Classification of NPA
Context:
The Reserve Bank of India (RBI) recently issued revised Master Directions to tighten the rules governing the classification of bad loans and recovery.
Effective April 1, 2027, the Indian banking system will transition to a framework aimed at aligning domestic risk management and reporting with globally accepted standards.
Changes in the New Framework:
Borrower-Level Classification:
Under the new rules, asset classification is tied strictly to the borrower rather than individual loans.
If a single loan of a borrower is classified as a Non-Performing Asset (NPA), all other credit facilities held by that same borrower will automatically be categorized as NPAs.
Upgradation to Standard Asset:
To upgrade an NPA borrower back to a "standard asset," the borrower must ensure the full repayment of all entire arrears of both interest and principal across all their credit facilities.
Automated Identification:
Moving away from manual tagging, the RBI has mandated that banks establish automated IT systems to accurately and uniformly identify NPAs
Concepts:
Non-Performing Asset (NPA):
Despite the overhaul, the fundamental basis for classifying a standard term loan as an NPA remains unchanged
It applies when the principal or interest payment is 90 days overdue.
Special Mention Accounts (SMA):
To ensure early detection and recognition of incipient financial stress before a loan account officially turns into an NPA, the RBI classifies stressed assets into sub-categories based on the duration of overdue payments:
SMA-0:
The principal or interest payment is overdue for up to 30 days.
SMA-1:
The payment remains overdue for more than 30 days and up to 60 days.
SMA-2:
The payment is overdue for more than 60 days and up to 90 days.
Once the overdue period crosses the 90-day threshold, the asset is formally flagged as an NPA.