NPA & SARFAESI — Set 6

Correct Answer: B. Shows signs of future stress but is currently standard

• **Vulnerable loan** = a loan currently classified as standard (performing) but exhibiting risk signals — such as the borrower's sector facing headwinds, leverage rising, or cash flows thinning — suggesting likely future deterioration. • **Monitoring tool** — banks and RBI use Special Mention Accounts (SMA) as a formal early-warning system: SMA-0 (1-30 days overdue), SMA-1 (31-60 days), SMA-2 (61-90 days) before the account tips into NPA. • **Supervisory action** — early identification enables CDR, restructuring, or enhanced monitoring to prevent NPA formation. • 💡 **Already an NPA** means the loan has already defaulted — not vulnerable, already stressed; **foreign citizen loans** and **fully repaid loans** are unrelated to the vulnerability classification.

Correct Answer: D. To maintain credit records and scores of borrowers

• **Credit Information Companies (CICs)** like CIBIL, Equifax, CRIF, and Experian maintain credit histories and CIBIL scores (300-900) for all borrowers — individuals and businesses. • **How banks use them** — before sanctioning a loan, banks pull the applicant's CIBIL report; a score below 700 typically results in rejection or higher interest rates. • **NPA prevention** — by flagging serial defaulters, CICs help banks avoid lending to high-risk borrowers, reducing fresh NPA generation. • 💡 **Arresting defaulters** is the role of law enforcement under IPC/RBI guidelines, not CICs; **business funding** is a bank/NBFC function; **financial newspapers** are media — none describe the CIC mandate.

Correct Answer: A. Sell the property to recover dues

• **Enforcement of Security Interest** = under Section 13(4) of SARFAESI, after the 60-day notice under Section 13(2) lapses, the bank may take possession of the secured asset and sell it through auction to recover outstanding dues — without a court order. • **Three modes of enforcement** — take possession, take over management of the secured asset, or appoint a manager to collect receivables. • **Speed advantage** — SARFAESI drastically cut the recovery time compared to DRT/civil courts; possession can be taken in 2-4 months. • 💡 **Citizenship changes** are a sovereign government function; **arresting family** is illegal and outside any banking law's scope; **seizing savings in other banks** requires a court attachment order, not SARFAESI.

Correct Answer: A. Special Mention Account

• **SMA = Special Mention Account** — an RBI early-warning classification for loans showing signs of stress before they become NPAs. • **Three sub-categories** — SMA-0: principal or interest overdue 1-30 days; SMA-1: 31-60 days overdue; SMA-2: 61-90 days overdue; once it crosses 90 days it becomes a sub-standard NPA. • **Regulatory use** — banks must report SMA-2 accounts (above ₹5 crore) to CRILC (Central Repository of Information on Large Credits) so RBI can monitor system-wide stress early. • 💡 **Small Management Asset**, **Security Maintenance Agency**, and **Standard Monitoring Account** are invented terms with no RBI definition — only Special Mention Account is the correct full form.

Correct Answer: D. Asset Quality Management

• **Asset Quality Management** = the comprehensive framework through which banks identify, classify, provision for, and resolve bad loans to maintain a healthy balance sheet. • **Key components** — NPA classification (sub-standard, doubtful, loss), provisioning norms, SMA monitoring, credit risk assessment, and recovery through SARFAESI/IBC/DRT. • **Regulatory oversight** — RBI's AQR, CRILC reporting, and PCA framework are all instruments of asset quality management at the system level. • 💡 **Branch Expansion** relates to network strategy; **Staff Training** is HR; **CRM** focuses on customer retention — none address the loan health and recovery framework that defines Asset Quality Management.

Correct Answer: A. Standard Asset

• **Standard Asset** = a loan where the borrower is paying principal and interest on time with no overdue beyond 90 days — carrying normal credit risk with no signs of impending default. • **Provisioning** — even standard assets require a 0.25-0.40% general provision (higher for certain sectors like commercial real estate and personal loans under RBI norms). • **NPA ladder** — Standard → Sub-standard (NPA up to 12 months) → Doubtful (D1/D2/D3) → Loss Asset; Standard is the only non-NPA category. • 💡 **Sub-standard** means overdue 90+ days (NPA); **Doubtful** means sub-standard for 12+ months; **Safe Asset** is not an RBI-defined NPA classification category.

Correct Answer: A. Strategic Debt Restructuring

• **SDR = Strategic Debt Restructuring** — an RBI scheme from June 2015 allowing banks in a lending consortium to convert a portion of their debt into majority equity (>51%) in a stressed company to change management. • **Time limit** — lenders must find a new promoter and divest the equity within 18 months of conversion, or the asset must be classified as NPA. • **Outcome** — SDR had limited success; most converted stakes could not be sold; it has been largely replaced by IBC's CIRP process under NCLT. • 💡 **Security Debt Reconstruction**, **Standard Debt Recovery**, and **Social Debt Reduction** are all fabricated terms; only Strategic Debt Restructuring is the RBI-defined scheme.

Correct Answer: D. To help the bank take physical possession of the asset

• **Court Commissioner / Magistrate** = under Section 14 of SARFAESI, when a borrower physically resists handing over the secured asset, the bank may approach the Chief Metropolitan Magistrate (CMM) or District Magistrate (DM) who then appoints a Court Commissioner to assist in forcible physical possession. • **Process** — the bank files an application with CMM/DM; within 30 days the official must facilitate possession; police assistance may be requisitioned if needed. • **Purpose** — provides legal backing to prevent law-and-order incidents during recovery, since bank officers alone cannot forcibly enter premises. • 💡 **Defending the borrower** is the role of the borrower's advocate; **managing bank operations** is the bank's own management; **setting interest rates** is RBI's monetary policy function — none describe Section 14's role.

Correct Answer: C. Erosion of net worth and continuous losses

• **Erosion of net worth and continuous losses** = under the Sick Industrial Companies (Special Provisions) Act (SICA), a unit is 'sick' when accumulated losses equal or exceed its entire net worth and it has suffered cash losses for the current and preceding financial year. • **Banking impact** — sick units are major contributors to NPAs; their loans often get restructured repeatedly under CDR before eventual write-off or IBC resolution. • **BIFR** — the Board for Industrial and Financial Reconstruction (BIFR) was the earlier body to revive sick units; now IBC's NCLT handles this. • 💡 **High profits** and **foreign expansion** signal a healthy, growing company — the opposite of sick; **large hiring** indicates growth, not distress.

Correct Answer: D. Recovering previously paid bonuses from executives due to subsequent losses

• **Clawback** = a contractual or regulatory provision allowing a bank's board/regulator to recover variable pay (bonuses, ESOPs) already paid to executives if their decisions are later found to have caused significant losses, NPAs, or risk failures. • **RBI guidelines** — RBI's compensation guidelines for private bank CEOs and WTDs mandate clawback clauses, especially for variable pay granted before the period when risk materialised. • **Governance purpose** — aligns executive incentives with long-term bank health rather than short-term profit; discourages reckless lending to show quarterly profits. • 💡 **Credit card fee** is a banking charge; **friend loan** is informal lending; **interest increase** is a penal rate mechanism — none involve recovering previously paid executive compensation.