The RBI had issued certain clarifications vide its notification dated 12^th Nov 2021 with a purpose to more accurately interpret the extant IRAC norms which we must keep in mind while conducting branch audits this time. The gist of the same are reproduced below which are very important from the perspective of deciding correct date of classifying various loan accounts as SMA or NPA, further downgradation of NPA accounts, in ascertaining quantum of interest reversal and also in creating provision as per norms:

1. Date of classification as SMA or NPA

It was observed that banks were not classifying accounts as NPA or SMA on correct dates. If an account’s 90^th day overdue date fell on suppose 31^st March, the account was being classified as NPA on 1^st April taking contention that account can be classified as NPA when it is overdue by more than 90 days.

Now, this gimmick is not possible. The account shall become NPA immediately on running of day-end process for the 90^th day. The overdue position should be cleared before running day-end process for the 90^th day else it will turn NPA on the same date as soon as day-end occurs.

In simple words, now the account turns SMA on the 30^th day evening and NPA on the 90^th day evening, if overdue is not cleared before day end process. Similarly, the account will become overdue on the due date itself if the due amount is not paid before running day end process on the due date.

Please understand that this is not a new provision. Instead, it is just a clarification on existing IRAC norms. So, these provisions shall be applicable on all loan accounts irrespective of dates of SMA or NPA.

1. Definition of ‘out of order’

Hitherto, there was a loophole banks were exploiting in defining ‘out of order’ in case of CC/OD facilities. In case of continuously exceeding sanctioned limit or DP, banks were correctly checking ‘out of order’ status on every day but ‘out of order’ status for cases wherein credits were not enough to cover interest charged was being checked only on balance sheet dates.

Now, the account will have to be checked on each and every day by the system if the credits during preceding 90 days are enough to cover interest charged during that period. In other words, a CC/OD account can become NPA on any date (not only closing date) by reason of inadequate credits in past 90 days to cover interest debited in that period.

1. NPA classification in case of interest arrears on term loans

Earlier, in case of term loans, account was classified as NPA only if interest due and charged during any quarter was not fully serviced within 90 days from the end of the quarter. For example- interest charged during April, May and June was required to be fully paid before 28^th September (90 days from 30^th June) to avoid becoming NPA. In this way, the borrower could defer payment of interest due for the month of April till 28^th September i.e. 5 months which was not in spirit with the IRAC norms.

Now, the same has been modified. Now onwards, a term loan account will be classified as NPA if the interest applied at specified rests remains overdue for more than 90 days. In other words, now each amount of interest charged is to be separately paid within 90 days and interest debited for a calendar quarter can not be clubbed together. For example- interest charged on 30^th April is to be paid by 29^th July, that charged on 31^st May is to be fully paid by 29^th August and that for the month of June is to be fully paid by 28^th September. So, now every amount of interest liability will get only 90 days for payment.

This modification will be more relevant in case of term loans during moratorium on principal repayment wherein only interest is required to be paid during moratorium and SMA or NPA status is decided for non payment of interest only.

1. Upgradation of NPA accounts only on full payment of arrears

Earlier, some lending institutions were upgrading NPA accounts to standard on payment of only partial overdue amount or only interest portion (called ‘critical amount’ in banking). It is clarified that NPA account can be upgraded only on payment of all arrears of both principal and interest. In other words, only critical amount can be paid to avoid NPA tag till the account actually turns NPA but once the account turns NPA, entire amount of arrears of both principal and interest is required to be fully paid to come out of NPA status. (This provision is not applicable in case of restructured account. There are separate provisions for such cases)

1. Booking of interest income in case of loans with moratorium on interest payment

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’ even though such interest has not been actually received to the bank. Further, if loans with moratorium on payment of interest (permitted at the time of sanction of the loan) become NPA after the moratorium period is over, the capitalized interest corresponding to the interest accrued during such moratorium period need not be reversed even though not actually realized.

Although these amendments/clarifications have been incorporated by RBI in its latest Master Circular on IRAC norms issued on 1^st April 2022, I have discussed them independently to attract your special attention keeping in view their importance in duly complying with IRAC norms while conducting branch audits this year.

Any further query from anyone on this subject is welcome.

CA Mahesh Bansal

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