The Reserve Bank of India (RBI) has directed banks not to upgrade non-performing assets (NPAs) as ‘standard’ asset after getting only interest payment from the borrower.

In a step to tighten the norms for bad loans, the RBI has stated that banks can standardise  an NPA account only if entire arrears of interest and principal are paid by the borrower.

The RBI has observed that some lending institutions upgrade accounts classified as NPAs to standard accounts on payment of only interest overdues and partial overdues. “In the case of interest payments in respect of term loans, an account will be classified as NPA if the interest applied at specified rests remains overdue for more than 90 days,” the RBI said in a notification.

The regulator has also asked banks to specify the exact due dates for repayment along with details of interest and principal amounts in loan agreements.

RBI said it has observed that due dates for repayments are sometimes not specifically mentioned in the loan agreements. Instead, a description of due dates is mentioned, which leaves scope for interpretation.

“Henceforth, the exact due dates for repayment of a loan, frequency of repayment, breakup between principal and interest, examples of special mention account (SMA) and NPA classification dates and shall be clearly specified in the loan agreement and the borrower shall be apprised of the same at the time of loan sanction and also at the time of subsequent changes, if any, to the sanction terms or loan agreement till full repayment of the loan," the RBI said.

These directives will be applicable immediately for new loans or before December 31, 2021. However, for existing loans banks have to comply with these guidelines as and when such loans become due for renewal or review. 

For loans that have a moratorium facility, banks will have to specify the exact date of commencement of repayment in the loan agreements. 

The RBI clarified that if loans with moratorium on payment of interest become NPA after the moratorium period is over, the capitalised interest corresponding to the interest accrued during such moratorium period need not be reversed.

In order to raise the level of awareness among the borrowers, RBI said lenders will have to place consumer education literature on their websites, explaining with examples, the concepts of date of overdue, SMA and NPA classification and upgradation.

“Further, it shall also be ensured that their front-line officers educate borrowers about all these concepts, with respect to loans availed by them, at the time of sanction, disbursal or renewal of loans. These instructions shall be complied with at the earliest, but not later than 31 March 2022," it said.