Special Mention Accounts (SMAs) or Stressed A/C

Special Mention Accounts (SMAs) are those standard accounts which exhibit early warning signal and lie in between the Standard and Sub Standard (NPA) category. These accounts require special attention to reverse their downward movement i.e. slippage to NPA. As a corollary, any account classified as NPA should have appeared for some time in the SMA category unless any reason abrupt thereof (like fraud, malfeasance, etc.). Different SMA and their corresponding character are shown below.

SMA Sub-category	Basis for classification
SMA-0/SMA-NF	Non-financial (NF) signals of incipient stress
SMA-1	Principal or interest payment overdue between 31-60 days
SMA-2	Principal or interest payment overdue between 61-90 days

While SMA-1 and SMA-2 are of financial character i.e. nonpayment of Principle and interest thereon the other one i.e. SMA-NF is of non-financial character which can be illustrated as follows:

List of any one of the following signals that may lead to categorize an account as SMA-NF:

1. Delay of 90 days or more in (a) submission of stock statement / other stipulated operating control statements or (b) credit monitoring or financial statements or (c) Non-renewal of facilities based on audited financials.
2. Actual sales / operating profits falling short of projections accepted for loan sanction by 40% or more.
3. A single event of non-cooperation / prevention from conduct of stock audits by banks.
4. Reduction of Drawing Power (DP) by 20% or more after a stock audit.
5. Evidence of diversion of funds for unapproved purpose.
6. Drop in internal risk rating by 2 or more notches in a single review.
7. Return of 3 or more cheques (or electronic debit instructions) issued by borrowers in 30 days. on grounds of non-availability of balance / DP in the account.
8. Return of 3 or more bills / cheques discounted or sent under collection by the borrower.
9. Devolvement of Deferred Payment Guarantee (DPG) installments.
10. LCs or invocation of BGs and its non-payment within 15 days.
11. Third request for extension of time either for creation or perfection of securities as against time specified in original sanction terms or compliance with any other terms and conditions of sanction.
12. Increase in frequency of overdrafts in current accounts.
13. The borrower reporting stress in the business and financials.

Bank has to monitor all these characteristics in a particular account regularly and try to identify these early warning signals because so that necessary remedial actions can be taken to prevent these accounts falling into NPA. Because once it falls in NPA it will create lots of other problems in front of the bank. The possible hazards which may arise are as follows:

1. Stops generating profit for the bank.
2. Provision for the same has to be made which hampers the bank’s profitability.
3. Gross NPA and Net NPA will rise.
4. Risk Weighted Asset increases which will again more capital to be kept aside in the form of CRAR.
5. Banks corporate image will be degraded as a result of increasing NPA.
6. People will lose trust on the bank.
7. Decorates the asset quality and at the same time increase the cost of fund for the bank.

As such it is better to prevent the new a/c s falling into NPA instead of curing the same. Hence every possible effort and attention must be given to the stressed a/c s so that they can be upgraded to standard a/c.

Options available to banks for stressed assets

1. Rectification
2. Exit from the account
3. Rescheduling/ restructuring
4. Rehabilitation
5. Compromise
6. Legal action
7. Write off

Rectification - Obtaining a specific commitment from the borrower to regularize the account so that the account comes out of SMA status or does not slip into the NPA category, within a specific time period acceptable to the bank without involving any loss or sacrifice on the part of the existing lenders.

Exit from the account: if there is no sign any revival of the a/c then bank may opt for exiting from the account, because further waiting may decrease the realizable value of security, so in that case it is prudent to exit.

Rescheduling/ restructuring: if the borrower is not a will full defaulter than bank may reschedule the loan on the basis of new cash flow statement. Rescheduling can be done in two ways.

1. By keeping the time frame same as per the original sanction letter which obviously may increase the liability of the borrower as the new installment will also include his overdue amount.
2. By keeping the installment same and increasing the timeframe of the loan.

The type of rescheduling which bank may follow depends upon the borrower and his capability to repay.(Rescheduling in Finacle can be done by using following menu “LADGEN” followed by ACM, option M, enter option E then rescheduling Y and then change in the E details can be made.)

Banker should always keep in mind that

• Re scheduling must be done after getting consent from the borrower and a formal consent application must be obtained from the borrower.
• Suitable modification in the terms and conditions of the sanction letter has to be made.
• Accounts where loan period expired cannot be rescheduled.
• Only be done if the borrower is not a willful defaulter
• If there is no fund diversion
• If there is any chance of reviving of the unit.
• After proper verification of the unit and its cash flow statement, non-complying with the same may be treated as attempt at ever greening a weak credit facility.
• Properly examining reasons on non-payment of dues. (This is an exhaustive list)
• BIRF cases are not eligible for restructuring.
• Banks may restructure accounts classified under standard, sub-standard, doubtful categories.

Rehabilitation: sometime organization may face adverse internal or market condition and incur losses for a long time, resulting in default in payment of bank’s due. Banks may rehabilitate those accounts after details viability study of the same. The important aspects that should be kept in mind are as follows:

• A unit is considered sick when any of the borrower account of the unit remains substandard for more than 6 months or
• There is a erosion of net worth of the company due to accumulated cash losses up to the extent of 50 per cent of its net worth during the previous accounting year and unit has been in commercial production for at least two years.
• Rehabilitation package must be fully implemented within 6 months from the date unit has been declared as potentially viable.
• During the six month period the unit will hold its operation which will allow the sick unit to draw amount from the CC account at least to the extent of deposit of sales proceeds.

Broad Relief parameters to be granted to sick unit for reviving

1. Interest on working capital: 1.5 percent below the prevailing fixed/prime lending rate of interest
2. Funded interest term loan: Interest Free. (Where a separate loan a/c equal to the overdue amount in the name of the borrower is created by taking fresh documents which is then debited and credited to the original a/c to make the original a/c regular. )
3. Working capital term loan: 1.5 percent below the prevailing fixed/prime lending rate of interest.
4. Term loan: relief of interest not more than 2% below the document rate.
5. Contingency loan Assistance: concessional rate allowed for working capital assistance.

Compromise: if restructure or rehabilitation of the account is not possible or viable, banks may try to recover their dues by offering some concessions to the borrower. Such decision is influenced by the availability/ readability of the securities, enforce ability of the documents etc.

Basic guidelines of compromise

1. All NPA accounts including suit filed and decreed accounts and those transferred to the Shadow Register will be eligible for compromise settlement. However, all suit filed / decreed cases shall be settled by way of consent decree through the court.
2. Settlement in an account which has been identified by H.O. as ‘Willful Defaulter’ will require permission of the Board of Directors.
3. Realizable value of securities charged to the Bank
4. Net worth of the borrower(s) / guarantor(s) like depletion value of the Worth
5. Date since when the account became NPA/Age of NPA
6. Legal position / enforceability of the documents
7. Business operations whether continuing satisfactorily or suspended / closed / operating on low volume
8. Category of defaulters / willful or non-willful
9. Time value of money
10. Market scenario
11. Net Present Value of securities net of cost of realization.

Legal Action: in case where compromise is not materializing, banks could initiate recovery proceedings. The different forums available are as follows.

Authority	Criteria
Government Machinery	In case of govt scheme, the recovery officers, appointed by govt help in recovery
Civil Court	Loan up to Rs. 10.00 Lac
Lak Adalats	Loans up to Rs. 20 lac
Debt Recovery tribunal(DRT)	Loans involving amount in excess of Rs.10.00 Lac.
SERFAESI,2002	Loans where outstanding id more than 10% of the principle amount or more than Rs.1 lakh.

Write off: when all the efforts of recovery of the dues are exhausted or. The bank is convinced that further of the case will not result any worthwhile results, the outstanding amount is written off by utilizing the provision made for that account in the book, if provision are not enough than excess amount is debited from the P/L a/c of the bank, the write off does not mean that the borrower’s liability to the bank has ended.