The Reserve Bank of India (RBI), on 12 November 2021, released a notification on 1 October 2021 regarding the clarifications on prudential norms on income recognition, asset classification and provisioning (IRACP) about advances.
The notification applies to all commercial banks, primary (urban), state and district central co-operative banks. The list also includes financial institutions and non-banking financial companies.
RBI has observed that loan agreements do not specify the repayment date of loans and structure the contract so that a subjective interpretation is possible. The agreement will now mention the exact dates for loan repayment, frequency of repayment, the breakup between principal and interest, examples of Special Mention Account/Non-Performing Asset (SMA/NPA) classification dates, etc., to reduce ambiguity. These rules are effective on or before 31 December 2021 for new loans. The new rules are to be followed for ongoing loans when the loans are up for renewal or review.
The SMA classifies the loans on two parameters- loans other than revolving facilities and loans like revolving facilities. For loans other than revolving facilities, the classification is done on principal or interest payment or any other amount wholly or partly overdue in the periods of 30 days, 30 to 60 days and 60 to 90 days. SMA is classified based on the outstanding balance that remains continuously more than the sanctioned limit or drawing power for 30 to 60 days and 60 to 90 days for loans like revolving facilities. This classification applies to all loans.
The notification also explains that an account will be labelled as NPA if the interest due in a quarter is not repaid within 90 days after the quarter ends.
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