NPA & SARFAESI — Set 4

Correct Answer: B. Securitisation

• **Securitisation** = the process of converting illiquid financial assets (like loans) into tradeable securities, allowing banks to raise fresh funds against their loan portfolios. • **Full form** — SARFAESI = Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. • **Scope** — the Act empowers banks to enforce security interests and sell assets to ARCs without court intervention. • 💡 **Social** and **Standardization** are unrelated to banking law; **Security** is actually covered by the word 'Interest' at the end of SARFAESI — it is not the 'S'.

Correct Answer: B. Insolvency and Bankruptcy Code, 2016

• **Insolvency and Bankruptcy Code, 2016 (IBC)** = a unified law that replaced multiple overlapping insolvency frameworks and created a single, time-bound process for resolving corporate defaults. • **Timeline** — CIRP must be completed in 180 days, extendable by 90 more days; beyond that, liquidation begins automatically. • **Key bodies** — NCLT adjudicates; Committee of Creditors (CoC, formed by financial creditors) votes on resolution plans; 66% approval needed. • 💡 **Banking Regulation Act** governs bank licensing, not insolvency; **Companies Act** covers corporate governance; **SARFAESI** handles secured asset enforcement — none replace IBC's insolvency resolution role.

Correct Answer: C. Cash Credit and Overdraft

• **Cash Credit and Overdraft** = revolving credit facilities where the borrower draws and repays repeatedly; declared 'Out of Order' when the outstanding balance exceeds the sanctioned limit continuously for 90 days, or when no credits are posted for 90 days. • **Why this category** — unlike term loans that have fixed EMIs, CC/OD accounts have no scheduled repayment, so 'Out of Order' is the NPA trigger instead of 'overdue'. • **NPA link** — an account that stays Out of Order for 90 days becomes a Non-Performing Asset. • 💡 **Term Loans** use the 'overdue' standard (90 days of missed payments); **Credit Cards** have their own overdue norms; **Fixed Deposits** are liabilities, not loans — none use the Out of Order classification.

Correct Answer: C. Total amount of all non-performing assets

• **Gross NPA** = the total outstanding amount of all loans classified as non-performing as per RBI's 90-day overdue norms — before deducting any provisions. • **Formula** — Gross NPA Ratio = (Gross NPA / Gross Advances) × 100; a key RBI monitoring metric. • **Why it matters** — Gross NPA gives the raw scale of bad loans on the books; Net NPA (Gross NPA minus provisions) shows the actual uncovered exposure. • 💡 **NPA minus provisions** describes Net NPA, not Gross NPA; **Tax paid** and **profit from bad loans** are completely unrelated concepts.

Correct Answer: B. Gross NPA - Provisions

• **Net NPA = Gross NPA − Provisions** — provisions are funds the bank has already set aside to cover expected losses on bad loans. • **Significance** — Net NPA reflects the actual uncovered risk; it directly erodes the bank's capital and profitability. • **RBI norms** — banks must maintain specific provisioning percentages (25% for sub-standard, up to 100% for loss assets), so higher Gross NPA forces higher provisions. • 💡 **Gross NPA + Provisions** would overstate the problem; **Total Assets − Total Liabilities** is net worth; **NPA / Total Advances** is the NPA ratio, not the Net NPA amount.

Correct Answer: C. Economic slowdown and project delays

• **Economic slowdown and project delays** = when GDP growth slows, corporate revenues fall and cash flows dry up, making loan repayment difficult; delayed infrastructure projects also trap borrowed capital without generating returns. • **Historical context** — RBI's Asset Quality Review (AQR) in 2015-16 forced banks to recognise these hidden NPAs, causing GNPA to spike sharply. • **Other structural causes** — wilful defaults, over-leveraged balance sheets, and poor due diligence during the credit boom of 2007-12. • 💡 **Savings account openings** and **employee count** have no bearing on corporate loan quality; **lower interest rates** actually ease repayment burden — they do not cause NPAs.

Correct Answer: A. Banks and specified Financial Institutions

• **Banks and specified Financial Institutions** = SARFAESI applies to all scheduled commercial banks, HFCs (Housing Finance Companies), ARCs (Asset Reconstruction Companies), and notified FIs like SIDBI and NHB. • **2016 amendment** — select urban cooperative banks and certain NBFCs were also brought under the Act's ambit. • **Excluded** — loans below ₹1 lakh and agricultural land are outside SARFAESI's enforcement scope. • 💡 Limiting to **only private**, **only public**, or **only co-operative** institutions each contradicts the Act's broad, inclusive design covering all major secured lenders.

Correct Answer: D. 15 days

• **15 days** — under Section 13(3A) of SARFAESI, after the bank issues a 60-day demand notice under Section 13(2), the borrower may submit a representation; the bank must reply within 15 days stating whether the objection is accepted or rejected with reasons. • **Process flow** — Section 13(2): 60-day notice → borrower objects → Section 13(3A): bank replies in 15 days → Section 13(4): bank takes possession if objection rejected. • **Purpose** — ensures borrowers get a fair hearing before asset seizure, preventing arbitrary action. • 💡 **30 days** and **45 days** are not prescribed under Section 13(3A); **7 days** is too short and has no basis in the Act.

Correct Answer: B. NPAs and Restructured Loans

• **Stressed Assets = NPAs + Restructured Loans + Written-off Loans** — a broader measure of banking sector distress than NPA alone. • **Restructured loans** — where repayment terms (tenure, interest rate) were relaxed because the borrower was in difficulty; these remain on the books but carry elevated risk. • **Policy relevance** — the stressed asset ratio gives a more complete picture of system-wide risk; RBI uses it to assess true banking sector health beyond just GNPA figures. • 💡 **Only NPAs** understates total stress; **Fixed Deposits and Gold** are liabilities/investments, not loan assets; **Standard Assets** are healthy — they are the opposite of stressed.

Correct Answer: B. A third-party account where funds are held during a transaction

• **Escrow Account** = a neutral third-party account where funds are held and released only when pre-agreed conditions are met — used in debt reconstruction to ensure repayment money reaches lenders and is not diverted. • **Debt restructuring use** — in large project loans under CDR or IBC resolution plans, all cash flows of the company are routed through an escrow so lenders maintain oversight. • **Legal standing** — the escrow agent (usually a bank or trustee) has no discretion; it acts purely on contractual triggers. • 💡 **Children's savings** and **zero-balance accounts** are standard banking products with no escrow feature; **illegal transactions** is the opposite — escrow is specifically designed to prevent fund misuse.