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JC - Legal Updates - Clarifications regarding IRAC norms

Legal Updates

17 Nov 2021

Clarifications regarding IRAC norms

Reserve Bank of India has issued clarifications on prudential norms on income recognition, asset classification and provisioning pertaining to advances.

Key clarifications:

A. Specification of due date/repayment date:
The loan agreements shall mention the exact due dates for repayment, break-up between principal and interest, examples of SMA/NPA classification, and the commencement of repayment date in case of moratorium (if any). In respect of fresh loans, the instructions shall be complied not later than December 31, 2021. In case of existing loans, compliance to these instructions shall be ensured on renewal/review.

B. Classification as Special Mention Account (SMA) and Non-Performing Asset (NPA)
(i)     The date of SMA/NPA shall reflect the asset classification status of an account at the day-end of that calendar date; and

(ii)    The instructions on SMA classification of borrower accounts are applicable to all loans, including retail loans, irrespective of size of exposure of the lending institution.

C. Clarification regarding definition of ‘out of order’ in CC/OD
An account shall be treated as ‘out of order’ if:
(i)     outstanding balance is continuously in excess of the sanctioned limit/drawing power for 90 days;

(ii)    no credits continuously for 90 days; and

(iii)    credits are not enough to cover the interest debited during the previous 90 days period.

D. NPA classification in case of interest payments
In case of interest payments in respect of term loans, an account will be classified as NPA if the interest applied at specified rests remains overdue for more than 90 days. This is effective from March 31, 2022.

E. Upgradation of accounts classified as NPAs
It is clarified 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.

F. Consumer Education
Certain consumer education literature is prescribed, to be placed on the websites of lending institutions which shall explain with examples, the concepts of date of overdue, SMA and NPA classification and upgradation, with specific reference to day-end process. These instructions shall be complied with at the earliest, but not later than March 31, 2022.

Reserve Bank of India - Notifications (rbi.org.in)

For any further information, please contact Mr. Ankit Sinha (ankit.sinha@jclex.com), Mr. Saurabh Sharma (saurabh.sharma@jclex.com), Ms. Rupul Jhanjee (rupul.jhanjee@jclex.com) or Ms. Teza Jose (teza.jose@jclex.com).