Asset Classification and Provisioning Norms MCQ: CAIIB BFM Unit 28 Module D

Correct Answer: B. Narasimham Committee. The Narasimham Committee suggested that banks should use specific, measurable rules to classify their assets.

Correct Answer: B. An asset that has stopped generating income for the bank. An NPA is a loan or advance where the borrower is no longer making payments, so it doesn’t earn income for the bank.

Correct Answer: C. More than 90 days. The standard rule is that if a loan payment (like interest or principal) is due but not paid for over 90 days, the loan becomes an NPA.

Correct Answer: C. When the account is ‘out of order’. OD/CC accounts are classified as NPA specifically when they are considered ‘out of order’.

Correct Answer: D. If the outstanding balance exceeds the limit OR there are no sufficient credits for 90 days. An account is ‘out of order’ if the amount owed goes above the approved limit or drawing power, or if no deposits (or not enough deposits to cover interest) are made for 90 days.

Correct Answer: C. If overdue for two crop seasons. Loans for short duration crops have a specific NPA rule based on crop cycles; they become NPA if payments are overdue for two harvest seasons.

Correct Answer: C. Not paid by the specified due date. Any amount that is supposed to be paid by a certain date but is not paid on or before that date is considered overdue.

Correct Answer: B. On an accrual basis. For standard, performing assets, income is recognized as it is earned (accrued), even if the cash has not yet been received.

Correct Answer: B. Only on a cash basis (when actually received). Income from NPAs can only be counted when the bank actually receives the cash payment.

Correct Answer: C. When the advance is secured by Term Deposits or certain government savings instruments with adequate value. An exception allows accrual basis recognition if the NPA is well-secured by specific instruments like Term Deposits, NSCs, KVPs, etc., and their value covers the loan amount adequately.

Correct Answer: C. On an accrual basis over the loan’s extended period. For NPAs that are restructured, related fees/commissions are recognized gradually (accrual basis) over the new, longer repayment time.

Correct Answer: B. Only upon actual realization (cash basis). Even if guaranteed by the government, income from such NPAs is recognized only when the money is actually received by the bank.

Correct Answer: C. Reverse the entry or make a full provision (set aside funds) for the amount. Any income (like interest or fees) that was recorded as earned but not yet received in cash must be cancelled (reversed) or fully provided for when the asset turns into an NPA.

Correct Answer: B. Only when the recovery is realized in cash or its equivalent. Money recovered from an NPA account can only be counted as income when the bank actually receives the cash or something easily convertible to cash.

Correct Answer: C. A consistent policy for appropriation. Banks need a standard, consistently applied internal rule for deciding how to split recovered money between the original loan amount (principal) and the overdue interest, if the borrower hasn’t specified.

Correct Answer: C. The provisioning norms (amount of funds set aside for potential losses). How an asset is classified directly dictates how much money the bank must set aside (provision) to cover the risk of potential loss from that asset.

Correct Answer: D. Substandard Asset. An asset is classified as Substandard if it has been an NPA for a period less than or equal to 12 months.

Correct Answer: B. Doubtful Asset. A Substandard asset is reclassified as a Doubtful Asset once it has remained in the Substandard category for a period of 12 months.

Correct Answer: C. Loss Asset. A Loss Asset is one where loss has been identified, but the amount has not been written off entirely, and it is considered uncollectible and of little value.

Correct Answer: C. The record of recovery of payments. NPA classification mainly depends on whether the borrower is actually making payments as per the loan terms, not on temporary issues.

Correct Answer: B. 3 months. Stock statements used to calculate how much a borrower can withdraw against their working capital limit should not be older than three months.

Correct Answer: C. 90 days. If the amount drawn continuously exceeds the allowed limit or drawing power (based on current assets) for 90 consecutive days, the account becomes NPA.

Correct Answer: C. It is classified as an NPA. Failure to review credit limits within the required time, specifically if the delay goes beyond 180 days from when the review was due, leads to the account being treated as an NPA.

Correct Answer: C. Payment of all arrears of interest and principal. Generally, an NPA account can only be upgraded to Standard status once the borrower has paid all the overdue interest and principal amounts.

Correct Answer: C. Satisfactory performance for 1 year after restructuring. Restructured MSME NPAs require one year of satisfactory performance before they can be upgraded.

Correct Answer: C. Until 10% of the restructured principal debt is repaid. The period during which the bank monitors the performance of a restructured account continues until the borrower has repaid at least 10% of the principal amount of the restructured debt.

Correct Answer: D. 1 year. An NPA account cannot be upgraded earlier than one year from the date the first payment becomes due according to the restructured repayment schedule.

Correct Answer: B. As NPA, despite the temporary regularization. Banks must look beyond temporary regularization near the year-end and classify accounts as NPA if they show fundamental weaknesses.

Correct Answer: B. All facilities granted to that borrower are classified as NPA. If even one loan or facility of a borrower turns into an NPA, all other loans and facilities given to that same borrower must also be classified as NPA.

Correct Answer: C. They are added to the principal operating account balance. When an LC devolves (bank has to pay) or a guarantee is invoked (bank has to pay), the resulting outstanding amount is considered part of the borrower’s main loan account for NPA assessment.

Correct Answer: C. If the LC is dishonored and the borrower fails to pay, provided other facilities are already NPA. If the LC payment fails (dishonored) and the borrower doesn’t cover the amount, the discounted bill is treated as NPA, but only if the borrower already has other facilities classified as NPA.

Correct Answer: C. 90 days. Overdue receivables from derivative contracts, representing a positive MTM value owed to the bank, are classified as NPA if they remain unpaid for 90 days.

Correct Answer: C. All the borrower’s funded facilities also become NPA. For these specific types of derivatives, if the amount owed to the bank becomes NPA, it triggers NPA classification for all other loans (funded facilities) given to that borrower.

Correct Answer: B. Only the overdue receivables were classified as NPA, not other facilities. There was a specific exception for FX derivatives from this period; only the overdue amount itself was marked NPA, without automatically affecting the borrower’s other loans.

Correct Answer: C. Only that specific MTM exposure. If the overdue amount relates only to the current settlement value (MTM) of the derivative, then only that specific overdue exposure is classified as NPA, not necessarily other facilities or the entire contract.

Correct Answer: B. It is reversed to specific Suspense Accounts. Income that was booked (accrued) but not received for these derivative exposures must be reversed and moved to designated suspense accounts when the exposure becomes NPA.

Correct Answer: B. They are accounted for as per NPA norms. Once any fund-based loan of a borrower turns NPA, all associated derivative exposures must also be treated according to the accounting rules applicable to NPAs (e.g., income recognition on cash basis, potential provisions).

Correct Answer: C. Based on the recovery record in that individual bank’s account. Each bank in a consortium must classify the borrower’s account according to the repayment performance related to the portion of the loan handled by that specific bank.

Correct Answer: C. The bank must classify the account as NPA. If a member bank does not receive its due share from pooled collections, it indicates a problem with recovery for that bank, requiring NPA classification.

Correct Answer: B. 50%. Significant erosion in the value of the security (collateral) is a reason for concern. If the realizable value falls below 50% of the assessed value, the asset is classified as Doubtful.

Correct Answer: C. When the realizable security value is less than 10% of the outstanding balance. If the security’s value has eroded so much that it covers less than 10% of the loan amount outstanding, the asset is considered virtually uncollectible and classified as Loss.

Correct Answer: C. 100% of the outstanding amount immediately. As soon as fraud is detected in a loan account, the bank must set aside provisions equal to the entire outstanding amount.

Correct Answer: B. They can spread the provision over a maximum of four quarters. While 100% provision is mandatory, banks are allowed to make this provision gradually over a period not exceeding four quarters, starting from the quarter in which the fraud was detected.

Correct Answer: B. Only the specific defaulted facility to the PACS is classified as NPA by the bank. If the loan was specifically for on-lending, only that loan defaults, not necessarily other borrowings of the PACS from the bank.

Correct Answer: C. Overdue for two crop seasons. Agricultural loans for short duration crops follow crop cycles; they become NPA if overdue for two seasons.

Correct Answer: D. Overdue for one crop season. Loans for long duration crops become NPA if overdue for a single crop season.

Correct Answer: C. All facilities to that end borrower (farmer) are classified as NPA. When loans are directly to the end borrower (even if routed via PACS/FSS), the standard borrower-wise classification applies: if one loan is NPA, all loans to that borrower are NPA.

Correct Answer: B. If adequate margin exists against the security value. These specific securities provide an exemption only if their value sufficiently covers the loan amount (i.e., there is adequate margin).

Correct Answer: D. Advances against gold ornaments. The special exemption from NPA norms (if margin is adequate) applies only to TDs, NSCs, KVPs/IVPs, and LIC policies. It does not apply to loans against gold, government securities, or other types of security.

Correct Answer: C. Only after the moratorium period ends. During the moratorium, payments are deferred. Interest is considered ‘due’ only on the date specified after the moratorium finishes.

Correct Answer: C. 90 days after the post-moratorium due date. Once the payment becomes due after the moratorium, the standard 90-day overdue rule applies for NPA classification.

Correct Answer: C. If principal or interest is missed on its respective due date. The text indicates these loans become NPA if a payment is missed when due, implying standard overdue rules likely apply without special moratorium considerations mentioned.

Correct Answer: C. The State Level Bankers’ Committee (SLBC). The definition of a crop season, crucial for agri NPA norms, is set by the SLBC for each state.

Correct Answer: C. Only if the Central Government formally repudiates (rejects) its guarantee. Loans backed by a Central Government guarantee have special status and only become NPA if the government explicitly refuses to honor its guarantee obligation.

Correct Answer: B. No, income recognition must follow standard NPA norms (cash basis if overdue). Even if the asset classification is deferred pending guarantee invocation/repudiation, the income recognition rules for NPAs (i.e., recognizing income only on cash receipt if overdue) still apply.

Correct Answer: C. Based on the standard 90-day overdue norms. Unlike Central Government guarantees, State Government guarantees do not provide exemption from standard NPA classification rules; the 90-day overdue criteria apply.

Correct Answer: C. Make a full provision for the amount of interest funded. Recognizing income that hasn’t actually been received in cash increases risk, so if funded interest is treated as income, an equivalent amount must be set aside as a provision.

Correct Answer: B. Fully provide for it or classify it as NPA. Converting unpaid interest into other instruments doesn’t necessarily improve recovery prospects, so the bank must either set aside provisions for the full amount or classify the converted portion as NPA.

Correct Answer: B. On a cash basis. Since the ultimate recovery depends on the takeout, the lending institution should be conservative and recognize income only when cash is actually received for the portion under the takeout agreement.

Correct Answer: B. Based on the classification status (including original NPA date) in the first lender’s books at takeover time. The taking over institution inherits the asset’s classification history to ensure proper risk assessment and provisioning.

Correct Answer: C. It is not treated as NPA. Since the bank’s risk is covered and payment is received from the guarantor (ECGC/EXIM), the advance is not considered non-performing for the bank.

Correct Answer: B. NPA classification can be deferred by up to one year. If remittance is blocked solely due to political issues abroad, banks can delay classifying the loan as NPA for a maximum of one year, recognizing the external factor causing the delay.

Correct Answer: B. Memorandum Record Reconciliation (MRR) accounts to track performance. Even after selling the assets, the originator needs internal records (MRR accounts) to monitor how those loans are performing, often as part of servicing agreements.

Correct Answer: C. Based on the performance of individual borrowers (obligors) within the pool. The purchasing bank must assess the risk of each underlying loan/borrower in the purchased pool and apply NPA norms accordingly.

Correct Answer: C. The right to audit the underlying loan accounts. To verify performance and servicing quality, the purchaser/investor needs the ability to inspect the records of the loans they have acquired.

Correct Answer: C. If the minimum amount due is not paid within 90 days of the statement’s payment due date. Credit cards become NPA if the cardholder fails to pay even the minimum required amount for more than 90 days after the payment deadline shown on the statement.

Correct Answer: D. 100% or write-off. Loss assets are considered uncollectible, so banks must either set aside provisions equal to 100% of the outstanding amount or remove the asset entirely from their books (write-off).

Correct Answer: D. 100%. The part of a doubtful loan that is not backed by any collateral value is considered highly risky and requires a full 100% provision.

Correct Answer: B. 25%. For the part of the loan covered by security, if the asset has been doubtful for one year or less, a 25% provision is needed.

Correct Answer: B. 40%. As the time spent in the doubtful category increases, the risk is perceived as higher. For the period between one and three years, the provision on the secured portion increases to 40%.

Correct Answer: D. 100%. If an asset remains doubtful for over three years, the chances of recovery are considered minimal, and even the secured portion requires a 100% provision.

Correct Answer: B. 15%. A standard provision of 15% is applied to the total outstanding amount of a substandard asset.

Correct Answer: D. 25%. Unsecured exposures within the substandard category require an additional 10% provision on top of the general 15%, making the total provision 25% for that unsecured part.

Correct Answer: C. 20%. If an infrastructure loan classified as substandard has specific risk-mitigating measures (like escrow accounts), the required provision is slightly higher at 20%.

Correct Answer: C. Where realizable security value is 10% or less of the outstanding exposure. An exposure is considered unsecured if the actual realizable value of the collateral covers 10% or less of the loan amount.

Correct Answer: B. 0.25%. Loans to the agricultural sector and SMEs generally have the lowest standard asset provision rate of 0.25%.

Correct Answer: D. 1.00%. Commercial Real Estate exposures are considered riskier among standard assets and carry a higher provision rate of 1.00%.

Correct Answer: C. 0.75%. Residential housing projects under CRE have a specific standard asset provision rate of 0.75%, lower than general CRE.

Correct Answer: D. 2.00%. Due to the potential risk associated with low initial rates, teaser rate housing loans require a significantly higher initial provision of 2.00% while the teaser rate applies.

Correct Answer: B. 0.40%. Once the teaser period ends and the rate resets to a higher level, the provision requirement reverts to the standard rate for ‘other’ assets (0.40%) after one year at the higher rate.

Correct Answer: D. 5.00%. Restructured loans, even if classified as standard, carry a higher perceived risk and require a 5% provision.

Correct Answer: B. 0.40%. This is the default standard asset provision rate for all other categories not having a specific rate assigned.

Correct Answer: C. Under ‘Other Liabilities and Provisions – Others’ as “Contingent Provisions against Standard Assets”. Unlike NPA provisions, standard asset provisions are not deducted from the loan amount shown but are presented separately on the liabilities side.

Correct Answer: C. Assessment of unhedged foreign currency exposures. If borrowers have significant foreign currency loans or exposures that are not protected against exchange rate fluctuations (unhedged), banks may need to hold extra provisions due to the added risk.

Correct Answer: C. The ratio of Provisions Held to Gross Non-Performing Assets. PCR indicates how much of the bank’s Gross NPAs are covered by the provisions it has already made.

Correct Answer: C. 70%. The RBI expects banks to maintain a PCR of 70% as a measure of adequate provisioning against their NPAs.

Correct Answer: C. Floating Provisions / Countercyclical Provisioning Buffer. Banks may build up extra provisions during good times (buffer) which exceed the mandatory minimums.

Correct Answer: B. During economic downturns for specific NPA provisions, with prior RBI approval. This buffer is meant to be used during tough economic times to absorb credit losses, but requires permission from the RBI before use.

Correct Answer: C. Scheduled Commercial Banks, AIFIs, SFBs, and specified NBFCs. The framework has broad applicability across various types of lending institutions, except RRBs.

Correct Answer: A. Principal or interest payment overdue between 1-30 days. SMA-0 indicates the very first stage of payment delay, within the first month.

Correct Answer: B. 31-60 days. SMA-1 represents the second stage, where payment is overdue for more than one month but not more than two months.

Correct Answer: C. SMA-2. SMA-2 covers the period where payment is overdue for more than 60 days but up to 90 days (i.e., 61-90 days).

Correct Answer: C. Based on the outstanding balance remaining continuously over the limit for 31-60 days (SMA-1) or 61-90 days (SMA-2). For these facilities, SMA classification is triggered if the borrower continuously uses more than the sanctioned limit/drawing power for these specific durations.

Correct Answer: C. 30 days. Lenders are required to initiate a review process promptly, within 30 days of a borrower defaulting on payment.

Correct Answer: C. Additional provisioning requirements may apply. Delay in resolving stressed assets can lead to penalties in the form of higher provisions that the bank must set aside.

Correct Answer: B. To collect and share credit information on large borrowers among lenders and RBI. CRILC helps in early recognition of financial distress and monitors the credit exposure to large borrowers.

Correct Answer: B. ₹5 crore (₹50 million). Banks need to report data to CRILC for all borrowers having a total exposure of ₹5 crore or more.

Correct Answer: C. Crop loans and interbank exposures. Certain categories like agricultural crop loans and exposures between banks themselves are not included in the CRILC reporting framework.

Correct Answer: C. SMA-0, SMA-1, and SMA-2 accounts. CRILC reporting covers all stages of early stress, including SMA-0 (indicating potential stress even if not overdue by 31 days), SMA-1, and SMA-2.

Correct Answer: B. Impose higher provisioning requirements or take supervisory action. Non-compliance with reporting norms or trying to mask the true status of loans can lead to penalties like increased provisions or other corrective actions by the regulator.

Correct Answer: C. To provide a consolidated framework for time-bound insolvency resolution. The IBC aims to streamline and speed up the process of resolving insolvency for companies and individuals.

Correct Answer: C. The Creditors (through an Insolvency Professional/Committee of Creditors). A major shift under IBC is that control moves from the defaulting debtor to the creditors, who then try to work out a resolution plan.

Correct Answer: D. Financial Creditors, Operational Creditors, or the Corporate Debtor. Any of these stakeholders can file an application to start the insolvency process if the conditions are met.

Correct Answer: B. It imposes a stay on most legal actions and claims against the debtor. The moratorium provides a calm period, preventing lawsuits and recovery actions against the company, allowing time for a resolution plan to be formed.

Correct Answer: C. 180 days, extendable to a maximum of 330 days. The process is designed to be time-bound, initially aimed at 180 days, but extendable up to a hard limit of 330 days in total.

Correct Answer: C. NCLT (for corporates/LLPs) and DRTs (for individuals/firms). The National Company Law Tribunal (NCLT) handles corporate insolvency, while Debt Recovery Tribunals (DRTs) handle individual and partnership insolvency.

Correct Answer: D. Insolvency and Bankruptcy Board of India (IBBI). IBBI is the dedicated regulator established under the IBC to oversee the insolvency framework and professionals.

Correct Answer: C. To acquire Non-Performing Assets (NPAs) from banks to clean their balance sheets. A bad bank is set up specifically to take over bad loans from other banks, allowing them to focus on normal lending activities.

Correct Answer: B. National Asset Reconstruction Company Limited (NARCL) and India Debt Resolution Company Ltd (IDRCL). NARCL is the entity that acquires the NPAs, while IDRCL manages and resolves these acquired assets.

Correct Answer: C. 15% in cash upfront and 85% in Security Receipts (SRs). Banks receive a small portion in cash immediately, while the majority is paid in the form of SRs, whose value depends on the final recovery from the NPA.

Correct Answer: B. It provides a guarantee to backstop the SRs, covering potential shortfalls. To make the SRs more acceptable to banks, the government guarantees their value up to a certain limit, ensuring banks recover at least a minimum amount if the final resolution yields less than the SR value.