NPA & SARFAESI — Set 7

Correct Answer: C. International Best Practices (Basel Norms)

• **International Best Practices (Basel Norms)** = India adopted the 90-day overdue norm in 2004 to align its NPA recognition standards with the Basel Committee's global banking framework. • **Basel Norms** provide a universal yardstick for credit risk measurement — a consistent 90-day threshold allows cross-country comparison of bank health. • 💡 Agricultural seasons influence NPA rules only for crop loans (2 seasons), not the general 90-day norm; Local laws and financial year end have no role in this standardisation.

Correct Answer: A. Goodwill and Brand Value

• **Goodwill and Brand Value** = SARFAESI Act empowers secured creditors to take possession of tangible secured assets only — assets that can be physically held, auctioned, or assigned. • **Intangible assets** like goodwill, brand value, or intellectual property have no physical form, making possession and auction impossible under the Act's enforcement mechanism. • 💡 Machinery, Land & Buildings, and Vehicles are all tangible secured assets — they can be seized and sold under Section 13(4) of SARFAESI; goodwill cannot.

Correct Answer: C. A bank guarantee is invoked but not paid by the customer

• **A bank guarantee is invoked but not paid by the customer** = Non-fund based facilities (Bank Guarantees, Letters of Credit) do not involve immediate cash outflow — the bank only promises to pay if the borrower defaults. • **When the guarantee is invoked**, the bank pays on the borrower's behalf; if the borrower cannot reimburse the bank, the amount crystallises into a direct credit exposure and becomes NPA if unpaid beyond 90 days. • 💡 Savings deposits, ATM cash levels, and employee leave have zero connection to NPA classification — they are operational matters, not credit risk events.

Correct Answer: A. Recovery of Debts Due to Banks and Financial Institutions Act, 1993

• **Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993** = DRTs were specifically created under this Act to provide a dedicated fast-track forum for banks to recover dues above ₹20 lakh. • **Appeals** against DRT orders go to the Debt Recovery Appellate Tribunal (DRAT); the DRT issues a Recovery Certificate that empowers a Recovery Officer to attach and sell the defaulter's property. • 💡 Banking Regulation Act 1949 governs bank licensing and operations; SARFAESI 2002 enables out-of-court asset seizure; RBI Act 1934 established the RBI — none of them created DRTs.

Correct Answer: C. Modifying the loan terms like interest rate or tenure for a stressed borrower

• **Modifying loan terms like interest rate or tenure for a stressed borrower** = Restructuring is a negotiated change to the original loan contract — typically extending tenure, reducing EMI, granting a moratorium, or lowering the interest rate — to help a viable but financially stressed borrower. • **Key rule** — A restructured account is a red flag; RBI requires banks to classify it as a 'restructured standard asset' and make higher provisions, since the risk of future default is elevated. • 💡 Closing a branch or selling the bank are corporate decisions unrelated to loan contracts; giving a free house is debt waiver, not restructuring — restructuring changes repayment terms, not the borrower's obligation.

Correct Answer: D. Borrowers defaulting on their loan obligations

• **Borrowers defaulting on their loan obligations** = Credit risk is the risk that a borrower will fail to repay principal or interest, causing the loan to become an NPA and eroding the bank's income and capital. • **It is the largest risk category** for banks — managed through credit appraisal, collateral, credit scores, and provisioning norms set by RBI. • 💡 Building fire is operational risk; competitor branches are business/strategic risk; ATM non-usage is market/service risk — none of these involve the possibility of loan default, which is the hallmark of credit risk.

Correct Answer: B. A bank or financial institution that holds collateral

• **A bank or financial institution that holds collateral** = Under SARFAESI, a 'Secured Creditor' is any bank, financial institution, or Asset Reconstruction Company (ARC) that has a security interest in a borrower's asset as collateral for a loan. • **Special powers** under SARFAESI — only secured creditors can issue the 60-day notice (Section 13(2)) and seize assets (Section 13(4)) without going to court. • 💡 An insurance company is a policyholder's counterparty, not a lender; a government tax official has statutory authority, not a contractual security interest; the borrower is the debtor, the opposite of a creditor.

Correct Answer: B. It is the legal right of the lender to seize collateral upon default

• **Legal right of the lender to seize collateral upon default** = A security interest is a charge created by the borrower in favour of the lender over a specific asset — it gives the lender the legal right to take and sell that asset if the borrower defaults. • **CERSAI** (Central Registry of Securitisation Asset Reconstruction and Security Interest) registers all such security interests to prevent double financing on the same asset. • 💡 Interest rate is the cost of borrowing, not a legal claim on assets; insurance premium protects against risk of loss, not default; prepayment reward would be a discount, not a security right.

Correct Answer: C. Reduced profitability and lending capacity

• **Reduced profitability and lending capacity** = High NPAs directly cut a bank's interest income (since NPA accounts stop earning interest) and force the bank to set aside large provisions from profits, shrinking both earnings and capital available to lend. • **Cascading effect** — lower lending capacity means fewer new loans, which reduces the bank's ability to support economic growth and can trigger rating downgrades and higher borrowing costs for the bank itself. • 💡 High NPAs actually force banks to raise lending rates (not lower them) to recover costs; new staff recruitment shrinks under stress; the bank's stock price typically falls, not rises, when NPA levels surge.

Correct Answer: B. The ratio of provisions to gross NPAs

• **Ratio of provisions made to gross NPAs** = PCR measures what percentage of its bad loans a bank has already set aside money to cover — a PCR of 70% means the bank has provisioned for 70% of its gross NPA value. • **RBI benchmark** — RBI has recommended a minimum PCR of 70% for scheduled commercial banks; a higher PCR signals greater financial resilience and conservative management. • 💡 Profit-to-salary, gold-to-cash, and branch-to-customer ratios are unrelated internal metrics — PCR is specifically a bad-loan buffer indicator, not a general operational ratio.