Customer Education Literature Document

Reserve Bank of India (RBI) guidelines on ‘Prudential norms on Income Recognition, Asset
Classification and Provisioning (IRACP), pertaining to Advances dated April 01, 2022.

With a view to increase awareness amongst the borrowers, placed herewith are concepts
/ clarifications / illustrative examples on due dates and specification of Special Mention
Account (SMA) / Non-Performing Asset (NPA) classification dates.

Q. Why is it important to read this?

A. RBI vide its circular no. RBI/2021-2022/125 DOR.STR.REC.68/ 21.04.048/2021-22 on

‘Prudential norms on Income Recognition, Asset Classification and Provisioning,
pertaining to Advances – Clarifications’ dated November 12, 2021 and IBA letter C&I-
III/IRAC/14.12/2021-22 on ‘Clarifications/guidance provided by RBI on Prudential
norms on IRACP’ dated December 30, 2021 have clarified and/or harmonised certain
aspects relating to SMA / NPA classification dates, dates of overdue, etc. with a view to
bring about uniformity and common understanding regarding the implementation of the
guidelines on IRACP in a harmonised manner.

The examples quoted are illustrative and not exhaustive in nature and relate to general
scenarios. The IRACP norms and clarifications issued by the RBI will prevail for
implementation and may be amended from time to time by the RBI.

Q. Banks classify loan accounts as Special Mention Account (SMA) and Non-Performing
Asset (NPA) immediately on default. What is the basis of such classification? When will
an account be classified as SMA or NPA?

A. The Bank classifies the borrower as SMA/NPA based on the extant Regulatory guidelines.
The same is explained hereunder:

1. Classification as Special Mention Account (SMA):

Lending institutions will recognize the incipient stress in loan accounts, immediately
on default, by classifying them as Special Mention Accounts (SMA). The basis of
classification of SMA / NPA category shall be as follows:

Loans other than revolving facilitiesLoans in the nature of cash credit /

overdraft
SMA sub- Basis for classification – SMA Sub- Basis for classification –
categories Principal or interest categories Outstanding balance
payment or any other remains continuously in

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 Loans other than revolving facilities Loans in the nature of cash credit /
overdraft
amount wholly or partly excess of the sanctioned
overdue. limit or drawing power,
whichever is lower, for a
period of:
SMA 0 Up to 30 days NA NA
SMA 1 More than 30 days and SMA 1 More than 30 days and
up to 60 days up to 60 days
SMA 2 More than 60 days and SMA 2 More than 60 days and
up to 90 days up to 90 days

2. Non-Performing Asset:

In accordance with the provisions of the RBI’s Master Circular on Prudential norms
on Income Recognition, Asset Classification and Provisioning pertaining to Advances
dated April 01, 2022, a Non-Performing Asset (NPA) is a loan or an advance where:

a. Interest and/or instalment of principal remains overdue for a period of more than
90 days in respect of a term loan
b. The account remains 'out of order' as indicated below, in respect of an Overdraft
/ Cash Credit (OD / CC)
c. A Credit Card account will be treated as non-performing, if the minimum amount
due, as mentioned in the statement, is not paid fully within 90 days from the due
date mentioned in the statement
d. The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted
e. The instalment of principal or interest thereon remains overdue for two crop
seasons for short duration crops
f. The instalment of principal or interest thereon remains overdue for one crop
season for long duration crops
g. The amount of liquidity facility remains outstanding for more than 90 days, in
respect of a securitisation transaction undertaken in terms of the Reserve Bank
of India (Securitisation of Standard Assets) Directions, 2021
h. In respect of derivative transactions, the overdue receivables representing
positive mark-to-market value of a derivative contract, if these remain unpaid for
a period of 90 days from the specified due date for payment

Apart from the above, an Overdraft / Cash Credit (“OD” / “CC”) can also be classified
as NPA due to the following technical reasons:

i. An account where the sanction limits have not been reviewed/renewed within
180 days from the due date and/or expiry of the adhoc sanction where the
account is not fully renewed

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 j. Stock / Book debts statement is older than 180 days

Advances against term deposits, National Savings Certificate (NSCs) eligible for
surrender, Indira Vikas Patra (IVPs), Kisan Vikas Patra (KVPs) and life policies will not
be treated as NPAs only if stipulated margin is maintained in the accounts. However,
advances against gold ornaments, government securities and all other securities are
not covered by this exemption.

Q. What is a Project loan? How is a project loan classified as non-performing?

A. 'Project Loan' means any term loan which has been extended for the purpose of setting
up of an economic venture. 'Date of Commencement of Commercial Operations' (DCCO)
will be documented by the Bank at the time of financial closure of the project. Bank may
restructure project loans, by way of revision of DCCO without classifying the account as
NPA subject to regulatory guidelines. A project loan would be classified as NPA as per
record of recovery (90 days overdue) or if project has not commenced operations by
stipulated DCCO / deferred DCCO or DCCO is extended beyond the regulatory
permissible periods or DCCO extensions are not as per regulatory conditions.

Q. When will an account be treated as ‘Out of Order’?

A. An account shall be treated as 'out of order' if:

a. The outstanding balance in the CC / OD account remains continuously in excess of
the sanctioned limit / drawing power for 90 days, or

b. 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, or 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 (note: The ‘previous 90 days period’ for determination of ‘out of order’ status of a
CC/OD account shall be inclusive of the day for which the day-end process is being run.)

Q. What is a stressed account?

A. Borrower is required to pay the EMI / instalment / interest at periodic intervals as per
the terms agreed at the time of availing the loan. In case EMI / instalment / interest due
is not paid on or before the due date, as per the agreed terms, such account is termed as
‘stressed account’.

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Q. As required by the RBI circular, please explain the terms of ‘Due’ & ‘Overdue’. How are
they different? When will accounts be flagged as overdue?

A. Banks use these terms to denote principal / interest / any charges levied on the loan
account as under:

1. Due:
Means the principal / interest / any charges levied on the loan account which are
payable within the period stipulated as per the terms of sanction of the credit
facility.

2. Overdue:
Means the principal / interest / any charges levied on the loan account which are
payable but have not been paid within the period stipulated as per the terms of
sanction of the credit facility. In other words, any amount due to the Bank under
any credit facility is 'overdue' if it is not paid on or before the due date as
contracted between the Bank and its customer.

Borrower accounts are flagged as overdue as part of the day-end processes for the due
date, irrespective of the time of running such processes.

Q. What is the accounting method used by Banks to arrive at the number of days overdue
for determining the SMA/NPA status?

A. IBA has clarified the relevance of the principle of 'First In First Out' (FIFO) in
appropriation of payments into the borrowal account as under:

The principle of FIFO i.e. 'First In, First Out' accounting method is relevant to arrive at
the number of days overdue for determining the SMA/NPA status. The FIFO principle
assumes that the oldest outstanding dues in the loan account needs to be cleared first.
The FIFO method thus requires that what is due first must be paid by the borrower first.

For example, in a loan account as on 01.02.2022, there are no overdues, and an amount
of INR 100 is due for payment towards principal instalment / interest / charges. Hence,
any payment being credited on or after 01.02.2022 in the loan account will be used to
pay off the dues outstanding on 01.02.2022.

Assuming that nothing is paid / or there is partial payment (INR 80) of dues during the
month of February, the overdue as on 01.03.2022 will be INR 20 i.e., INR 100 - INR 80.
Additionally, an amount of INR 100 becomes due on 01.03.2022. Now a payment /
partial payment into the account on or after 01.03.2022 will be first utilised to pay off
the partial due of 01.02.2022 i.e., INR 20 of February (INR 100- INR 80).

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 If there is excess amount available (after recovery of INR 20), then after recovering the
dues of 01.02.2022, the remaining amount will be treated as recovery towards due of
01.03.2022.

Q. How do Banks determine the “age of oldest dues”?

A. The age of oldest dues is calculated in days from the date on which the oldest payment
is due and continues to remain unpaid. In the above illustration, if the dues relating to
01.02.2022 remain unpaid till 01.03.2022, the age of the oldest dues is calculated as 29
days on 01.03.2022.

Q. What is the change that is being spoken about? How does it apply to me?

A. Your loan account classification has changed based on when the payment is received
from you. You will therefore need to ensure timely payment of dues / maintain sufficient
funds to ensure payment of dues on or before the due date. Mentioned below are a few
examples shared for your understanding:

Earlier method of classification Revised method of classification

If the due date is 31.12.2021 and payment If the due date is 31.12.2021 and payment
was not received in the account on or is not received on or before 31.12.2021,
before 01.01.2022, the loan account the loan account will be treated as
would be treated as overdue and overdue and accordingly the DPD (Days
accordingly DPD (Days Past Due) will start Past Due) will start from 31.12.2021 itself
from 01.01.2022. as part of the day end processing activity
of the Bank.
In the scenario above, the status of your
loan / Credit Card A/c would change only In the scenario above, the status of your
on the next working day in case of non- loan / Credit Card A/c will change on the
receipt of payment. same day as the due date during the day
end processing activity of the Bank in case
of non-receipt of payment.

This is applicable in case of servicing

interest for loan accounts.

Further, if the due date falls on a non-

working day, the borrower has to ensure
that the repayment is made on or before
the due date.

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Q. At what periodicity does the Bank carry out the asset classification of account as
SMA/NPA?

A. The Bank carries out the asset classification processes on a daily and continuous basis.

Q. What is restructuring and what is asset classification if an account is restructured?

A. Restructuring may involve modification of terms of the advances / securities, which

would generally include, among others, alteration of payment period / payable amount
/ the amount of instalments / rate of interest; roll over of credit facilities; sanction of
additional credit facility / release of additional funds for an account in default to aid
curing of default / enhancement of existing credit limits; compromise settlements where
time for payment of settlement amount exceeds three months. Any restructuring of
facility on account of financial difficulty of borrower will result in classification of account
as NPA.

However, in case of loans at floating rate of interest (ROI), the EMI amount and/or tenor
of the loan, etc. may undergo a change, if the ROI rate has changed. Such change in the
EMI amount or the tenor of the loan is not construed as restructuring.

Q. When will upgradation of accounts classified as NPAs happen?

A. It is clarified that loan accounts classified as NPAs are upgraded to ‘Standard’ asset only
if the entire arrears of interest and principal pertaining to all the credit facilities 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 per the specific regulatory circular will continue to be
applicable.

Q. How does SMA/NPA classification happen at borrower level?

A. SMA reporting is carried out at borrower level as per regulatory guidelines and thus,
overdue in any one account of the borrower will result in reporting of the borrower as
SMA.

Further, in case of NPA, if a loan account of a borrower is classified as NPA, all other
accounts of the same borrower/ co – borrower(s) are also classified as NPA, irrespective
of overdue status in other accounts.

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Q. Whom can I contact in case of queries or further assistance on this?

A. For any retail / individual account related queries, kindly connect with the nearest
Branch / Loan Centre (https://www.axisbank.com/contact-us). If you are a non-retail /
corporate borrower, you may reach out to your Service Relationship Manager /
Relationship Manager for any grievances and clarifications.

Q. What is the impact on the borrower if the account is slipped to SMA/NPA?

A. As per the extant regulatory guidelines, the Bank has to report the account as SMA/NPA
to Central Repository Information of Large Credit (CRILC), Credit Information Companies
(CICs), etc. from time to time, which impacts the credit history of the borrower.

Q. When will an account move into SMA or NPA? Can this be explained with an illustrative
example?

A. The following table illustrates the movement of an account to SMA and further to NPA
based on delay / non-payment of dues and subsequent upgrade to Standard category at
day end process:

Due date Payment Payment covers Age of SMA or NPA SMA or

of payment date oldest Classification NPA
dues in reporting
days date
Entire dues up to
01.01.2022 01.01.2022 0 NIL NA
01.01.2022
No payment or Part
01.02.2022 01.02.2022 payment of dues of 1 SMA-0 01.02.2022
01.02.2022
No payment or Part
01.02.2022 02.02.2022 payment of dues of 2 SMA-0 01.02.2022
01.02.2022
Dues of 01.02.2022 not
fully paid 01.03.2022 is
01.03.2022 29 SMA-0 01.02.2022
also due at EOD
01.03.2022
Dues of 01.02.2022
fully paid, Due for
1 SMA-0 01.03.2022
01.03.2022 is not paid
at EOD 01.03.2022
No payment of full dues 01.02.2022/
31 SMA-1
of 01.02.2022 and 03.03.2022

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 Due date Payment Payment covers Age of SMA or NPA SMA or
of payment date oldest Classification NPA
dues in reporting
days date
01.03.2022 at EOD
03.03.2022
Dues of 01.02.2022
fully paid, due for
01.03.2022 not fully 1 SMA-0 01.03.2022
paid at EOD
01.03.2022
No payment of dues of
01.02.2022,
01.02.2022/
01.04.2022 01.03.2022 and amount 60 SMA-1
03.03.2022
dues on 01.04.2022 at
EOD 01.04.2022
No payment of dues of
01.02.2022
01.02.2022 till
61 SMA-2 /
01.04.2022 at EOD
02.04.2022
02.04.2022
No payment of dues of
01.02.2022
01.02.2022 till
01.05.2022 90 SMA-2 /
01.05.2022 at EOD
02.04.2022
01.05.2022
No payment of dues of
01.02.2022 till
91 NPA 02.05.2022
01.05.2022 at EOD
02.05.2022
Fully paid dues of
01.06.2022 01.06.2022 01.02.2022 at EOD 93 NPA 02.05.2022
01.06.2022
Paid entire dues of
01.03.2022 &
01.07.2022 01.07.2022 62 NPA 02.05.2022
01.04.2022 at EOD
01.07.2022
Paid entire dues of
01.05.2022 &
01.08.2022 01.08.2022 32 NPA 02.05.2022
01.06.2022 at EOD
01.08.2022
Paid entire dues of
01.07.2022 &
01.09.2022 01.09.2022 1 NPA 02.05.2022
01.08.2022 at EOD
01.09.2022

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 Due date Payment Payment covers Age of SMA or NPA SMA or
of payment date oldest Classification NPA
dues in reporting
days date
Paid entire dues of Standard
STD from
01.10.2022 01.10.2022 01.09.2022 & 0 account with
01.10.2022
01.10.2022 no overdue

For detailed guidelines on asset classification and provisioning, please refer to the RBI’s
Master Circular - Prudential Norms on IRACP pertaining to Advances dated April 1, 2022.
The above asset / SMA classification norms are subject to changes as per regulatory
instructions issued from time to time.

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