Indian Economy Quiz: NPAs, the Insolvency Code and Banking Reforms

The correct answer is C, 90 days. Under the Reserve Bank's prudential norms on income recognition and asset classification, an asset stops being a performing asset when interest or an instalment of principal remains overdue for more than ninety days, and the bank must then stop treating the interest as income and start making provisions. Option A is wrong; thirty days of overdue status only puts the account in the special mention category, an early warning stage, not in the NPA class. Option B is wrong for the same reason, sixty days being another special mention stage. Option D is wrong because 180 days was the older standard, used before 2004, and papers often keep it as the distractor for candidates who have learnt the rule from an old book. For crop loans the test is in crop seasons instead of days.

The correct answer is B, a sub-standard asset. The classification runs in a sequence: an account that has just become non-performing is sub-standard for the first twelve months, after which it becomes doubtful, and it is called a loss asset when recovery is no longer expected. Option A is wrong because a standard asset is one where repayment is regular and which carries no more than normal risk, so it is not an NPA at all. Option C is wrong because an asset becomes doubtful only after it has stayed sub-standard for more than twelve months, and the doubtful class is itself divided by age for provisioning. Option D is wrong because a loss asset is one identified as irrecoverable by the bank, its internal auditors or the Reserve Bank inspection, though some salvage value may remain.

The correct answer is C, 2016. The Code was passed in 2016 on the recommendations of the Bankruptcy Law Reforms Committee and replaced a scatter of older laws, among them the Sick Industrial Companies Act and parts of the Companies Act, with a single time-bound process in which control passes from the defaulting promoter to the creditors. Option A is wrong because 2002 is the year of the SARFAESI Act, which deals with enforcement of security rather than with insolvency as a whole. Option B is wrong because 2013 is the year of the Companies Act, under which the National Company Law Tribunal itself was provided for. Option D is wrong because 2019 saw only amendments, including the outer limit of 330 days for the resolution process, not the enactment of the Code.

The correct answer is B, the National Company Law Tribunal. For companies and limited liability partnerships the application for insolvency is filed before the Tribunal, which admits or rejects it, declares the moratorium and appoints the interim resolution professional; appeals lie to the National Company Law Appellate Tribunal and then to the Supreme Court. Option A is wrong for companies, though the Debt Recovery Tribunal is indeed the adjudicating authority under the Code for individuals and partnership firms, which is the distinction most often tested. Option C is wrong because the Securities Appellate Tribunal hears appeals against orders of the market regulator. Option D is wrong because winding up by the High Court belonged to the older company law regime, which the Code and the Companies Act of 2013 replaced.

The correct answer is C, the Insolvency and Bankruptcy Board of India. Created under the Code of 2016, it registers and oversees insolvency professionals, insolvency professional agencies and information utilities, and makes the regulations under which the resolution process runs, which makes it both a regulator and a rule-maker. Option A is wrong because the Reserve Bank regulates banks and may direct them to refer accounts for insolvency, but it does not regulate insolvency professionals. Option B is wrong because the Securities and Exchange Board of India regulates the securities market. Option D is wrong because the Code is administered by the Ministry of Corporate Affairs rather than the Ministry of Finance, and in any case a ministry is not the statutory regulator here. Remember the pair: the Ministry of Corporate Affairs administers the Code and the Board is its statutory regulator, while the Reserve Bank stays the regulator of the banks that file the cases.

The correct answer is C, 330 days. Section 12 of the Code gives the resolution process 180 days from the date of admission, allows the adjudicating authority to extend it once by up to 90 days on a resolution of the Committee of Creditors, and the amendment of 2019 added the outer limit of 330 days, which includes any time spent in litigation and in extensions. Option A is wrong because 180 days is only the first period, before any extension. Option B is wrong because 270 days, that is 180 plus 90, was the limit before the 2019 amendment, and papers keep it as the distractor for candidates working from older notes. Option D is wrong because the Code counts the outer limit as 330 days and not as a year. If no plan is approved within the limit, the company goes into liquidation.

The correct answer is C, 2002. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002 lets a secured creditor issue a notice to a defaulting borrower and then take possession of and sell the secured asset without going to court, and it also provides for asset reconstruction companies that buy bad loans from banks. Option A is wrong because 1993 is the year of the Act that created the Debt Recovery Tribunals, and swapping these two years is the standard trap. Option B is wrong because 1998 is the year of the second Narasimham Committee report on banking sector reforms. Option D is wrong because 2016 is the year of the Insolvency and Bankruptcy Code, which works alongside SARFAESI rather than replacing it.

The correct answer is B, 1993. The Recovery of Debts Due to Banks and Financial Institutions Act of 1993 set up the Debt Recovery Tribunals, with Debt Recovery Appellate Tribunals above them, to take bank recovery suits out of the ordinary civil courts where they had been pending for years. Option A is wrong because 1985 belongs to the Sick Industrial Companies Act, whose Board for Industrial and Financial Reconstruction the Insolvency Code later replaced. Option C is wrong because 2002 is the year of the SARFAESI Act. Option D is wrong because 2013 is the year of the Companies Act. Under the Insolvency and Bankruptcy Code the same Debt Recovery Tribunal also acts as the adjudicating authority for the insolvency of individuals and partnership firms.

The correct answer is A, M. Narasimham. The Committee on the Financial System of 1991 and the Committee on Banking Sector Reforms of 1998, both under him, recommended prudential norms for income recognition and provisioning, a minimum capital to risk-weighted assets ratio, a lower statutory liquidity ratio and cash reserve ratio, entry for new private banks and greater autonomy for bank boards, and these became the base of reform. Option B is wrong because Raghuram Rajan chaired the committee on financial sector reforms of 2008 and later, as Governor, ordered the asset quality review of 2015. Option C is wrong because Bimal Jalan was a Governor of the Reserve Bank and later headed a committee on its economic capital framework. Option D is wrong because Urjit Patel chaired the committee on the monetary policy framework.

The correct answer is B, sixty-six per cent. The Committee of Creditors is made up of the financial creditors of the company, with voting shares in proportion to the debt owed to each, and a resolution plan is approved only when creditors holding at least sixty-six per cent of the voting share vote for it; the same majority is needed for important decisions such as extending the process or going into liquidation. Option A is wrong because fifty-one per cent is the threshold for routine decisions of the committee, not for a resolution plan, and this is the commonest error. Option C is wrong because seventy-five per cent was the original requirement in the Code of 2016, lowered by the amendment of 2018 because plans were failing for want of a few votes. Option D is not a threshold the Code uses anywhere.

The correct answer is C, persons who are not eligible to submit a resolution plan. Section 29A, inserted by amendment in 2018, lists disqualifications, chiefly for promoters and connected persons whose accounts have been classified as non-performing, for undischarged insolvents and for persons disqualified as directors, so that a defaulting promoter cannot buy the company back cheaply through the very process his default caused. Option A is wrong because the moratorium is Section 14, which stays suits, recovery and transfer of assets once the application is admitted. Option B is wrong because the distribution waterfall on liquidation is Section 53, in which insolvency costs and workmen's dues rank first. Option D is wrong because the threshold of default, now one crore rupees, comes from Section 4.