NPA & SARFAESI — Set 7
Banking · NPA और SARFAESI · Questions 61–70 of 80
The 90-day overdue norm for NPA classification was adopted by India to align with?
Correct Answer: C. International Best Practices (Basel Norms)
India adopted the 90-day norm to bring its banking standards at par with global best practices. Basel norms provide an international framework for managing banking risks. This alignment helps in making Indian banks more credible in the global market.
Which of the following is an example of an 'Intangible' asset that cannot be seized under the SARFAESI Act?
Correct Answer: A. Goodwill and Brand Value
SARFAESI generally applies to tangible secured assets that can be possessed and sold. Intangible assets like goodwill or brand value are difficult to auction physically. The act primarily focuses on physical collateral used to secure loans.
A 'Non-fund based' facility becoming an NPA usually happens when?
Correct Answer: C. A bank guarantee is invoked but not paid by the customer
Non-fund based facilities like Bank Guarantees or Letters of Credit do not involve immediate cash outflow. However, if the guarantee is invoked and the customer fails to provide the funds, it becomes a bad debt. These items must be carefully monitored as 'contingent liabilities'.
The 'Debt Recovery Tribunal' (DRT) was established under which act?
Correct Answer: A. Recovery of Debts Due to Banks and Financial Institutions Act, 1993
DRTs were established under the RDDBFI Act of 1993, which was later amended. They provide a dedicated judicial platform for banks to recover their dues from defaulters. They handle cases above a specific monetary threshold, usually ₹20 lakh currently.
What is 'Restructuring' of a loan?
Correct Answer: C. Modifying the loan terms like interest rate or tenure for a stressed borrower
Restructuring involves changing the existing loan contract to help a borrower who is facing financial difficulty. It might include extending the repayment period or reducing the interest rate. It is a way to avoid the account becoming a total loss NPA.
The 'Credit Risk' of a bank is primarily the risk of?
Correct Answer: D. Borrowers defaulting on their loan obligations
Credit risk is the most significant risk for banks, as it involves the potential for loans to turn into NPAs. Managing this risk involves careful screening of borrowers and maintaining adequate collateral. It is the primary reason why banks maintain capital adequacy ratios.
Under the SARFAESI Act, a 'Secured Creditor' refers to?
Correct Answer: B. A bank or financial institution that holds collateral
A secured creditor is a lender that has a legal claim to specific collateral provided by the borrower. The SARFAESI Act gives special powers to these creditors for debt recovery. Unsecured creditors do not enjoy these summary powers of asset seizure.
What is the role of 'Security Interest' in a loan agreement?
Correct Answer: B. It is the legal right of the lender to seize collateral upon default
Security interest is a legal claim created by the borrower in favor of the lender over a specific asset. It acts as a guarantee that the debt will be repaid. The enforcement of this interest is the primary mechanism of the SARFAESI Act.
Which of the following is a 'Direct' impact of high NPAs on a bank?
Correct Answer: C. Reduced profitability and lending capacity
High NPAs mean less interest income and a need for higher provisioning from profits. This reduces the bank's ability to lend further to productive sectors of the economy. It can also lead to a decrease in the bank's overall valuation.
What is the 'Provision Coverage Ratio' (PCR)?
Correct Answer: B. The ratio of provisions to gross NPAs
PCR indicates the percentage of bad loans for which a bank has already set aside funds. A higher PCR means the bank is better prepared to handle potential losses from its NPAs. It is a sign of conservative and healthy financial management.