A healthy credit score is your answer to all your financial needs, as it facilitates better loan terms and helps you access diverse credit options. If you are looking to buy a home, invest in a business or buy a car, your lender will ask for your CIBIL report to ascertain that you have a favourable credit score.
The CIBIL report uses various indicators and account statuses like STD, LSS and SMA to portray your financial situation and creditworthiness. Here, we focus on Special Mention Accounts (SMAs) which is an important element of the CIBIl report that warns you against potential financial stress. Understanding what SMAs mean can help you manage your finances better and address potential challenges before they escalate into issues that affect your credit score.
In this article we answer the question: what is SMA in CIBIL report, how it may affect your credit score and the differences between SMA and NPAs.
What does SMA mean in the CIBIL Report?
A Special Mention Account (SMA) in your CIBIL report shows that one of your loans is exhibiting early signs of financial stress but hasn’t yet deteriorated into a Non-Performing Asset (NPA). An NPA is a loan for which you have an overdue period of 90 days or more. NPAs can severely lower your credit score and reduce your chances of securing new loans.
SMAs are essentially an early warning system within your CIBIL report, alerting both you and lenders that there may be potential issues with maintaining timely repayments on your loans. When you see an SMA classification, you have the opportunity to renegotiate loan terms, restructure your debts, or seek financial counselling to improve your repayment capacity and prevent the loan from slipping into an NPA status.
SMA classifications
SMAs are categorised based on the duration and severity of the financial stress associated with your loans. Here’s how they are categorised.
1. SMA-0
– These are loans that have been performing well for 12 months but have recently shown signs of stress.
– SMA-0 is for accounts that are less than 30 days past due.
2. SMA-1
– These are loans that have been in financial stress for more than 30 days but less than 90 days past due.
– This classification needs immediate attention as beyond the 90-day mark, your loan account will be classified as an NPA.
Do SMAs affect your credit score?
SMAs can impact your credit score, but not directly. Being classified as an SMA does not immediately lower your credit score. However, if you have been seeing an SMA status for a prolonged period and have been facing significant financial stress, this can impact your creditworthiness. Here’s how SMAs may influence your credit score:
1. SMAs themselves are not directly reported to credit bureaus like CIBIL. However, if an SMA account remains unresolved and continues to deteriorate, it can eventually be classified as an NPA, which is reported and harms your credit score.
2. Managing an SMA requires careful attention to your overall credit utilisation and payment history. Late or missed payments, which often accompany SMA status, are recorded on your credit report and can lower your credit score.
3. Even if your credit score isn’t immediately affected, lenders may view your SMA status as a red flag during credit assessments. This makes it harder to secure favourable loan terms.
4. If an SMA account progresses to an NPA, the negative impact on your credit score can be huge and may take years to improve. This limits your borrowing capability for extended periods.
How to address SMA status?
If you have an SMA status on your CIBIL report, you must proactively work towards resolving it to mitigate the impact it may have on your credit score. Here are some steps you can take:
1. Review your budget: The first thing to do is to review your current income and expenses. Identify non-essential expenses that you can reduce or eliminate to free up funds for loan repayments.
2. Use emergency funds: If you have funds set aside for emergencies, you can consider using them to cover your overdue loan payments to avoid credit deterioration.
3. Communicate with your lender: Reach out to your lender as soon as you notice an SMA status. You can discuss options like extending the loan tenure, reducing the interest rate, or arranging a temporary moratorium on payments to ease your financial burden.
4. Increase your income: Explore options to secure additional income, like freelance opportunities or part-time jobs, to supplement your primary income and ease your financial burden.
5. Prioritise loan repayments: Focus on paying-off loans with higher interest rates first to reduce your overall debt burden more efficiently.
6. Debt consolidation: Consider consolidating multiple high-interest debts into a single loan with a lower interest rate. This can ease the repayment process and reduce the overall interest costs.
SMAs vs. NPAs: Key Differences
Lastly, Special Mention Accounts (SMAs) and Non-Performing Assets (NPAs) are vastly different and understanding these differences can help you understand your CIBIL report more accurately.
Aspect
Special Mention Accounts (SMAs)
Non-Performing Assets (NPAs)
What are they?
Loans showing early signs of financial stress but not yet NPAs.
Loans where borrowers have stopped making interest or principal payments.
Duration of overdue
Less than 90 days past due.
90 days or more past due.
Impact on credit score
– Indirect impact. – Can lead to NPA classification if unresolved.
Direct and severe negative impact on credit score.
Reporting
Not immediately reported to credit bureaus.
Directly reported to credit bureaus, affecting credit history.
Risk assessment
Early warning system, lenders monitor more closely.
Indicates high risk of default. Results in stricter terms or loan application rejections.
Final thoughts
Special Mention Accounts are loans that show early signs of financial stress but have not yet become Non-Performing Assets. Now that you know what SMA is in the CIBIL report, you can prioritise addressing your SMA status promptly to prevent credit deterioration and negative credit reporting.
Check yourcredit score for free and get a detailed CIBIL report in just a few steps using Tata Capital’s tool. Tata Capital offers a wide variety of tools to help you manage your finances and build wealth. Our financial experts offer you the support and advice you need to boost your credit score and invest in the right opportunities.
04 December 2024
6 mins read
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