Module: | MODULE D: BALANCE SHEET MANAGEMENT
Q541: Consider the following statements regarding the general regulatory criteria for asset classification and non-performing asset identification:
1. An asset is categorized as a Non-Performing Asset if the interest or principal installment remains overdue for a period exceeding 90 days, a rule which strictly applies to bills discounted that remain overdue for 90 days from their designated due date.
2. For revolving credit facilities, an Overdraft or Cash Credit account is explicitly classified as an NPA if the outstanding balance remains continuously out of order for 90 days.
3. Under RBI prudential norms, asset classification is strictly determined on a facility-wise basis, ensuring that a downgrade in one specific term loan does not automatically penalize the borrower's other performing credit limits.
4. Agricultural advances designated for short-duration crops transition into NPAs if the installment of principal or interest remains overdue for exactly two crop seasons.
2. For revolving credit facilities, an Overdraft or Cash Credit account is explicitly classified as an NPA if the outstanding balance remains continuously out of order for 90 days.
3. Under RBI prudential norms, asset classification is strictly determined on a facility-wise basis, ensuring that a downgrade in one specific term loan does not automatically penalize the borrower's other performing credit limits.
4. Agricultural advances designated for short-duration crops transition into NPAs if the installment of principal or interest remains overdue for exactly two crop seasons.
✅ Correct Answer: A
The Reserve Bank of India strictly regulates the Income Recognition and Asset Classification (IRAC) norms to ensure commercial banks maintain transparent balance sheets.
The 90-day delinquency standard is the universal baseline for determining when a performing loan slips into the Non-Performing Asset (NPA) category.
A: This is the correct combination.
Statements 1, 2, and 4 accurately describe the 90-day overdue rule for term loans and bills, the out-of-order definition for revolving cash credit, and the two-season parameter for short-duration agricultural lending.
B: This option is incorrect because it relies on the false Statement 3, which misidentifies the fundamental unit of asset classification, and omits the correct statements 2 and 4.
C: This option is incorrect because it includes Statement 3, falsely claiming that asset classification is performed on a facility-wise basis rather than a borrower-wise basis.
D: This option is incorrect because Statement 3 is legally and operationally false.
Asset classification is strictly determined on a borrower-wise basis, not a facility-wise basis.
If a single borrower holds three credit facilities (e.g., a home loan, a car loan, and a personal loan) and defaults on just one for more than 90 days, the bank is legally required to downgrade all three facilities to NPA status simultaneously.
Breakdown of Statements:
Statement 1 is factually accurate.
The 90-day rule is the cornerstone of IRAC norms, equally applying to missing equated monthly installments (EMIs) and failing to clear discounted bills of exchange upon maturity.
Statement 2 is methodologically correct.
Overdrafts do not have fixed EMIs; therefore, they become NPAs if the outstanding balance continuously exceeds the sanctioned limit or drawing power for 90 days, termed as being "out of order."
Statement 3 is a regulatory falsehood.
The borrower-wise classification rule prevents banks from masking credit risk by keeping a defaulted borrower's other accounts functionally standard.
Statement 4 is correct.
To accommodate the cash flow cycles of farmers, short-duration crops (like paddy or wheat) are granted a grace period of two crop seasons before NPA classification, whereas long-duration crops are granted one season.
The 90-day delinquency standard is the universal baseline for determining when a performing loan slips into the Non-Performing Asset (NPA) category.
A: This is the correct combination.
Statements 1, 2, and 4 accurately describe the 90-day overdue rule for term loans and bills, the out-of-order definition for revolving cash credit, and the two-season parameter for short-duration agricultural lending.
B: This option is incorrect because it relies on the false Statement 3, which misidentifies the fundamental unit of asset classification, and omits the correct statements 2 and 4.
C: This option is incorrect because it includes Statement 3, falsely claiming that asset classification is performed on a facility-wise basis rather than a borrower-wise basis.
D: This option is incorrect because Statement 3 is legally and operationally false.
Asset classification is strictly determined on a borrower-wise basis, not a facility-wise basis.
If a single borrower holds three credit facilities (e.g., a home loan, a car loan, and a personal loan) and defaults on just one for more than 90 days, the bank is legally required to downgrade all three facilities to NPA status simultaneously.
Breakdown of Statements:
Statement 1 is factually accurate.
The 90-day rule is the cornerstone of IRAC norms, equally applying to missing equated monthly installments (EMIs) and failing to clear discounted bills of exchange upon maturity.
Statement 2 is methodologically correct.
Overdrafts do not have fixed EMIs; therefore, they become NPAs if the outstanding balance continuously exceeds the sanctioned limit or drawing power for 90 days, termed as being "out of order."
Statement 3 is a regulatory falsehood.
The borrower-wise classification rule prevents banks from masking credit risk by keeping a defaulted borrower's other accounts functionally standard.
Statement 4 is correct.
To accommodate the cash flow cycles of farmers, short-duration crops (like paddy or wheat) are granted a grace period of two crop seasons before NPA classification, whereas long-duration crops are granted one season.