JAIIB PPB Guide: Non-Performing Assets, Letters of Credit & Deferred Payment Guarantees Explained

This detailed guide is specially written for JAIIB PPB aspirants who want to understand the topics of Non-Performing Assets (NPA), Letter of Credit (LC), and Deferred Payment Guarantee (DPG) thoroughly. These topics are highly scoring and repeatedly asked in exams. You will also find concept-based examples, case scenarios, and important MCQs with answers for self-assessment.

🎥 WATCH PART 1:

1️⃣ Non-Performing Assets (NPA)

Definition

A Non-Performing Asset (NPA) is a loan or advance where the borrower has stopped making interest or principal repayments for a period of 90 days or more. For a Cash Credit (CC) or Overdraft (OD) account, it becomes NPA when the account remains out of order for more than 90 days.

Categories of NPAs

• Sub-Standard Assets: Assets that remain NPA for up to 12 months.
• Doubtful Assets: Assets that remain sub-standard for more than 12 months.
• Loss Assets: Assets where loss has been identified by the bank or auditor but not fully written off.

Government Guaranteed Loans

Loans guaranteed by the Central Government are not classified as NPAs unless the government repudiates its guarantee.
However, loans guaranteed by the State Government are treated as NPAs if interest or principal is overdue for more than 90 days.

Borrower-wise Classification

If a borrower has multiple credit facilities from a bank, and even one facility turns NPA, all facilities of that borrower are treated as NPA. This ensures consistent asset classification and prevents diversion of funds.

Practical Scenario – Term Loan & Cash Credit

• In Term Loans – when an installment of principal or interest remains unpaid for 90 days → it becomes NPA.
• In CC/OD accounts – if the account shows irregularity or out-of-order position beyond 90 days → it becomes NPA.

Wilful Defaulter and Legal Aspects

A borrower who deliberately defaults despite having the capacity to pay is termed as a wilful defaulter.
If the borrower diverts funds, siphons money, or disposes of assets without the bank’s consent, strict action is taken under RBI and legal guidelines.

WATCH PART 2:

Director’s Guarantee & Misrepresentation

When a Director provides personal guarantee for company loans, the bank must disclose all material facts.
If concealment or misrepresentation occurs (covered under Sections 142 & 143 of the Indian Contract Act), the guarantee becomes voidable.

Example – Amar, Akbar & Anthony (Surety’s Liability)

Three friends – Amar, Akbar & Anthony – give a joint guarantee for a business loan. Later, Akbar withdraws from the firm.
Unless the guarantee is revoked formally, all three remain jointly liable under the principle of Continuing Guarantee.
After repayment, the sureties gain the Right of Subrogation, i.e., they can recover money from the borrower.

2️⃣ Letter of Credit (LC)

Meaning

A Letter of Credit is a financial undertaking by a bank (Issuing Bank) on behalf of its customer (Applicant) to pay a specified amount to the Beneficiary against submission of specified documents within the stipulated time.

Parties in LC

• Applicant: The importer/buyer who requests the LC.
• Beneficiary: The exporter/seller who receives payment under LC.
• Issuing Bank: The bank that issues the LC on behalf of the applicant.
• Advising Bank: The bank that authenticates and forwards the LC to the beneficiary.

Red Clause LC

In a Red Clause LC, the issuing bank allows the beneficiary to obtain advance payment before shipment. This helps the exporter with pre-shipment finance but increases risk to the bank, as it becomes an unsecured advance if shipment fails.

Relationship between LC and NPA

If a bank pays under a devolved LC (i.e., applicant fails to pay and bank makes payment), the amount paid becomes part of the borrower’s liability. If repayment is not made within 90 days, it is classified as an NPA.

3️⃣ Deferred Payment Guarantee (DPG) and Bank Guarantee (BG)

Definition

A Bank Guarantee (BG) is a promise made by a bank to pay a specified amount to the beneficiary if the applicant fails to perform contractual obligations.
A Deferred Payment Guarantee (DPG) is similar but payment by the bank is deferred over a period, usually linked to installments or delivery milestones.

Types of Bank Guarantees

• Financial Guarantee: Ensures repayment of financial obligations (like loan installments).
• Performance Guarantee: Ensures completion of a project or service as per contract.
• Deferred Payment Guarantee: Guarantees payment for goods purchased on deferred credit basis.

WATCH PART 3 :

Legal Concepts

As per Section 126 of the Indian Contract Act, a Contract of Guarantee involves three parties — Creditor, Principal Debtor, and Surety.
Once the Surety pays the Creditor, he gains the Right of Subrogation to recover from the Debtor.
If the bank fails to disclose important facts while taking a guarantee, the contract may be void under Sections 142 & 143 (misrepresentation and concealment).

Practical Scenario – Deferred Payment Guarantee

A machinery supplier sells goods to a company on deferred payment terms of 12 months. The bank issues a DPG guaranteeing payment in 12 monthly installments if the buyer defaults. If the buyer fails, the bank makes payment and recovers the same from the borrower.

4️⃣ Interlinkage: NPA – LC – DPG

When a Letter of Credit devolves or a Guarantee is invoked, and the borrower fails to reimburse the bank, that exposure becomes a funded liability.
If overdue for more than 90 days → it is treated as NPA.
Therefore, non-fund-based facilities like LC and BG are equally critical in credit monitoring.

Operational Aspects of Loan Accounts & Types of Collateral for JAIIB PPB Candidates

5️⃣ Revision Summary

• NPA arises when dues remain unpaid for 90+ days.
• Classification is borrower-wise, not facility-wise.
• LC is a Non-Funded commitment ensuring payment to the exporter.
• Red Clause LC allows pre-shipment advances.
• DPG covers installment payments for deferred credit sales.
• Sections 142 & 143 deal with misrepresentation and concealment.
• Right of Subrogation empowers guarantor to recover from debtor.

Conclusion

This article covered in-depth concepts of Non-Performing Assets (NPA), Letter of Credit (LC), and Deferred Payment Guarantee (DPG) with examples, legal sections, and Q&A.