In a recent interview with bank directors, higher regulatory officials have stated that provision should only be considered for loans where principal or interest payments are due between 61 and 90 days as of March 1, 2020. Such loans are categorized as SMA2 – or, special mention accounts (SMA) -2.
Several banks were under the impression that all SMA accounts per March 1 was to be provided. This would have significantly consumed banks’ capital and reduced their ability to provide fresh loans, ”a senior banker tells ET.
An SMA2 loan that is granted moratorium and not serviced by the borrower will become an NPA by March 30. Such a loan will attract a total provision of 10% – of which 5% will be from the end of March and a further 5% at the end of June quarter.
SMA loans – divided into three baskets (0, 1 and 2) – are a classification introduced by the RBI five years ago to detect early signs of stress on bank borrowers and monitor accounts at risk of bad loans or non-performing assets (NPA’er).
As per an analyst estimate, total SMA loans were around £ 3.2 lakh crore at the end of September 2019 – of which SMA0 was £ 1.45 lakh crore, SMA1 £ 0.84 lakh crore and SMA2 £ 0.96 lakh crore. (SMA1 is loans where interest or principal are due between 31 and 60 days; while SMA0 is loans where principal and interest are due for less than 31 days or show initial signs of stress). While the total SMA number had been just over £ 3 lakh crore since January 2019, it is believed to have risen in late February 2020 when the spread of Covid-19 began to hurt an already declining economy.
“It is good that RBI has clarified. Some of the auditors insisted that the provision cover the entire SMA book. Banks will get a legal advantage of 5% this quarter … ”said another banker.
The normal provision for NPA is 15% for secured loans and 25% for unsecured loans. This means that if a £ 100 crore loan becomes an NPA or a substandard, at least £ 15 crore needs to be deducted by the bank from its earnings as a provision – a prudent asset classification and accounting rule that reduces the bottom line and lowers the lender’s capital adequacy.
During the meeting, some of the bank executives suggested that the regulator should extend the moratorium (or postpone servicing interest or repayment of loans) by another three months. The current moratorium period ends May 31. “Given the partial shutdown, the RBI may decide to extend the moratorium. This could coincide with some government action next week against small and medium-sized businesses, ”said one industry.
“At the meeting, RBI also said it was up to the banks to decide whether they would grant moratorium on NBFC borrowing from banks,” said one banker. The regulatory authority, which has remained silent on the NBFC issue for weeks, may have been forced to express its views after the Supreme Court directing the RBI to ensure the implementation of the March 27 circular in its letter and spirit.
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