The classification of irregular loan accounts refers to the categorization of loans based on their repayment status and the degree of delinquency. In banking and financial institutions, loans are classified to assess the level of risk associated with each loan account and to take appropriate measures for risk management. Here are detailed notes on the classification of irregular loan accounts:
1. Standard Assets:
- Standard assets refer to loan accounts where borrowers are making regular and timely repayments as per the agreed-upon terms.
- These accounts do not exhibit any signs of financial distress or default.
2. Substandard Assets:
- Substandard assets are loan accounts where the borrower has shown signs of financial difficulty or irregular repayments.
- These accounts have been classified as irregular, with overdue payments between 30 and 90 days.
- While they are not yet non-performing assets (NPAs), they carry a higher risk of default.
3. Doubtful Assets:
- Doubtful assets are loan accounts that have remained substandard for an extended period, typically over 90 days.
- The likelihood of repayment in these accounts is low, and there is substantial doubt about their recovery.
- Banks make provisions for doubtful assets to account for potential losses.
4. Loss Assets or Non-Performing Assets (NPAs):
- Loss assets, also known as NPAs, are loan accounts where the borrower has failed to make repayments for a significant period, typically over 180 days.
- The chances of recovery in these accounts are minimal, and they pose the highest risk of default.
- Banks must make full provisions for NPAs, reflecting the potential loss on these assets in their financial statements.
5. Special Mention Accounts (SMA):
- Special Mention Accounts refer to loan accounts that show signs of stress but have not yet been classified as substandard or doubtful.
- There are three categories of SMA based on the number of days of overdue payments: SMA-0 (1-30 days overdue), SMA-1 (31-60 days overdue), and SMA-2 (61-90 days overdue).
- Banks closely monitor these accounts and take corrective actions to prevent further deterioration.
6. Restructured Accounts:
- Restructured accounts are loans that have undergone a restructuring process due to financial difficulties faced by the borrower.
- Restructuring involves modifying the terms of the loan, such as extending the loan tenure or reducing the interest rate, to ease the burden on the borrower.
- Such accounts may be classified as standard assets if the borrower adheres to the new repayment terms.
7. Written-Off Accounts:
- Written-off accounts are loan accounts that the bank considers unrecoverable after all efforts to collect the outstanding amount have been exhausted.
- Writing off the account does not absolve the borrower from the obligation to repay the debt, but it allows the bank to clean up its books.
Proper classification of irregular loan accounts is essential for accurate risk assessment, provisioning, and reporting of loan portfolios. The classification enables banks to identify potential credit risks, take timely remedial actions, and maintain the health of their loan portfolios. However, it is crucial for banks to adhere to the guidelines and regulatory requirements related to loan classification to ensure transparency and consistency in reporting.