MCQ Test: Basel Norms - 2 - Bank Exams MCQ

Under the guidelines provided by the Reserve Bank of India (RBI), for Non-Performing Assets (NPA) categorized under the D3 category (outstanding for more than 3 years), banks are required to maintain provisions. The provisions to be maintained are as follows:

• For the secured portion of the NPA: Banks should maintain a provision of 25% of the outstanding amount.
• For the unsecured portion of the NPA: Banks should maintain a provision of 40% of the outstanding amount.

These provisions act as a buffer to cover potential losses and ensure that banks are adequately prepared to absorb any potential default or non-repayment by the borrower. The specific provisioning requirements for different categories of NPAs help banks manage the risk associated with their loan portfolio and maintain financial stability.

In the context of BCBS, 's' stands for Supervision. BCBS stands for the Basel Committee on Banking Supervision. It is an international committee comprised of central banks and banking supervisory authorities from different countries. The BCBS provides guidance and develops global standards for the supervision, regulation, and risk management of banks. The committee's objective is to enhance the stability and soundness of the global banking system by promoting effective supervision and the implementation of internationally agreed-upon standards.

When the Reserve Bank of India (RBI) supervises the implementation of Basel regulations bank-wise, it is known as the SREP (Supervisory Review and Evaluation Process). SREP is a comprehensive supervisory framework used by regulatory authorities, including the RBI, to assess and evaluate the risk profiles, governance, capital adequacy, and risk management practices of banks. It involves conducting regular assessments and evaluations to ensure that banks comply with Basel standards and guidelines. The SREP process enables the RBI to identify potential risks and weaknesses in individual banks and take appropriate supervisory actions to maintain the stability and resilience of the banking system.

Non-Performing Assets (NPAs) can be purchased by various entities, including:

A) Asset Reconstruction Companies (ARCs): ARCs are specialized financial institutions that acquire and resolve NPAs from banks and financial institutions. They purchase NPAs from banks at a discounted price and attempt to recover the dues through various means.

B) Banks: Banks themselves have the authority to purchase NPAs. They may choose to buy NPAs from other banks or financial institutions as part of their strategic decision-making or to manage their loan portfolios.

C) Financial Institutions: Financial institutions, including non-banking financial companies (NBFCs), can also purchase NPAs. These institutions may have expertise in dealing with distressed assets and may acquire NPAs as part of their business activities.

D) NBFCs: Non-Banking Financial Companies (NBFCs) are financial intermediaries that provide various types of loans and financial services. Some NBFCs specialize in dealing with distressed assets and may purchase NPAs to resolve them and recover the dues.

In summary, all of the above entities have the potential to purchase NPAs, depending on their respective strategies, expertise, and regulatory permissions.

Off-balance sheet activities refer to the business activities of a bank that do not appear on its balance sheet but can still have an impact on its financial condition and risk profile. These activities typically involve contingent liabilities, guarantees, derivatives, and other forms of financial instruments. They are considered off-balance sheet because they are not directly recorded as assets or liabilities on the bank's balance sheet, but they can still expose the bank to risks and obligations.

ALM (Asset Liability Management) refers to the process of managing the assets and liabilities of a bank to ensure a proper balance between profitability, liquidity, and risk.

Bad loan exposure and NPA (Non-Performing Asset) both refer to loans that are not being repaid as per their agreed terms and pose a risk to the bank's financial health.

Therefore, the most appropriate answer to the given question is C) off-balance sheet exposure.

The main motive of the Basel accords, specifically Basel I, Basel II, and Basel III, is to establish international standards and guidelines for banks to ensure the stability and soundness of the global banking system. These accords were developed by the Basel Committee on Banking Supervision (BCBS), which is comprised of central banks and regulatory authorities from different countries.

The primary objective of the Basel accords is to enhance the risk management and risk governance practices of banks. The regulations and frameworks set forth in the accords aim to increase the risk tolerance level of banks by establishing minimum capital requirements, defining risk-weighted assets, and implementing risk management practices.

By increasing the risk tolerance level, the Basel accords seek to promote a more resilient banking sector that can withstand financial shocks and crises, thereby protecting depositors, investors, and the overall stability of the financial system.

Therefore, the correct answer is C) Increase risk tolerance level.

In the context of NPA (Non-Performing Asset) accounts, it is a standard practice that interest should not be debited to the account, even if it has been recovered. Once an account is classified as an NPA, it means that the borrower has failed to make timely payments of principal and interest for a specified period.

According to regulatory guidelines and accounting standards, when an account becomes an NPA, the recognition of income from that account is generally suspended. This means that no further interest can be debited to the NPA account, regardless of whether it has been recovered or not.

The purpose of this restriction is to reflect the deteriorating financial position of the borrower and the increased credit risk associated with the NPA account. Recognizing interest on an NPA account, even if recovered, would not accurately reflect the financial reality and could potentially distort the bank's financial statements.

Therefore, the correct statement in the context of NPA accounts is A) The interest cannot be debited to the account even if it has been recovered.

Earlier, the minimum investment requirement in Security Receipts (SRs) for Asset Reconstruction Companies (ARCs) was 5%. However, as per the guidelines issued by the Reserve Bank of India (RBI) in 2020, the minimum investment requirement in SRs has been increased to 15% for ARCs.

This means that ARCs are now required to invest a minimum of 15% of the SRs' value from their own funds when acquiring non-performing assets (NPAs) from banks or financial institutions. The increase in the minimum investment is aimed at aligning the interests of the ARCs with the underlying assets and improving their skin in the game.

Therefore, the correct answer is B) 15%.

In the context of agricultural loans, particularly for long duration crops, an account is classified as a Non-Performing Asset (NPA) after the stipulated period of one crop season. A crop season refers to the time it takes for a particular crop to be harvested from sowing to harvesting.

The Reserve Bank of India (RBI) guidelines define one crop season as the duration from the time of advance for a specific crop until the harvesting and marketing of that crop. If a borrower fails to repay the agricultural loan within the prescribed time frame of one crop season, the loan account is considered an NPA.

Therefore, the correct answer is D) 1 crop season.

The implementation of Non-Performing Assets (NPA) norms in India was recommended by the Narasimham committee. The committee, officially known as the Committee on the Financial System (CFS), was established in 1991 and chaired by M. Narasimham, a former Governor of the Reserve Bank of India (RBI).

The Narasimham committee was appointed to examine and make recommendations on various aspects of the Indian financial system, including banking reforms. One of the key recommendations of the committee was the introduction of prudential norms for asset classification and provisioning, which included the concept of NPAs.

Based on the recommendations of the Narasimham committee, the RBI introduced the prudential norms for asset classification, income recognition, and provisioning of NPAs in a phased manner. These norms aimed to strengthen the banking system by ensuring proper recognition and management of non-performing assets.

Therefore, the correct answer is B) Narasimham committee.

In the case of short duration crops, an account is classified as a Non-Performing Asset (NPA) after two crop seasons have passed and the loan remains unpaid. A crop season refers to the time it takes for a particular crop to be harvested from sowing to harvesting.

The Reserve Bank of India (RBI) guidelines specify that if a borrower fails to repay the agricultural loan within the stipulated time frame of two crop seasons for short duration crops, the loan account is considered an NPA.

Therefore, the correct answer is B) 2 crop seasons.

Under the asset classification norms for Non-Performing Assets (NPA) in India, accounts that remain overdue for a period of more than one year but up to three years are categorized as doubtful assets.

Doubtful assets are those where the possibility of recovery is uncertain, and there are significant doubts about the borrower's ability to repay the loan. These assets have a higher degree of risk compared to substandard assets, as the potential for loss is more pronounced.

It is important for banks and financial institutions to classify assets appropriately based on their repayment status and assess the probability of recovery. By classifying assets as doubtful, banks can reflect the increased risk in their financial statements and take appropriate measures for provisioning and risk management.

Therefore, the correct answer is C) doubtful asset.

As per the prudential norms set by the Reserve Bank of India (RBI) for asset classification and provisioning, the provisioning percentage for standard assets is 0.40%.

Provisioning refers to the practice of setting aside a portion of a bank's profits to cover potential losses from loans and investments. For standard assets, which are loans that are not classified as non-performing, the RBI requires banks to maintain a minimum provision of 0.40% of the outstanding amount.

This provision acts as a cushion for potential losses that may arise in the future due to default or deterioration in the asset quality. It helps banks to maintain financial stability and strengthen their resilience against unforeseen risks.

Therefore, the correct answer is C) 0.40% for the provisioning percentage of standard assets.

The Conservation Buffer is a term used in banking regulations. It refers to a mandatory capital requirement imposed on banks by regulatory authorities. Its purpose is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of economic stress or financial instability. The Conservation Buffer helps strengthen the resilience of banks and enhances their ability to withstand adverse economic conditions.

The implementation of Basel III, which is a set of international banking regulations, started on 1st April 2013. Basel III was introduced as a response to the global financial crisis that occurred in 2008. It aimed to strengthen the regulation, supervision, and risk management practices of the banking sector to promote financial stability and reduce the likelihood of future crises.