Audit of Banks

What are the two main functions of Commercial Banks?

• Accepting loans and granting deposits
• Accepting deposits and granting loans
• Investing in securities and granting advances
• Issuing credit cards and granting loans
• Pluto

Answer explanation

Commercial banks are the primary financial institutions that manage deposits and provide loans.

Where are banking operations conducted?

• Headquarters
• Controlling offices
• Administrative offices
• Branches

Answer explanation

All operational activities related to banking are conducted at the bank branches.

What is an example of a non-funded loan?

• Term Loan
• Cash credit
• Letter of credit
• Demand Loan

Answer explanation

Non-funded loans represent commitments or guarantees provided by the bank, not direct fund transfers. Letters of credit are such guarantees.

What does the acronym "NPA" stand for?

• Non-Performing Asset
• Net Performing Asset
• Non-Performing Advance
• Net Performing Advance

Answer explanation

NPA refers to a loan where the borrower has failed to make interest or principal payments for a specified period.

What is a characteristic of an "Out of Order" account?

• Outstanding balance consistently exceeds the sanctioned limit
• Account is closed due to inactivity
• Customer has requested a temporary freeze on the account
• Account has insufficient funds to cover a single transaction

Answer explanation

An "Out of Order" account is essentially an active account exceeding its approved credit limit.

What is the primary purpose of a "Drawing Power" in a Cash Credit facility?

• To set the maximum interest rate applicable to the loan
• To determine the maximum amount a borrower can withdraw
• To define the time period within which the loan must be repaid
• To establish the collateral required to secure the loan

Answer explanation

Drawing Power calculates the maximum available funds based on the value of the pledged security, allowing borrowers to utilize the sanctioned limit effectively.

What is the role of "Margin" in the context of secured loans?

• It is a bonus payment made by the borrower for quick loan processing
• It is an additional fee charged by the bank for processing the loan
• It is the difference between the value of the security and the loan amount, acting as a buffer for the bank
• It is the total interest earned by the bank over the loan tenure

Answer explanation

Margin protects the lender from potential losses due to fluctuations in the collateral's value.

What is the key responsibility of the "Lead Bank" in a Consortium Lending arrangement?

• Evaluating the borrower's creditworthiness and distributing the approved loan amount among participating banks
• Negotiating the loan terms and conditions on behalf of all participating banks
• Collecting and distributing loan repayments among the participating banks
• Monitoring the borrower's financial health and compliance with loan terms

Answer explanation

The Lead Bank plays a central role in a consortium, assessing risk and allocating funds among member banks.

Which government guaranteed advances are considered NPAs for both provisioning and income recognition purposes?

• State Government guaranteed advances
• Central Government guaranteed advances
• Both Central and State government guaranteed advances
• Advances guaranteed by both governments but invoked

Answer explanation

State Government guarantees carry a higher risk perception for banks compared to Central Government guarantees.

What is the defining feature of a "Substandard Asset"?

• An asset that has remained an NPA for less than or equal to 12 months
• An asset that has been identified as a loss but not yet written off
• An asset where the loss has been identified and written off
• An asset that has remained in the substandard category for over 12 months

Answer explanation

Substandard assets are the first stage of NPA classification, indicating early signs of stress in loan repayment.