Timely payment of loan EMIs and credit card outstanding is one of the most important things that an individual must do to maintain or build their credit score. Timely payment has the highest weight in calculating an individual’s credit score. However, when an individual misses a loan EMI or credit card outstanding payment, the bank categorises it as a special mention account (SMA) in the individual’s credit report. The SMA undergoes various stages before being categorised as a non-performing asset (NPA).
In this article, we will understand what an SMA is, the stages that it goes through, and its impact on your credit score and new credit applications.
What is a special mention account?
If an individual has missed a loan EMI payment or a credit card bill payment, the bank doesn’t directly classify it as a non-performing asset. Instead, as per Reserve Bank of India (RBI) rules, the bank classifies such a credit account as a special mention account.
When an individual’s credit account is categorised as an SMA, it is reflected in the individual’s credit report. A credit account categorised as an SMA goes through three stages before being categorised as a non-performing asset.
When an individual’s loan EMI is overdue for 1 to 30 days, the loan account is categorised as SMA–0. For example, suppose an individual’s personal loan EMI payment date is 25th March. If the individual doesn’t pay the EMI before or by 25th March, the personal loan account will be categorised as SMA–0.
When an individual’s loan EMI is overdue for more than 30 days and up to 60 days from the EMI payment date, the loan account is categorised as SMA–1. Continuing with the above example, suppose the individual doesn’t pay the EMI by 24th April. In this case, the loan account will be categorised as SMA – 1.
When an individual’s loan EMI is overdue for more than 60 days and up to 90 days from the EMI payment date, the loan account is categorised as SMA–2. Continuing with the above example, suppose the individual doesn’t pay the EMI by 24th May. In this case, the loan account will be categorised as SMA – 2.
When an individual’s loan EMI is overdue for more than 90 days from the EMI date, the loan account is categorised as a non-performing account. Continuing with the above example, suppose the individual doesn’t pay the EMI by 23rd June. In this case, the loan account will be categorised as NPA.
As the loan account categorisation moves from SMA–0 to NPA, at every stage, the bank reports the status to the Credit Information Companies (CICs). The CICs update the loan categorisation in the individual’s credit report.
What is the significance of SMA categorisation?
The SMA categorisation of loan and credit card accounts serves as an early warning signal about signs of borrower stress to the bank. It signals that the borrower may be facing financial problems and is struggling to pay the loan EMI. The SMA categorisation helps banks identify borrowers who are falling behind in their EMI payment and may be at risk of defaulting in future.
Banks monitor such accounts closely to prevent them from turning into NPAs. With SMA categorisation, a bank can detect loan repayment-related potential problems at an early stage and take appropriate steps to contain them. For the individual, the categorisation of a loan into SMA in their credit report is a warning signal to take action.
If the individual doesn’t pay the overdue loan EMI and the other charges (if any), when the loan is an SMA, it will turn into an NPA. When an SMA account is categorised as an NPA in the credit report, the individual’s credit score can take a big hit.
Impact of SMA on credit score
When a loan account is categorised as SMA, it adversely impacts the individual’s credit score. The impact will depend on whether the loan account is categorised as SMA–0, SMA–1, SMA–2, or NPA. As the account progresses from one stage to another, the impact on the credit score can be higher. When a loan account is categorised as NPA, it can have a significant impact on the individual’s credit score.
If more than one account is categorised as SMA in an individual’s credit report, the impact on the credit score will be higher. Categorisation of multiple accounts as SMA at the same time indicates deeper financial stress for the individual.
Impact of SMA on new credit applications
When an individual applies for a loan or a credit card, the bank checks the individual’s credit score and report. The bank will check the credit report for any SMA, NPA, and other details. The presence of any SMA and NPA in the credit report influences the bank’s decision on new credit applications.
When a bank sees the presence of SMA or NPA in an individual’s credit report, it raises questions about the individual’s credit behaviour. At times, an SMA may be a one-time occurrence, after which the individual has paid the outstanding amount, and their credit score may have recovered. In such cases, the bank may consider the SMA as a one-off instance and still approve the new credit application, provided the other eligibility criteria are met.
However, if the SMA has progressed to NPA and remained in the credit report for an extended period, with no corrective action from the borrower, the bank will treat it as a red flag. In such cases, the bank will reject the new credit application.
How to avoid SMA in a credit report?
An individual must be proactive with timely payments to avoid any loan or credit card account from being categorised as an SMA in the credit report. The individual can automate loan EMI and credit card bill payments. Banks offer the option of auto-debit from a savings account for payment of loan EMI and credit card bills. Choose an auto-debit date that is at least 3 to 5 days before the EMI due date. The buffer provides time to address any auto-payment failure, regardless of the reason.
Check your credit report regularly to spot any SMA at an early stage. If you come across any dues that are not legitimate, report them to the bank so that they are removed from your credit report. If the dues are legitimate, pay them so that the bank reports the payment to the CIC, and it gets removed from your credit report.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached on LinkedIn.
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