Ever worried about missing a loan payment? You're not alone. Understanding what happens when a loan account, overdraft, or cash credit facility falls into difficulty, specifically becoming a Non-Performing Asset (NPA), is crucial for many borrowers. This episode cuts through the complexity to explain exactly what an NPA is, how banks classify them, and what rights you have in this challenging situation.

We'll explore the regulatory framework that defines an NPA, like interest or principal being overdue for more than 90 days for a term loan, or an overdraft/cash credit account remaining "out of order". Learn about the early warning signs, known as Special Mention Accounts (SMA), which indicate incipient stress before an account becomes an NPA.

Discover that asset classification is primarily based on the record of recovery. While banks should not classify an account as NPA merely due to temporary deficiencies, issues like old stock statements for working capital or unreviewed/unrenewed credit limits can trigger classification. An important point to note is that if a borrower has multiple facilities with a bank, generally all facilities are treated as NPA if one becomes non-performing.

While NPA classification itself doesn't carry the same severe civil and penal consequences as being classified a 'wilful defaulter' or facing 'fraud' charges (which can include being barred from institutional finance or criminal proceedings), it does have significant impacts, including the potential for banks to take measures under the SARFAESI Act, 2002, such as taking possession or selling mortgaged property.

The question of whether borrowers are entitled to a prior hearing before NPA classification has seen conflicting judgments from various High Courts. Although some courts have held that borrowers should be informed and given an opportunity to represent, others have concluded that no prior hearing is required before NPA classification. The Supreme Court has mandated prior hearings for fraud classification due to serious consequences, but the civil consequences of standard NPA classification are argued to be less drastic. Crucially, the SARFAESI Act does provide borrowers with safeguards and the ability to raise objections against NPA classification under Sections 13(3-A) and 17.

Furthermore, banks are encouraged to provide consumer education to borrowers about the concepts of overdue, SMA, and NPA classification.

Tune in to understand these complex banking norms, how NPA classification works, and the rights and safeguards available to borrowers under the existing legal and regulatory framework.