The Reserve Bank of India (RBI), in a circular, on November 12 issued a set of clarifications on its current asset classification guidelines and said the banks must specify the exact due dates for repayment in loan agreements so that there remains no room for varied interpretations. At present, the agreement only describes the due date, which could be potentially misleading.
“Henceforth, the exact due dates for repayment of a loan, frequency of repayment, break up between principal and interest, examples of special mention account (SMA) and non-performing asset (NPA) classification dates shall be clearly specified in the loan agreement and the borrower shall be apprised of the same 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," the circular said.
In addition to this, the circular also mentioned that banks should specify that loans that come with a moratorium facility should specify the exact date of commencement for repayment of loans. All these mandates should be complied with by December 31, 2021. As for the ongoing loans, these guidelines will apply as and when the concerned loans come up for renewal.
RBI also said that the loan accounts which have been classified as NPAs may be upgraded like a standard asset class only if the entire outstanding payments, including interest and principal, are paid back by the borrower. Earlier, upon repayment of only interest and partial overdue, the banks would reinstate the NPA account back to the standard asset category.
Additionally, previously, in the case of interest payments, an account was classified as NPA only if the interest due and charged during any quarter was not serviced fully within 90 days from the end of the quarter. But currently, the account will be classified as an NPA if the interest due and charged remains overdue for more than 90 days, effective from March 31, 2022.
With regards to Cash credit and Overdraft (CC/OD), the circular clarified that at present, CC/OD account is treated as "out of order” if:
- There are no credits continuously for 90 days as on the date of the Balance Sheet
- Credits are not enough to cover the interest debited during the same period.
In order to further define the contours of “out-of-order”, the circular further stipulated that the CC/OD account will be considered the same if:
- The outstanding balance in the CC/OD account remains continuously in excess of the sanctioned limit/drawing power for 90 days
- 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
- 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.
Also, to promote consumer awareness and education in this field, the circular advocated for relevant literature to be made available on their website and more.
“With a view to increasing awareness among the borrowers, lending institutions shall 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 the day-end process. 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. These instructions shall be complied with at the earliest, but no later than March 31, 2022”,
read the circular.