We present a simple guide to understanding some crucial loan terms and classifications:
1. What does ‘Overdue’ mean?
When you take a loan, there’s an agreed-upon date by which you need to make your repayments, be it principal or interest. If a payment isn’t made by this date, it’s termed as ‘overdue’.2. Special Mention Accounts (SMA)
When a loan becomes overdue, it’s important for us to track its status. We classify these overdue accounts under ‘Special Mention Accounts’ or SMA, based on how long the amount has been overdue:|
SMA Subcategories |
Basis for classification- Principal or interest payment or any other amount wholly or partly overdue |
|
SMA-0 |
Upto 30 days |
|
SMA-1 |
More than 30 days and upto 60 days |
|
SMA-2 |
More than 60 days and upto 180 days |
3. Non-Performing Assets (NPA)
If a loan remains unpaid beyond certain thresholds, it may be classified as a Non-Performing Asset (NPA). This term signifies that the loan has become risky in terms of repayment.4. Upgrading from NPA to ‘Standard’ Asset
Good news! Even if your loan is classified as an NPA, it can return to the ‘standard’ category, implying normal status. How? Simply by repaying all the overdue principal and interest. If you have multiple credit facilities with us, ensure that all dues across facilities are cleared to upgrade any loan from NPA to standard.5. Day-End Processes
We perform a day-end process to classify loans. If your loan becomes overdue or reaches an SMA or NPA status, it will be marked as such on the calendar date of that day-end process.Why is this important for you?
Being aware of these terms and classifications helps you manage your loans better. It assists in avoiding unnecessary penalties, maintaining a good credit score, and enjoying continued financial benefits with us.For further clarity, please refer to the example mentioned below:
Let’s consider X Company, who took out a loan from an NBFC on January 1, 2023. His monthly repayment date is set for the last day of each month, starting from January 31, 2023.
On Time Payment: If X Company makes his payment on or before January 31, his loan is in good standing and there are no overdue amounts. Overdue & SMA-0: Let’s say it’s February 10, 2023, and X Company has forgotten to make his January repayment. His loan is now overdue by 10 days. At this point, the NBFC classifies his account under SMA-0, as it is overdue (less than 30 days).
SMA-1: Time moves on, and it’s March 5, 2023. X Company has still not made his January repayment, making his loan overdue by 34 days. Now, his account is shifted to SMA-1 because it’s overdue more than 30 days but less than 60 days.
SMA-2: It’s now April 20, 2023, and X Company’s January payment is still pending. His loan is overdue by 80 days. His account is now classified under SMA-2, indicating it’s overdue more than 60 days but less than 180 days.
NPA Classification: If X Company’s overdue period crosses 180 days without payment, the NBFC will classify his account as a Non-Performing Asset (NPA). This is a significant classification, indicating serious delinquency in repayment.
Reverting to Standard Asset: Let’s say on May 10, 2023, X Company clears all his overdue amounts, including any accumulated interest. Once he does this, his account can be reclassified from NPA back to a ‘standard’ asset, indicating he’s now back in good standing.