Devolved letters of credit (L/Cs) will be monitored under the Reserve Bank India's (RBI's) new system for identifying and monitoring stressed assets in the banking sector.

It is a much stricter regime that aims to identify and monitor stressed before these cause serious damage to the banking system.

Three categories

Banks will now have to classify several types of accounts as special mention accounts (SMA) within which there will be three sub-categories.

The first category is where there is principal or interest payment overdue for more than 30 days but the account is showing early signs of stress.

Warning signs

One of the signs is the devolvement of an L/C when the bank has to pay the seller of the goods when the purchaser is in default.

Other signs are a delay in submission of a stock statement or a frequent recourse to overdraft.

The second category is where the principal or interest payment has been overdue for 31-60 days and the third is where the principal or interest payment has been overdue for 61-90 days.

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