In order to better manage bad loans or loans that do not seem to fetch any return for the banking concern which is though an asset for the institution, RBI classified such debt owed to customer groups into three categories classified under SMAs or Special Mention Accounts. Alongside, banks also planned certain incentives for early detection of such defaults.
SMA-0 is a category in which both the principal and interest has remained outstanding for a period of 30 days after the payment due date and there can be some incipient stress with the loan account.
SMA-1 is a category in which stress with respect to the principal and interest has remain overdue for a period of more than 30 days to 60 days.
SMA-2 is the third category devised in order to mitigate the bad loan problem with the amount being overdue for tenure between 61 days to less than 90 days.
As per the stipulations of the RBI, a loan account which has remain overdue for 90 days or more is classified as a NPA or Non-Performance Assets.
More, so to correctly identify the loan accounts as turning into SMAs, RBI has put in place some non-financial signs for banks to identify and treat such accounts as SMAs.
So, before the loan account actually becomes non-performing for the bank, they are advised to take all possible corrective measures such as restructure possible viable accounts, create Joint lender's forum or JLF when the loan remains overdue for more than 60 days and is classified as SMA2.
Also, a corrective action has to be planned in a month's time after the loan account has been declared SMA2.
Recently, Reliance Communications has defaulted on its loan accounts with different banks on both principal and interest payments. Concurrently, its loan accounts have been classified as SMA1 or SMA2, which signify that there are probably higher chances that it can slip to the NPA category which is a great threat to the overall banking sector.