For a borrower who has missed a loan repayment, the phrase “90 days” can create a dangerous sense of comfort. It is easy to assume that there is a three-month grace period before the bank can take serious action.

That is not quite how the regulatory framework works.

For most bank loans, an account can be classified as a Non-Performing Asset (NPA) when principal, interest or another amount due remains overdue for more than 90 days, subject to the specific rules applicable to the facility. But the borrower does not have to wait until the 90th day to act. In fact, the period before NPA classification is precisely when early intervention is most useful.

The Reserve Bank of India (RBI) requires lenders to identify financial stress progressively through Special Mention Account (SMA) categories. The objective is to encourage resolution before an account becomes an NPA.

The 90 Days Are Not a Grace Period

Under the RBI's current prudential framework for commercial banks, a term loan generally becomes an NPA when interest and/or instalment of principal remains overdue for more than 90 days. Different tests apply to facilities such as cash credit and overdrafts, where an account may become NPA if it remains “out of order” in accordance with the RBI's prescribed criteria.

There is also an important distinction between the due date and the date on which an account becomes an NPA.

The RBI requires banks to identify overdue amounts through their day-end processes. An amount not paid on its due date is treated as overdue from that date. The SMA/NPA classification date is correspondingly determined through the relevant day-end process.

So, if an instalment falls due on a particular date and remains unpaid, the clock does not begin weeks later when the bank sends a reminder. The overdue period begins from the relevant due date.

That is why borrowers should not treat the 90-day point as a deadline for starting discussions with the lender.

SMA-0, SMA-1 and SMA-2: The Warning System

Before an account becomes an NPA, the RBI framework uses Special Mention Account (SMA) categories to identify stress.

For loans other than revolving facilities, the classification broadly works as follows:

1. SMA-0: overdue up to 30 days;
2. SMA-1: overdue for more than 30 days and up to 60 days; and
3. SMA-2: overdue for more than 60 days and up to 90 days.

The same framework applies across loans, including retail loans, subject to specific exclusions such as agricultural advances governed by crop-season norms.

These classifications matter because they provide an early indication that the account is deteriorating.

A borrower who reaches SMA-2 should not approach the situation as though there is still plenty of time. At that point, the account is approaching the NPA threshold, and the scope for an orderly solution may be narrower.

What Should a Borrower Do at SMA-0 or SMA-1?

The first step is surprisingly basic: find out exactly what is overdue.

Borrowers should obtain a current statement of account and reconcile it against the sanction letter, loan agreement and repayment schedule. A missed EMI may not be the only issue. Interest, charges or other contractual amounts can also affect the account.

If the default arose because of a temporary cash-flow problem, the borrower should approach the lender early and explain the position with supporting financial information.

For a business, that may mean providing projected cash flows, receivables ageing, inventory information, management accounts and details of expected inflows. For an individual borrower, it may involve demonstrating the expected source and timing of repayment.

The objective is to move the conversation from “I cannot pay” to “Here is why the shortfall occurred and here is a credible route to regularisation.”

Can the Bank Restructure the Loan?

Potentially, but restructuring is not an automatic right of the borrower.

The RBI's Prudential Framework for Resolution of Stressed Assets requires lenders to have board-approved policies for resolution and encourages them to initiate resolution even before a default occurs. Once a borrower is reported in default, lenders are required to undertake a prima facie review within the prescribed 30-day “Review Period” and consider an appropriate resolution strategy.

Depending on the circumstances and the lender's applicable policy, a resolution plan can involve restructuring or other measures designed to address financial stress.

But borrowers should be careful about assuming that a restructuring request automatically prevents NPA classification. The regulatory treatment depends on the nature of the resolution, the applicable RBI framework and whether its conditions have been satisfied.

A borrower should therefore obtain written confirmation from the lender rather than relying on an informal assurance from a relationship manager.

What About MSME Borrowers?

MSME borrowers may have additional restructuring mechanisms depending on their eligibility and the type of lender involved.

The RBI has a separate Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises, including mechanisms for identifying and resolving stress in eligible MSME accounts. The RBI's regulatory materials distinguish this framework from the general Prudential Framework for Resolution of Stressed Assets.

This makes early classification and communication particularly important for an MSME that is beginning to experience financial stress.

A business should not wait until its banking relationship has deteriorated severely before asking whether a specialised MSME mechanism is available.

Can the Borrower Simply Pay Before Day 90?

If the borrower has the funds, regularising the account before NPA classification is obviously preferable.

But there is an important practical point: the borrower should confirm the amount required to fully regularise the account, rather than simply paying one missed instalment.

If several instalments, interest or other amounts are overdue, a partial payment may not bring the account back into regular status.

The borrower should therefore ask the lender for a written statement of the overdue amount and, where relevant, the amount required for regularisation as of a particular date.

Payment records should also be preserved.

What Happens After NPA Classification?

Once an account is classified as an NPA, the consequences become more serious.

The RBI framework requires NPAs to be further classified into categories such as sub-standard, doubtful and loss assets, depending on the prescribed criteria and the period for which the asset remains non-performing.

An NPA classification also affects the lender's income recognition and provisioning obligations.

More importantly for borrowers, the lender may move towards recovery and enforcement measures. Depending on the facility, security and circumstances, this can include proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), recovery proceedings or other remedies available under law.

The exact route depends on the nature of the debt, security and lender.

What If the Bank Has Classified the Account Incorrectly?

Borrowers should not assume that an NPA classification is beyond scrutiny.

If the borrower believes that the account was wrongly classified—for example, because payments were made on time, the bank failed to credit a payment correctly, or the applicable classification rules were misunderstood—the borrower should immediately collect the relevant bank statements, payment confirmations, correspondence and loan records.

The RBI's framework requires banks to have appropriate internal systems for timely identification and classification of NPAs.

A genuine classification error should therefore be raised promptly through the lender's grievance mechanism, with supporting documents.

The Best Time to Act Is Before the NPA Date

The 90-day period should not be viewed as a countdown during which the borrower can simply wait.

The SMA framework makes the regulatory approach clear: financial stress is expected to be identified early, with lenders moving from SMA-0 to SMA-1 and SMA-2 before an account crosses into NPA territory. For borrowers, the practical strategy is equally clear.

Identify the default early. Quantify the actual overdue amount. Communicate with the lender. Explore realistic resolution options. Document every commitment. And do not assume that a restructuring request, partial payment or verbal assurance automatically prevents NPA classification.

Once the account crosses the NPA threshold, the room for a negotiated and orderly solution may become significantly smaller. The strongest opportunity to protect the borrowing relationship is often not after the bank begins recovery action, but while the account is still showing the first signs of stress.