Unit 28 Asset Classification and Provisioning Norms MCQ Caiib

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MCQS UNIT 28
ASSET CLASSIFICATION
PROVISIONING NORM
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Banks derive their major source of income by:
a) Charging fees on transactions
b) Earning interest on advances and investments
c) Trading in commodities
d) Providing insurance services
The correct answer is (b) Earning interest on advances and investments. According to the
statement, banks derive their major source of income by way of interest on advances and
investments. This indicates that a significant portion of a bank's income comes from earning
interest on the loans it provides (advances) and the investments it holds.
Income is booked initially on ______ basis on performing advances.
a) Cash

b) Accrual
c) Amortization
d) Provision
The correct answer is (b) Accrual. According to the statement, income is booked initially on
an accrual basis on performing advances. This means that the bank recognizes income as it is
earned, even if the cash payment has not been received. Accrual accounting is a common
practice in recognizing revenue when it is earned rather than when the payment is received.
Under which condition should income not be accounted for or recognized?
a) If the counterparty delays for 60 days
b) If the counterparty delays for 75 days
c) If the counterparty delays for 90 days (90-day delinquency norm)

d) If the counterparty delays for 120 days
The correct answer is (c) If the counterparty delays for 90 days (90-day delinquency norm).
According to the statement, if the bank is not able to get/recover interest from the
counterparty within a reasonable time, known as the 90-day delinquency norm, then the
income should not be accounted for or recognized until it is actually received. This
establishes a threshold for delayed payments beyond which income recognition is deferred.
One of the important recommendations of the Narasimham Committee was that:
a) Banks should focus only on domestic operations
b) Banks should have less transparency in their balance sheets
c) Balance sheets of the banks should be transparent and comply with international
accounting standards

d) Banks should avoid compliance with international standards
The correct answer is (c) Balance sheets of the banks should be transparent and comply with
international accounting standards. According to the statement, one of the important
recommendations of the Narasimham Committee was that the balance sheets of the banks
should be transparent and comply with international accounting standards. This emphasizes
the need for clear and internationally comparable financial reporting by banks.
The Narasimham Committee recommended that:
a) Banks should have diverse accounting practices
b) Banks should adopt inconsistent income recognition practices
c) Banks should adopt uniform accounting practices in regard to income recognition and bad
debts provisioning

d) Banks should follow different standards for bad debts provisioning
The correct answer is (c) Banks should adopt uniform accounting practices in regard to
income recognition and bad debts provisioning. According to the statement, the Narasimham
Committee recommended that banks should adopt uniform accounting practices in regard to
income recognition and bad debts provisioning. This emphasizes the importance of
consistency and standardization in accounting practices across banks for better
comparability and transparency.
Who has introduced, in a phased manner, prudential norms for income recognition, asset
classification, and provisioning for the advances portfolio?
a) International Accounting Standards Board (IASB)
b) Securities and Exchange Board of India (SEBI)

c) Reserve Bank of India (RBI)
d) Narasimham Committee
The correct answer is (c) Reserve Bank of India (RBI). According to the statement, the
Reserve Bank of India has introduced, in a phased manner, prudential norms for income
recognition, asset classification, and provisioning for the advances portfolio of the banks.
This indicates that the RBI is responsible for implementing these prudential norms to ensure
the financial soundness of banks.
How should the classification of assets of banks be done?
a) Based on subjective criteria
b) Without any specific criteria

c) On the basis of objective criteria ensuring uniform and consistent application of norms
d) Following random criteria
The correct answer is (c) On the basis of objective criteria ensuring uniform and consistent
application of norms. According to the statement, the classification of assets of banks has to
be done on the basis of objective criteria, which would ensure a uniform and consistent
application of the norms. This emphasizes the need for clear and standardized criteria for
asset classification to maintain consistency across the banking sector.
An asset, including a leased asset, becomes ______________ when it ceases to generate

income for the bank.
a) Performing
b) Marketable

c) Non-performing
d) Appreciating
The correct answer is (c) Non-performing. According to the statement, an asset, including a
leased asset, becomes non-performing when it ceases to generate income for the bank. Non-
performing assets are those that fail to generate income or interest for the bank.
For a term loan to be classified as a Non-Performing Asset (NPA), what condition must be
met?
a) Interest and/or installment of principal remain overdue for a period of more than 30 days
b) Interest and/or installment of principal remain overdue for a period of more than 60 days
c) Interest and/or installment of principal remain overdue for a period of more than 90 days

d) Interest and/or installment of principal remain overdue for a period of more than 120
days
The correct answer is (c) Interest and/or installment of principal remain overdue for a period
of more than 90 days. According to the statement, a term loan is classified as a Non-
Performing Asset (NPA) when interest and/or installment of principal remain overdue for a
period of more than 90 days. This duration is a key threshold for term loans to be categorized
as NPAs.
For an Overdraft/Cash Credit (OD/CC) account to be classified as a Non-Performing Asset

(NPA), what condition must be met?
a) The account remains 'out of order' for more than 60 days
b) The account remains 'out of order' for more than 90 days

c) The account remains 'out of order' for more than 120 days
d) The account remains 'out of order' for more than 180 days
The correct answer is (b) The account remains 'out of order' for more than 90 days. According
to the statement, an Overdraft/Cash Credit (OD/CC) account is classified as a Non-
Performing Asset (NPA) when the account remains 'out of order' in respect of an OD/CC for
more than 90 days. This duration is a key threshold for OD/CC accounts to be categorized as
NPAs.
What condition must be met for an Overdraft or Cash Credit (CC) account to be classified as a
Non-Performing Asset (NPA)?

A) The account balance should be positive
B) The account remains 'out of order'
C) Regular repayments are made
D) The interest rate is low
B) The account remains 'out of order' - According to the provided statement, an Overdraft or
Cash Credit account is considered an NPA when it remains 'out of order'. This indicates a
situation where the borrower is not meeting the agreed-upon terms, leading to the
classification of the account as a Non-Performing Asset.
What condition must be met for a Bill Purchase or Bill Discount to be classified as a Non-
Performing Asset (NPA)?

A) The bill amount is high
B) The bill remains overdue for more than 90 days
C) The bill is paid in advance
D) The discount rate is low
B) The bill remains overdue for more than 90 days - According to the provided statement, a
Bill Purchase or Bill Discount is considered an NPA when the bill remains overdue for a period
exceeding 90 days. This signifies a delayed payment beyond the stipulated timeframe,
leading to the classification of the transaction as a Non-Performing Asset.
What condition must be met for a short-duration crop loan to be classified as a Non-

A) The loan amount is too small
B) The installment of principal or interest remains overdue for one crop season
C) The crop yield is high
D) The installment of principal or interest remains overdue for two crop seasons
D) The installment of principal or interest remains overdue for two crop seasons - According
to the provided statement, a short-duration crop loan is considered an NPA when the
installment of principal or interest remains overdue for two crop seasons. This indicates a
prolonged delay in repayment, leading to the classification of the loan as a Non-Performing
Asset.

What condition must be met for a long-duration crop loan to be classified as a Non-
A) The loan term is short
B) The installment of principal or interest remains overdue for three crop seasons
C) The crop yield is low
D) The installment of principal or interest remains overdue for one crop season
D) The installment of principal or interest remains overdue for one crop season - According
to the provided statement, a long-duration crop loan is considered an NPA when the
installment of principal or interest remains overdue for one crop season. This signifies a

delayed payment for an extended period, leading to the classification of the loan as a Non-
Performing Asset.
What condition must be met for a securitization transaction to be classified as a Non-

A) The transaction involves a low-risk asset
B) The amount of liquidity facility remains outstanding for less than 30 days
C) The securitization is undertaken in terms of guidelines dated February 1, 2006
D) The amount of liquidity facility remains outstanding for more than 90 days
D) The amount of liquidity facility remains outstanding for more than 90 days - According to
the provided statement, a securitization transaction is considered an NPA when the amount

of liquidity facility remains outstanding for more than 90 days. This indicates a prolonged
delay in addressing liquidity issues, leading to the classification of the transaction as a Non-
Performing Asset.
What condition must be met for a derivative contract to be classified as a Non-Performing

Asset (NPA)?
A) The contract involves a low market risk
B) The overdue receivables remain unpaid for 30 days
C) The derivative contract is highly profitable
D) The overdue receivables representing positive mark-to-market value remain unpaid for 90
days

D) The overdue receivables representing positive mark-to-market value remain unpaid for 90
days - According to the provided statement, a derivative contract is considered an NPA when
the overdue receivables, representing the positive mark-to-market value, remain unpaid for
a period of 90 days. This indicates a prolonged delay in settling obligations, leading to the
classification of the derivative contract as a Non-Performing Asset.
Under what condition should banks classify an account as a Non-Performing Asset (NPA)?
A) The account has a high credit limit
B) The interest charged is fully serviced within 90 days

C) The account balance is consistently low
D) The interest charged during any quarter is not serviced fully within 90 days from the end
of the quarter
D) The interest charged during any quarter is not serviced fully within 90 days from the end
of the quarter - According to the statement, banks should classify an account as NPA if the
interest charged is not fully serviced within 90 days from the end of the quarter. This
indicates a delayed or incomplete payment of interest, leading to the classification of the
account as a Non-Performing Asset.
Under what condition should an account be treated as 'out of order'?

A) The account balance is consistently low
B) The outstanding balance is within the sanctioned limit
C) The outstanding balance remains continuously in excess of the sanctioned limit
D) The account has a high credit score
C) The outstanding balance remains continuously in excess of the sanctioned limit -

According to the statement, an account should be treated as 'out of order' if the outstanding
balance continuously exceeds the sanctioned limit. This signifies a situation where the
account is not being managed within the approved limits, leading to the classification of the
account as 'out of order.'

Under what condition should an account be treated as 'out of order' when the outstanding
balance in the principal operating account is less than the sanctioned limit/drawing power?
A) The outstanding balance exceeds the sanctioned limit
B) There are continuous credits for 90 days
C) The account has a high credit score
D) There are no credits continuously for 90 days or credits are insufficient to cover the
interest debited during the same period
D) There are no credits continuously for 90 days or credits are insufficient to cover the
interest debited during the same period - According to the statement, an account should be
treated as 'out of order' if there are no credits continuously for 90 days or if the credits are

not enough to cover the interest debited during the same period, even if the outstanding
balance is less than the sanctioned limit/drawing power. This indicates a lack of financial
activity or insufficient funds to cover interest obligations, leading to the classification of the
account as 'out of order.'
Under which condition is any amount due to the bank considered 'overdue'?
A) If the borrower requests an extension for payment
B) If the amount is not paid on the due date fixed by the bank
C) If the borrower has a good credit history
D) If the amount is paid before the due date

B) If the amount is not paid on the due date fixed by the bank - According to the statement,
any amount due to the bank is considered 'overdue' if it is not paid on the due date fixed by
the bank. This signifies a failure to meet the agreed-upon payment schedule, leading to the
classification of the amount as 'overdue.'
How is income from Non-Performing Assets (NPA) treated?
A) It is recognized on accrual basis
B) It is booked as income only when it is actually received
C) It is recognized only if the assets are liquidated
D) It is booked as income regardless of its receipt status

B) It is booked as income only when it is actually received - According to the statement,
income from Non-Performing Assets (NPA) is not recognized on an accrual basis. Instead, it is
booked as income only when it is actually received. This approach aligns with the principle of
recognizing income when it becomes certain and actual rather than relying on an accrual
basis.
What is the treatment of interest on government guaranteed advances that become Non-
Performing Assets (NPA)?
A) Interest is recognized in income accounts immediately
B) Interest is recognized only if the government guarantees repayment

C) Interest is recognized when the advances are approved
D) Interest is not taken to the income account unless it has been realized
D) Interest is not taken to the income account unless it has been realized - According to the
statement, in the case of government guaranteed advances becoming NPAs, the interest
should not be taken to the income account unless it has been realized. This implies that the
recognition of interest is contingent upon its actual receipt, aligning with a conservative
approach to income recognition.
What action should be taken regarding interest accrued and credited to the income account
in the previous year if an advance, including bills purchased and discounted, becomes a Non-
Performing Asset (NPA) at the close of any year?

A) Keep the interest accrued in the income account
B) Reverse the interest accrued and credited in the corresponding previous year
C) Increase the interest accrual for the current year
D) Transfer the interest to a separate NPA account
B) Reverse the interest accrued and credited in the corresponding previous year - According
to the statement, if an advance becomes an NPA at the close of any year, the interest
accrued and credited to the income account in the corresponding previous year should be
reversed. This ensures that the income recognition aligns with the actual status of the
advance, reflecting the conservative accounting principle in the event of non-performance.

What should be done with fees, commission, and similar income that have accrued in respect
to Non-Performing Assets (NPAs)?
A) Continue to accrue in the current period
B) Reverse or provide for them in the current period
C) Carry them forward to the next fiscal year
D) Adjust them against the principal amount of the NPA
B) Reverse or provide for them in the current period - According to the statement, in respect
of NPAs, fees, commission, and similar income that have accrued should cease to accrue in
the current period and should be reversed or provided for with respect to past periods if

uncollected. This emphasizes the prudence in recognizing income, aligning with the
conservative approach when dealing with Non-Performing Assets.
What action should be taken with the finance charge component of finance income on a
leased asset that has accrued and was credited to the income account before the asset
became non-performing, and remains unrealized?
A) Continue to recognize it in the income account
B) Reverse or provide for it in the current accounting period
C) Carry it forward to the next fiscal year
D) Adjust it against the principal amount of the non-performing asset

B) Reverse or provide for it in the current accounting period - According to the statement,
when the finance charge component of finance income on a leased asset has accrued and
was credited to the income account before the asset became non-performing, and remains
unrealized, it should be reversed or provided for in the current accounting period. This
reflects the prudent approach of adjusting the income recognition in the face of non-
performance, aligning with conservative accounting principles.
Under what condition may interest realized on Non-Performing Assets (NPAs) be taken to
the income account?
A) Regardless of the source of credits in the accounts
B) If the interest is realized within 30 days

C) If the borrower has a good credit history
D) Provided the credits in the accounts towards interest are not out of fresh/additional credit
facilities sanctioned to the borrower concerned
D) Provided the credits in the accounts towards interest are not out of fresh/additional credit
facilities sanctioned to the borrower concerned - According to the statement, interest
realized on NPAs may be taken to the income account, but only if the credits in the accounts
towards interest are not out of fresh/additional credit facilities sanctioned to the borrower
concerned. This condition emphasizes that the interest realization should not be a result of
extending new credit facilities to the borrower but rather from existing arrangements.
In the absence of a clear agreement between the bank and the borrower for the
appropriation of recoveries in Non-Performing Assets (NPAs), what should banks adopt?

A) Random allocation of recoveries
B) Prioritize interest due over principal
C) Uniform and consistent accounting principle
D) Allow borrowers to decide the appropriation
C) Uniform and consistent accounting principle - According to the statement, in the absence
of a clear agreement, banks should adopt an accounting principle for the purpose of
appropriation of recoveries in NPAs. This ensures a uniform and consistent approach,
providing clarity and fairness in the allocation of recoveries towards principal or interest due.
Which of the following is not a category of non-performing asset (NPA)?

A) Substandard Assets
B) Doubtful Assets
C) Loss Asset
D) Stable Asset
D) Stable Asset - According to the statement, the categories of non-performing assets (NPA)
are Substandard Assets, Doubtful Assets, and Loss Assets. "Stable Asset" is not a recognized
category in the classification of NPAs based on the mentioned criteria.
A substandard asset would be one, which has remained NPA for a period less than or equal
to _______.

A) 6 months
B) 9 months
C) 12 months
D) 15 months
**Explanation:**
C) 12 months - According to the statement, a substandard asset is one that has remained
NPA for a period less than or equal to 12 months. This classification is based on the duration
for which the asset has been non-performing.

What is a characteristic of a substandard account?
A) High credit score of the borrower
B) Current net worth of the borrower/guarantor is sufficient
C) Current market value of the security is more than required
D) The current net worth of the borrower/guarantor or the current market value of the
security is not enough to ensure recovery of the dues in full
**Explanation:**
D) The current net worth of the borrower/guarantor or the current market value of the
security is not enough to ensure recovery of the dues in full - According to the statement, a
characteristic of a substandard account is that the current financial strength of the

borrower/guarantor or the market value of the security is insufficient to guarantee the full
recovery of dues to the banks.
An asset would be classified as doubtful if it has remained in the substandard category for a
period of ________.
A) 6 months
B) 9 months
C) 12 months
D) 15 months
C) 12 months - According to the statement, an asset would be classified as doubtful if it has

remained in the substandard category for a period of 12 months. This indicates a prolonged

period of non-performance, leading to a change in the classification from substandard to
doubtful.
**Question:**
Which of the following is not a characteristic of a doubtful asset?
A) Inherent weaknesses similar to substandard assets
B) Uncertainty regarding collection or liquidation in full
C) Highly questionable and improbable recovery
D) Clear prospects for full recovery
D) Clear prospects for full recovery - According to the statement, a doubtful asset has
inherent weaknesses similar to substandard assets, and its characteristic includes

uncertainty regarding collection or liquidation in full, with recovery being highly
questionable and improbable. Therefore, the characteristic not aligned with a doubtful asset
is having clear prospects for full recovery.
Which of the following statements is not correct about a loss asset?
A) Loss has been identified by the bank or auditors
B) The amount has been fully written off
C) The asset is classified as a loss asset
D) RBI inspection can identify the loss

B) The amount has been fully written off - According to the statement, a loss asset is one
where loss has been identified but the amount has not been written off wholly. Therefore,
the incorrect statement is that the amount has been fully written off for a loss asset.
Which of the following statements about a loss asset is wrong?
A) The asset is considered uncollectible
B) There may be some salvage or recovery value
C) The continuance as a bankable asset is warranted
D) Loss asset has little value
C) The continuance as a bankable asset is warranted - According to the statement, a loss

asset is considered uncollectible and of such little value that its continuance as a bankable

asset is not warranted. Therefore, the incorrect statement is that the continuance as a
bankable asset is warranted for a loss asset.
The classification of an asset as NPA should be based on the ________ of recovery.
A) Probability
B) History
C) Record of recovery
D) Assessment
C) Record of recovery - According to the statement, the classification of an asset as Non-

Performing Asset (NPA) should be based on the record of recovery. This emphasizes the
historical performance and collection records in determining the asset's classification.

Under which condition should a bank not classify an advance account as Non-Performing
Asset (NPA)?
A) Temporary non-availability of adequate drawing power
B) Submission of stock statements
C) Balance outstanding within the limit
D) Timely renewal of limits on the due date
A) Temporary non-availability of adequate drawing power - According to the statement, a

bank should not classify an advance account as NPA merely due to the existence of some
deficiencies, which are temporary in nature, such as non-availability of adequate drawing
power. Temporary issues like these, mentioned in the statement, should not trigger the
immediate classification of the account as an NPA.

Banks should ensure that drawings in the working capital accounts are covered by the
adequacy of:
A) Fixed assets to ensure stability
B) Long-term liabilities for sustainability
C) Current assets, as they are first appropriated in times of stress
D) Shareholder equity to maintain financial health
C) Current assets, as they are first appropriated in times of stress - According to the
statement, banks should ensure that drawings in working capital accounts are covered by the
adequacy of current assets since current assets are first appropriated in times of stress. This
ensures that the bank's working capital is appropriately secured to address financial
challenges or stress situations.

In times of distress, which asset is first appropriated?
A) Fixed assets for stability
B) Long-term liabilities for sustainability
C) Current assets
D) Shareholder equity for financial health
C) Current assets - According to the statement, in times of distress, current assets are first
appropriated. This means that during challenging situations, the use or allocation of current
assets takes precedence as they are considered for immediate utilization to address financial
difficulties.
Stock statements relied upon by the banks for determining drawing power should not be
older than ______.

A) 1 month
B) 2 months
C) 3 months
D) 6 months
C) 3 months - According to the statement, stock statements used by banks for determining
drawing power should not be older than three months. This ensures that the information
regarding stock levels is relatively current and reflects the recent status of the borrower's
inventory.
When will a working capital borrowal account become a Non-Performing Asset (NPA),?

A) If the unit is not working
B) If irregular drawings are permitted for a continuous period of 90 days
C) If the borrower's financial position is satisfactory
D) If regular repayments are made
B) If irregular drawings are permitted for a continuous period of 90 days - According to the
statement, a working capital borrowal account will become an NPA if irregular drawings are
permitted in the account for a continuous period of 90 days, even if the unit is working or the
borrower's financial position is satisfactory. Irregularities in drawings for an extended period
trigger the classification as an NPA.
Regular and adhoc credit limits need to be reviewed/regularized not later than ______ from
the due date/date of ad hoc sanction.

A) 1 month
B) 2 months
C) 3 months
D) 6 months
C) 3 months - According to the statement, regular and adhoc credit limits need to be
reviewed or regularized not later than three months from the due date or date of ad hoc
sanction. This ensures timely assessment and adjustment of credit limits, promoting effective
financial management.
An account where the regular/ad hoc credit limits have not been reviewed/renewed within
______ from the due date/date of ad hoc sanction will be treated as NPA.

A) 120 days
B) 150 days
C) 180 days
D) 210 days
C) 180 days - According to the statement, an account where the regular/ad hoc credit limits
have not been reviewed/renewed within 180 days from the due date/date of ad hoc
sanction will be treated as Non-Performing Asset (NPA). This underscores the importance of
timely reviews and renewals in managing credit risk.
If arrears of interest and principal are paid by the borrower in the case of loan accounts
classified as NPAs, the account should:

A) Remain as Non-Performing Asset (NPA)
B) Be classified as a substandard account
C) Be classified as a doubtful account
D) No longer be treated as non-performing and may be classified as a 'standard' account
D) No longer be treated as non-performing and may be classified as a 'standard' account -

According to the statement, if arrears of interest and principal are paid by the borrower in
the case of loan accounts classified as NPAs, the account should no longer be treated as non-
performing and may be classified as a 'standard' account. This indicates that the account's
performance status can improve with the settlement of arrears.

Under which condition may an account be considered for upgradation to 'standard'?
A) The account has a high credit limit
B) Satisfactory performance during the specified period
C) The borrower has a good credit history
D) The account is associated with a long-term relationship
B) Satisfactory performance during the specified period - According to the statement, an

account may be considered for upgradation to 'standard' only if it demonstrates satisfactory
performance during the specified period. This emphasizes the importance of consistent and
reliable performance in determining the upgradation of an account's status.
What is the meaning of 'Specified Period' according to the statement?

A) A period of one month
B) A period of six months
C) A period of one year
D) A period of two years
C) A period of one year - According to the statement, 'Specified Period' means a period of
one year from the commencement of the first payment of interest or principal, whichever is
later, on the credit facility with the longest period of moratorium under the terms of a
restructuring package.

If arrears of interest and principal are paid by the borrower in the case of loan accounts
classified as NPAs, the account should:
A) Remain as Non-Performing Asset (NPA)
B) Be classified as a substandard account
C) Be classified as a doubtful account
D) No longer be treated as non-performing and may be classified as a 'standard' account
D) No longer be treated as non-performing and may be classified as a 'standard' account -

According to the statement, if arrears of interest and principal are paid by the borrower in
the case of loan accounts classified as NPAs, the account should no longer be treated as non-

performing and may be classified as a 'standard' account. This indicates that the account's
performance status can improve with the settlement of arrears.
With regard to the upgradation of accounts classified as NPA due to restructuring, non-
achievement of the date of commencement of commercial operations (DCCO), etc., the
instructions specified for such cases shall be:
A) Not applicable
B) Partially applicable
C) Fully applicable
D) Applicable only to specific industries
C) Fully applicable - According to the statement, the instructions specified for the
upgradation of accounts classified as NPA due to restructuring, non-achievement of the date

of commencement of commercial operations (DCCO), etc., shall be fully applicable. This
implies that the designated guidelines and instructions are to be entirely followed in these
cases.
What does 'Satisfactory Performance' mean in the case of an MSME account?
A) Timely submission of financial statements
B) No payment (interest and/or principal) overdue for more than 30 days
C) Consistent increase in credit limit
D) Frequent interactions with the bank officials
B) No payment (interest and/or principal) overdue for more than 30 days - According to the
statement, 'Satisfactory Performance' in the case of an MSME account means that no

payment (interest and/or principal) shall remain overdue for a period of more than 30 days.
This indicates the importance of timely payments for assessing satisfactory performance in
MSME accounts.
What does 'Satisfactory Performance' mean in the context of a cash credit/overdraft

account?
A) Regular submission of financial reports
B) Outstanding in the account exceeds the sanctioned limit
C) Outstanding in the account not exceeding the sanctioned limit or drawing power for more
than 30 days
D) Frequent withdrawals from the account

C) Outstanding in the account not exceeding the sanctioned limit or drawing power for more
than 30 days - According to the statement, in the case of a cash credit/overdraft account,
satisfactory performance means that the outstanding in the account shall not be more than
the sanctioned limit or drawing power, whichever is lower, for a period of more than 30
days. This emphasizes the importance of maintaining the account within the approved limits
for assessing satisfactory performance.
Under what condition may Standard accounts classified as NPA and NPA accounts retained in
the same category on restructuring be upgraded?
A) Immediately after the restructuring
B) Only when 10% of the outstanding debt is repaid after restructuring
C) Without any conditions

D) After the lender's decision
B) Only when 10% of the outstanding debt is repaid after restructuring - According to the
statement, these accounts may be upgraded only when all the outstanding loan/facilities
demonstrate 'satisfactory performance' during the period from the date of implementation
of the Restructuring Plan (RP) up to the date by which at least 10% of the sum of outstanding
principal debt as per the RP and interest capitalization sanctioned as part of the restructuring
is repaid.
What does 'satisfactory performance' mean in the context of upgrading Standard accounts
classified as NPA and NPA accounts on restructuring?
A) Timely submission of financial reports
B) No payment overdue for more than 30 days

C) Repayment of at least 10% of the sum of outstanding principal debt after restructuring
D) Consistent increase in credit limit
C) Repayment of at least 10% of the sum of outstanding principal debt after restructuring -
According to the statement, 'satisfactory performance' is demonstrated during the period
from the date of implementation of the RP up to the date by which at least 10% of the sum
of outstanding principal debt as per the RP and interest capitalization sanctioned as part of
the restructuring is repaid.
When can an account be upgraded?
A) Immediately after restructuring
B) Before one year from the commencement of the first payment of interest or principal

C) After one year from the commencement of the first payment of interest or principal
D) After the completion of the moratorium period
C) After one year from the commencement of the first payment of interest or principal -
According to the statement, an account cannot be upgraded before one year from the
commencement of the first payment of interest or principal (whichever is later) on the credit
facility with the longest period of moratorium under the terms of the Restructuring Plan
(RP). This emphasizes a waiting period of at least one year from the specified
commencement date for upgrading the account.
How should borrowal accounts be handled near the Balance Sheet Date,?
A) Subjectively

B) With care and without scope for subjectivity
C) With leniency
D) Without consideration
B) With care and without scope for subjectivity - According to the statement, borrowal
accounts recorded near the Balance Sheet Date should be handled with care and without
scope for subjectivity. This emphasizes the need for cautious handling and objective
assessment.
When should an account be deemed as an NPA?
A) Only if explicitly mentioned in the audit report
B) If there are inherent weaknesses in the account
C) When subject to multiple credits

D) Irrespective of the data available
B) If there are inherent weaknesses in the account - According to the statement, if the
account indicates inherent weakness based on the available data, it should be deemed as a
Non-Performing Asset (NPA). This emphasizes the importance of data-driven assessments.
What should banks do in genuine cases of borrowal accounts near the Balance Sheet Date?
A) Automatically classify as NPAs
B) Provide leniency in classification
C) Furnish satisfactory evidence to Statutory Auditors/Inspecting Officers
D) Ignore the classification

C) Furnish satisfactory evidence to Statutory Auditors/Inspecting Officers - In genuine cases,
banks must furnish satisfactory evidence to Statutory Auditors/Inspecting Officers about the
manner of regularisation of the account to eliminate doubts on their performing status. This
underscores the importance of transparency and evidence in handling genuine cases near
the Balance Sheet Date.
how should the treatment of facilities granted by a bank to a borrower and investments in all
securities issued by the borrower be considered?
A) Only the particular facility or investment that has become irregular should be treated as
NPA/NPI
B) The entire facilities and investments should be treated as NPA/NPI

C) Only the investment part should be treated as NPA/NPI
D) It depends on the nature of the irregularity
B) The entire facilities granted by a bank to a borrower and investments in all securities
issued by the borrower should be treated as NPA/NPI - According to the statement, the
facilities granted by a bank to a borrower and investments in all securities issued by the
borrower should be treated as NPA/NPI, not just the particular facility or investment that has
become irregular. This implies a comprehensive approach to the treatment of irregularities
across all facilities and investments associated with the borrower.
**Question 1:**

how should the balance outstanding in the account where debits arising out of devolvement
of letters of credit or invoked guarantees are parked be treated?
A) Treated separately from the borrower's principal operating account
B) Excluded from the borrower's accounts entirely
C) Treated as a separate entity
D) Treated as part of the borrower's principal operating account
D) Treated as part of the borrower's principal operating account - According to the

statement, if the debits arising out of devolvement of letters of credit or invoked guarantees
are parked in a separate account, the balance outstanding in that account should be treated

as a part of the borrower's principal operating account for the purpose of application of
prudential norms on income recognition, asset classification, and other considerations.
How should the treatment of irregularities be applied to facilities and investments?
A) Only the irregular parts should be considered
B) The entire facilities and investments should be excluded
C) Comprehensive treatment of all facilities and investments
D) It depends on the severity of irregularities
C) Comprehensive treatment of all facilities and investments - According to the statement,

the facilities granted by a bank to a borrower and investments in all securities issued by the
borrower should be treated comprehensively as part of prudential norms. Irregularities

should not be isolated to specific parts, emphasizing a holistic approach to ensure proper
application of norms on income recognition and asset classification.
when may bills discounted under LC favoring a borrower not be classified as a Non-
performing Asset (NPA)?
A) Only when bills are promptly paid
B) If any other facility granted to the borrower is classified as NPA
C) Bills discounted under LC are always classified as NPA
D) When there are no irregularities in the bills

B) If any other facility granted to the borrower is classified as NPA - According to the
statement, bills discounted under LC favoring a borrower may not be classified as an NPA
when any other facility granted to the borrower is classified as NPA. This implies that the
classification of bills may depend on the overall status of facilities granted to the borrower.
when will outstanding bills discounted under LC be classified as NPA?
A) When the borrower fails to make good the amount disbursed
B) Immediately after presentation
C) If the payment under the LC is not made on the due date for any reason
D) When other facilities are classified as NPA

D) When other facilities are classified as NPA - According to the statement, if documents
under LC are not accepted on presentation or the payment under the LC is not made on the
due date by the LC issuing bank for any reason, and the borrower does not immediately
make good the amount disbursed, the outstanding bills discounted will immediately be
classified as NPA. This classification is aligned with the status of other facilities granted to the
borrower.
under what conditions will outstanding bills discounted under LC be immediately classified as
NPA with effect from the date when other facilities had been classified as NPA?
A) If the LC issuing bank delays payment on the due date
B) If documents under LC are not accepted on presentation

C) When the borrower immediately makes good the amount disbursed
D) If the borrower does not immediately make good the amount disbursed as a result of
discounting of concerned bills
The outstanding bills discounted will immediately be classified as NPA with effect from the
date when other facilities had been classified as NPA if:
1. Documents under LC are not accepted on presentation.
2. The payment under the LC is not made on the due date by the LC issuing bank for any
reason.
3. The borrower does not immediately make good the amount disbursed as a result of
discounting of concerned bills.

when will the overdue receivables representing positive mark-to-market value of a derivative
contract be treated as a non-performing asset (NPA)?
A) After 60 days of non-payment
B) If these remain unpaid for 90 days
C) Immediately upon non-payment
D) After 120 days of non-payment
B) If these remain unpaid for 90 days - According to the statement, the overdue receivables
representing positive mark-to-market value of a derivative contract will be treated as a non-
performing asset if these remain unpaid for 90 days. This emphasizes the specific time frame
for non-payment triggering the classification as an NPA.
**Question 1:**

What action should be taken regarding the amount representing positive mark-to-market value
of foreign exchange derivative contracts (other than forward contracts, plain vanilla swaps, and
options) entered into during April 2007 to June 2008?
A) Include it in the borrower's general account
B) Park it in a separate account maintained in the name of the client/counterparty
C) Treat it as an immediate NPA
D) Exclude it from any classification
B) Park it in a separate account maintained in the name of the client/counterparty - According

to the statement, the amount representing positive mark-to-market value of certain foreign

exchange derivative contracts should be parked in a separate account maintained in the name
of the client/counterparty.
How does the overdue status of the amount in the separate account impact the classification
of other funded facilities provided to the client?
A) Automatically makes all other funded facilities NPA
B) Has no impact on the classification of other funded facilities
C) Follows the principle of borrower-wise asset classification
D) Leads to immediate reclassification of other funded facilities
C) Follows the principle of borrower-wise asset classification - According to the statement,

even if the receivable from the separate account is overdue for 90 days or more, it will not

make other funded facilities provided to the client NPA. The classification follows the principle
of borrower-wise asset classification.
What will happen if the receivable from the separate account becomes overdue for 90 days or
more?
A) Immediate reclassification of other assets of the client
B) No impact on the classification of other assets of the client
C) Classification of the receivable itself as NPA
D) Exclusion of the receivable from any classification

C) Classification of the receivable itself as NPA - According to the statement, if the receivable
from the separate account becomes overdue for 90 days or more, it shall itself be classified as
NPA, as per the extant Income Recognition and Asset Classification (IRAC) norms.
when will the current credit exposure of a derivative contract be classified as a non-performing
asset (NPA)?
A) Immediately upon maturity
B) After an overdue period of 30 days
C) After an overdue period of 90 days
D) Only if the potential future exposure is realized

C) After an overdue period of 90 days - The statement mentions that in cases where the
contract provides for settlement of the current mark-to-market value of a derivative contract
before its maturity, only the current credit exposure will be classified as an NPA after an
overdue period of 90 days.
What aspect of the derivative contract will be considered for classification as an NPA?
A) Only potential future exposure
B) Only past credit exposure
C) Both current and potential future exposure
D) Only potential future exposure if realized

C) Both current and potential future exposure - According to the statement, in cases where the
contract provides for settlement before maturity, only the current credit exposure (not the
potential future exposure) will be classified as an NPA after an overdue period of 90 days. This
emphasizes the distinction between the current and potential future exposure in the context
of NPA classification.
What action should be taken after 90 days of the overdue period for receivables?
A) Record the overdue receivables as realized income
B) Reverse the amount already taken to 'Profit and Loss a/c'
C) Hold the amount in a 'Profit Realization Account'
D) Recognize the overdue receivables as potential future income

B) Reverse the amount already taken to 'Profit and Loss a/c' - According to the statement, after
90 days of the overdue period, the amount already taken to 'Profit and Loss a/c' should be
reversed.
Where should the reversed amount be held after the 90-day overdue period?
A) Hold it in a 'Suspense Account-Future Receivables'
B) Include it in the 'Profit and Loss Reserve'
C) Hold it in a 'Profit Realization Account'
D) Include it in the 'Suspense Account-Crystallized Receivables'
D) Include it in the 'Suspense Account-Crystallized Receivables' - According to the statement,

after 90 days of the overdue period, the reversed amount should be held in a 'Suspense

Account-Crystallized Receivables' in the same manner as done in the case of overdue advances.
This ensures proper accounting treatment for unrealized income.
What will the MTM value of derivative contracts comprise in cases where more settlements
are provided for in the future?
A) Only crystallized receivables
B) Only potential future receivables
C) Crystallized receivables and positive/negative MTM of future receivables
D) Only potential future payables

C) Crystallized receivables and positive/negative MTM of future receivables - According to the
statement, in cases where derivative contracts provide for more settlements in the future, the
MTM value will comprise crystallized receivables and positive or negative MTM in respect of
future receivables.
What action should be taken if the derivative contract is not terminated after the overdue
receivable remains unpaid for 90 days?
A) Continue recording MTM value in Profit and Loss Account
B) Reverse crystallized receivables from Profit and Loss Account
C) Reverse positive MTM of future receivables to 'Suspense Account –Positive MTM'
D) Record overdue receivables as realized income

C) Reverse positive MTM of future receivables to 'Suspense Account –Positive MTM' -

According to the statement, if the derivative contract is not terminated after the overdue
receivable remains unpaid for 90 days, in addition to reversing crystallized receivables, the
positive MTM pertaining to future receivables may also be reversed from Profit and Loss
Account to another account styled as 'Suspense Account –Positive MTM.' This ensures proper
accounting treatment in such situations.
How should the asset classification of accounts under a consortium be determined?
A) Based on the credit rating of the borrower
B) Solely based on the lead bank's recovery record

C) Exclusively based on the record of recovery of individual member banks
D) By considering the number of member banks in the consortium
C) Exclusively based on the record of recovery of individual member banks - According to the
statement, the asset classification of accounts under a consortium should be based on the
record of recovery of the individual member banks and other aspects having a bearing on the
recoverability of the advances. This emphasizes the importance of assessing the recovery
performance of each member bank individually in determining asset classification.
What action should banks participating in a consortium take to ensure proper asset
classification?

A) Rely on the lead bank's recovery records
B) Request express consent from the lead bank for asset classification
C) Independently determine asset classification without consulting the lead bank
D) Arrange to get their share of recovery transferred from the lead bank
D) Arrange to get their share of recovery transferred from the lead bank - According to the
statement, banks participating in a consortium should arrange to get their share of recovery
transferred from the lead bank to ensure proper asset classification in their respective books.
Why is it essential for banks to arrange the transfer of their share of recovery from the lead
bank?
A) To maintain confidentiality of recovery information

B) To expedite the recovery process
C) To ensure uniformity in recovery procedures
D) To ensure proper asset classification in their respective books
D) To ensure proper asset classification in their respective books - The statement emphasizes
that arranging the transfer of their share of recovery from the lead bank is crucial for banks to
ensure proper asset classification in their respective books. This underlines the significance of
accurate and individualized asset classification for each participating bank.
In which scenario is it not considered prudent for accounts to go through various stages of
asset classification?
A) Accounts with potential threats for recovery

B) Accounts with erosion in the value of security
C) Accounts with frauds committed by borrowers
D) Accounts with non-availability of security
A) Accounts with potential threats for recovery - According to the statement, it is not
considered prudent for accounts to go through various stages of asset classification in
scenarios where there are potential threats for recovery.
Why is it not considered prudent for certain accounts to go through various stages of asset
classification?
A) To expedite the recovery process

B) To avoid disclosure of security information
C) Due to the existence of factors like frauds and erosion in security value
D) To simplify the documentation process
C) Due to the existence of factors like frauds and erosion in security value - The statement
suggests that in cases where there are potential threats for recovery on account of erosion in
the value of security or non-availability of security and the existence of other factors such as
frauds committed by borrowers, it is not considered prudent for such accounts to go through
various stages of asset classification. This implies a need for a more direct and focused
approach in handling these specific situations.
How should an asset be classified in cases of serious credit impairment?

A) As a standard asset
B) As a substandard asset
C) As a doubtful or loss asset, as appropriate
D) As a performing asset
C) As a doubtful or loss asset, as appropriate - According to the statement, in cases of serious

credit impairment, the asset should be straightaway classified as doubtful or loss asset, as
appropriate. This indicates a swift and direct approach to asset classification in situations of
significant credit impairment.
When can erosion in the value of security be considered significant?

A) When the realizable value is more than 50% of the assessed value
B) When the realizable value is exactly 50% of the assessed value
C) When the realizable value is less than 50% of the assessed value
D) When the realizable value is 100% of the assessed value
C) When the realizable value is less than 50% of the assessed value - According to the
statement, erosion in the value of security can be reckoned as significant when the realizable
value of the security is less than 50% of the value assessed by the bank or accepted by RBI at
the time of the last inspection. This threshold indicates a point at which the erosion is
considered substantial enough to be deemed significant.
How are loans with erosion in the value of security treated when the realizable value is less
than 50% of the assessed value,?

A) Classified as standard assets
B) Straightaway classified under doubtful category
C) Considered as performing assets
D) Subject to further assessment before classification
B) Straightaway classified under doubtful category - According to the statement, when

erosion in the value of security is significant (realizable value less than 50% of the assessed
value), such NPAs may be straightaway classified under the doubtful category. This implies a
direct and immediate classification without the need for further assessment, given the
severity of the erosion in security value.

Under what conditions should an asset be straightaway classified as a loss asset?
A) When the realizable value is more than 10% of the outstanding
B) When the realizable value is exactly 10% of the outstanding
C) When the realizable value is less than 10% of the outstanding
D) When the realizable value is equal to the outstanding
C) When the realizable value is less than 10% of the outstanding - According to the
statement, if the realizable value of the security, as assessed by the bank/approved
valuers/RBI, is less than 10% of the outstanding in the borrowal accounts, the existence of
security should be ignored, and the asset should be straightaway classified as a loss asset.
This threshold of 10% signifies a point at which the asset is considered to have minimal
recovery potential, warranting an immediate classification as a loss asset.

How should banks respond to a detected fraud?
A) Provide for a partial amount due to the bank
B) Delay the provision until a thorough investigation is conducted
C) Normally provide for the entire amount due to the bank immediately
D) Seek compensation from the depositor involved in the fraud
C) Normally provide for the entire amount due to the bank immediately - According to the
statement, upon detecting a fraud, banks should normally provide for the entire amount due
to the bank (including in the case of deposit accounts) immediately. This emphasizes a swift
and proactive response to address the impact of fraud on the bank's financials.

What may banks adjust while computing the provisioning requirement for accounts declared
as fraud accounts?
A) Adjustments to interest rates
B) Adjustments to loan tenures
C) Adjustments to financial collateral eligible under Basel III
D) Adjustments to the original loan amount
C) Adjustments to financial collateral eligible under Basel III - According to the statement,
while computing the provisioning requirement, banks may adjust financial collateral eligible
under Basel III Capital Regulations (Standardised Approach) available to them concerning
accounts declared as fraud accounts.

Why do banks make adjustments to financial collateral under Basel III for provisioning
requirements in the case of fraud accounts?
A) To increase the capital charge for credit risk
B) To reduce the impact of fraud on capital adequacy
C) To minimize the provisioning requirement
D) To comply with regulatory guidelines
B) To reduce the impact of fraud on capital adequacy - The adjustment to financial collateral
under Basel III for provisioning requirements in the case of fraud accounts aims to reduce the
impact of fraud on the bank's capital adequacy. This ensures that the impact of fraud is
appropriately considered in regulatory capital calculations.

How do banks have the option to handle provisioning for fraud accounts over time?
A) Provisions must be made in a single quarter
B) Provisions can be spread over a maximum of two quarters
C) Provisions can be spread over a period not exceeding four quarters
D) Provisions must be made in the same quarter as the fraud detection
C) Provisions can be spread over a period not exceeding four quarters - According to the
statement, to smoothen the effect of provisioning on quarterly profit and loss, banks have
the option to make provisions over a period not exceeding four quarters, commencing from
the quarter in which the fraud has been detected. This provides flexibility for banks to
manage the impact of fraud-related provisions over a reasonable timeframe.

What should banks do if the provision for fraud is spread over two to four quarters, resulting
in full provisioning in more than one financial year?
A) Debit 'Other Reserves' by the entire remaining un-provided amount
B) Credit 'Other Reserves' by the entire remaining un-provided amount
C) Debit 'Profit and Loss Account' by the entire remaining un-provided amount
D) Proportionately reverse the debits to 'Other Reserves' and complete provisioning in the
next financial year
D) Proportionately reverse the debits to 'Other Reserves' and complete provisioning in the
next financial year - According to the statement, if the provision for fraud is spread over two

to four quarters, resulting in full provisioning in more than one financial year, banks should
proportionately reverse the debits to 'Other Reserves' and complete the provisioning by
debiting the profit and loss account in the subsequent quarters of the next financial year.
What type of reserves should banks debit when making provisions for fraud?
A) Statutory Reserves
B) Specific Reserves
C) General Reserves
D) 'Other Reserves' (excluding those created under Section 17(2) of the Banking Regulation
Act 1949)

D) 'Other Reserves' (excluding those created under Section 17(2) of the Banking Regulation
Act 1949) - According to the statement, when making provisions for fraud, banks should
debit 'Other Reserves,' excluding those created under Section 17(2) of the Banking
Regulation Act 1949.
Why do banks proportionately reverse the debits to 'Other Reserves' when completing
provisioning for fraud?
A) To minimize the impact on profit and loss account
B) To maintain a stable level of 'Other Reserves'
C) To comply with regulatory guidelines
D) To avoid provisioning in the next financial year

A) To minimize the impact on profit and loss account - Banks proportionately reverse the
debits to 'Other Reserves' to minimize the impact on the profit and loss account while
completing provisioning for fraud in the next financial year. This approach helps in managing
the financial impact more smoothly.

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COMPLETE PREPARATION FOR CAIIB PDF VIDEOS MOCK TEST

a) Charging fees on transactions

b) Earning interest on advances and investments

d) Providing insurance services

Income is booked initially on ______ basis on performing advances.

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Under which condition should income not be accounted for or recognized?

a) If the counterparty delays for 60 days

b) If the counterparty delays for 75 days

c) If the counterparty delays for 90 days (90-day delinquency norm)

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One of the important recommendations of the Narasimham Committee was that:

a) Banks should focus only on domestic operations

b) Banks should have less transparency in their balance sheets

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The Narasimham Committee recommended that:

a) Banks should have diverse accounting practices

b) Banks should adopt inconsistent income recognition practices

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a) International Accounting Standards Board (IASB)

b) Securities and Exchange Board of India (SEBI)

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How should the classification of assets of banks be done?

a) Based on subjective criteria

b) Without any specific criteria

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d) Following random criteria

An asset, including a leased asset, becomes ______________ when it ceases to generate

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For an Overdraft/Cash Credit (OD/CC) account to be classified as a Non-Performing Asset

a) The account remains 'out of order' for more than 60 days

b) The account remains 'out of order' for more than 90 days

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B) The account remains 'out of order'

C) Regular repayments are made

D) The interest rate is low

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B) The bill remains overdue for more than 90 days

C) The bill is paid in advance

D) The discount rate is low

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C) The crop yield is high

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A) The loan term is short

C) The crop yield is low

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What condition must be met for a securitization transaction to be classified as a Non-

A) The transaction involves a low-risk asset

C) The securitization is undertaken in terms of guidelines dated February 1, 2006

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What condition must be met for a derivative contract to be classified as a Non-Performing

A) The contract involves a low market risk

B) The overdue receivables remain unpaid for 30 days

C) The derivative contract is highly profitable

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A) The account has a high credit limit

B) The interest charged is fully serviced within 90 days