Summary of this article
SMAs in your credit report can hamper you credit score
Here's how it works and how to avoid such slippage
One of the most important things that individuals must do to build their credit score is to make timely payments for loan equated monthly instalments (EMIs) and any outstanding in their credit cards. When individuals miss their loan EMI payment or maintaining balance in their credit cards, the bank categorises them as special mention accounts (SMAs). This is also shown in the individual’s credit report and could affect the credit score.
Here we see various stages of SMA, and how it can impact your credit score and new applications for loans:
What Is SMA In The Credit Report
If you miss a loan EMI payment or fail to clear your credit card bill, your bank will not directly classify your account as a non-performing asset (NPA). According to the Reserve Bank of India (RBI) rules, the bank will instead classify such a credit account as a special mention account.
This is also shown in the individual’s credit report. The SMA categorization in the credit account goes through three stages before it is classified as an NPA.
If your loan or EMI payments are overdue for less than thirty days, it is categorised as SMA-0. Between 30-60 days of overdue, the account is classified under SMA-1, and then between 60-90 days, it becomes SMA-2 for the bank. Only after 90 days of lack of repayment of the overdue amount is the account shifted to the NPA category.
As the loan account is moved from SMA-0 to NPA, at every stage, the bank provides an updated report to Credit Information Companies (CICs). It is the CICs who update the loan category in the individual’s credit report.
The SMA categorisation provides an early signal to banks about the borrower’s financial stress and tells them that the individual is struggling to repay the loan. This also shows banks that the individuals who are not able to pay the loan EMI could be at risk of defaulting on the loan in the future.
Banks monitor these SMA accounts and can detect any potential problems that the borrower can face at an early stage, so that they can take appropriate steps to contain them.
How Does It Impact Your Credit Score
When you apply for a loan or a credit card, the bank checks your credit score and report. The bank also checks for any SMA or NPA on an existing loan or any past history of them before authorising the loan. If there is any mention of SMA or NPA in your report could influence the bank’s decision to authorise a new loan.
When the bank notices any mention of SMA or NPA in the borrower’s credit report, it raises questions about the borrower’s behaviour. If the SMA is a one-time occurrence and the loan EMI is paid before turning into an NPA, then the credit score can be recovered. In such cases, it is up to the bank’s discretion, where it could brush off the SMA as a one-off instance and approve the new loan if other criteria are fulfilled. It could also charge a higher interest rate on the new loan if there is an existing loan on which the borrower has defaulted on EMI payment once.
It is important that individuals regularly monitor their credit card scores and proactively pay the loan amounts on time. Individuals should check their credit report and spot any SMAs arising at an early stage. If there are legitimate dues, make the payments regularly and avoid any spillage to your credit score.
