What happens when a retail loan turns bad — repayment, default and rescheduling, monitoring and classification of irregular accounts, and the legal recovery toolkit available to Indian banks: the SARFAESI Act 2002, Debt Recovery Tribunals, Lok Adalat, and Direct Recovery Agents. With 50 exam-style MCQs with hidden answers.
📅 Updated: September 2026 • 29 min read
1 Repayment, Default & Rescheduling
⚠️
Definition
Default occurs when a borrower fails to make scheduled repayments. Banks may offer rescheduling (revised repayment terms) to genuinely distressed but viable borrowers before resorting to recovery action.
2 Monitoring of Loan Accounts
Banks monitor retail loan accounts through periodic account reviews, early-warning signal (EWS) systems, and automated alerts for missed EMIs — enabling timely intervention before an account slips into serious default.
3 Classification of Irregular Loan Accounts
Classification
Criteria
Special Mention Account (SMA)
Overdue 1–90 days (SMA-0/1/2 sub-categories)
Substandard Asset
NPA for ≤12 months
Doubtful Asset
Remained substandard for 12 months
Loss Asset
Considered uncollectible; full provisioning required
An account becomes a Non-Performing Asset (NPA) once principal/interest remains overdue for more than 90 days.
4 Recovery Policy of Banks
Every bank maintains a board-approved Recovery Policy outlining the sequence of actions — reminders, notices, restructuring options, and (where required) legal recovery mechanisms — applied fairly and in compliance with RBI's Fair Practices Code.
5 SARFAESI Act, 2002
Full Form
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
Key Power
Allows banks to enforce security interest (e.g., seize and sell mortgaged property) without court intervention, for NPAs above a threshold.
Process
60-day notice to the borrower → possession of secured asset → sale/auction → adjustment of proceeds against dues.
6 Debt Recovery Tribunal (DRT)
Established under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act), DRTs provide a faster, specialised judicial forum (compared to ordinary civil courts) for banks to recover dues above a specified threshold.
7 Recovery through Lok Adalat
Lok Adalats ("People's Courts") offer an alternative dispute resolution forum for settling smaller-value NPA cases through mutual compromise/settlement — faster, informal and cost-effective compared to regular litigation.
8 Engaging Direct Recovery Agents
Banks may engage third-party Direct Recovery Agents (DRAs) for retail loan collection, subject to RBI's Fair Practices Code — DRAs must be properly trained, identify themselves, and avoid any coercive, intimidating or harassing recovery practices.
✓ Key Takeaways
An account becomes an NPA when overdue beyond 90 days; classification then proceeds through Substandard → Doubtful → Loss.
The SARFAESI Act, 2002 allows banks to enforce security interest without court intervention, following a 60-day notice.
DRTs (under the RDDBFI Act, 1993) offer a faster judicial forum than civil courts for bank debt recovery.
Lok Adalat provides a faster, informal settlement route for smaller-value NPA cases.
Third-party Direct Recovery Agents must comply with RBI's Fair Practices Code, avoiding coercive recovery tactics.
📝 Top 50 JAIIB-Style MCQs on Recovery of Retail Loans
Test your understanding with these 50 practice MCQs, closely modelled on the pattern expected in the JAIIB RBWM exam. Each question has 5 options — the correct answer is hidden by default; tap "Show Answer" to reveal it along with a short explanation.
⚠️ Repayment, Default & Rescheduling
1 "Default" in a retail loan occurs when:
A. A borrower fails to make scheduled repayments
B. A borrower repays the loan ahead of schedule
C. A bank waives the entire loan voluntarily
D. A loan is sanctioned but never disbursed
E. A borrower opens a new savings account
Answer: A. Default occurs when scheduled repayments are missed.
2 "Rescheduling" of a loan typically involves:
A. Revising repayment terms for a genuinely distressed but viable borrower
B. Immediately seizing the borrower's assets
C. Cancelling the loan permanently with no further action
D. Doubling the interest rate automatically
E. Reporting the borrower to the police
Answer: A. Rescheduling revises terms for distressed but viable borrowers.
3 Banks typically offer rescheduling:
A. Before resorting to recovery action, for viable borrowers
B. Only after a loan has been fully written off
C. Never; rescheduling is not permitted in India
D. Only to corporate borrowers, never retail
E. Only after SARFAESI action has concluded
Answer: A. Rescheduling is offered before recovery action, for viable borrowers.
4 A "genuinely distressed but viable" borrower refers to someone who:
A. Faces temporary difficulty but retains capacity to repay under revised terms
B. Has no intention of ever repaying
C. Has already fully repaid the loan
D. Never took a loan in the first place
E. Has permanently lost all income with no prospects
Answer: A. This describes a temporarily distressed but still-viable borrower.
5 Default management in retail banking primarily aims to:
A. Balance recovery of dues with fair treatment of distressed borrowers
B. Immediately punish every defaulting borrower with no assessment
C. Ignore all defaults permanently
D. Waive all loans automatically upon default
E. Apply no policy or process whatsoever
Answer: A. It balances recovery with fair treatment of distressed borrowers.
📡 Monitoring of Loan Accounts
6 Banks monitor retail loan accounts through:
A. Periodic reviews, early-warning signals, and automated EMI alerts
B. No monitoring whatsoever
C. Only annual audits with no interim checks
D. Random selection with no systematic process
E. Customer self-reporting alone, with no bank oversight
Answer: A. Banks use reviews, EWS and automated alerts for monitoring.
7 "Early-Warning Signal (EWS)" systems primarily help to:
A. Enable timely intervention before serious default occurs
B. Guarantee that no loan ever defaults
C. Eliminate the need for any loan monitoring
D. Only apply after a loan is already written off
E. Replace the need for a Recovery Policy
Answer: A. EWS enables timely intervention before serious default.
8 Automated alerts for missed EMIs are an example of:
A. Proactive account monitoring
B. A punitive legal recovery mechanism
C. A type of loan rescheduling
D. A form of loan write-off
E. A regulatory penalty on the bank
Answer: A. Automated EMI alerts are a proactive monitoring tool.
9 The primary benefit of periodic account reviews is:
A. Identifying deteriorating accounts before they become serious NPAs
B. Increasing the number of defaults deliberately
C. Having no impact on recovery outcomes
D. Replacing the need for any recovery policy
E. Applying only to corporate loans
Answer: A. Periodic reviews identify deteriorating accounts early.
10 Timely intervention following an EWS trigger might include:
A. Contacting the borrower to understand and address the cause of delay
B. Immediately initiating SARFAESI proceedings with no prior contact
C. Ignoring the signal entirely
D. Automatically writing off the loan
E. Reporting the customer to the police immediately
Answer: A. Early intervention typically starts with borrower contact.
📋 Classification of Irregular Loan Accounts
11 An account becomes a Non-Performing Asset (NPA) when overdue beyond:
A. 90 days
B. 1 day
C. 10 years
D. It never becomes an NPA regardless of delay
E. 365 days exactly, with no earlier classification
Answer: A. An account becomes an NPA after 90 days overdue.
12 A "Special Mention Account (SMA)" covers overdue periods of:
A. 1–90 days
B. Over 10 years
C. Exactly 0 days (no overdue at all)
D. Only after write-off
E. Only for corporate accounts
Answer: A. SMA covers accounts overdue 1–90 days.
13 A "Substandard Asset" is an NPA that has remained so for:
A. 12 months or less
B. More than 50 years
C. Exactly 1 day
D. It is not related to NPA duration at all
E. Only before becoming an NPA
Answer: A. Substandard status applies to NPAs of up to 12 months.
14 A "Doubtful Asset" classification applies when an account has:
A. Remained substandard for 12 months
B. Just been disbursed
C. Never missed a single payment
D. Been repaid in full
E. Been classified for less than a day
Answer: A. Doubtful status follows 12 months as substandard.
15 A "Loss Asset" is one considered:
A. Uncollectible, requiring full provisioning
B. Fully performing with no risk
C. Eligible for a bonus interest rate
D. Automatically converted into a fixed deposit
E. Not subject to any accounting treatment
Answer: A. A Loss Asset is uncollectible and requires full provisioning.
📜 Recovery Policy of Banks
16 A bank's Recovery Policy is typically:
A. Board-approved, outlining a structured sequence of recovery actions
B. Informal, decided arbitrarily by each branch
C. Non-existent in Indian banks
D. Identical to the Product Policy
E. Set solely by individual recovery agents
Answer: A. Recovery Policy is board-approved with a structured process.
17 A Recovery Policy typically includes:
A. Reminders, notices, restructuring options and legal mechanisms
B. Only immediate legal action with no prior steps
C. No structured sequence of any kind
D. Only cash incentives for defaulters
E. Only social media announcements
Answer: A. Reminders, notices, restructuring and legal steps are typical components.
18 RBI's Fair Practices Code, in the context of recovery, requires:
A. Recovery actions to be applied fairly and without harassment
B. No restrictions of any kind on recovery methods
C. Immediate coercive action against every defaulter
D. Recovery to be conducted only via anonymous agents
E. No requirement to notify the borrower ever
Answer: A. The Fair Practices Code requires fair, non-harassing recovery.
19 A Recovery Policy's sequenced approach primarily aims to:
A. Escalate proportionately, resorting to legal recovery only where necessary
B. Always start with the most severe legal action first
C. Skip all borrower communication
D. Apply identical treatment regardless of overdue severity
E. Have no relationship to the account's overdue status
Answer: A. The policy escalates proportionately, reserving legal action for necessary cases.
20 Applying the Recovery Policy consistently across similarly-placed borrowers primarily ensures:
A. Fairness and compliance with regulatory expectations
B. Arbitrary treatment based on branch discretion alone
C. No compliance requirement whatsoever
D. Guaranteed full recovery in every case
E. Elimination of the need for any documentation
Answer: A. Consistent application ensures fairness and regulatory compliance.
⚖️ SARFAESI Act, 2002
21 SARFAESI stands for:
A. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act
B. Standard Accounting and Regulatory Framework for Enforcement of Securities in India
C. Statutory Act for Recovery of Frozen Assets and Enforcement of Securities in India
D. Secure Asset Retention and Financial Enforcement System of India
E. None of these
Answer: A. SARFAESI stands for Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.
22 The SARFAESI Act was enacted in:
A. 2002
B. 1993
C. 1949
D. 2016
E. 1985
Answer: A. SARFAESI was enacted in 2002.
23 SARFAESI's key power for banks is to:
A. Enforce security interest without court intervention, for NPAs above a threshold
B. Only pursue recovery via civil courts
C. Waive all NPAs automatically
D. Grant fresh loans to defaulters
E. Freeze the borrower's savings account permanently with no legal process
Answer: A. SARFAESI allows enforcement without court intervention above a threshold.
24 Under SARFAESI, the notice period given to the borrower before enforcement is typically:
A. 60 days
B. 1 day
C. 10 years
D. No notice is required at all
E. 5 minutes
Answer: A. A 60-day notice is typically given under SARFAESI.
25 After taking possession of a secured asset under SARFAESI, the bank typically:
A. Sells/auctions the asset and adjusts proceeds against dues
B. Retains the asset permanently with no sale
C. Returns the asset to the borrower unconditionally
D. Destroys the asset
E. Transfers the asset to a random third party for free
Answer: A. The bank sells/auctions the asset and adjusts proceeds against dues.
🏛️ Debt Recovery Tribunal (DRT)
26 DRTs were established under:
A. The Recovery of Debts Due to Banks and Financial Institutions Act, 1993
B. The Companies Act, 1956
C. The Banking Regulation Act, 1949 exclusively
D. The Indian Contract Act, 1872
E. No specific statute; DRTs are informal bodies
Answer: A. DRTs were established under the RDDBFI Act, 1993.
27 Compared to ordinary civil courts, DRTs offer:
A. A faster, specialised judicial forum for bank debt recovery
B. A slower, more generalised forum
C. No difference whatsoever
D. No jurisdiction over any banking matters
E. A forum exclusively for foreign banks
Answer: A. DRTs are faster and specialised compared to civil courts.
28 DRTs handle debt recovery cases:
A. Above a specified threshold value
B. Regardless of value, including ₹1 cases
C. Only for foreign currency loans
D. Only for corporate deposits
E. Only for cases below ₹100
Answer: A. DRTs handle cases above a specified threshold.
29 The primary rationale for setting up DRTs was to:
A. Provide banks a faster recovery route than congested civil courts
B. Eliminate all judicial oversight of bank recovery
C. Replace SARFAESI entirely
D. Serve only non-banking disputes
E. Handle only criminal cases
Answer: A. DRTs provide a faster recovery route than congested civil courts.
30 DRTs and SARFAESI, together, form part of India's:
A. Legal recovery toolkit for banks and financial institutions
B. Consumer protection framework exclusively
C. Foreign exchange management framework
D. Corporate tax structure
E. Insurance regulatory framework
Answer: A. DRTs and SARFAESI together form the legal recovery toolkit.
🤝 Recovery through Lok Adalat
31 Lok Adalat is best described as:
A. An alternative dispute resolution forum for mutual settlement
B. A criminal court exclusively
C. A private arbitration firm
D. A stock exchange tribunal
E. A foreign exchange regulator
Answer: A. Lok Adalat is an alternative dispute resolution forum.
32 Lok Adalats are particularly suited for:
A. Smaller-value NPA cases settled through mutual compromise
B. Only extremely large corporate defaults
C. Only criminal fraud cases
D. Only foreign currency disputes
E. Only cases with no possibility of settlement
Answer: A. Lok Adalats suit smaller-value NPA cases via mutual compromise.
33 Compared to regular litigation, Lok Adalat proceedings are:
A. Faster, more informal and cost-effective
B. Slower and more expensive
C. Identical in every respect
D. Only available to government departments
E. Only conducted in a foreign language
Answer: A. Lok Adalat is faster, more informal and cost-effective.
34 A Lok Adalat settlement is typically reached through:
A. Mutual compromise between the bank and borrower
B. Unilateral imposition by the bank alone
C. Forced confession from the borrower
D. No negotiation of any kind
E. A coin toss
Answer: A. Lok Adalat settlements are reached through mutual compromise.
35 Banks use Lok Adalat as one option within their broader:
A. Recovery Policy toolkit
B. Product Policy exclusively
C. Marketing strategy
D. HR policy
E. IT infrastructure plan
Answer: A. Lok Adalat is one option within the Recovery Policy toolkit.
👥 Engaging Direct Recovery Agents
36 Direct Recovery Agents (DRAs) engaged by banks must comply with:
A. RBI's Fair Practices Code
B. No code of conduct whatsoever
C. Only their own personal judgement, unregulated
D. Foreign banking regulations exclusively
E. No requirement to identify themselves
Answer: A. DRAs must comply with RBI's Fair Practices Code.
37 Direct Recovery Agents must:
A. Be properly trained and identify themselves to the borrower
B. Remain anonymous at all times
C. Use coercive and intimidating tactics freely
D. Have no training requirement whatsoever
E. Act without any bank authorisation
Answer: A. DRAs must be trained and identify themselves.
38 Coercive, intimidating or harassing recovery practices by DRAs are:
A. Prohibited under RBI's Fair Practices Code
B. Explicitly encouraged by RBI
C. A mandatory recovery method
D. Irrelevant to banking regulation
E. Only prohibited for corporate loans, not retail
Answer: A. Such practices are prohibited under the Fair Practices Code.
39 A bank engaging third-party DRAs remains responsible for:
A. Ensuring the DRA's conduct complies with regulatory requirements
B. No responsibility whatsoever once the DRA is engaged
C. Only the DRA's marketing materials
D. Nothing; DRAs operate fully independently with no bank oversight
E. Only the DRA's tax filings
Answer: A. Banks remain responsible for DRA conduct compliance.
40 Retail loan collection via DRAs is typically used for:
A. Follow-up on overdue accounts as part of the recovery process
B. Sanctioning new loans
C. Opening new savings accounts
D. Conducting KYC verification for account opening
E. Issuing debit cards
Answer: A. DRAs follow up on overdue accounts as part of recovery.
🔁 Comprehensive Review
41 A borrower overdue by 45 days would be classified as:
A. An SMA (Special Mention Account)
B. A Loss Asset
C. A fully performing asset with no classification
D. A Doubtful Asset
E. An NPA already past 90 days
Answer: A. 45 days overdue falls within the SMA (1-90 day) range.
42 A bank recovering ₹50,000 from a small retail borrower would most efficiently pursue:
A. Lok Adalat, given the smaller value and desire for quick settlement
B. Full-scale SARFAESI proceedings for such a small amount
C. DRT litigation exclusively, bypassing all other options
D. No recovery action of any kind
E. International arbitration
Answer: A. Lok Adalat suits smaller-value, quick-settlement cases.
43 A bank wanting to enforce a mortgage on a defaulted home loan without going through lengthy civil litigation would use:
A. The SARFAESI Act
B. Only informal phone reminders indefinitely
C. No legal mechanism at all
D. A simple newspaper notice with no further action
E. Direct seizure with no notice of any kind
Answer: A. SARFAESI enables mortgage enforcement without lengthy civil litigation.
44 If a defaulting borrower disputes the recovery amount in a large-value case, the bank might pursue recovery via:
A. The Debt Recovery Tribunal
B. No forum at all; disputes cannot be resolved
C. A private, unregulated agent with full discretion
D. Social media posts against the borrower
E. Immediate imprisonment with no judicial process
Answer: A. The DRT is the specialised forum for such disputes.
45 A bank's decision on which recovery route to use (rescheduling, DRA follow-up, Lok Adalat, DRT, or SARFAESI) primarily depends on:
A. The account's classification, value, and the borrower's circumstances
B. A random coin toss
C. The borrower's astrological sign
D. The day of the week alone
E. No relevant factors; all routes are chosen identically
Answer: A. The choice depends on classification, value and borrower circumstances.
46 A DRA using threatening language to recover a personal loan violates:
A. RBI's Fair Practices Code
B. No regulation whatsoever, since it is a permitted practice
C. Only the DRA's own internal preference, with no external rule
D. Only foreign banking law, not Indian law
E. Nothing; threats are standard recovery practice
Answer: A. Threatening recovery conduct violates the Fair Practices Code.
47 An account moving from Substandard to Doubtful classification indicates:
A. It has remained an NPA for over 12 months without recovery
B. It has just been sanctioned
C. It has been fully repaid
D. It is no longer an NPA
E. It has improved to a fully performing status
Answer: A. This transition reflects 12+ months of continued NPA status.
48 A retail borrower facing a temporary job loss but with strong future income prospects would most appropriately be offered:
A. Loan rescheduling
B. Immediate SARFAESI action with no discussion
C. Immediate DRT litigation
D. Permanent account closure with no recourse
E. No engagement of any kind
Answer: A. Rescheduling suits a temporarily distressed but viable borrower.
49 For JAIIB purposes, the overall recovery framework demonstrates that Indian banks:
A. Have a graduated set of tools, from monitoring to legal enforcement, matched to case severity
B. Have only one single recovery method with no alternatives
C. Cannot legally recover any defaulted loan
D. Rely solely on informal, unregulated methods
E. Have no monitoring capability whatsoever
Answer: A. Banks have a graduated toolkit matched to case severity.
50 The single most important reason JAIIB candidates must understand loan recovery mechanisms is that:
A. Managing defaults and recovery is a core, recurring responsibility in retail lending operations
B. Loan defaults never occur in practice
C. Recovery mechanisms apply only to corporate loans
D. Recovery is entirely outsourced with no banker involvement
E. This topic has no bearing on a banker's day-to-day role
Answer: A. Default management and recovery is a core, recurring retail banking responsibility.
Disclaimer: This article is prepared for educational and exam-preparation purposes only, as of September 2026. Candidates should cross-check the latest official IIBF syllabus and current notifications before the exam.