:
If the due date of a loan account is March 31, 2025, and full dues are not received before the lending institution runs the day-end process for this date, the date of overdue shall be March 31, 2025.
If it continues to remain overdue, then this account shall get tagged as SMA-1 upon running the day-end process on April 30, 2025 (i.e., upon completion of 30 days of being continuously overdue). Accordingly, the date of SMA-1 classification for that account shall be April 30, 2025.
Similarly, if the account continues to remain overdue, it shall get tagged as SMA-2 upon running the day-end process on May 30, 2025, and if it continues to remain overdue further, it shall get classified as NPA upon running the day-end process on June 29, 2025.
If the interest or principal remains overdue for more than 90 days, the loan account is classified as a Non-Performing Asset (NPA). Once an asset is classified as NPA, it will move back to the Standard category only if the DPD (Days Past Due) count becomes 0.
As per RBI guidelines, lending institutions will flag borrower accounts as overdue at the day-end process for the due date, irrespective of the time of running such processes. The classification of borrower accounts as SMA or NPA shall also be done as part of the day-end process for the relevant date.
In other words, the SMA or NPA classification date shall be the calendar date for which the day-end process is run.
What is Days Past Due (DPD)?
It indicates whether you have been consistent in your repayments and, if not, how many instalments you have missed and by how many days.
The counting of DPD will be based on the oldest payment due date, and the number of days overdue shall be counted to classify the loan account as NPA.
In case the due date and billing date are different, the due date will be considered for calculating the DPD.
Receipt of Payment Instrument
In situations where the payment instrument has been collected from the borrower but is pending clearance or has not been deposited in the bank, only the actual collection of repayment will be considered sufficient to discharge the borrowers payment obligation.
Upgradation of NPA Accounts
Loan accounts classified as NPAs may be upgraded as ‘standard’ assets only if the entire arrears of interest and principal are paid by the borrower. Partial payments, such as payment of only interest or a single installment, shall not result in the upgradation of the loan account.
Once a loan account is classified as an NPA, it shall remain as such until the borrower clears all overdue interest and principal amounts in full.
Frequently Asked Questions (FAQs) on NPA (Non-Performing Asset)
Under Asset Classification Guidelines for NBFCs - Akme Fintrade (India) Limited
A Loss Asset refers to:
Any loan or advance identified as a loss by Akme Fintrade (India) Limited, or by its internal/external auditors, or by the inspecting bank, to the extent it is not yet written off in the books.
An account where there exists a potential threat of non-recoverability, either due to erosion or non-availability of security, or due to fraudulent activities or omissions by the borrower.
Such assets are considered as having minimal realizable value and are treated as loss assets for classification purposes.
A Non-Performing Asset (NPA) is a loan or advance where interest or principal payments have remained overdue for more than 90 days. It includes:
A term loan where instalment or interest is overdue for more than 90 days.
A demand or call loan that remains unpaid for more than 90 days from the date of demand.
A bill that remains unpaid for over 90 days.
Any interest receivable or income under Other Current Assets that remains overdue beyond 90 days.
Any dues on account of sale of assets, services rendered, or expense reimbursements pending for more than 90 days.
In short, any facility where payment remains overdue beyond 90 days is classified as an NPA.
As per regulatory norms, if a borrower has multiple loan facilities with the same NBFC and any one account becomes irregular or NPA, then all linked loan accounts of that borrower shall be treated as non-performing.
Example 1:
If a customer has four loans under Loan Against Property and one of them becomes NPA due to delayed repayment, then all four loans will be treated as NPAs.
Example 2:
If a customer has loans across multiple product categories say, Loan Against Property, Business Loan, and Commercial Vehicle Loan and one account becomes NPA, then all other linked accounts under that borrower will also be treated as NPAs as per classification norms.
To remove the NPA status, the borrower must pay all outstanding dues both principal and interest in full.
Only when the entire arrears are cleared can the asset be reclassified as a Standard Asset.
In case a borrower has multiple NPA-linked accounts, payment must be made towards all such accounts to lift the NPA status completely.
A loan account can be upgraded to regular status only when all unpaid instalments both principal and interest are fully paid.
Example:
If three EMIs are pending, the borrower must pay all three instalments in full (including interest) to regularize the account and remove NPA tagging.
