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The Reserve Bank of India (RBI) has asked lenders to clearly specify the exact due dates for repayment of a loan, frequency of repayment, breakup between principal and interest, among others, in the loan agreement.

Further, they also have to give examples of special mention account (SMA) and non-performing account (NPA) classification dates.

The central bank said the borrower should be apprised of the aforementioned dates at the time of loan sanction and also at the time of subsequent changes, if any, to the sanction terms or loan agreement till full repayment of the loan.

In cases of loan facilities with moratorium on payment of principal and/or interest, RBI emphasised that the exact date of commencement of repayment should also be specified in the loan agreements.

Scope for different interpretations

The aforementioned instructions should be complied with at the earliest, but not later than December 31, 2021, in respect of fresh loans.

In case of existing loans, however, compliance to these instructions should necessarily be ensured as and when such loans become due for renewal/review.

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This RBI clarification comes as it has 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.

Consumer education

With a view to increasing awareness among the borrowers, lending institutions have been asked to place consumer education literature on their websites explaining with examples, the concepts of date of overdue, SMA and NPA classification and upgradation, with specific reference to day-end process.

RBI said lending institutions may also consider displaying such consumer education literature in their branches by means of posters and/or other appropriate media. Further, it shall also be ensured that their front-line officers educate borrowers about all these concepts with respect to loans availed by them at the time of sanction/disbursal/renewal of loans.

SMA classification

The basis for classification of Special Mention Accounts/SMA (which show incipient stress) in the case of loans other than revolving facilities will be: SMA-0 (when principal or interest payment or any other amount wholly or partly overdue up to 30 days); SMA-1 (more than 30 days and upto 60 days); and SMA-2 (more than 60 days and upto 90 days).

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The basis for classification of SMA in the case of loans in the nature of revolving facilities like cash credit/overdraft will be: SMA-1 (when principal or interest payment or any other amount wholly or partly overdue for more than 30 days and upto 60 days); and SMA-2 (more than 60 days and upto 90 days).

In the above context, the RBI clarified that borrower accounts should be flagged as overdue by the lending institutions as part of their day-end processes for the due date, irrespective of the time of running such processes.

Day-end process

Similarly, classification of borrower accounts as SMA as well as NPA should be done as part of day-end process for the relevant date and the SMA or NPA classification date should be the calendar date for which the day end process is run. In other words, the date of SMA/NPA should reflect the asset classification status of an account at the day-end of that calendar date.

RBI said the instructions on SMA classification of borrower accounts are applicable to all loans2, including retail loans, irrespective of size of exposure of the lending institution.

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Cash credit/Overdraft (CC/OD) account will be treated as “out of order if the outstanding balance in the account remains continuously in excess of the sanctioned limit/drawing power for 90 days”.

Further, such an account will be treated as “out of order if the outstanding balance in the account is less than the sanctioned limit/ drawing power but there are no credits continuously for 90 days, or the outstanding balance in the 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”.

Term loans

In 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. RBI said these instructions shall be effective from March 31, 2022.

Upgradation of loan accounts

RBI said 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 issued the aforementioned directive as it has come across some lending institutions upgrading accounts classified as NPAs to ‘standard’ asset category upon payment of only interest overdues, partial overdues, etc.