Banking sector reforms: Basel norms, risk and NPA management - Question Bank

1. What is the ultimate goal of banking sector reforms, including Basel norms and NPA management?
A) To make banking more complex
B) To create a more resilient, stable, and trustworthy financial system
C) To reduce competition among banks
D) To increase government intervention in banking operations
2. Which of the following is an example of a 'substandard' asset in India, assuming a 90-day NPA norm?
A) A loan on which principal or interest is overdue for 75 days
B) A loan on which principal or interest is overdue for 100 days
C) A loan on which principal or interest is overdue for 150 days
D) A loan on which principal or interest is overdue for 1 year
3. The Basel Committee on Banking Supervision (BCBS) is part of which international organization?
A) International Monetary Fund (IMF)
B) World Trade Organization (WTO)
C) Bank for International Settlements (BIS)
D) United Nations (UN)
4. Which aspect of risk management is most directly related to the potential for large, infrequent losses due to external events or internal failures?
A) Credit Risk Management
B) Market Risk Management
C) Operational Risk Management
D) Liquidity Risk Management
5. What is the primary goal of robust risk management frameworks in banks?
A) To maximize short-term profits at any cost
B) To ensure the long-term solvency and stability of the bank
C) To increase the number of employees
D) To simplify regulatory compliance
6. Which of the following is a risk that could lead to a bank's failure if not managed properly?
A) Excessive profits
B) Inadequate capital reserves and poor risk management
C) Too many satisfied customers
D) Low operational costs
7. The introduction of the 'Common Equity Tier 1' (CET1) capital ratio is a key feature of:
A) Basel I
B) Basel II
C) Basel III
D) None of the above
8. What does 'early warning system' for NPAs typically involve?
A) Ignoring overdue payments until they become NPA
B) Monitoring borrower financial health, repayment patterns, and industry trends
C) Increasing loan disbursement
D) Reducing capital requirements
9. Which of the following is a measure taken by banks to mitigate market risk?
A) Strict credit appraisal
B) Diversification of investments and use of hedging instruments
C) Increasing operational staff
D) Reducing provisioning for NPAs
10. What is the primary impact of Basel III on the capital requirements for banks?
A) Significantly lower and less stringent requirements
B) Higher quality and quantity of capital, with additional buffers
C) Capital requirements focused only on credit risk
D) Reduced emphasis on risk-weighted assets
11. Basel III's focus on 'leverage ratio' aims to:
A) Encourage higher risk-taking
B) Provide a simple, non-risk-based backstop to the risk-weighted capital requirements
C) Reduce the need for liquidity management
D) Increase operational efficiency
12. Which of the following is a significant challenge in managing NPAs?
A) Rapid economic growth
B) Long legal processes for recovery and borrower insolvency
C) Low interest rates
D) Increased competition from new banks
13. What is the main objective of the 'recovery' process for NPAs?
A) To increase the bank's lending capacity
B) To recover the maximum possible amount from the non-performing loan
C) To renegotiate loan terms for higher interest
D) To improve the bank's public image
14. The 'Standardised Approach' for credit risk under Basel II/III involves:
A) Banks using their own internal models
B) Using external credit ratings to assign risk weights
C) Focusing solely on operational risk
D) Calculating capital based on market volatility
15. Which type of risk is most directly addressed by the concept of 'loan loss reserves'?
A) Market Risk
B) Operational Risk
C) Credit Risk
D) Liquidity Risk
16. What is the role of the Reserve Bank of India (RBI) in relation to Basel norms and NPA management?
A) To set international banking standards
B) To implement and enforce Basel norms and issue guidelines for NPA management
C) To directly manage all bank assets
D) To guarantee all bank deposits
17. Which of the following is a consequence of high NPAs on a bank's financial health?
A) Increased net interest margin
B) Reduced ability to lend and potential capital erosion
C) Higher deposit growth
D) Improved operational efficiency
18. What is a 'stressed scenario' in the context of Basel norms, particularly for liquidity risk?
A) A period of exceptionally high market volatility
B) A scenario where a bank faces significant outflows of funds
C) A situation of rapid economic growth
D) A period of low interest rates
19. The 'countercyclical capital buffer' under Basel III is designed to:
A) Increase credit growth during booms
B) Ensure banks build up capital buffers during periods of excess credit growth that can be drawn down during stress
C) Reduce the impact of interest rate changes
D) Simplify risk reporting
20. What is the 'capital conservation buffer' introduced in Basel III?
A) An additional layer of common equity tier 1 capital
B) A reduction in risk-weighted assets
C) A temporary relaxation of liquidity requirements
D) A measure to increase dividend payouts
21. The 'Internal Ratings-Based' (IRB) approach for calculating credit risk capital is a feature of which Basel framework?
A) Basel I
B) Basel II and Basel III
C) Basel III only
D) Basel I and Basel II
22. Which of the following is a tool for managing credit risk at the origination stage?
A) Selling NPAs to ARCs
B) Credit scoring and robust underwriting standards
C) Increasing capital adequacy ratio
D) Implementing LCR
23. What is the purpose of 'provisioning' in NPA management?
A) To increase the bank's profits
B) To set aside funds to cover potential losses from bad loans
C) To offer new loans
D) To reduce the bank's capital requirements
24. Which Basel accord introduced a specific capital charge for operational risk?
A) Basel I
B) Basel II
C) Basel III
D) All of the above
25. Liquidity risk for a bank is the risk that it will:
A) Not be able to meet its obligations as they fall due
B) Face a downgrade in its credit rating
C) Experience a significant drop in its stock price
D) Be unable to attract new depositors
26. Operational risk encompasses losses resulting from:
A) Poor credit assessment
B) Inadequate provisioning for NPAs
C) Inadequate or failed internal processes, people, systems, or external events
D) Adverse market movements
27. Market risk for a bank primarily relates to potential losses arising from:
A) Customer defaults on loans
B) Changes in interest rates, foreign exchange rates, or equity prices
C) Internal system failures
D) Regulatory changes
28. Credit risk in banking refers to the risk of:
A) Loss due to operational failures
B) Loss due to adverse movements in market prices
C) Loss arising from a borrower's failure to repay a loan
D) Loss due to inadequate liquidity
29. Which of the following is NOT a type of risk that banks typically manage?
A) Credit Risk
B) Market Risk
C) Operational Risk
D) Inflation Risk (as a primary bank-managed risk, though it impacts)
30. What is the main objective of asset reconstruction companies (ARCs) in managing NPAs?
A) To increase the volume of new loans
B) To acquire NPAs from banks and resolve them
C) To set interest rates
D) To manage foreign exchange reserves
31. The SARFAESI Act, 2002 in India provides a legal framework for:
A) Deposit insurance
B) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
C) Payment systems regulation
D) Consumer protection in banking
32. Which of the following is a common strategy for NPA management?
A) Increasing lending to risky borrowers
B) Restructuring loans and debt recovery tribunals
C) Ignoring overdue payments
D) Reducing capital requirements
33. What is the primary risk associated with a high level of NPAs for a bank?
A) Increased profitability
B) Reduced capital adequacy and profitability
C) Enhanced liquidity
D) Lower operational costs
34. Which NPA category signifies an asset where loss has been identified by the bank or internal/external auditors but has no realisable value or very little value?
A) Substandard Asset
B) Doubtful Asset
C) Loss Asset
D) Standard Asset
35. A loan classified as 'Doubtful' for more than one year falls under which NPA category?
A) Substandard Asset
B) Loss Asset
C) Standard Asset
D) Doubtful Asset
36. What is the classification of an NPA that has remained in the 'Substandard' category for 12 months or less?
A) Doubtful Asset
B) Loss Asset
C) Standard Asset
D) Substandard Asset
37. Under Indian banking regulations, a loan becomes an NPA if interest and/or installment of principal remains overdue for a period of how many days?
A) 60 days
B) 90 days
C) 120 days
D) 180 days
38. What is a 'Non-Performing Asset' (NPA) in the context of banking?
A) A loan that is fully repaid
B) An asset that generates high returns
C) A loan or advance for which principal or interest payment has remained overdue for a specified period
D) An investment in government securities
39. The Net Stable Funding Ratio (NSFR) in Basel III aims to promote:
A) Short-term liquidity resilience
B) Long-term structural funding stability
C) Leverage reduction
D) Operational risk management
40. What is the primary purpose of the Liquidity Coverage Ratio (LCR) introduced by Basel III?
A) To ensure banks can meet their short-term obligations
B) To measure a bank's profitability
C) To assess the quality of a bank's assets
D) To monitor trading activities
41. Basel III, developed in response to the 2007-2008 financial crisis, aims to strengthen which of the following?
A) Bank profitability and efficiency
B) Global banking regulation, supervision, and risk management
C) The speed of financial transactions
D) The number of financial institutions
42. Which of the following is a significant enhancement in Basel III compared to Basel II?
A) Reduced capital requirements
B) Increased focus on leverage
C) Relaxed liquidity standards
D) Simplified risk weighting
43. Pillar 3 of Basel II is concerned with:
A) Internal Capital Adequacy Assessment Process (ICAAP)
B) Supervisory Review Process (SRP)
C) Market Discipline through enhanced disclosure
D) Operational Risk Measurement
44. What is the main purpose of Pillar 2 in the Basel II framework?
A) To provide guidelines for risk management
B) To standardize reporting requirements
C) To enhance supervisory review of a bank's risk profile and capital adequacy
D) To promote market discipline through disclosure
45. Basel II introduced three pillars. What does Pillar 1 primarily address?
A) Supervisory Review
B) Market Discipline
C) Minimum Capital Requirements
D) Liquidity Management
46. Which of the following is a key component of Basel II, introduced in 2004?
A) Introduction of operational risk capital charge
B) Focus solely on credit risk mitigation
C) Mandatory use of internal ratings for capital calculation
D) Emphasis on liquidity coverage ratio
47. Under Basel I, what was the minimum capital requirement as a percentage of risk-weighted assets?
A) 5%
B) 8%
C) 10%
D) 12%
48. Basel I accord, introduced in 1988, primarily focused on which type of risk?
A) Operational Risk
B) Market Risk
C) Credit Risk
D) Liquidity Risk
49. What is the primary objective of Basel norms in the banking sector?
A) To increase bank profitability
B) To enhance financial stability and reduce systemic risk
C) To standardize accounting practices globally
D) To facilitate cross-border mergers and acquisitions
All Question Banks
E-Book Banking sector reforms: Basel norms, risk and NPA management One Line Questions Banking sector reforms: Basel norms, risk and NPA management Online Test Banking sector reforms: Basel norms, risk and NPA management