Introduction
A bank or lender can identify the accounts that may default. While this may be difficult, the distinct classification helps measure credit risks. It is none other than SMAs or special mention accounts. These accounts help banks & lenders classify defaulters by monitoring. Find out more about these accounts and how they work in this post.
What is a Special Mention Account?
The special mention account meaning is a bank account showing early signs of repayment trouble. This usually happens when payments are delayed or missed. Banks watch these accounts closely to avoid bigger financial problems. The Reserve Bank of India has set three groups for these accounts.
SMA-0 means payment is overdue for 1 to 30 days.
SMA-1 means overdue for 31 to 60 days.
SMA-2 means overdue for 61 to 90 days.
This system works like an early warning sign so banks can step in quickly. Regular checks on these accounts help stop further delays and protect the bank's money. Banks lower the risk of defaults & keep their loan books stable by handling these cases early.
What is a Non Performing Asset?
A non-performing asset is a loan or advance where the borrower has not paid for at least 90 days. This includes both the main loan amount as well as the interest. The loan does not earn money for the bank or lender once this happens. The risk of loss at this stage is high, so recovery efforts become harder.
Special Mention Account vs Non Performing Asset
The main difference between special mention accounts & non-performing assets is timing. An NPA is a loan where payments have stopped for 90 days or more. It no longer earns income for the bank.
As per the special mention account RBI rule, the Reserve Bank of India classifies these as non-performing assets. A special mention account is one that might soon turn into an NPA. Banks or lenders can take steps to fix the issue before it worsens by marking it early.
A special mention account in CIBIL refers to this status in your credit record. It applies to all loan types except certain farm loans linked to crop seasons.
When does a Special Mention Account change to a Non Performing Asset?
If you do not repay your loan interest or principal within 90 days, no matter the loan type, such as term loan, overdraft, or cash credit, the lender will mark your loan account as a non-performing asset. NPAs are classified based on how long the assets remain overdue.
1. Doubtful Asset -A doubtful asset means the account is overdue for more than 12 months.
2. Sub-Standard Asset -A sub-standard asset is when the account is overdue for up to 12 months.
3. Loss Asset -A loss asset is when the account stays non-performing for more than three years. The bank sees the asset as irrecoverable (which results in a complete loss).
Types of Special Mention Account
There are four types of special mention accounts:
1. SMA-0 refers to accounts where the payment is not overdue for more than 30 days, but the account is showing early signs of stress.
2. SMA-1 covers payments overdue between 31-60 days.
3. SMA-2 covers payments overdue between 61-90 days.
4. SMA-NF refers to cases where there are signs of non-financial stress on an account.
The above classification works as an early warning system that helps lenders find possible problems and take action on time. Regular reviews of special mention accounts help stop further delay and protect the bank's finances. Managing these accounts lets lenders reduce the risk of defaults. They can keep their loan portfolios stable. This way, action can be taken early while lowering the chance of accounts becoming NPAs.
Type | Description |
SMA-0 | Loan payment overdue for less than 30 days, but showing early signs of trouble |
SMA-1 | Loan payment overdue between 31 & 60 days |
SMA-2 | Loan payment overdue between 61 & 90 days |
SMA-NF | Showing non-financial signs of stress |
Importance of Special Mention Account
As per special mention accounts RBI guidelines, SMAs can help lenders spot risk early while assessing borrower reliability. It also helps decide on loan terms.
1. Spot Possible Credit Risks Early - Banks use SMAs to find accounts that may face repayment issues. This helps them measure risk more accurately.
2. Show Early Warning Signs -These accounts reveal issues like delayed payments, giving lenders a chance to act before the problem grows.
3. Help in Smarter Loan Decisions -Banks can approve only those instant personal loans that are less risky by identifying accounts likely to default.
4. Impact on Interest Rates -It may result in higher interest rates to cover the additional risk if an account falls under SMA.
5. Clear Categorisation for Monitoring -Accounts are sorted into SMA-0, SMA-1, SMA-2 depending on overdue days. That makes it easier to monitor the repayment health.
6. Ongoing Review Protects Banks -Regular checks on SMA accounts reduce the chance of them becoming NPAs, keeping the bank's finances secure.
RBI's Classification of Special Mention Account
The Reserve Bank of India sets clear rules for classifying accounts as special mention accounts. These focus on repayment behaviour and overdue days, helping lenders detect risk early.
1. Irregularities in Repayment -The account can be flagged as an SMA for closer monitoring if borrowers delay or skip instalments (even slightly).
2. Overdue Periods -The RBI places SMAs into three groups depending on overdue days:
SMA-0: Overdue for 1–30 days
SMA-1: Overdue for 31–60 days
SMA-2: Overdue for 61–90 days
Banks must monitor the accounts that may miss payments. This system guides banks in spotting accounts that need urgent attention so they can act before the loan turns into an NPA.
Impact of Special Mention Account on Credit Score
Special Mention Accounts or SMAs can harm the credit score while making borrowing harder in the future.
1. Impact on the Credit Score -SMAs show possible repayment trouble (that may reduce the score).
2. Negative Effects on Credit Agencies -Late payments or payment issues marked as SMAs appear badly on your credit report.
3. Lower Borrowing Capacity -A lower credit score from SMAs makes it harder to get loans, credit cards, or mortgages.
4. May Result in Higher Interest Rates -Lenders may charge higher rates to cover the extra risk linked with SMAs.
5. Lenders Assess Risks -SMAs are seen as warning signs for higher default risk, affecting approval chances.
Paying on time helps you avoid SMAs and keeps your score safe. In addition to this, managing money prevents SMAs & keeps borrowing options open with better terms.
Can I Mitigate the Impact of a Special Mention Account in CIBIL Report?
Now you know what is special mention account. It is time to understand how to reduce its impact. You can take steps to manage your SMA status and work on improving your credit score. Follow are a few ways how you can better reduce the impact of the SMA in the CIBIL report while improving your chances of loan approval:
1. Repaying a Loan on Time -Always pay your EMIs on time to avoid defaults and prevent your account from slipping into SMA or NPA status.
2. Communicate with Lenders -Speak with your lender early if you are facing financial issues. They may offer a temporary solution to help you stay on track.
3. Plan about Finance More -Use budgeting, saving or prioritising debt repayment to keep your finances stable & avoid missed payments.
It is important to have systems to spot early signs of SMAs or NPAs for lenders. Regularly monitoring loan accounts or checking for payment stress may reduce risk. In addition, it also helps assess repayment capacity before lending.
Also Read: How to Check Loan Account Number (LAN)?
How to check if your account is a Special Mention Account?
You can better follow these steps to find out whether your account has been marked as an SMA (or Special Mention Account):
1. Review Bank Communication -Banks usually send a notice if your account status changes to SMA.
2. Consider Online Banking -Log in to your bank's online portal or app to see whether there are any SMA alerts.
3. Review Statements -Go through your bank statements regularly to spot any mention of SMA or special status.
4. Contact Customer Service -Call or email your bank to confirm your account status directly.
5. Monitor Payment Status -Monitor your EMIs and due dates to avoid missed payments that could lead to SMA tagging.
How to rectify Special Mention Account?
People can work towards rectifying when accounts are tagged as special mention accounts. What they need is to follow the given steps:
1. Find the Pending Payments - Check your account details to spot any missed or overdue payments that caused the SMA tag.
2. Reach Out to Your Bank -Consult your lender to explore repayment plans or any other solution that may help you clear the dues.
3. Pay on Time Going Forward -Make all future payments on or before the due date to stop the situation from worsening.
4. Check for New Terms -Negotiate a settlement or repayment schedule that makes it easier to repay what you owe.
5. Keep Track of Your Progress -Monitor your payment record & stay in touch with your lender until the SMA tag is removed.
Common Reasons for an Account to be Marked as Special Mention Account
Several situations may result in an account being tagged as an SMA. It helps lenders monitor it closely while adjusting loan terms to manage risk.
1. Missed or Late Payments -Regularly missing due dates can trigger an SMA classification.
2. Not Enough Balance -It may result in SMA tagging if your account does not have enough funds to cover scheduled EMIs.
3. Sudden Financial Strain -Job loss or medical emergencies (any personal financial issues) may disrupt payment schedules.
4. Business Cash Flow Problems - Companies facing short-term cash shortages may find it hard to pay loans on time.
5. Market Changes - A downturn in the economy or falling market demand can reduce income. It may affect repayment abilities.
Impact of Special Mention Account on Loan Approval
When an account is tagged as an SMA, it can strongly influence whether a loan gets approved. Lenders treat SMAs as warning signs that the borrower might face repayment trouble.
1. Warning for Lenders -An SMA signals the risk of missed payments, making banks cautious about lending.
2. Lower Credit Trust -Borrowers with an SMA history may be seen as higher risk. This results in stricter approval checks or higher interest rates.
3. Changed Loan Terms -A lender might approve a smaller loan amount to reduce their risk.
In short, having an SMA can reduce your chances of getting a loan and may affect the conditions offered. This makes it important to keep your credit record clean.
Conclusion
Knowing what special mention accountsmean & how they impact your credit is imperative for smart financial planning. It can be less severe than a Non-Performing Asset. Still, an SMA can lower your CIBIL score while making loan approvals harder. You must act speedily by settling overdue payments as well as keeping open communication with lenders. Track your credit report to reduce its impact.
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Frequently Asked Questions (FAQs)
Q.1. What is the full form of SMA in the CIBIL report?
SMA's full form is Special Mention Account. It is a category used by banks to flag accounts that show early signs of repayment issues. Being marked as an SMA indicates possible payment delays. But it's not as severe as being classified as an NPA or Non-Performing Asset.
Q.2. What is the difference between NPA and SMA in the CIBIL report?
An SMA highlights potential repayment risks before a loan becomes a Non-Performing Asset (NPA). NPAs are accounts where repayments have been overdue for more than 90 days. While SMA is a warning stage, NPA is a confirmed default that can severely impact credit scores and future borrowing capacity.
Q.3. Is SMA applicable to every type of loan?
Yes. The SMA classification can apply to almost all loan types, including personal loans, home loans, business loans, and vehicle loans. Any overdue payment that meets the bank's SMA criteria can result in this status, regardless of whether the loan is secured with collateral or unsecured.
Q.4. What causes SMA-0?
SMA-0 means payment is overdue for 30 days or less. It is the earliest warning stage. You should act speedily to clear the dues. This way, you can prevent the account from moving into more severe SMA categories.
Q.5. When does an SMA turn into an NPA?
An SMA becomes an NPA when loan payments remain overdue for more than 90 days. This depends on how long the payment delay continues.
Q.6. Do SMAs impact my CIBIL score?
An SMA can lower your CIBIL score, since it indicates repayment concerns to lenders. The impact may be smaller than an NPA. Still, prolonged or repeated SMA status can harm your creditworthiness. It has a drastic impact on future loan approvals as well as interest rates offered by banks.
