The Reserve Bank of India (RBI) on Friday issued a set of clarifications to its prudential norms on income recognition, asset classification and provisioning (IRACP), including directions on more transparent loan agreements and upgrades of non-performing assets (NPAs).
Henceforth, banks and non-banking financial companies (NBFCs) must clearly specify the exact due dates for repayment of a loan, frequency of repayment, break-up between principal and interest, as also examples of special mention account (SMA)/ NPA classification dates in the loan agreement. The borrower shall be apprised of these details at the time of loan sanction and also at the time of subsequent changes to the sanction terms or loan agreement till full repayment of the loan.
“The extant instructions on IRACP norms specify that an amount is to be treated as overdue if it is not paid on the due date fixed by the bank. It has been observed that due dates for repayments are sometimes not specifically mentioned in the loan agreements, and instead a description of due dates is mentioned, leaving scope for different interpretations,” the RBI said.
In cases of loans with moratorium on payment of principal or interest, the exact date of commencement of repayment shall also be specified in the loan agreements. The deadline for complying with this guideline is December 31, 2021 for fresh loans. In case of existing loans, compliance to these instructions will have to be ensured as and when such loans become due for renewal or review.
Lenders will have to flag borrower accounts as overdue as part of their day-end processes for the due date, irrespective of the time of running such processes. Similarly, classification of borrower accounts as SMA as well as NPA shall be done as part of the day-end process for the relevant date and the SMA or NPA classification date shall be the calendar date for which the day-end process is run.
Additionally, the central bank clarified that the instructions on SMA classification of borrower accounts apply to all loans, including retail, irrespective of the size of exposure of the lending institution.
Cash credit/overdraft (CC/OD) accounts are classified as NPA if they are ‘out of order’. The RBI clarified that an account shall be treated as ‘out of order’ if the outstanding balance in the account remains continuously in excess of the sanctioned limit or drawing power for 90 days. Alternately, a CC/OD account will be considered ‘out of order’ if the outstanding balance in it is less than the sanctioned limit or drawing power but there are no credits continuously for 90 days, or the balance in the account is less than the sanctioned limit or drawing power but credits are not enough to cover the interest debited during the previous 90-day period.
In case of interest payments, an account is classified as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter. The RBI clarified that in case of interest payments in respect of term loans, an account will be classified as NPA if the interest applied at specified rates remains overdue for more than 90 days. These instructions shall be effective from March 31, 2022.
“It has been observed that some lending institutions upgrade accounts classified as NPAs to ‘standard’ asset category upon payment of only interest overdues, partial overdues, etc. In order to avoid any ambiguity in this regard, it is clarified that loan accounts classified as NPAs may be upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by the borrower,” the RBI said.