Module: | MODULE D: BALANCE SHEET MANAGEMENT
Q544: Consider the following statements regarding the specific capital provisioning requirements for Sub-Standard Assets:
1. A baseline provision of 15 percent on the total outstanding balance is mandatory for all Sub-standard Assets across all sectors, calculated without making any allowance for Export Credit Guarantee Corporation cover.
2. An additional 10 percent provision, totaling 25 percent, must be strictly made specifically for the unsecured portion of any advance formally classified as Sub-standard.
3. When an NPA restructured account is eventually upgraded to a standard asset, it is completely exempted from future provisions, instantly resetting to the baseline 0.40 percent standard requirement.
4. For infrastructure loans classified as Sub-standard, a total provision of 20 percent is mandated, provided that a valid Escrow mechanism is available and actively maintained.
2. An additional 10 percent provision, totaling 25 percent, must be strictly made specifically for the unsecured portion of any advance formally classified as Sub-standard.
3. When an NPA restructured account is eventually upgraded to a standard asset, it is completely exempted from future provisions, instantly resetting to the baseline 0.40 percent standard requirement.
4. For infrastructure loans classified as Sub-standard, a total provision of 20 percent is mandated, provided that a valid Escrow mechanism is available and actively maintained.
✅ Correct Answer: A
When an asset falls into the Sub-standard category (NPA $\le$ 12 months), the bank must aggressively provision against potential loss.
The RBI delineates between secured and unsecured exposures, recognizing that uncollateralized defaults destroy capital much faster.
A: This is the correct combination.
Statements 1, 2, and 4 accurately detail the 15 percent baseline, the 25 percent unsecured penalty, and the 20 percent infrastructure escrow concession.
B: This option is incorrect because it includes the false Statement 3, failing to recognize the lingering provisioning requirements applied to upgraded restructured accounts.
C: This option is incorrect as it includes Statement 3, erroneously claiming an instant reset to 0.40 percent upon NPA upgradation.
D: This option is incorrect because Statement 3 is legally and mathematically false.
Upgrading a restructured NPA to standard status does not instantly reset its risk profile.
To prevent premature relief, the RBI mandates that the upgraded account still requires a heavy 2.00 percent provision for the first five years from the date of upgradation.
Breakdown of Statements:
Statement 1 is a firm accounting rule.
The 15% provision applies to the gross outstanding balance.
No deductions or allowances are made for ECGC/CGTMSE guarantees at the Sub-standard stage; those benefits only apply at the Doubtful stage.
Statement 2 is factually accurate.
The unsecured portion represents total capital loss upon default.
Therefore, an extra 10% is added to the 15% baseline, forcing a 25% provision on any portion lacking tangible security.
Statement 3 is a regulatory falsehood.
Restructured upgrades carry a persistent 2.00% provisioning burden for five years to ensure the recovery is genuine and not a temporary accounting manipulation.
Statement 4 is a specific regulatory concession.
Because infrastructure projects are vital and highly regulated, a Sub-standard infrastructure loan backed by a valid Escrow account (ensuring cash flow capture) is granted a slightly lower total provision of 20% instead of the standard 25% for unsecured loans.
The RBI delineates between secured and unsecured exposures, recognizing that uncollateralized defaults destroy capital much faster.
A: This is the correct combination.
Statements 1, 2, and 4 accurately detail the 15 percent baseline, the 25 percent unsecured penalty, and the 20 percent infrastructure escrow concession.
B: This option is incorrect because it includes the false Statement 3, failing to recognize the lingering provisioning requirements applied to upgraded restructured accounts.
C: This option is incorrect as it includes Statement 3, erroneously claiming an instant reset to 0.40 percent upon NPA upgradation.
D: This option is incorrect because Statement 3 is legally and mathematically false.
Upgrading a restructured NPA to standard status does not instantly reset its risk profile.
To prevent premature relief, the RBI mandates that the upgraded account still requires a heavy 2.00 percent provision for the first five years from the date of upgradation.
Breakdown of Statements:
Statement 1 is a firm accounting rule.
The 15% provision applies to the gross outstanding balance.
No deductions or allowances are made for ECGC/CGTMSE guarantees at the Sub-standard stage; those benefits only apply at the Doubtful stage.
Statement 2 is factually accurate.
The unsecured portion represents total capital loss upon default.
Therefore, an extra 10% is added to the 15% baseline, forcing a 25% provision on any portion lacking tangible security.
Statement 3 is a regulatory falsehood.
Restructured upgrades carry a persistent 2.00% provisioning burden for five years to ensure the recovery is genuine and not a temporary accounting manipulation.
Statement 4 is a specific regulatory concession.
Because infrastructure projects are vital and highly regulated, a Sub-standard infrastructure loan backed by a valid Escrow account (ensuring cash flow capture) is granted a slightly lower total provision of 20% instead of the standard 25% for unsecured loans.