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Decoding Non-Performing Assets

Decoding Non-Performing Assets

Decoding Non-Performing Assets

Non-Performing Assets (NPAs) are a major cause of concern for every bank. What would happen if you are unable to pay your home loan EMIs for some reason? Will your bank immediately confiscate your assets and declare your home loan account as a Non-Performing Asset?

The answer is “No”.

Banks will not classify your home loan as a Non-Performing Asset if you miss one or two Equated Monthly Instalments (EMIs).

MakaanIQ tells you what NPAs are, and when a home loan account would be considered an NPA:

What is a Non-Performing Asset (NPA)?

According to a master circular published by the Reserve Bank of India (RBI) on July 1, 2015, NPAs are assets that cease to generate income for banks. Such assets are loans or advances on which banks generate income when home loan borrowers pays the interest and/or the principal amount component. Banks consider a loan as an NPA if you fail to pay the interest, and/or pay back the principal amount component for a period of more than 90 days.

What happens to an overdue loan amount until 90 days?

Banks detect an incipient stress in the loan account. When a bank identifies an incipient stress in your loan account, this is the warning signal of a standard asset (i.e. a loan which does not faces problems in the normal course of repayment) slowly and gradually becoming an NPA. Banks categorise such an account as a Special Mentioned Account (SMA) when the EMI remains unpaid for a period of 30 to 90 days after the due date of payment.

You probably assume that a period of '30-90 days for SMAs' is different from a period of '90 days for NPAs'.

This is why SMAs are classified into three categories:

SMA Category

Basis of Classification

SMA Bucket 1

Principle and Interest payment not overdue for over 30 days, but account reflects incipient stress

SMA Bucket 2

Principle and Interest payment overdue between 31-60 days

SMA Bucket 3

Principle and Interest payment overdue between 61-90 days

After SMA Bucket 3, the asset becomes an NPA.

How do banks treat SMAs?

Banks do everything possible to prevent an SMA from becoming NPA. If an SMA does not become an NPA, banks can upgrade it to a standard asset account. For instance, banks would take rectifying measures if there is a possibility that the borrower will pay the EMI and regularise the loan account. Similarly, if the borrower is not a willful defaulter, banks will take restructuring measures according to the applicant's repayment capacity. In extreme cases, when a revival of the loan account or recovery of dues seem improbable, banks may close the loan account by writing-off the outstanding loan amount.

How missing EMIs can impact your credit rating

Banks do everything possible to prevent your account from being an NPA. This does not mean that your credit score will decline only if your asset become an NPA, or is in the SMA bucket 2 or 3 category. If you miss the payment even once, your credit score will decline significantly, lowering your creditworthiness.  Lenders may turn down your loan application if they find out that you did not pay the EMI on time, even once. Never underestimate the power of timely EMI payments.

Banks see it as a minor default if you miss or delay payments for a period lesser than 30 days. This does not mean that nothing happens to your credit score. Lenders, however, will be willing to negotiate with you. The frequency with which you miss payments and the reasons will be the major parameters for mediation. You can also adduce proof of subsequent payments to the lender to prove your willing to repay your debts.

However, if you fail to make payment beyond 90 days, your loan account will become an NPA. This will be considered a major default. No lender will offer any form of credit to you.

Quick Tips

  • If there is ever a delay in payment because of a technical glitch which is the bank's fault, ask the lender for a written letter which says that the delay did not happen because of lack of funds.
  • If you ever missed EMI payments in the past, ask your lender to restructure your loan account, taking into consideration your future income, available savings and other assets.
  • Lenders may offer you many options if you miss EMI payments because of reasons beyond your control, like an unexpected medical contingency.
Last Updated: Thu Nov 16 2017

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