Special Mention Account (SMA) is an account which is exhibiting signs of incipient stress resulting in the borrower defaulting in timely servicing of her debt obligations, though the account has not yet been classified as NPA as per the extant RBI guidelines. In 2014, the classification of Special Mention Accounts (SMA) was introduced by the RBI to identify those accounts that has the potential to become an NPA/Stressed Asset. There are three types of SMA – SMA 0, SMA1 and SMA 2. They are usually categorized in terms of duration.

SMA – 01-30 Days
SMA – 131-60 Days
SMA – 261-90 Days


Assuming due date for an account as 4th day of every month (say 4th Aug, 2022):

  • If the EMI/entire dues of a particular account are not received into the bank account before the day end process is run on the 4th calendar day i.e the due date, the account shall be treated as overdue after day end process. Accordingly, this account shall be classified as SMA-0. The account shall remain classifies under SMA-0 until the end of the 30th day.
  • If this account remains continuously overdue even after the completion of day end process on 30th day from the initial due date, after its classification as SMA-0, the account shall be classified as SMA-1 and shall continue to remain under this head till the 60th day.
  • Similarly, if the account continues to remains overdue even after the end of 60 days, it shall get classified as SMA-2 upon running of day end process on the 61st day from the initial due date. The maximum days to remain under SMA -2 is 90 days.

If the account remains continuously overdue for 90 days, it shall get classified as NPA (Non-Performing Asset) upon running of day end process on the 91st day from the initial due date.


A non-performing asset (NPA) is a classification used by financial institutions for loans and advances that are in default or in arrears. In general, loans are classified as NPAs when the payment is outstanding for a period of 90 days or more, though some lenders can use shorter or longer time window in considering a loan or advance past due based on the conditions of the loan. A loan can be classified as a nonperforming asset at any point during the term of the loan or at its maturity.

Nonperforming assets (NPAs) are listed on the Balance Sheet of every bank or other financial institution. After a specified period of non-payment by the borrower, the lender will force the borrower to liquidate any assets that were pledged in the debt agreement. In case no assets were pledged, the lender may have to write-off the asset as a bad debt. He can also sell it at a discount to any collection agencies.

Nonperforming creates a significant burden on the balance sheet of the lender. The nonpayment of interest or principal reduces the lender’s cash flow, which can disrupt budgets and decrease earnings. Loss provisions created on loans are set aside to cover any potential losses which may occur, and it therefore reduced the capital available with the Banks. Once the defaulted loans are determined, the actual losses are written off against the earnings. Carrying a significant amount of NPAs on the balance sheet over a period of time is an indicator to regulators that the financial fitness of the bank is at risk.


It is crucial for both the borrower as well as the lender to be aware of their assets whether they are performing or non-performing assets.

In case of the borrower, if the asset is a non-performing asset and interest payments are not done, it can affect their credit and growth possibilities in a negative way. It might hamper their ability to obtain any future borrowing.

In case of the bank/lender, interest earned on loans acts as a main source of income. Therefore, non-performing assets will affect their ability to generate adequate income and thus, their overall profitability. Keeping a track of NPAs is highly significant for banks since it will adversely affect their liquidity and growth abilities.

Non-performing assets would be manageable, but it depends on the amount of NPAs how many there are and how far they have stayed overdue. Most banks can take on a fair amount of NPAs in the short term. However, if the volume of NPAs continue to increase over a period of time, it threatens the financial health and future success of the lender.

  • Term Loans, Cash Credit and Overdraft Facilities are treated as NPA if the installment of the loan, whether principal or interest, is due for more than 90 days.
  • Agricultural Advances are considered as NPAs if the principal payments have stayed overdue for the specified period of time. The specified period is defined as
    • two or more crop seasons/harvest seasons for short duration crops, and
    • one crop duration for long duration crops.
  • There could be other types of NPAs, including residential mortgages, home equity loans, credit card loans, non-credit card outstanding, and direct & indirect consumer loans. Expected payment on any account is overdue for more than 90 days would be classifies as NPA.

Classification of NPAs can be done among 3 categories:

  1. Sub- Standard Assets: Sub-standard assets are those assets that have remained NPAs for a period of less than or equal to 12 months (91 days to 12 months) and the risk of the asset is normal. Risk is significantly higher as compared to Standard Assets. Banks are generally ready to take some reductions in the market value on the loan amounts categorized under this.
  2. Doubtful Debts: The term ‘Doubtful Debt’ itself means that there is a very low chance of recovery of its advances/loans from the party. Doubtful assets are those assets that have remained under sub-standard NPAs for a period of more than 12 months. Such advances can put the bank’s liquidity and reputation in jeopardy.
  3. Loss Assets: The final classification of non-performing assets is loss assets. This loan is identified either by the bank itself or by an external auditor/ internal auditor. The bank, in this case, has to write off the entire loan amount outstanding.

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