NPA & SARFAESI — Set 5

Correct Answer: C. Reserve Bank of India (RBI)

• **Reserve Bank of India (RBI)** launched AQR in 2015-16 under Governor Raghuram Rajan to force banks to correctly classify loans that were being evergreened or hidden as 'standard'. • **Impact** — GNPA of Indian banks nearly doubled within two years; PSU banks were most affected, revealing years of suppressed bad-loan recognition. • **Follow-up** — RBI mandated banks to complete NPA recognition by March 2017; many banks reported massive losses triggering PCA framework placements. • 💡 **World Bank** and **Ministry of Finance** do not conduct bank-level loan audits in India; **SEBI** regulates capital markets, not bank loan portfolios.

Correct Answer: A. Allowing banks to convert debt into equity shares of the company

• **SDR** = an RBI scheme (introduced June 2015) that allowed a consortium of lenders to convert their outstanding debt into majority equity in a defaulting company, enabling them to change management. • **Mechanism** — after conversion, lenders must sell the equity stake to a new promoter within 18 months to recover their money. • **Limitation** — SDR largely failed because finding buyers for stressed companies proved difficult; it has since been superseded by IBC resolution under NCLT. • 💡 **Reducing branches** and **farm loan waivers** are administrative/political measures unrelated to debt restructuring; **account insurance** (DICGC) is a separate deposit-protection scheme.

Correct Answer: C. Giving fresh loans to hide older bad loans

• **Evergreening** = the malpractice of disbursing a new loan to a struggling borrower specifically so they can repay the instalment on an older loan — artificially keeping the account 'standard' on paper. • **Why it is harmful** — it delays NPA recognition, inflates bank profits, and lets bad debt accumulate invisibly; RBI's AQR (2015-16) was designed specifically to uncover such practices. • **Consequences** — bank officers involved can face RBI action; the borrower's underlying financial stress remains unresolved and worsens over time. • 💡 **Planting trees** and **environmental loans** are wordplay on 'green'; **a loan that never ends** misreads 'ever-green' literally — none of these describe the banking malpractice.

Correct Answer: D. Recovery Rate

• **Recovery Rate** = the percentage of the total defaulted or written-off loan amount that the bank successfully recovers through legal channels (SARFAESI, DRT, IBC, Lok Adalat). • **Benchmark** — India's recovery rate has historically been low (~25-30% under DRT), which is why IBC was introduced; IBC-based recoveries have been higher but still below global averages. • **Channel comparison** — SARFAESI typically yields faster but partial recovery; IBC can yield higher recovery but takes longer despite the statutory timeline. • 💡 **Inflation Index** measures price levels; **Lapse Ratio** is an insurance metric; **Sensex** tracks stock market performance — none measure loan recovery in banking.

Correct Answer: D. An asset backed by collateral

• **Secured asset** = any asset against which the borrower has created a charge or mortgage in favour of the lender — for example, a house, factory, or vehicle pledged as collateral for a loan. • **SARFAESI scope** — the Act applies only to secured loans; unsecured loans (personal loans, credit cards) cannot be enforced under this Act. • **Enforcement** — under Section 13(4), once the 60-day notice lapses without full payment, the bank can take possession of the secured asset without a court order. • 💡 **Bank vault assets** are the bank's own holdings; **high-value** alone does not make an asset 'secured'; **government buildings** cannot be pledged — only privately owned collateral qualifies.

Correct Answer: A. Weak and stressed banks

• **PCA monitors weak and stressed banks** — RBI places a bank under PCA when key financial indicators breach threshold levels: GNPA > 6%, Net NPA > 3%, CRAR below 10.25%, or negative Return on Assets for two consecutive years. • **Restrictions imposed** — bank cannot open new branches, cannot increase risk-weighted assets, dividend payouts are stopped, management changes may be mandated. • **Goal** — prevent early-stage distress from becoming a full bank failure; PCA gives RBI supervisory control before the situation becomes irreversible. • 💡 **Employee performance** is managed internally via HR; **new bank openings** are governed by RBI licensing norms (not PCA); **forex rates** are monitored through monetary policy tools — PCA addresses none of these.

Correct Answer: A. Cash Reserve Ratio

• **CRR = Cash Reserve Ratio** — the mandatory percentage of a bank's Net Demand and Time Liabilities (NDTL) that must be maintained as cash with RBI; currently set by RBI's Monetary Policy Committee. • **Liquidity role** — CRR ensures banks always have a liquid reserve; RBI uses CRR hikes to drain excess liquidity from the system and vice versa. • **NPA link** — banks under PCA or with high NPAs may face additional CRR-related restrictions as RBI tightens oversight of their funding. • 💡 **Credit Risk Rating** is a credit assessment tool (CRISIL, ICRA); **Central Revenue Record** is a land/government term; **Capital Recovery Ratio** is not an RBI-defined metric.

Correct Answer: D. To acquire large NPA accounts from banks

• **NARCL (National Asset Reconstruction Company Ltd)** = India's government-backed 'bad bank' set up in 2021 to acquire large NPA accounts exceeding ₹500 crore from commercial banks at a discounted price. • **Mechanism** — NARCL pays 15% cash upfront and issues 85% as government-guaranteed Security Receipts; IDRCL (India Debt Resolution Company Ltd) acts as the management entity to actually resolve these assets. • **Target** — initially aimed to absorb ₹2 lakh crore of stressed assets, freeing banks' balance sheets to lend fresh. • 💡 **HNI account management** is a wealth management function; **0% home loans** is not commercially viable; **replacing RBI** would require a constitutional overhaul — none describe NARCL's actual mandate.

Correct Answer: D. Temporary suspension or delay in repayment of loan

• **Moratorium** = a legally sanctioned period during which the borrower is permitted to pause loan repayments without triggering default or NPA classification. • **When granted** — typically during economic crises (e.g., COVID-19 moratorium of March-August 2020 announced by RBI) or natural disasters; also applies during the initial construction phase of project loans. • **Interest treatment** — the loan is not waived; interest continues to accrue during moratorium and is added to the principal, increasing the total repayment burden. • 💡 **Immediate property seizure** is the opposite — that is enforcement, not moratorium; **permanent cancellation** is a loan waiver; **doubling interest** would be punitive, not a relief measure.

Correct Answer: A. Doubtful-3 (D3)

• **Doubtful-3 (D3)** = a sub-standard asset that has remained in the doubtful category for more than 3 years; it carries the highest provisioning requirement among doubtful assets. • **Classification ladder** — D1: doubtful up to 1 year (25% provision on secured portion); D2: doubtful 1-3 years (40% provision); D3: doubtful >3 years (100% provision on secured portion). • **Practical meaning** — by D3 stage, recovery is considered highly unlikely; banks often explore write-off or sale to ARC. • 💡 **D2** covers 1-3 years; **D1** is the earliest doubtful stage (up to 1 year); **Permanent Loss** is not an RBI NPA sub-category — 'Loss Asset' is the correct term for fully unrecoverable loans.