Question 1

A bank classifies an advance as 'Doubtful' under NPA norms when the loan remains non-performing for a period of:

Accepted Answer

Under RBI's NPA classification framework, advances are categorized based on the period of non-performance: (1) Sub-standard: up to 12 months of non-performance; (2) Doubtful: 12 to 36 months of non-performance; (3) Loss: beyond 36 months or when the asset is considered uncollectible. The 'Doubtful' category reflects higher credit risk than Sub-standard but allows for potential recovery within the extended timeline. This classification directly impacts provisioning requirements — Doubtful assets require 25–40% provisioning depending on the age of arrears. Therefore, the answer is C.

Question 2

Under Basel III norms applicable in India, the minimum Capital-to-Risk-Weighted Assets Ratio (CRAR) that banks must maintain is:

Accepted Answer

Basel III, implemented globally and adopted by RBI for Indian banks, prescribes a minimum CRAR (also called Capital Adequacy Ratio) of 10.5% for banks operating in India. This comprises Tier 1 capital (minimum 6%) and Tier 2 capital. The 10.5% threshold is higher than the international Basel III minimum of 10.5% (which includes a capital conservation buffer of 2.5%). CRAR is calculated as (Tier 1 Capital + Tier 2 Capital) / Risk-Weighted Assets × 100. This ratio ensures banks maintain sufficient capital to absorb losses and support their lending operations. Therefore, the answer is B.

Question 3

The Insolvency and Bankruptcy Code (IBC) 2016 prescribes a maximum resolution timeline of how many days for the resolution of a corporate insolvency case?

Accepted Answer

The IBC 2016 establishes a structured timeline for resolving corporate insolvency proceedings. The standard resolution period is 180 days from the date of admission of the insolvency petition by the National Company Law Tribunal (NCLT). This period can be extended by an additional 90 days (maximum 270 days total) if required, subject to NCLT approval and creditor consent. The 180+90 day framework is designed to ensure faster resolution compared to traditional liquidation or recovery proceedings, which could span years. The NCLT is the adjudicating authority for all IBC proceedings. Therefore, the answer is C.

Question 4

Under the Insolvency and Bankruptcy Code (IBC) 2016, what is the maximum statutory timeline for completing the Corporate Insolvency Resolution Process (CIRP) including extensions?

Accepted Answer

The IBC 2016 prescribes a maximum resolution timeline of 180 days for completing the Corporate Insolvency Resolution Process (CIRP), with a provision for a single extension of up to 90 days, making the absolute maximum 270 days. The National Company Law Tribunal (NCLT) is the adjudicating authority. Therefore, answer is D.

Question 5

Which of the following best describes the relationship between Gross NPA and Net NPA in a bank's balance sheet?

Accepted Answer

Gross NPA represents the total value of all non-performing assets before making any provisions or write-offs. Net NPA is calculated by deducting provisions made against NPAs from Gross NPA. The formula is: Net NPA = Gross NPA − Provisions made. This distinction is crucial for assessing true asset quality. Therefore, answer is A.

Question 6

Under the Securities and Exchange Board of India (SEBI) framework, which of the following best describes the primary function of a Clearing Corporation in the stock exchange ecosystem?

Accepted Answer

A Clearing Corporation acts as a central counterparty (CCP) between buyers and sellers in stock exchange transactions. It guarantees settlement of trades, manages counterparty risk, and ensures that both parties fulfill their obligations regardless of whether the other party defaults. In India, the National Securities Clearing Corporation Limited (NSCCL) and Indian Clearing Corporation Limited (ICCL) perform this function for NSE and BSE respectively. The Clearing Corporation does NOT directly execute trades (that is the exchange's role), nor does it regulate market participants (SEBI's role), nor does it custody securities permanently (depositories like NSDL and CDSL do). Therefore, answer is B.

Question 7

A bank's treasury department is evaluating investment in Government Securities (G-secs) for its Statutory Liquidity Ratio (SLR) compliance. Under RBI guidelines, which of the following statements about G-secs held for SLR purposes is CORRECT?

Accepted Answer

Government Securities are debt instruments issued by the Government of India and constitute the primary approved liquid asset for SLR compliance under Section 24 of the Banking Regulation Act 1949. Banks must maintain a minimum SLR percentage of their NDTL in approved liquid assets, predominantly G-secs. For regulatory compliance, G-secs are valued at book value rather than market value. G-secs provide both safety (backed by sovereign guarantee) and liquidity (tradeable in secondary markets). Therefore, answer is B.

Question 8

Which of the following is NOT a component of Tier 1 capital under Basel III norms?

Accepted Answer

Under Basel III, Tier 1 capital comprises Common Equity Tier 1 (CET1) and Additional Tier 1 (AT1) capital. CET1 includes paid-up capital, retained earnings, and other comprehensive income. AT1 includes perpetual non-cumulative preference shares and subordinated debt meeting specific criteria. Tier 2 capital, by contrast, includes subordinated debt (with maturity ≥5 years), general provisions, and investment reserves. Subordinated debt with maturity less than 5 years does NOT qualify as Tier 1 or Tier 2 capital — it is excluded from regulatory capital. Preference shares that are cumulative (rather than non-cumulative) also do not qualify as AT1. Therefore, the answer is D.

Question 9

A bank classifies a loan as 'Sub-standard' NPA when the loan remains non-performing for a period not exceeding which duration?

Accepted Answer

Under RBI's NPA classification norms, a Sub-standard asset is one where the loan has remained non-performing for a period not exceeding 12 months. After 12 months, if the loan continues to be non-performing, it is reclassified as 'Doubtful'. Beyond 36 months, it moves to the 'Loss' category. Therefore, answer is B.

Question 10

Under the SARFAESI Act 2002, a bank can initiate asset seizure proceedings without obtaining a court order for non-performing advances of what minimum amount?

Accepted Answer

The SARFAESI Act 2002 empowers banks and financial institutions to recover secured debts without court intervention. The threshold amount for such recovery is ₹1 lakh. For amounts exceeding ₹1 lakh, banks can directly seize mortgaged assets, sell them, and adjust the proceeds against the outstanding debt. This provision significantly accelerates recovery compared to traditional DRT (Debt Recovery Tribunal) proceedings, which apply to debts exceeding ₹20 lakh. Therefore, the answer is B.

Question 11

Under the SARFAESI Act 2002, a bank can initiate asset seizure proceedings without obtaining a court order for non-performing loans exceeding which amount?

Accepted Answer

The SARFAESI Act 2002 empowers banks and financial institutions to seize and sell secured assets without court intervention for dues exceeding ₹1 lakh. This provision significantly accelerates the recovery process for banks. For amounts ≤ ₹1 lakh, banks must approach the Debt Recovery Tribunal (DRT) or civil courts. Therefore, answer is C.

Question 12

An Asset Reconstruction Company (ARC) purchases a portfolio of Non-Performing Assets (NPAs) from a commercial bank at a 40% discount to the book value of ₹500 crore. The ARC issues Security Receipts (SRs) to the bank as consideration. Six months later, the ARC recovers ₹180 crore from the underlying assets. According to RBI regulations on ARCs and Security Receipts, which statement BEST describes the accounting and redemption position?

Accepted Answer

When an ARC purchases NPAs, it pays the bank in the form of Security Receipts (SRs), which represent the bank's claim on the ARC's recovery proceeds. In this case: Book value of NPAs = ₹500 crore. ARC purchase price = 60% of ₹500 crore = ₹300 crore (40% discount). The bank receives SRs worth ₹300 crore. When the ARC recovers ₹180 crore from the underlying assets, this recovery is credited towards redemption of the SRs. The bank's SR holding is partially redeemed to the extent of recovery. RBI regulations (ARC Directions 2010, as amended) specify that SRs are redeemed based on actual recoveries made by the ARC from the underlying assets. The bank recognizes the recovery as income and the SR value is reduced by the recovery amount. The remaining SR value (₹300 crore − ₹180 crore = ₹120 crore) continues to be held by the bank as a claim on future recoveries. This is distinct from the original NPA write-off; the bank has transferred credit risk to the ARC but retains recovery risk through the SR holding.

Question 13

An Asset Reconstruction Company (ARC) purchases a non-performing loan portfolio from a bank at a discount. Under RBI regulations, what instrument does the ARC issue to the bank in exchange for the loan assets?

Accepted Answer

When an ARC acquires bad loans from a bank, it pays a portion in cash and issues 'Security Receipts' (SRs) for the remaining amount. Security Receipts are tradable instruments that represent the bank's claim on the cash flows generated from the reconstructed assets. The redemption of SRs depends on the recovery performance of the underlying assets. This mechanism is governed by RBI's ARC Regulations and the SARFAESI Act 2002. Therefore, the answer is A.

Question 14

An NPA is classified as 'Doubtful' when the asset remains non-performing for a period exceeding which timeframe?

Accepted Answer

Under RBI's NPA classification norms, an asset is classified as 'Doubtful' when it has remained in the 'Sub-standard' category for a continuous period exceeding 12 months. The Doubtful category spans from 12 months to 36 months of non-performance. After 36 months, the asset moves to the 'Loss' category. This classification directly impacts provisioning requirements: Doubtful assets require 25–40% provisioning (depending on security coverage), whereas Sub-standard requires 15% and Loss requires 100% provisioning.

Question 15

Under the Insolvency and Bankruptcy Code (IBC), 2016, the maximum statutory timeline for resolution of a corporate insolvency is how many days, including any extension?

Accepted Answer

The IBC, 2016 prescribes a maximum resolution timeline of 180 days from the date of admission of an insolvency petition by the National Company Law Tribunal (NCLT). This period can be extended by up to 90 additional days by the NCLT in certain circumstances, making the absolute maximum 270 days (180 + 90). This timeline is critical for creditors (including banks) as it determines how quickly their claims will be adjudicated and recovery initiated. The NCLT is the sole adjudicating authority for corporate insolvency proceedings in India.

Question 16

A bank's Capital-to-Risk-Weighted Assets Ratio (CRAR) under Basel III must not fall below which minimum threshold as prescribed by RBI for Indian banks?

Accepted Answer

Under Basel III framework, as implemented by RBI, the minimum Capital Adequacy Ratio (CRAR) for Indian banks is 10.5%. This comprises Tier 1 capital (minimum 6%) and Tier 2 capital. The CRAR is calculated as (Tier 1 + Tier 2 Capital) / Risk-Weighted Assets × 100. The 10.5% threshold is higher than the international Basel III minimum of 10.5% (which includes the capital conservation buffer of 2.5%). Banks falling below this ratio face regulatory action, including restrictions on dividend distribution and capital deployment. This is a critical metric for assessing bank solvency and is monitored continuously by RBI.

Question 17

Asset Reconstruction Companies (ARCs) in India are regulated by which authority, and what is the primary instrument through which ARCs monetize their acquired bad loans?

Accepted Answer

ARCs are regulated by the Reserve Bank of India (RBI) under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002. ARCs acquire non-performing assets (bad loans) from banks at a discount and monetize them through the issuance of Security Receipts (SRs). Security Receipts are financial instruments issued by ARCs to investors, backed by the cash flows generated from the recovery of acquired NPAs. The redemption of SRs depends on the actual recovery from the underlying bad loans. This mechanism allows banks to clean up their balance sheets while ARCs attempt recovery, creating a specialized market for distressed assets.

Question 18

Under the Insolvency and Bankruptcy Code (IBC) 2016, what is the maximum timeline for completion of the corporate insolvency resolution process (CIRP) including any extension granted by the National Company Law Tribunal (NCLT)?

Accepted Answer

The IBC 2016 prescribes a standard resolution timeline of 180 days from the admission of an insolvency application, with a provision for a single extension of up to 90 days by the NCLT, making the maximum total timeline 270 days. This is a core regulatory framework governing capital market participants and listed companies. The NCLT is the sole adjudicating authority for insolvency matters under the IBC. Therefore, the answer is B.

Question 19

A bank classifies a corporate loan as 'Doubtful' under the NPA classification norms. According to RBI's provisioning guidelines, what is the minimum provisioning requirement for the 'Doubtful' category?

Accepted Answer

Under RBI's NPA classification framework, a loan is classified as 'Doubtful' if it remains in the 'Sub-standard' category for 12 months or more, or if it shows signs of deterioration within 12–36 months of becoming NPA. For the 'Doubtful' category, RBI mandates a minimum provisioning of 25% for the first 12 months of classification as Doubtful, 40% for the second year, and 100% for the third year onwards. However, the question asks for the minimum across the Doubtful period, which is 25%. Therefore, the answer is C.

Question 20

A bank's Gross NPA ratio is 2.5% and its provisioning coverage ratio (PCR) is 60%. What is the bank's approximate Net NPA ratio?

Accepted Answer

Net NPA is calculated as: Net NPA = Gross NPA − Provisions. The Provisioning Coverage Ratio (PCR) is the percentage of Gross NPA covered by provisions. If Gross NPA is 2.5% and PCR is 60%, then Provisions = 2.5% × 60% = 1.5%. Therefore, Net NPA = 2.5% − 1.5% = 1.0%. This tests the candidate's ability to work with NPA metrics used in capital market analysis and bank financial statements. Therefore, the answer is B.

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