If a borrower defaults on a bank loan, his other loans drawn from the same bank too may become non-performing assets (NPAs) affecting the customer's credit worthiness, bankers said.
All loans may be tagged as NPAs even if the customer is prompt on the repayment of other loans to the same bank. For example, if you default on a credit card loan to a particular bank, your home loan or car loan in the same bank, on which the loan repayment is prompt, may also become a bad loan.
This is because the Reserve Bank of India (RBI) norms require banks to follow NPA classification at a borrower level and not on one particular loan, said private sector Axis Bank in a response to a Moneycontrol Query.
“The asset classification per extant applicable income recognition and asset classification regulations, requires every bank to follow asset classification at a borrower level and not at a facility/product level,” Axis Bank spokesperson said in a statement.
“We have used the said regulations for determination of our proforma NPA and provisions made in the financial statement for Q3FY21. Hence, the borrower level classification is a RBI regulatory requirement and not an Axis Bank specific choice. The actual customer classification shall be done only upon final order of the Supreme Court,” the bank said.
On January 27, the Times of India reported that Axis Bank customers who default on credit cards will see their home loans too getting the NPA tag. Clarifying on the report, the lender said this action is nothing specific to the bank, but applicable to all banks as per the RBI norms.
Another senior banker from a public sector bank too said one loan default will impact the asset classification of other loans taken by the same borrower. "That happens," said the banker, who didn't want to be identified. "The other loans too become NPA and your CIBIL score gets impacted," said the banker.
This rule means that a customer needs to make sure all his loan repayments are proper to avoid the NPA tag. “It is upto the bank how to exercise the RBI norms on a borrower level. Generally banks have been increasing provisions expecting an increase in stress in the system,” said Siddharth Purohit, Senior Analyst at SMC Global Securities.
What if loans are from two group entities?
But, the NPA tag on other loans may not come if the loans are given by two separate group entities, experts said. For instance, if the home loan is from the bank and the credit card loan is from a different entity in the same group, then one loan default may not impact the other loan.
“IRAC (Income Recognition and Asset Classification) norms are clear on this issue. If the loans are from the same bank, one facility going bad will lead to all facilities being declared as NPA,” said Naresh Malhotra, a senior banking consultant and former State Bank of India (SBI) Executive.
However, in case of a credit card loan default in SBI, this rule wouldn’t apply because SBI credit card is issued by a different entity and other loans are given by the bank, Malhotra said. "Hence one default will not affect the other,” Malhotra said.
But, if one takes the home loan and a car loan (both from the same bank), one default could impact the asset classification of the other, Malhotra said.
What happens when a loan becomes an NPA?
As per rules, a loan becomes an NPA if there is no payment of interest or principal for 90 days. Once a loan is classified as an NPA, it is bad news for both the bank and the borrower. The bank will have to set aside money to cover the likely losses on such loans, while the customer’s credit score will get impacted on loan default. Higher provisions impact the profitability of the bank. For the borrower, a lower credit score will impact his ability to secure another loan at cheaper rate.
Banks have seen their bad loans going up substantially in the recent years. The RBI has projected the overall GNPAs to shoot up to 13.5 percent of total loans by September this year from 7.5 per cent in September last year in a base case scenario. In a worst case scenario, the bad loans could go up to nearly 15 percent of the total loans, the RBI said.