Loans can be upgraded from NPA to standard category only after repayment of arrears: RBI

Loan accounts can be upgraded from non-performing asset (NPA) to standard asset category only upon repayment of entire arrears of interest and principal pertaining to all credit facilities in the case of borrowers having more than one credit facility from a lending institution, according to the Reserve Bank of India (RBI).

This is according to the RBI’s clarification on its November 2021 circular on ‘Prudential Norms on Income Recognition, Asset Classification and Provisioning’.

What this means is that if a borrower has two credit facilities, with one of them (say, a housing loan) being standard and the other (say, business loan) non-performing, the lender’s entire exposure to this borrower will be treated as non-performing. This exposure can be upgraded only if the non-performing account is regularised.

Banks wanted the RBI to allow them to treat the two exposures separately due to provisioning implications.

In its November 2021 circular, the RBI observed that some lending institutions upgrade accounts classified as NPAs to ‘standard’ asset category upon payment of only interest overdues and partial overdues.

In order to avoid any ambiguity in this regard, the central bank had clarified that loan accounts classified as NPAs may be upgraded as ‘standard’ assets only if entire arrears of interest and principal are paid by the borrower.

With regard to upgradation of accounts classified as NPA due to restructuring, non-achievement of date of commencement of commercial operations (DCCO), the instructions as specified for such cases shall continue to be applicable.

In its clarification, the RBI said the ‘previous 90 days period’ for determination of ‘out of order’ status of a Cash Credit /Overdraft account shall be inclusive of the day for which the day-end process is being run.