CAIIB Paper 2 Module D Quiz 3

For ordinary term loans, an account generally becomes NPA when interest and/or instalment of principal remains overdue for more than 90 days, subject to specific prudential rules and exceptions.

Overdue status is determined against the contractual due date and applicable RBI instructions. Banks should apply system-based, consistent recognition rather than wait for year-end or audit.

Cash-credit and overdraft accounts are assessed under the out-of-order criteria, which include continuously exceeding the sanctioned limit or drawing power for the prescribed period, or other specified irregularity conditions.

Asset classification is based on the applicable prudential recognition criteria, not merely collateral value. Security affects recovery prospects and provisioning treatment but does not override NPA recognition.

A substandard asset is generally one that has remained NPA for a period up to 12 months. Further classification depends on the length of time it remains non-performing and the applicable rules.

An asset that has remained in the substandard category for the prescribed period is generally classified as doubtful. Doubtful classification is further divided by the period for which it has remained doubtful.

A loss asset is identified by the bank, auditors or RBI as uncollectible or of such little value that it should not remain as a bankable asset. It may still have some salvage value, and write-off treatment follows applicable rules.

Provisioning recognises impairment and expected loss in accordance with applicable prudential rules. It reduces reported profit and/or net asset value and supports transparent financial reporting.

Applicable provisioning rules may distinguish the secured portion, based on eligible realisable security value, from the unsecured portion. Security must be valued and treated according to RBI requirements; it does not guarantee recovery.

Standard assets are performing assets, but prudential provisioning may still be required at rates that vary by exposure category and regulatory instructions. Banks must use the current applicable RBI circulars.

For NPAs, income recognition is generally on a realisation basis under prudential norms, and unrealised interest already credited may require reversal/provisioning as specified. Exact treatment follows current RBI directions.

A token payment alone does not automatically upgrade an NPA. The account must meet the applicable prudential conditions for regularisation, including servicing the relevant dues as prescribed.

Upgradation generally requires payment of the entire arrears of interest and principal relating to the borrower’s relevant credit facilities, in accordance with the current RBI instructions. The precise treatment should be checked against the applicable circular.

A technical write-off removes an amount from the reported advances in the manner prescribed for accounting/reporting, but it does not necessarily waive the borrower’s liability. Recovery efforts can continue.

Provisioning recognises loss while the asset may remain on the books net of provision. A write-off removes the written-off amount from the relevant books/accounts under the bank’s policy and regulations; legal recovery rights may continue.

Certain agricultural advances are assessed using crop-season-based criteria under RBI prudential norms rather than applying the ordinary 90-day term-loan trigger mechanically. Banks must apply the current category-specific instructions.

Consortium and multiple-banking exposures must be classified under applicable RBI instructions, including rules relevant to borrower accounts and information from member banks. A bank should not invent a separate classification merely from its collateral share.

Restructuring is not a substitute for assessing repayment capacity. Banks must evaluate viability and follow current RBI prudential requirements on asset classification, provisioning and any permitted resolution framework.

PCR broadly measures provisions held relative to gross non-performing advances, although definitions and reporting conventions should be checked for the context. A higher ratio generally indicates a larger provisioning cushion against recognised NPAs.

Gross NPAs represent non-performing advances before eligible deductions. Net NPA calculations deduct provisions and other specified items under the applicable definition, so the net ratio can be lower.