MSME Account Restructuring Quiz

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Questions and Answers

What percentage of crop loss must be assessed to consider rescheduling agriculture loans?

75%

33% (correct)

20%

50%

Which method is NOT mentioned as a way to assess crop loss?

Eye estimates/visual impressions

Deliberations by government authorities

Crop cutting experiments

Soil analysis (correct)

In the case of crop loss between 33% and 50%, what is the maximum repayment period for a restructured loan?

Two years (correct)

Three years

One year

Five years

What should banks consider when rescheduling long-term agriculture loan instalments?

Repaying capacity of the borrower Signup and view all the answers

What is the minimum moratorium period required for restructured loans?

One year Signup and view all the answers

What happens if the crop loss is assessed at 50% or more?

Repayment period may be extended to five years. Signup and view all the answers

Who is responsible for explaining the reasons for not using crop cutting experiments in extreme situations?

State Government/District Authorities Signup and view all the answers

Which of the following is NOT a type of certificate mentioned?

Loanwaiver Signup and view all the answers

What is the classification status of a non-performing asset (NPA) purchased by a bank within the first 90 days of its purchase?

It is classified as a standard asset. Signup and view all the answers

What is the minimum outstanding amount for a borrower or guarantor to be considered a wilful defaulter?

₹25 lakh Signup and view all the answers

How should recoveries from a purchased NPA be accounted for?

They should first be adjusted against its acquisition cost. Signup and view all the answers

What risk weight should banks assign to non-performing financial assets purchased from other banks for capital adequacy?

100% Signup and view all the answers

Which of the following actions constitutes a diversion of funds?

Using working capital for long-term investments Signup and view all the answers

What additional risk charge applies if a purchased non-performing asset is an investment?

It attracts a capital charge for market risks. Signup and view all the answers

In the context of siphoning of funds, what distinguishes this action?

Utilizing funds for personal gains Signup and view all the answers

Which of the following institutions are affected by the RBI's master direction on loan transfers?

Scheduled commercial banks, small finance banks, and NBFCs. Signup and view all the answers

Which scenario does NOT qualify as a diversion of funds?

Using capital obtained from a loan to develop a new product Signup and view all the answers

What is required when funds obtained through a credit facility are to be transferred to other entities?

Prior written permission from the lender Signup and view all the answers

What is the maximum overdue period for a payment to be considered satisfactory for MSME accounts?

30 days Signup and view all the answers

What is the definition of 'satisfactory performance' for all accounts during the monitoring period?

The borrower cannot be in default at any point of time. Signup and view all the answers

What is the required aggregate exposure of lenders for MSME accounts to qualify for upgrade to 'standard' status?

Less than ₹25 crores Signup and view all the answers

How long must satisfactory performance be demonstrated for non-MSME accounts before they can be upgraded?

One year Signup and view all the answers

What additional requirement is needed for accounts with aggregate exposure of ₹100 crores or above to qualify for an upgrade?

A credit rating of BBB- or better Signup and view all the answers

What does the monitoring period refer to for upgrading accounts?

From the date of implementation of the restructuring plan Signup and view all the answers

For accounts with exposure of ₹500 crores and above, how many ratings are required for upgrade?

Two ratings Signup and view all the answers

What happens to NPAs upon restructuring concerning asset classification?

They retain the same asset classification as before restructuring. Signup and view all the answers

What is the time frame allowed for the borrower or guarantor to make a written representation to the Review Committee after receiving a proposal?

15 days Signup and view all the answers

Who is the chairperson of the Review Committee in the case of commercial banks?

Whole-Time Director who is the MD & CEO/CEO Signup and view all the answers

Which of the following individuals is NOT considered a member of the Review Committee?

Member of the Identification Committee Signup and view all the answers

What requirement must be established for a director to be considered a wilful defaulter?

The wilful default must have occurred with their consent or connivance. Signup and view all the answers

What action must a lender take before transferring a defaulted loan of ₹25 lakh and above?

Conduct a comprehensive investigation regarding wilful default. Signup and view all the answers

Which of the following is a responsibility of the Review Committee?

To provide an opportunity for personal hearings. Signup and view all the answers

What must be included when the Review Committee communicates its decision to the wilful defaulter?

A reasoned order stating the decision Signup and view all the answers

What constitutes a necessary condition for a personal hearing to be held as per the Review Committee's procedures?

The proposal must be received from the Identification Committee. Signup and view all the answers

What is the maximum repayment period for a restructured loan when crop loss is assessed between 33% and 50%?

Two years Signup and view all the answers

What percentage of crop loss is sufficient to trigger a deliberation by the State Government or District Authorities for relief?

33% Signup and view all the answers

If a natural calamity occurs, which of the following loans are eligible for restructuring?

All short-term loans except overdue ones Signup and view all the answers

In cases where the crop of the year is damaged but productive assets are intact, what action is taken regarding long-term agriculture loans?

Loan instalments are rescheduled and the loan period is extended by one year Signup and view all the answers

What type of assessment do different states use for crop loss, apart from crop cutting experiments?

Visual impressions Signup and view all the answers

For crop losses of 50% or more, what is the maximum repayment period that can be extended for a restructured loan?

Five years Signup and view all the answers

In extreme situations like widespread floods, who is responsible for explaining the absence of crop cutting experiments?

The District Collector Signup and view all the answers

What is the required moratorium period for all restructured loan accounts?

One year Signup and view all the answers

What is the minimum credit exposure that requires the transferor to obtain two external valuation reports?

Rs.100 crore Signup and view all the answers

What method must be followed after bilateral negotiations if the total lender exposure to the borrower is Rs.100 crore or more?

Swiss Challenge method Signup and view all the answers

Which of the following is a restriction on the transferor after transferring stressed loans?

They cannot assume any operational or legal risks related to the transferred loans. Signup and view all the answers

If a transferee has no existing exposure to the borrower, how is the acquired stressed loan classified upon acquisition?

Standard Signup and view all the answers

What is the minimum cooling period before a transferor may take fresh exposure on a borrower after transferring stressed loans?

12 months Signup and view all the answers

When must the asset classification status of a loan acquired by a transferee, who has existing exposure to the borrower, align with?

The existing asset classification of the borrower Signup and view all the answers

Who bears the cost of the valuation exercise when transferring stressed loans?

The transferor Signup and view all the answers

What must be ensured by lenders when transferring stressed loans through bilateral sales?

Only permitted transferees and ARCs can receive the loans. Signup and view all the answers

What happens to additional provisions made if an insolvency application is filed?

Half may be reversed upon filing. Signup and view all the answers

What is a primary purpose of restructuring loans?

To grant concessions to the borrower. Signup and view all the answers

Under what condition may the additional provisions be reversed when assignment of debt proceedings are initiated?

Upon completion of the assignment of debt/recovery. Signup and view all the answers

What happens to accounts classified as 'standard' upon restructuring?

They are downgraded to a non-performing asset (NPA). Signup and view all the answers

Which of the following is NOT considered a reason for lenders to engage in restructuring?

Concerns about the overall financial market. Signup and view all the answers

What is a necessary condition that must be met for an account to be considered for restructuring?

The account must be classified as 'standard'. Signup and view all the answers

What must lenders do in their financial statements related to restructuring provisions?

Make appropriate disclosures under 'Notes on Accounts'. Signup and view all the answers

Which entities are exempt from the guidelines on resolution of stressed assets?

Micro, Small and Medium Enterprises (MSMEs). Signup and view all the answers

What is the minimum holding period for transferring loans with a tenor of up to two years?

Three months Signup and view all the answers

Under what condition can a transferee perform due diligence at the portfolio level instead of for each individual loan?

When one-third of the portfolio is assessed individually Signup and view all the answers

What is the requirement concerning transfer consideration during the transfer of loans?

It should be arrived transparently on an arm's length basis Signup and view all the answers

For loans where security cannot be registered, how is the minimum holding period calculated?

From the date of first repayment Signup and view all the answers

What should be ensured when a loan transfer results in a change of lender of record?

The existing loan agreement must have suitable enabling provisions Signup and view all the answers

How should due diligence be performed by transferees regarding the loans?

It must be done by their own staff with similar rigour used for originating loans Signup and view all the answers

What percentage of economic interest must a transferor retain when performing due diligence at the portfolio level?

10% Signup and view all the answers

What is required when transferring a loan in regard to cash basis?

The transfer must be executed on a cash basis Signup and view all the answers

What classification does an account receive on April 30, 2022, if it is overdue?

SMA-1 Signup and view all the answers

What must happen for an account to be classified as SMA-2?

It must be overdue when the day-end process runs on May 30, 2022. Signup and view all the answers

How often must the CRILC-Main Report be submitted by lenders?

Monthly Signup and view all the answers

What is the time frame for lenders to conduct a prima facie review after a borrower is reported in default?

30 days Signup and view all the answers

What percentage of lenders by number is required for decisions agreed upon in an inter-creditor agreement (ICA) to be binding?

60% Signup and view all the answers

What is the minimum percentage of total outstanding credit facilities required for a decision to be binding among lenders?

75% Signup and view all the answers

When can lenders initiate the process of implementing a resolution plan (RP)?

Anytime before default is reported Signup and view all the answers

What is the purpose of the inter-creditor agreement (ICA) during the Review Period?

To provide ground rules for implementing the resolution plan Signup and view all the answers

Study Notes

Non-Performing Assets (NPAs) Restructuring

NPAs retain the same asset classification post-restructuring.
Upgradation conditions vary for MSME accounts with lender exposure less than ₹25 crores, requiring one year of satisfactory performance with no overdue payments exceeding 30 days.
For accounts with aggregate exposure of ₹100 crores and above, upgrading requires a credit rating of at least BBB- from recognized Credit Rating Agencies.

Agriculture Loan Restructuring

Short-term Crop Loans can be restructured unless overdue during a natural calamity.
Losses of 33% or more trigger restructuring; with 33%-50% damage, repayment can be extended up to 2 years; above 50%, up to 5 years.
Long-term agricultural loans may have instalments rescheduled based on the borrower's capacity.

Loan Transfer Regulations

NPAs purchased can be classified as 'standard' for 90 days; thereafter classified based on recovery records.
Recoveries from NPAs purchased first offset acquisition costs, with excess recognized as profit.
100% risk weight applies to non-performing financial assets for capital adequacy.

Wilful Defaulters

Defined as borrowers or guarantors with a default of ₹25 lakh and above, with potential liability extending to company promoters and directors.
Companies and management held accountable for wilful defaults.

Diversion and Siphoning of Funds

Diversion involves misuse of short-term funds for long-term purposes, unauthorized transfers, and non-compliance with credit facility terms.
Siphoning relates to using borrowed funds for operations unrelated to the borrower's business.

Review Procedure for Wilful Default Cases

Borrowers may appeal to a review committee within 15 days of identification.
The committee includes the bank's MD & CEO and independent directors, ensuring unbiased assessments.
Personal hearings are allowed for entities under suspicion of wilful default.
A thorough internal investigation required before transferring loans classified as defaults.

Conclusion

Compliance with restructuring protocols is critical for borrowers under financial distress, particularly in agricultural and MSME sectors.
Banks must maintain rigorous standards in assessing wilful defaulters, ensuring responsible lending practices.

SMA Classification and Reporting

SMA classification date for accounts is set on April 30, 2022, for SMA-1; overdue accounts will transition to SMA-2 by May 30, 2022, and to NPA by June 29, 2022.
Scheduled commercial banks must report credit information to the Central Repository of Information on Large Credits (CRILC) for borrowers with exposure of ₹5 crore and above, submitting monthly and weekly reports.

Implementation of Resolution Plans

Lenders must establish Board-approved policies for the resolution of stressed assets, initiating plans before a default occurs.
Once a borrower is in default, lenders have 30 days (Review Period) to review the account and decide on the resolution strategy, including potential legal actions.
An inter-creditor agreement (ICA) must be signed by lenders during the Review Period, requiring a decision from 75% by value of total credit facilities and 60% of lenders by number to be binding.

Prudential Norms and Asset Classification

Restructuring allows lenders to grant concessions and revise advance terms for borrowers facing financial difficulties.
Accounts previously classified as 'standard' enter immediate downgrade to 'sub-standard' upon restructuring.
Crop loans are eligible for restructuring if damage is assessed at 33% or more, with various criteria set for determining the loss.

Restructuring Loans Based on Natural Calamity

Short-term loans can be restructured unless overdue at the time of calamity; principal and interest may convert into term loans.
Repayment for loans due to 33%-50% loss may extend up to two years, while losses of 50% or more may allow up to five years for repayment with a one-year moratorium.

Transfer of Loans

Loans not in default can be transferred via assignment or loan participation agreements, requiring borrower consent and enabling provisions.
Transfers must be cash-based, conducted transparently and arm's length, with due diligence performed by transferee staff.
Minimum holding periods for loans are three months for under two years and six months for over two years and depend on security registration.

Transfer and Disclosure Requirements

Stressed loans may only be sold to permitted buyers, typically asset reconstruction companies (ARCs).
If transfers exceed ₹100 crore, two independent valuations are required.
After transferring loans, lenders assume no further risks associated with them; subsequent exposure may occur after a cooling-off period of at least 12 months.

Conditions for Non-ARC Transfers

Non-ARC buyers with no previous exposure to the borrower must classify acquired loans as "Standard" initially.
If the new owner holds existing loans for the borrower, the asset classification will match the borrower's classification with the transferee.

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Description

Test your knowledge on the conditions for upgrading MSME accounts after restructuring. This quiz covers key criteria, including asset classification and performance requirements. Perfect for finance students and professionals looking to deepen their understanding of MSME regulations.