JAIIB PPB NPA, Letter of Credit & Deferred Payment Guarantee: The Complete 2026

If you are preparing for the JAIIB exam. Mastering JAIIB PPB NPA. Letter of Credit and Deferred Payment Guarantee concepts is non-negotiable.

These three topics from the Principles &. Practices of Banking paper are high-scoring. Conceptually linked, and asked again and again.

This 2026 guide explains each one in plain English. With examples, a comparison table, common mistakes, exam-ready MCQs and FAQs.

You will not just memorise definitions here. You will understand why a loan turns bad. How a Letter of Credit protects an exporter. And when a guarantee becomes a funded liability for the bank. That deeper understanding is exactly what helps you crack tricky application-based questions in the actual exam.

Why NPA, LC and DPG Matter for JAIIB PPB

Banking runs on credit. Every loan, guarantee and Letter of Credit is a calculated risk. The JAIIB PPB syllabus tests whether you understand how banks measure. Monitor and recover that risk.

These three topics are connected by one thread: credit exposure. A loan is direct exposure. An LC or guarantee is indirect — until the customer defaults.

Then it becomes direct, and may turn into a Non-Performing Asset. Examiners love testing this interlinkage. So learn the topics together, not in isolation.

Non-Performing Assets (NPA): The Core Concept

What Is a Non-Performing Asset?

A Non-Performing Asset (NPA) is a loan or advance on. The borrower has stopped paying interest or principal for a period of 90 days or more. The asset stops generating income for the bank. So it is classified as non-performing.

For a Cash Credit (CC) or Overdraft (OD) account. The account becomes an NPA when it stays "out of order" for more than 90 days.

When Does Each Facility Turn NPA?

• Term Loan: When an installment of principal or interest stays unpaid for more than 90 days.
• Cash Credit / Overdraft: When the account remains out of order beyond 90 days &mdash. The outstanding balance stays over the sanctioned limit or drawing power continuously.
• Bills Purchased / Discounted: When the bill stays overdue for more than 90 days (confirm the exact treatment on the latest official IIBF notification).

The Three Categories of NPAs

Once an asset turns non-performing. Banks classify it further based on how long it has stayed bad. This drives how much money the bank must set aside as provision.

• Sub-Standard Assets: Assets that have remained NPA for up to 12 months.
• Doubtful Assets: Assets that have stayed sub-standard for more than 12 months.
• Loss Assets: Assets where a loss has been identified by the bank or auditor. Not yet fully written off.

Government Guaranteed Loans

This is a favourite exam trap. The treatment differs by who gives the guarantee:

• Central Government guarantee: The loan is not classified as NPA unless the government actually repudiates (refuses to honour) its guarantee.
• State Government guarantee: The loan is treated as NPA if interest or principal stays overdue for more than 90 days. Like any normal advance.

Borrower-Wise Classification

Here is a rule students often get wrong. If a borrower has multiple credit facilities. Even one facility turns NPA. Then all facilities of that borrower are treated as NPA.

This is called borrower-wise classification. It ensures consistency. Stops borrowers from diverting funds between a "good" account. A "bad" one to hide stress.

Wilful Defaulter and Legal Aspects

A wilful defaulter is a borrower who has the capacity to pay. Deliberately chooses not to. If the borrower diverts funds.

Siphons money. Or disposes of charged assets without the bank's consent. Strict action follows under RBI guidelines and the law.

Director's Guarantee and Misrepresentation

When a Director gives a personal guarantee for a company loan. The bank must disclose all material facts. If there is concealment or misrepresentation, the guarantee can become voidable. This is covered under Sections 142 and 143 of the Indian Contract Act. Which deal with guarantees obtained by misrepresentation and by concealment.

Example — Amar, Akbar & Anthony (Surety's Liability)

Three friends — Amar. Akbar and Anthony — give a joint guarantee for a business loan. Later, Akbar withdraws from the firm.

Unless the guarantee is formally revoked. All three stay jointly liable under the principle of Continuing Guarantee. Once the sureties repay the bank. They gain the Right of Subrogation &mdash. The right to recover that money from the borrower.

Letter of Credit (LC): How Banks Power Trade

What Is a Letter of Credit?

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

In simple terms. The LC replaces the buyer's promise to pay with the bank's promise to pay. That is why exporters trust it so much in international. Domestic trade.

The Four Main Parties in an LC

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

Red Clause LC

In a Red Clause LC. The issuing bank allows the beneficiary to draw an advance payment before shipment. This gives the exporter pre-shipment finance. But it raises the bank's risk. Because the advance becomes an unsecured exposure if the shipment never happens.

How an LC Connects to NPA

An LC is a non-funded facility &mdash. No money leaves the bank when it is issued. But when an LC devolves (the applicant fails to pay.

The bank honours the payment). The amount paid becomes part of the borrower's liability. If the borrower does not reimburse the bank within 90 days.

That funded exposure is classified as an NPA.

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

What Is a Bank Guarantee?

A Bank Guarantee (BG) is a promise by a bank to pay a specified amount to the beneficiary if the applicant fails to perform a contractual obligation. The bank steps in only on default.

A Deferred Payment Guarantee (DPG) works the same way. But the bank's payment is spread over time &mdash. Usually linked to installments or delivery milestones.

Types of Bank Guarantees

• Financial Guarantee: Ensures repayment of financial obligations, such as loan installments.
• Performance Guarantee: Ensures a project or service is completed as per contract.
• Deferred Payment Guarantee: Guarantees payment for goods bought on a deferred credit basis.

The Legal Foundation

Under Section 126 of the Indian Contract Act. A Contract of Guarantee involves three parties — the Creditor. The Principal Debtor and the Surety.

Once the Surety pays the Creditor. The Surety gains the Right of Subrogation to recover from the Debtor. If the bank fails to disclose important facts while taking the guarantee. The contract may be void under Sections 142 and 143 (misrepresentation and concealment).

Practical Scenario — Deferred Payment Guarantee

A machinery supplier sells equipment 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 pays the supplier. Then recovers the amount from the borrower.

LC vs Bank Guarantee vs DPG: Comparison Table

This single table answers most comparison-based questions in the exam. Bookmark it for revision.

The Interlinkage: NPA – LC – DPG

Here is the big-picture insight examiners reward. When a Letter of Credit devolves or a guarantee is invoked. And the borrower fails to reimburse the bank. That exposure turns into a funded liability.

If it stays overdue for more than 90 days. It becomes an NPA — exactly like a normal loan. That is why non-fund-based facilities like LC. BG. DPG are just as important in credit monitoring as direct loans.

How to Study These Topics for JAIIB PPB

Concepts are only half the battle. Use this simple study plan to lock them in:

1. Build the skeleton first. Learn the 90-day NPA rule. The three NPA categories, and the four LC parties before anything else.
2. Master the traps. Central vs State Government guarantees and borrower-wise classification are repeat favourites.
3. Use scenarios, not rote. Re-read the Amar-Akbar-Anthony and machinery-DPG examples until you can explain them aloud.
4. Drill with questions. Practise plenty of mock tests so application-based questions feel routine.
5. Revise with the table. The LC vs BG vs DPG table above is your one-page revision sheet.

For more topic-wise breakdowns, explore our free guides covering the full JAIIB PPB syllabus.

Common Mistakes to Avoid

• Confusing facility-wise with borrower-wise: Remember. One bad facility makes all the borrower's facilities NPA.
• Mixing up the two Government guarantees: Central = safe until repudiated. State = treated like any overdue advance.
• Calling an LC funded from day one: It is non-funded until it devolves.
• Treating BG. LC as the same: A BG pays only on default. An LC pays on document compliance.
• Forgetting the 90-day thread: Devolved LCs. Invoked guarantees still become NPAs after 90 days.

Frequently Asked Questions (FAQ)

What is the 90-day rule for NPA?

An asset is classified as a Non-Performing Asset when interest or principal stays overdue for more than 90 days. Or when a CC/OD account remains out of order beyond 90 days.

Is a Letter of Credit a funded or non-funded facility?

An LC is a non-funded facility. It becomes funded only when it devolves — that is. When the bank actually pays because the applicant defaulted.

What is the difference between a Bank Guarantee and a Letter of Credit?

In a Bank Guarantee, the bank pays only if the customer defaults. In a Letter of Credit. The bank pays when the beneficiary submits documents that comply with the LC terms.

How is a Deferred Payment Guarantee different from a normal guarantee?

A DPG backs payments that are spread over time. Such as machinery bought on installment-based deferred credit. A normal guarantee usually covers a single obligation.

Can a non-fund-based facility become an NPA?

Yes. If a devolved LC or an invoked guarantee is not reimbursed by the borrower within 90 days. The funded exposure is classified as an NPA. Always confirm exact treatment on the latest official IIBF notification.

Quick Revision Summary

• An NPA arises when dues stay unpaid for more than 90 days.
• NPA classification is borrower-wise, not facility-wise.
• NPAs are graded as Sub-Standard, Doubtful or Loss assets.
• An LC is a non-funded commitment that ensures payment to the exporter.
• A Red Clause LC allows pre-shipment advances.
• A DPG covers installment payments for deferred-credit sales.
• Sections 142 and 143 deal with misrepresentation and concealment in guarantees.
• The Right of Subrogation lets a guarantor recover from the borrower.

Conclusion: Turn These Concepts Into Marks

Non-Performing Assets. Letters of Credit. Deferred Payment Guarantees are among the most rewarding topics in JAIIB PPB.

They are logical. Interlinked. And once you grasp the 90-day thread that ties them together.

The questions almost answer themselves.

Study the concepts. Internalise the examples, avoid the common traps, and test yourself relentlessly. Do that. And these chapters move from being your weak spots to being your strongest scoring zone. You have got this — now go practise and pass with confidence.

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