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CS Professional · Banking and Insurance - Laws and Practice · Performing and Non Performing Assets

Sunrise Textiles Ltd, a borrower of Bharat Commercial Bank, has begun missing instalments. The bank wants to act early, before the account becomes an NPA. Under the RBI's prudential framework on resolution of stressed assets, what should the bank do when it observes the first signs of stress in a large account?

The bank should identify stress early and classify the account as a Special Mention Account according to days overdue. SMA-0, SMA-1 and SMA-2 categories exist so that incipient stress is recognised and addressed before the account becomes a non-performing asset after 90 days.

  1. AWait until the account is overdue for 90 days and then classify it as NPA before any action
  2. BIdentify the stress early and classify the account as a Special Mention Account (SMA) based on days overdueCorrect
  3. CImmediately file a recovery suit and skip the SMA classification
  4. DWrite off the account from the books without any classification

Explanation

The framework requires banks to recognise incipient stress by classifying accounts as SMA-0, SMA-1 or SMA-2 depending on how long principal or interest is overdue. This lets the bank act before the account slips into NPA. Waiting for 90 days defeats the early-recognition purpose.

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