NPA & SARFAESI — Set 1

Correct Answer: C. Non-Performing Asset

• **Non-Performing Asset** = NPA refers to a loan or advance where the borrower has stopped making interest or principal payments; the bank can no longer treat it as an income-generating asset. • **90-day rule** — for term loans, a loan is classified as NPA when repayment remains overdue for 90 consecutive days; for overdraft/cash credit, when the outstanding balance stays above the sanctioned limit for 90+ days. • The NPA label triggers mandatory provisioning by the bank, reducing its reported profits and capital. • 💡 New Payment Agreement is wrong — no such banking term exists; Net Profit Account is wrong — accounts are classified by asset quality, not profit; National Property Agency is wrong — that is not a banking concept at all.

Correct Answer: D. 90 days

• **90 days** = a term loan is classified as a Non-Performing Asset when interest or principal remains overdue for 90 consecutive days — this is the RBI's standard norm applicable since 2001. • **Sub-standard stage** — when a loan crosses 90 days overdue it enters Sub-standard; if it remains NPA for over 12 months it becomes Doubtful; over 36 months = Loss asset. • For agricultural loans, the threshold is different: 2 crop seasons for short-duration crops, 1 crop season for long-duration crops. • 💡 30 days is wrong — that is the overdue period used for bills purchased and discounted; 60 days is wrong — that was the older threshold before RBI revised it to 90 days in 2001; 180 days is wrong — it was an even older norm for term loans, abandoned long before current rules.

Correct Answer: C. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest

• **Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest** = SARFAESI Act, 2002, gives banks and financial institutions the power to recover secured loans without approaching civil courts. • **Three powers** — under SARFAESI, lenders can (1) take possession of secured assets, (2) sell or lease those assets, and (3) convert part of the debt to equity. • The Act also enables securitisation of assets through Special Purpose Vehicles (SPVs) and the creation of Asset Reconstruction Companies (ARCs) regulated by RBI. • 💡 All three wrong options are fabricated acronym expansions — none corresponds to any real legislation; SARFAESI's full form has exactly four components: Securitisation, Reconstruction, Financial Assets, and Enforcement of Security Interest.

Correct Answer: D. 2002

• **2002** = the SARFAESI Act was passed by Parliament and came into force in 2002 — it was enacted to plug gaps in the existing Debt Recovery Tribunal (DRT) route established in 1993. • **Key motivation** — the Narasimham Committee reports (1991 and 1998) highlighted the need for faster NPA recovery; SARFAESI was the legislative response. • SARFAESI works alongside the DRT framework: banks can use SARFAESI for secured loans ≥ ₹1 lakh without a court decree, while DRT handles cases where a decree is sought. • 💡 2000 is wrong — the Securitisation Ordinance was briefly discussed then but the Act was not passed; 1999 is wrong — this predates the Act entirely; 2005 is wrong — by 2005 SARFAESI was already operational for three years.

Correct Answer: B. Sub-standard Asset

• **Sub-standard Asset** = when a loan first crosses the 90-day overdue threshold it enters the Sub-standard category, where it stays for up to 12 months. • **Provisioning requirement** — banks must set aside 15% of the outstanding loan as provision for Sub-standard assets (10% for secured, 25% for unsecured portions). • After 12 months in Sub-standard, the asset graduates to Doubtful, requiring provisions of 25–100% depending on how long it has been Doubtful. • 💡 Doubtful Asset is wrong — that requires more than 12 months as NPA; Loss Asset is wrong — that is the final stage where the loan is deemed irrecoverable; Standard Asset is wrong — standard means the loan is performing with no overdue.

Correct Answer: B. Willful Defaulter

• **Willful Defaulter** = a borrower is declared a Willful Defaulter when they default despite having the capacity to repay, or divert loan funds to purposes other than the stated project, or siphon funds out of the business. • **Consequences** — banks must report willful defaulters to Credit Information Companies (CICs) like CIBIL; such borrowers cannot access further credit from any scheduled commercial bank. • RBI guidelines require lenders to identify and publish a list of willful defaulters quarterly; criminal proceedings can also be initiated under the IPC. • 💡 Bankrupt Defaulter is wrong — a bankrupt person legally lacks resources to repay, which is different from deliberately not paying; Accidental Defaulter is not an RBI-recognized term; Insolvent Defaulter is wrong — insolvency implies genuine inability, not wilful intent.

Correct Answer: D. 60 days

• **60 days** = after a loan account becomes NPA, the bank issues a demand notice giving the borrower 60 days to repay the dues; only if the borrower fails to respond can the bank proceed to take possession. • **Borrower's right of appeal** — once the bank takes action, the borrower can appeal to the Debt Recovery Tribunal (DRT) within 30 days of receiving the possession notice. • The 60-day notice is a mandatory step — skipping it renders the bank's subsequent actions legally invalid. • 💡 90 days is wrong — 90 days is the overdue threshold for NPA classification, not the SARFAESI notice period; 30 days is wrong — 30 days is the period the borrower gets to appeal to DRT after bank action; 15 days is wrong — there is no 15-day notice period prescribed under SARFAESI.

Correct Answer: B. To manage and recover bad loans from banks

• **To manage and recover bad loans from banks** = ARCs are specialised financial institutions that purchase NPA portfolios from banks at a discount, then attempt to recover the full amount through restructuring, asset sales, or legal action. • **Regulated under SARFAESI** — ARCs must be registered with and are regulated by RBI; they issue Security Receipts (SRs) to investors as evidence of their interest in the NPA portfolio. • ARCs help banks clean up their balance sheets quickly, freeing capital for fresh lending, while the ARC earns a profit on the difference between purchase price and recovered amount. • 💡 Regulating the stock market is wrong — that is SEBI's role; printing currency is wrong — that is the RBI/Government of India function; providing new loans is wrong — ARCs deal only in existing distressed assets, they do not originate new loans.

Correct Answer: C. Doubtful Asset

• **Doubtful Asset** = after 12 months in the Sub-standard category, a loan moves to Doubtful — meaning the bank considers full recovery highly unlikely given the deteriorating collateral and borrower condition. • **Provisioning jumps sharply** — Doubtful assets require 25% provision in the first year, 40% in the second year, and 100% after 3 years (if the secured portion is covered; the unsecured portion needs 100% from day one of Doubtful). • The Doubtful stage lasts until 36 months as NPA, after which it becomes a Loss asset. • 💡 Sub-standard Asset is wrong — that applies only for the first 12 months as NPA; Standard Asset is wrong — standard means the loan is performing normally; Loss Asset is wrong — that requires more than 36 months as NPA or identification as irrecoverable by auditors/RBI.

Correct Answer: B. Loss Asset

• **Loss Asset** = a Loss asset is one where the bank or its auditors (internal/external) or RBI inspectors have identified the loan as irrecoverable, but it has not yet been formally written off the books. • **100% provisioning required** — banks must maintain a 100% provision against Loss assets; this fully absorbs the expected loss from the bank's capital. • Written-off loans disappear from the balance sheet but the bank retains the legal right to continue recovery action against the borrower. • 💡 Standard Asset is wrong — it is a healthy, performing loan with no overdue; Doubtful Asset is wrong — some recovery is still considered possible in the Doubtful stage; Sub-standard Asset is wrong — that is the first stage of NPA where some collateral security still has value.