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CS Professional · Banking and Insurance - Laws and Practice · Performing and Non Performing Assets

Shreeram Traders' term loan with a bank is classified as a standard asset. The bank is preparing provisions at year end under the RBI prudential norms. Which statement about the general provision on standard assets is correct?

A general provision is required on standard assets even though the account is performing. RBI prescribes rates by category of advance as a prudential buffer, so a bank cannot wait for the loan to become sub-standard or be restructured before providing.

  1. ANo provision is needed because the account is not overdue
  2. BA general provision is required even though the account is performing, at rates prescribed by RBI for the category of advanceCorrect
  3. CA provision is required only when the loan becomes a sub-standard asset
  4. DProvision is required only if the borrower requests restructuring

Explanation

Under RBI norms, banks must hold a general provision on standard assets, at rates that vary by sector or category of advance. This is a prudential buffer and does not depend on overdue status. Waiting until the asset turns sub-standard ignores this requirement.

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