Chapter 24: Restructuring/Rehabilitation and Recovery (CAIIB – Paper 1)
1. What is the primary indicator that an account may become a Non-Performing Asset (NPA)?
A. Customer requests additional loan
B. Increase in collateral value
C. Interest or principal remains overdue for more than 90 days
D. Frequent deposits made by the borrower
An account is classified as NPA when interest or principal remains overdue for more than 90 days (for term loans) or as per RBI guidelines for other types of advances.
2. Which of the following is considered a stressed asset?
A. Performing savings account
B. Government bonds with fixed returns
C. Bank deposits in another bank
D. Loan account facing repayment difficulties but not yet an NPA
A stressed asset is an account where the borrower is facing repayment difficulties. It may or may not have become an NPA yet.
3. Which measure is typically used for recovery of a defaulted corporate loan?
A. Restructuring the loan terms to improve repayment capacity
B. Offering higher interest rates immediately
C. Ignoring overdue payments temporarily
D. Transferring funds from other accounts of the borrower
Loan restructuring involves modifying the terms of the loan, such as interest rate, repayment period, or moratorium, to help the borrower improve repayment capacity.
4. Which RBI scheme is specifically designed for the rehabilitation of stressed MSME accounts?
A. SARFAESI Act
B. Strategic Debt Restructuring (SDR) / Scheme for MSME restructuring
C. Priority Sector Lending Scheme
D. Repo-linked Lending Rate Scheme
RBI has introduced schemes like SDR and specific MSME restructuring guidelines to facilitate revival of stressed micro, small, and medium enterprises.
5. What is the primary objective of the SARFAESI Act in recovery?
A. To restructure performing loans
B. To provide interest subsidies to borrowers
C. To enable banks to recover NPAs by enforcing security without court intervention
D. To provide insurance on stressed assets
The SARFAESI Act allows banks and financial institutions to enforce security interest and recover NPAs directly, without approaching courts.
6. In credit risk management, what does the term “Credit Default” imply?
A. Failure of a borrower to meet debt obligations on time
B. Early repayment of loan by the borrower
C. Availing additional credit facilities
D. Regular EMI payments without delay
Credit default occurs when a borrower fails to make timely payment of principal or interest as per loan agreement, leading to stressed assets or NPAs.
7. Who is classified as a wilful defaulter by banks?
A. A borrower who repays the loan with minor delays due to cash flow issues
B. A borrower who has the capacity to repay but deliberately avoids repayment
C. A borrower who requests restructuring due to genuine business losses
D. Any borrower whose loan is overdue for more than 30 days
A wilful defaulter is a borrower who, despite having adequate resources, intentionally avoids repayment of the loan or obligations to the bank.
8. What is the typical approach of banks towards a non-cooperative borrower?
A. Granting additional credit facilities immediately
B. Ignoring defaults and waiting for repayment
C. Classifying the borrower as standard without follow-up
D. Initiating recovery action under SARFAESI or legal proceedings
Non-cooperative borrowers avoid engagement with the bank despite overdue payments. Banks usually initiate recovery actions such as legal proceedings or enforcement under SARFAESI.
9. Which of the following actions may lead to a borrower being reported as a wilful defaulter to RBI?
A. Partial payment of EMI with delay due to genuine reasons
B. Requesting a loan restructuring due to temporary liquidity issues
C. Diversion of funds for purposes other than agreed, despite having repayment capacity
D. Early closure of loan before tenure
A borrower is reported as a wilful defaulter if they divert funds for purposes other than those agreed, despite having the capacity to repay.
10. Which of the following best describes a non-cooperative borrower?
A. A borrower who avoids contact with the bank and refuses to provide information for loan recovery
B. A borrower who regularly communicates and negotiates repayment terms
C. A borrower who repays in installments as agreed
D. Any borrower whose account is standard
Non-cooperative borrowers avoid communication, do not respond to bank notices, and provide no assistance for recovery, making the recovery process difficult.
11. What is a key difference between a stressed asset and a wilful defaulter?
A. Stressed asset is always due to deliberate non-payment
B. A stressed asset may be due to genuine financial difficulty, while wilful defaulter deliberately avoids repayment despite capacity
C. Wilful defaulter always has collateral security
D. Stressed asset accounts are never classified as NPAs
Stressed assets may arise from genuine financial stress, whereas wilful defaulters deliberately avoid repayment despite having adequate repayment capacity.
12. Which of the following is a common option available to banks for dealing with stressed assets?
A. Ignore overdue amounts until the borrower requests assistance
B. Increase interest rates without borrower consent
C. Restructuring the loan terms to improve repayment capacity
D. Close the account immediately without due process
One of the main options available to banks is loan restructuring, which involves modifying repayment terms to help the borrower recover and service the loan.
13. What is the primary objective of selling stressed assets to Asset Reconstruction Companies (ARCs)?
A. To recover bad loans by transferring risk and management responsibility
B. To provide new loans to the borrower immediately
C. To reduce the borrower’s credit rating
D. To avoid reporting NPAs to RBI
Selling stressed assets to ARCs helps banks recover part of their NPA and transfer the responsibility of recovery to specialized agencies.
14. Which of the following recovery measures involves legal enforcement of security without approaching courts?
A. Loan restructuring
B. SARFAESI action
C. Bilateral settlement with borrower
D. Debt waiver
The SARFAESI Act allows banks to enforce security and recover dues directly without court intervention.
15. What is a common alternative for banks to manage stressed assets besides restructuring and SARFAESI recovery?
A. Granting fresh loans without assessing repayment capacity
B. Ignoring the account until it becomes standard again
C. Reducing interest rates for all borrowers
D. Selling the stressed asset to an Asset Reconstruction Company (ARC)
Banks often sell stressed assets to ARCs to recover part of their dues while transferring the management and risk to specialized agencies.
16. Under RBI guidelines, which of the following is NOT an option for banks to resolve stressed MSME accounts?
A. One-time settlement (OTS)
B. Ignoring overdue accounts
C. Restructuring the loan
D. Recovery through legal proceedings
RBI mandates that banks must actively resolve stressed accounts through restructuring, OTS, or recovery measures. Ignoring accounts is not permitted.
17. What is the main purpose of RBI guidelines on restructuring of advances?
A. To allow banks to waive interest on all loans
B. To increase bank profits by charging higher fees
C. To help borrowers facing genuine financial stress continue repayment while ensuring bank asset quality
D. To convert all stressed loans into equity
RBI guidelines allow banks to restructure loans to help borrowers overcome temporary financial difficulties while maintaining prudential norms for asset classification and provisioning.
18. According to RBI, which accounts are eligible for restructuring?
A. Only performing accounts with no overdue
B. Accounts facing financial difficulty, including standard, SMA, or stressed accounts as per specific norms
C. Only NPA accounts above ₹10 crore
D. Any account, regardless of repayment history
RBI guidelines specify that restructuring can be applied to accounts facing genuine financial stress, including standard or SMA accounts, but not to accounts that are wilful defaulters.
19. Which of the following is a key principle in RBI’s restructuring guidelines?
A. Restructuring should be offered to wilful defaulters
B. No documentation is required for restructuring
C. Banks should charge penalty interest on all restructured loans
D. Restructuring should be based on viability assessment of the borrower
RBI mandates that restructuring should only be done after assessing the borrower’s viability and ensuring that the restructured terms are sustainable.
20. Which of the following RBI guidelines deals specifically with MSME loan restructuring?
A. Resolution Framework for COVID-19 related Stress in MSMEs
B. SARFAESI Act, 2002
C. Priority Sector Lending Guidelines
D. Basel III Capital Adequacy Norms
RBI issued a special Resolution Framework to allow restructuring of MSME loans impacted by COVID-19, specifying prudential norms and classification.
21. Under RBI restructuring guidelines, what happens to the classification of a standard asset when it is restructured?
A. It automatically becomes an NPA
B. It remains standard during the restructuring period if all terms are met
C. It is downgraded to doubtful immediately
D. It is written off from the books
If the borrower complies with the terms of restructuring, the account can continue to be classified as standard during the restructuring period as per RBI prudential norms.
22. Which of the following is NOT allowed under RBI restructuring guidelines?
A. Extending repayment period for viable borrowers
B. Revising interest rates for stressed accounts
C. Restructuring wilful defaulters’ loans
D. Conversion of interest into working capital term loans
RBI guidelines clearly state that wilful defaulters are not eligible for restructuring and banks must follow legal recovery measures instead.
23. Which of the following is a framework provided by RBI for restructuring stressed assets?
A. Basel III Capital Adequacy Norms
B. Prudential Framework for Resolution of Stressed Assets
C. Priority Sector Lending Guidelines
D. SARFAESI Act, 2002
The RBI Prudential Framework for Resolution of Stressed Assets provides guidelines for identification, resolution, and restructuring of stressed accounts.
24. Under RBI’s frameworks, which of the following is a mechanism for banks to recover dues from stressed assets?
A. Providing additional loans without assessment
B. Ignoring overdue accounts temporarily
C. Waiving entire principal and interest immediately
D. Sale of financial assets to Asset Reconstruction Companies (ARCs)
Banks can sell stressed financial assets to ARCs to recover part of their dues and transfer the responsibility of recovery to specialized agencies.
25. What is the main benefit of selling stressed assets to ARCs?
A. It increases the borrower’s loan obligations
B. It delays the recovery process
C. It helps banks clean up their balance sheet and recover dues efficiently
D. It automatically classifies the loan as standard
Selling to ARCs allows banks to improve asset quality by transferring stressed assets and recovering part of the dues while the ARC manages recovery.
26. Which of the following RBI guidelines provide a framework for the sale of financial assets by banks?
A. MSME Lending Guidelines
B. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act
C. Priority Sector Lending Framework
D. Basel III Liquidity Norms
The SARFAESI Act allows banks to enforce security interest and sell stressed financial assets to ARCs for recovery without approaching courts.
27. Which of the following is NOT an option under RBI’s prudential framework for resolving stressed assets?
A. Strategic Debt Restructuring (SDR)
B. Scheme for Sale of Financial Assets to ARCs
C. Ignoring overdue accounts indefinitely
D. One Time Settlement (OTS) for borrowers
RBI frameworks mandate active resolution measures; ignoring overdue accounts indefinitely is not permitted.
28. Caselet: A company, XYZ Ltd., has a term loan of ₹10 crore. Due to temporary liquidity issues, the company has defaulted on interest payments for 2 months. The bank has assessed that the company has a viable business model and sufficient future cash flows.
What is the most appropriate action for the bank under RBI guidelines?
A. Classify the account as a wilful defaulter immediately
B. Restructure the loan terms to help the company recover and continue repayment
C. Transfer the loan to SARFAESI action immediately
D. Waive off the overdue interest entirely
Since XYZ Ltd. has a viable business and temporary stress, the bank can restructure the loan under RBI guidelines to support recovery, instead of taking punitive measures.
29. A borrower has an outstanding term loan of ₹50 lakh. Due to stress, the bank decides to restructure by extending the repayment period from 5 years to 7 years, keeping the interest rate at 10% p.a. If the original EMI was ₹1,06,260, what will be the approximate new EMI after restructuring?
A. ₹1,50,000
B. ₹1,25,000
C. ₹85,000
D. ₹1,05,000
Restructuring extends the loan tenure, which reduces the EMI. Using standard EMI formula, the EMI for ₹50 lakh over 7 years at 10% comes approximately to ₹85,000.
30. Caselet: ABC Ltd., an SME, is facing stress due to COVID-19 impact. The bank is considering the RBI Resolution Framework for COVID-19 related stress. Which of the following statements is correct?
A. The bank can restructure the SME loan as per RBI guidelines without downgrading it to NPA immediately
B. The bank must report ABC Ltd. as a wilful defaulter
C. The bank must take immediate legal action under SARFAESI
D. The bank cannot restructure SME loans under any circumstances
RBI provided a special framework for COVID-19 stressed MSME accounts, allowing banks to restructure without classifying the account as NPA immediately.
31. A bank has a stressed account of ₹2 crore. The sale of this asset to an ARC is agreed at 75% of the book value. How much will the bank recover immediately?
A. ₹50 lakh
B. ₹1.25 crore
C. ₹1 crore
D. ₹1.5 crore
Sale price to ARC = 75% of ₹2 crore = ₹1.5 crore. This is the immediate recovery for the bank.
32. Caselet: A corporate borrower has defaulted on a term loan due to diversion of funds but has sufficient resources to repay. What classification should the bank assign?
A. Standard Asset
B. Wilful Defaulter
C. Stressed Asset (SMA-0)
D. NPA with immediate restructuring
Since the borrower has diverted funds intentionally despite having capacity to repay, they are classified as a wilful defaulter as per RBI guidelines.
