NPA & SARFAESI — Set 8

Correct Answer: B. 90 days

• **90 days** = A loan becomes a Non-Performing Asset when principal or interest remains unpaid for more than 90 consecutive days — at this point, the bank must stop accruing interest income on it and classify it as Sub-standard. • **Adopted in 2004**, the 90-day norm aligned India with Basel international standards; before this, India used a 180-day norm. • 💡 30 days triggers SMA-1 classification (early warning); 60 days triggers SMA-2; 120 days is not a regulatory threshold — 90 days is the precise NPA trigger under RBI prudential norms.

Correct Answer: C. Loss

• **Loss Asset** = A loan is classified as a Loss Asset when the bank (or auditors/RBI inspectors) identifies it as uncollectable — recovery is considered impossible or negligible, though it may not yet be written off the books. • **100% provisioning required** — banks must set aside the full outstanding amount as provision for loss assets, reflecting zero expected recovery. • 💡 SMA-2 is a pre-NPA warning stage (61-90 days overdue); Sub-standard is NPA for up to 12 months with some recovery hope; Doubtful is NPA beyond 12 months with collateral doubts — only Loss represents the final, near-zero recovery stage.

Correct Answer: A. ₹20 Lakh

• **₹20 Lakh** = DRTs have jurisdiction over debt recovery cases where the bank's claim exceeds ₹20 lakh — this threshold filters out smaller disputes and keeps the tribunal focused on high-value NPA recovery. • **Below ₹20 lakh**, banks typically use Lok Adalats (up to ₹20 lakh for pre-litigation) or civil courts; above this limit, DRT is the prescribed fast-track forum under the RDDBFI Act 1993. • 💡 ₹10 lakh, ₹1 lakh, and ₹5 lakh are all below the DRT threshold and are not prescribed limits under the Act — ₹20 lakh is the exact statutory minimum for DRT jurisdiction.

Correct Answer: B. To allow banks to recover bad loans without court intervention

• **To allow banks to recover bad loans without court intervention** = SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act 2002 empowers secured creditors to enforce their security interest — take possession, manage, and sell collateral — without filing a civil suit. • **Recovery process** — Step 1: 60-day notice under Section 13(2); Step 2: take possession under Section 13(4) if unpaid; Step 3: sell/lease/assign the secured asset to recover dues. • 💡 Helping customers get loans is the purpose of lending policy, not SARFAESI; tax on bank profits is governed by Income Tax Act; currency printing is regulated by RBI Act — SARFAESI deals exclusively with enforcement of security interests.

Correct Answer: C. Two seasons

• **Two crop seasons** = For short-duration crops (harvested within a year), if instalment or interest remains overdue for two crop seasons, the loan is classified as NPA — this replaces the standard 90-day norm to accommodate the seasonal cash-flow cycle of farmers. • **Long-duration crops** (harvested after one year, e.g., sugarcane) — the NPA threshold is one crop season of default, not two. • 💡 One season applies to long-duration crops only; three seasons and four seasons are not prescribed thresholds under RBI's agricultural NPA norms — two seasons is correct for short-duration crops.

Correct Answer: B. Setting aside money from profits to cover potential loan losses

• **Setting aside money from profits to cover potential loan losses** = Provisioning is a regulatory requirement where banks must charge a portion of profits to a provision account as a buffer against expected losses from NPAs — the amount depends on the NPA category. • **Provisioning norms** — Sub-standard: 15% (secured), 25% (unsecured); Doubtful: 25–100% depending on how long; Loss: 100% — the worse the asset quality, the higher the provision required. • 💡 Opening branches, acquiring customers, and hiring managers are business operations — they have nothing to do with provisioning, which is purely an accounting and capital adequacy mechanism tied to loan quality.

Correct Answer: D. CERSAI

• **CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest of India)** = CERSAI is a government company that maintains a central online database of all security interests (mortgages, hypothecation charges) created on property across India. • **Its key role** is preventing double financing — if a borrower has already pledged a property to Bank A, Bank B can check CERSAI before lending and avoid being defrauded. • 💡 SEBI regulates securities markets; Ministry of Finance sets fiscal policy; RBI is the central bank regulating monetary policy — none of them run the security interest registry, which is CERSAI's exclusive function under SARFAESI.

Correct Answer: A. Special Mention Account (SMA)

• **Special Mention Account (SMA)** = SMA is a pre-NPA early-warning category for accounts that are overdue but haven't crossed the 90-day NPA threshold — SMA-0 (1-30 days), SMA-1 (31-60 days), SMA-2 (61-90 days). • **Purpose** — RBI introduced SMA to prompt banks to begin corrective action (restructuring, recovery calls) before a loan officially becomes NPA, reducing eventual credit losses. • 💡 'Standard Loss Account', 'Safe Mode Account', and 'Secured Management Asset' are fictitious terms — they do not exist in RBI's prudential classification framework; only SMA is the recognised pre-NPA designation.

Correct Answer: B. Removing a bad loan from the balance sheet while continuing recovery

• **Removing a bad loan from the balance sheet while continuing recovery** = A write-off is an accounting action — the bank removes a fully provisioned loss asset from its books to present a cleaner balance sheet, but the borrower's legal liability remains fully intact. • **Recovery continues** — after write-off, banks pursue recovery through DRT, SARFAESI, or ARCs; any amount recovered post-write-off is recorded as income (recovery from written-off accounts). • 💡 Increasing the loan amount is a credit enhancement, not a write-off; completely forgiving debt is a waiver (very different legally — it extinguishes the borrower's liability); giving longer time is restructuring — write-off is an accounting removal, not a legal forgiveness.

Correct Answer: C. Asset Reconstruction Companies (ARCs)

• **Asset Reconstruction Companies (ARCs)** = ARCs are specialised entities registered under SARFAESI Act 2002 that acquire NPAs from banks at a discounted price (paying through Security Receipts) and then use legal and operational tools to recover the debt. • **How it works** — the bank transfers the NPA to an ARC, receives Security Receipts, and cleans its balance sheet; the ARC then pursues recovery through restructuring, asset sale, or legal action, earning a management fee plus upside. • 💡 Mutual Funds pool investor money for market investments; Insurance Companies manage risk through premiums and claims; Investment Banks facilitate capital market transactions — none of these buy and recover bank NPAs, which is the exclusive role of ARCs under SARFAESI.