Module: | MODULE D: BALANCE SHEET MANAGEMENT
Q553: Consider the following statements regarding the advanced provisioning tiers applicable to Doubtful and Loss Assets:
1. For the secured portion of assets remaining in the Doubtful category, banks must rigorously provide exactly 25 percent for D1 assets, and a mandatory 40 percent for D2 assets.
2. The secured portion of Doubtful assets aged continuously over 3 years, designated as D3, requires a full 100 percent provision, perfectly matching the provisioning burden of a Loss asset.
3. The unsecured portion of any Doubtful asset strictly requires a 100 percent provision across all D1, D2, and D3 categories without any regulatory exceptions.
4. If the realizable value of the security severely depletes to strictly below 10 percent of the outstanding balance, banks are permitted to maintain a 40 percent provision until the final legal write-off.
2. The secured portion of Doubtful assets aged continuously over 3 years, designated as D3, requires a full 100 percent provision, perfectly matching the provisioning burden of a Loss asset.
3. The unsecured portion of any Doubtful asset strictly requires a 100 percent provision across all D1, D2, and D3 categories without any regulatory exceptions.
4. If the realizable value of the security severely depletes to strictly below 10 percent of the outstanding balance, banks are permitted to maintain a 40 percent provision until the final legal write-off.
✅ Correct Answer: A
As an NPA ages into Doubtful and Loss territory, the probability of recovery plummets.
The provisioning framework reflects this decay by scaling up the capital charge on secured portions over time, while instantly demanding 100% capital backing for anything unsecured or severely degraded.
A: This is the correct combination.
Statements 1, 2, and 3 correctly map the exact secured provisioning tiers (25% for 1 year, 40% for 1-3 years, 100% for over 3 years) and the immediate 100% mandate for all unsecured doubtful exposures.
B: This option is incorrect because it includes the false Statement 4, severely diluting the strict regulatory requirements for Loss asset triggers.
C: This option is incorrect because it incorporates the mathematically false Statement 4 regarding collateral depletion.
D: This option is incorrect because Statement 4 is mathematically and operationally false.
If the realizable value of the security severely depletes to strictly below 10 percent of the outstanding balance, the loan is practically unsecured.
It bypasses doubtful aging, is immediately classified as a Loss asset, and banks must mandate an immediate 100 percent provision on the entire outstanding amount.
Breakdown of Statements:
Statement 1 is the core Basel/RBI aging matrix for Doubtful assets.
The longer an asset is dead, the harder it is to liquidate the security, forcing the provision from 25% (D1) up to 40% (D2).
Statement 2 is structurally correct.
Once an asset sits in D3 (NPA for over 4 years total), the RBI assumes the security is entirely illiquid, demanding a 100% provision just like a declared Loss asset.
Statement 3 is a non-negotiable regulatory absolute.
If there is no tangible security backing a Doubtful asset, the probability of recovery is near zero, triggering an instant 100% provision.
Statement 4 is an accounting falsehood.
A drop below 10% collateralization triggers instant Loss status and a 100% provision; a 40% provision is illegally low in this scenario.
The provisioning framework reflects this decay by scaling up the capital charge on secured portions over time, while instantly demanding 100% capital backing for anything unsecured or severely degraded.
A: This is the correct combination.
Statements 1, 2, and 3 correctly map the exact secured provisioning tiers (25% for 1 year, 40% for 1-3 years, 100% for over 3 years) and the immediate 100% mandate for all unsecured doubtful exposures.
B: This option is incorrect because it includes the false Statement 4, severely diluting the strict regulatory requirements for Loss asset triggers.
C: This option is incorrect because it incorporates the mathematically false Statement 4 regarding collateral depletion.
D: This option is incorrect because Statement 4 is mathematically and operationally false.
If the realizable value of the security severely depletes to strictly below 10 percent of the outstanding balance, the loan is practically unsecured.
It bypasses doubtful aging, is immediately classified as a Loss asset, and banks must mandate an immediate 100 percent provision on the entire outstanding amount.
Breakdown of Statements:
Statement 1 is the core Basel/RBI aging matrix for Doubtful assets.
The longer an asset is dead, the harder it is to liquidate the security, forcing the provision from 25% (D1) up to 40% (D2).
Statement 2 is structurally correct.
Once an asset sits in D3 (NPA for over 4 years total), the RBI assumes the security is entirely illiquid, demanding a 100% provision just like a declared Loss asset.
Statement 3 is a non-negotiable regulatory absolute.
If there is no tangible security backing a Doubtful asset, the probability of recovery is near zero, triggering an instant 100% provision.
Statement 4 is an accounting falsehood.
A drop below 10% collateralization triggers instant Loss status and a 100% provision; a 40% provision is illegally low in this scenario.