NPA & SARFAESI — Set 3

Correct Answer: C. Narasimham Committee

• **Narasimham Committee** = the Committee on the Financial System (1991) chaired by M. Narasimham recommended introducing Income Recognition, Asset Classification (IRAC) norms and prudential provisioning standards — the foundation of India's NPA framework. • **Two reports** — the first Narasimham Committee Report (1991) introduced IRAC norms; the second (1998) strengthened them and recommended reducing Gross NPA ratio and improving capital adequacy. • These norms brought Indian banking standards in line with international Basel guidelines on credit risk. • 💡 Rangarajan Committee focused on monetary policy and agricultural credit, not NPA norms; Urjit Patel Committee (2013) was on monetary policy framework, not asset classification; Tendulkar Committee was on poverty estimation methodology, completely unrelated to banking.

Correct Answer: A. Diverting funds for purposes other than the stated project

• **Diverting funds for purposes other than the stated project** = fund diversion is a qualitative (non-quantitative) indicator of NPA risk — it signals misuse of credit even before a payment actually defaults. • **Qualitative vs Quantitative** — quantitative indicators are objective numbers (overdue days, outstanding balance); qualitative indicators include fund diversion, siphoning of funds, management fraud, and failure to maintain books of accounts. • Banks flag qualitative indicators because they often precede quantitative defaults; detecting them early allows preventive action. • 💡 Balance falling below minimum limit is wrong — that is a quantitative metric (numerical threshold); Failure to pay interest for 90 days is wrong — that is the standard quantitative NPA trigger; Cheque bouncing is wrong — while it is a sign of stress, it is a quantitative operational event, not a qualitative strategic action.

Correct Answer: D. Debt Recovery Appellate Tribunal

• **Debt Recovery Appellate Tribunal** = DRAT is the appellate body above the DRT — borrowers or banks unhappy with a DRT order can file an appeal at the DRAT within 30 days. • **Hierarchy** — the debt recovery chain under RDDBFI Act / SARFAESI runs: Bank action → DRT (first appeal by borrower within 30 days) → DRAT (second appeal) → High Court / Supreme Court. • There are five DRATs in India located in Mumbai, Delhi, Kolkata, Chennai, and Allahabad, each overseeing multiple DRTs in their jurisdiction. • 💡 Department of Revenue and Tax is wrong — that is a central government fiscal body; District Recovery Assessment Team is wrong — no such body exists in Indian banking law; Debt Recovery Association and Trust is wrong — this is a fabricated option with no legal basis.

Correct Answer: D. Non-Performing Assets

• **Non-Performing Assets** = Sub-standard, Doubtful, and Loss are the three formal RBI-prescribed categories of NPAs, each representing a progressively worse recovery outlook. • **The full asset quality ladder** — Standard (performing, 0 days overdue) → Sub-standard (NPA for ≤12 months) → Doubtful (NPA for 12–36 months) → Loss (NPA for 36+ months or identified irrecoverable by auditors/RBI). • Each category carries a different provisioning requirement, directly impacting the bank's profitability and capital adequacy. • 💡 Share prices are wrong — shares are classified by market cap (large/mid/small cap), not these terms; Fixed Assets are wrong — fixed assets use depreciation accounting, not NPA categories; Bank deposits are wrong — deposits are liabilities of a bank, not assets subject to NPA classification.

Correct Answer: A. 12 months

• **12 months** = a Sub-standard asset automatically transitions to Doubtful after exactly 12 months in the Sub-standard category — there is no discretion for the bank to delay this reclassification. • **Provisioning consequence** — the transition from Sub-standard (15%) to Doubtful D1 (25% for secured portion) means the bank must immediately increase its provision, reducing reported profits. • The 12-month clock starts from the day the loan was first classified as NPA (i.e., day 91 of being overdue for a term loan). • 💡 6 months is wrong — no such intermediate classification exists; 18 months is wrong — by 18 months the asset has already been Doubtful for 6 months; 24 months is wrong — at 24 months the loan has been Doubtful for a full year and is approaching the D2 provisioning bracket.

Correct Answer: A. Public auction or private treaty

• **Public auction or private treaty** = SARFAESI gives banks two routes to sell secured assets after taking possession: a public auction (where any buyer can bid, subject to a minimum 'upset price') or a private treaty (direct negotiation with a specific buyer). • **Upset price** — the bank must set a reserve (upset) price for the asset before auction; if no bid meets this price, the bank can re-auction or use the private treaty route. • This avoids the need for court approval of each sale, dramatically speeding up the recovery process compared to civil court decrees. • 💡 Only through court proceedings is wrong — the entire purpose of SARFAESI is to avoid going to court; Only to the government is wrong — assets can be sold to any eligible buyer; Giving them away for free is wrong — banks are mandated to maximize recovery for their depositors.

Correct Answer: B. Directly seizing any property without notice

• **Directly seizing any property without notice** = banks have no legal right to seize any property without following due process — they must issue the mandatory 60-day demand notice under SARFAESI or obtain a decree from DRT before enforcement. • **Legitimate recovery channels** — banks can use: SARFAESI Act (for secured loans ≥ ₹1 lakh), DRT/DRAT (for loans ≥ ₹20 lakh), Lok Adalats (for smaller settlements up to ₹20 lakh), and IBC/NCLT (for corporate insolvency). • Unauthorised seizure of property exposes bank officials to civil and criminal liability under general law. • 💡 SARFAESI Act is wrong as an answer — it is a valid, court-free recovery mechanism; Debt Recovery Tribunals are wrong — DRTs are a legitimate statutory forum; Lok Adalats are wrong — Lok Adalats provide speedy, low-cost settlement for smaller claims and are fully recognised under the Legal Services Authorities Act, 1987.

Correct Answer: D. One-Time Restructuring

• **One-Time Restructuring** = OTR is a special dispensation by RBI allowing banks to modify the repayment terms of a stressed loan once (extension of tenure, moratorium, reduction in rate) without classifying it as an NPA, provided the borrower's account was standard before restructuring. • **COVID-19 OTR** — the most prominent use of OTR was during the COVID-19 pandemic (RBI circular, August 2020), where banks were allowed to restructure eligible personal and corporate loans impacted by the pandemic. • Once restructured under OTR, the account is monitored; if it defaults again within the prescribed period, it is immediately downgraded to NPA. • 💡 Official Tax Recovery is wrong — tax recovery is handled by income tax/GST authorities, not banks; One-Time Reconstruction is wrong — ARC restructuring is different and is not abbreviated as OTR; Over-The-Rate is wrong — it is a fabricated term with no banking application.

Correct Answer: C. Agricultural sector

• **Agricultural sector** = RBI has a special NPA norm for farm loans: for short-duration crops (e.g., paddy, wheat), a loan becomes NPA if overdue for 2 crop seasons; for long-duration crops (e.g., sugarcane, rubber), 1 crop season is the threshold. • **Why different from 90 days** — agricultural income is seasonal and tied to monsoon/harvest cycles; applying a rigid 90-day rule would unfairly penalise farmers who genuinely wait for harvest to repay. • This special treatment also reflects government policy to support food security and the farming community. • 💡 Service sector is wrong — standard 90-day NPA rule applies; Retail sector is wrong — standard 90-day rule applies to personal/retail loans; Industrial sector is wrong — industrial (corporate) loans follow the standard 90-day overdue norm.

Correct Answer: B. Gross NPA Ratio

• **Gross NPA Ratio** = Gross NPA Ratio = (Gross NPA ÷ Gross Advances) × 100; it is the primary measure of a bank's asset quality — a higher ratio means a larger share of the bank's loan book is non-performing. • **Trend** — India's banking sector Gross NPA ratio peaked at ~11–12% in 2018 (after RBI's Asset Quality Review forced full recognition); it improved to ~3.9% by FY2023 due to IBC resolutions, write-offs, and improved credit monitoring. • Net NPA Ratio = (Gross NPA − Provisions) ÷ (Gross Advances − Provisions); Net NPA shows what remains at risk after the bank's provisions buffer. • 💡 Capital Adequacy Ratio (CAR) is wrong — CAR measures a bank's capital against risk-weighted assets, not NPA; Cash Reserve Ratio (CRR) is wrong — CRR is the proportion of deposits held with RBI, a liquidity tool; Net Interest Margin is wrong — NIM measures the difference between interest earned and interest paid, a profitability metric.