The Reserve Bank of India (RBI) has asked the banks to specify exact due dates of repayments in loan agreements and inform the borrower about the same.
The decision was taken as the Central bank observed that not mentioning due dates specifically in loan agreements is leaving scope for different interpretations.
“The exact due dates for repayment of a loan, frequency of repayment, breakup between principal and interest, examples of SMA/NPA classificationdates must be clearly specified in the loan agreement and the borrower should be apprised of the same at the time of loan sanction and also at the time of subsequent changes, if any, to the terms till full repayment of the loan,” the RBI said in a statement.
The banks are told to comply with the latest norms 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.
What it means for borrowers and lenders?
– The current norms state that a loan turns overdue if is not repaid on the due date fixed by the bank.
– In order to remove the ambiguity on classificiation of special mention accounts (SMA) and non performing assets (NPAs) RBI mentioned that borrower accounts must 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.
– Similarly, classification of borrower accounts as SMA as well as NPA should be done as part of day-end process for the relevant date.
– The SMA or NPA classification date will 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.
– The guidelines on SMA classification of borrower accounts are applicable to all loans, including retail loans, irrespective of size of exposure of the lending institution.
Upgradation of accounts classified as NPAs
The Central Bank has also noticed that some lending institutions upgrade accounts classified as NPAs to ‘standard’ asset category upon payment of only interest overdues, partial overdues, etc.
In order to avoid any ambiguity in this regard, RBI guidelines mandate that loan accounts classified as NPAs may be upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by the borrower. With regard to upgradation of accounts classified as NPA due to restructuring, non-achievement of date of commencement of commercial operations (DCCO), etc., the instructions as specified for such cases shall continue to be applicable.
Income recognition policy for loans with moratorium on payment of interest
In cases of loans where moratorium has been granted for repayment of interest, lending institutions may recognize interest income on accrual basis for accounts which continue to be classified as ‘standard’.
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