Module: | Capital Adequacy, Basel Norms & Monetary Policy
Q31: Which of the following rules govern Income Recognition and Appropriation of Recoveries?
1. For Non-Performing Assets (NPAs), income must be recognized on a cash basis (actual receipt) rather than accrual.
2. If an account turns NPA, any interest previously accrued but not realized must be reversed.
3. The appropriation of recoveries (towards Principal vs. Interest) is determined strictly by the RBI's "Interest First" mandate.
4. The appropriation of recoveries must follow the uniform and consistent Board-approved policy of the bank.
Which of the statements given above is/are correct?
2. If an account turns NPA, any interest previously accrued but not realized must be reversed.
3. The appropriation of recoveries (towards Principal vs. Interest) is determined strictly by the RBI's "Interest First" mandate.
4. The appropriation of recoveries must follow the uniform and consistent Board-approved policy of the bank.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statements 1 and 2 accurately reflect the core Income Recognition (IRAC) norms: income on NPAs must strictly be recognized on a cash basis (actual receipt), and any interest accrued and credited to the income account before the asset became NPA, but not actually realized, must be reversed.
Statement 4 is correct, and Statement 3 is incorrect: RBI does not mandate a strict "Interest First" rule for the appropriation of recoveries in NPA accounts.
Instead, RBI guidelines explicitly state that the appropriation of recoveries (whether towards principal or interest) must be governed by a uniform, consistent, and transparent policy approved by the individual bank's Board of Directors.
Statement 4 is correct, and Statement 3 is incorrect: RBI does not mandate a strict "Interest First" rule for the appropriation of recoveries in NPA accounts.
Instead, RBI guidelines explicitly state that the appropriation of recoveries (whether towards principal or interest) must be governed by a uniform, consistent, and transparent policy approved by the individual bank's Board of Directors.