What are NPA & SMA? Understanding Their Impact on Personal Loans

According to the guidelines set by the Reserve Bank of India (RBI), if a borrower fails to make timely repayments on their loan EMIs or defaults on any EMI payments, the bank will classify the loan account as either an SMA or an NPA. Non-performing Asset is the full form of NPA. These classifications, along with the laws and regulations set forth by the RBI and other relevant authorities, are mandatory and must be adhered to by the borrower.

Table of Content

• What are Non-Performing Assets?
• What are Special Mention Accounts?
• The Connection Between Smas And Npas
• Identification Of Loan Account As Special Mention Account
• Identification of Loan Account as Non-Performing Asset

When a lender categorises any loan or overdraft (OD) account as an SMA or NPA, the information is reported to credit bureaus such as Experian, CRIF, and CIBIL. As a result, the credit score of both the borrower and any guarantors will be negatively impacted. Let’s explore the concepts of NPA and SMA in detail.

Suggested Read: CRIF vs. CIBIL: 10 Must-Know Differences

What Are Non-Performing Assets?

Non-performing assets (NPAs) are loans or advances provided by banks or financial institutions that have not been repaid or have become overdue for a certain period. Essentially, when a borrower fails to make the required payments, whether interest or principal, on a loan for a prolonged period, the loan is categorised as a non-performing asset. These assets are deemed non-productive because they no longer generate any income for the bank or financial institution, which can negatively impact the institution’s financial health. Substandard (overdue for 12 months), Doubtful (12-36 months) and Loss assets (uncollectible) are the three types of NPA.

What Are Special Mention Accounts?

The full form of SMA is Special Mention Accounts (SMA), and as indicated by the term, these are accounts that show an elevated likelihood of deteriorating asset quality within the first 90 days. In other words, an account or loan is classified as SMA when either the principal or interest payment, or both, are overdue, but the delay is not yet beyond 90 days. SMA also includes accounts that exhibit other signs of stress that may not be directly related to financial indicators but still suggest potential problems.

In 2014, the Reserve Bank of India (RBI) implemented the Special Mention Account (SMA) classification to identify accounts that could potentially become Non-Performing Assets (NPAs) or stressed assets. This classification helps in the early identification of such accounts, enabling more effective management of potential issues. There are three types of SMA: SMA-0 refers to payments overdue by 1-30 days, SMA-1 by 31-60 days and SMA-2 by 61-90 days. 

Suggested Read: What Is Sma In Cibil? Meaning, Impact & Recovery Process

The Connection Between Smas And Npas

SMA accounts serve as early indicators of potential NPAs. When a borrower’s loan is categorised as an SMA, it suggests that the borrower is experiencing financial difficulties, increasing the likelihood that the loan may eventually become an NPA. Prompt identification and proper management of SMA accounts are essential to prevent further decline and reduce the number of NPAs on the bank’s records.

Identification Of Loan Account As Special Mention Account

There are three sub-categories of Special Mention Accounts (SMA): SMA-0, SMA-1, and SMA-2.

For term loans, such as home loans, personal loans, etc., if the borrower fails to make partial or full repayment of the principal or interest for up to 30 days, the loan account is classified as SMA-0. If the repayment is overdue for more than 30 days but not exceeding 60 days, the account is classified as SMA-1. If the loan remains overdue for more than 60 days but less than 90 days, it is categorized as SMA-2. For loans like cash credit and overdrafts, if the outstanding balance exceeds the sanctioned limit for more than 30 days and up to 60 days, the loan account is classified as SMA-1. If the overdue period exceeds 60 days but is still under 90 days, the account is classified as SMA-2.

Identification of Loan Account as Non-Performing Asset

Regardless of the type of credit—be it a term loan, overdraft, or cash credit—if the borrower fails to repay either the interest or the principal, in part or in full, for over 90 days, the lender will classify the loan account as a Non-Performing Asset (NPA).

Now that you’re familiar with the SMA and NPA classifications and their impact on your credit score and history, it’s important to avoid defaulting on loan repayments and make sure to pay your EMIs on time. Doing so will help you prevent your loan account from being classified as SMA or NPA while also allowing you to avoid late payment fees and interest penalties.