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WorksheetsMOODY'S QUIZ 2
Total questions: 209
Worksheet time: 3hrs 37mins
Name
Class
Date
1.
A note in the auditor's report for TGH Ltd. indicates that an asset reserve was credited INR 50,000, instead of expensed, as a result of creative accounting. What effect will this entry have on TGH Ltd.’s financial statements?
a)
Profit will be overstated.
b)
Liabilities will be overstated.
c)
Liabilities will be understated.
d)
Shareholder's equity will be understated.
2.
Under what circumstances would a company typically seek external debt financing?
a)
When it is cash rich.
b)
When its structure allows for new equity investors.
c)
When equity holders are willing to take on additional risk.
d)
When existing owners are unwilling to dilute their ownership interest.
3.
What is the typical loan-to-value ratio for companies with lower levels of financial risk or high levels of available equity finance?
a)
0.6
b)
0.8
c)
0.5
d)
0.3
4.
Which type of equity shares can be repaid at the discretion of the issuer?
a)
Common stock.
b)
Convertible preference shares.
c)
Cumulative preference shares.
d)
Redeemable preference shares.
5.
What aspect of a business must be considered when performing an industry and business risk assessment?
a)
Its future cash flows.
b)
Its vulnerability within the competitive marketplace
c)
Management’s capacity to run the business profitably.
d)
Its ability to generate cash through its daily operations.
6.
What is the main purpose of conducting a competitive analysis during the loan pricing decision process?
a)
To calculate the lowest lending rate the bank is willing to apply to the loan.
b)
To determine the probability of loss based on the competitor’s rate pricing.
c)
To persuade the relevant committee to approve a lending rate lower than those of competitors.
d)
To determine whether the lending rate should be adjusted based on the ceiling established by other lenders.
7.
What part of the loan pricing process sets an interest rate floor, below which the loan is financially undesirable?
a)
Cost analysis.
b)
Loan structuring.
c)
Loan accounting.
d)
Competitive analysis.
8.
At what stage in the management cycle should the management consider the effect of changes in the external environment on the company’s business goals?
a)
Assessing business needs.
b)
Developing plans to meet goals.
c)
Aggregating and organising resources.
d)
Adjusting plans, resources, and methodologies
9.
What factor plays a key role in influencing the industry due to a large bargaining power of a significant supplier?
a)
Labour disruptions.
b)
Liberal credit terms.
c)
Decreased sales prices.
d)
Improved service levels
10.
How might an inadequate management succession plan affect a business’s cash flow?
a)
Training the new managers to address their skill gaps may result in excessive costs.
b)
Cost of hiring for the positions vacated due to promotion of the new managers will impact the cash flow.
c)
Weak relationship of the new managers with the bank staff may result in the credit facilities not being renewed.
d)
Poor decisions of the new managers that lack sufficient skills or experience might result in weaker business performance.
11.
Which best describes the effect that political decisions and frequent legislation changes in India have on its business and industry risk?
a)
Banks absorb most of the impact and businesses are less affected as a result.
b)
Taxation policies cause businesses to be less transparent in their financial reporting.
c)
Opportunistic decisions that influence monetary policy can negatively affect a business’s financial performance.
d)
Demonetisation of high denomination currency notes is an example of legislation that negatively affects small businesses working with cash.
12.
How can a company’s management best minimise the impact of potential interruptions in the input supplies?
a)
Obtain supplier insurance.
b)
Hold large stocks for all key supply inputs.
c)
Maintain good personal rapport with the key input suppliers.
d)
Ensure that there is an alternate supply source for all key inputs.
13.
Which state of the economy has a neutral impact on credit risk?
a)
Contraction.
b)
Recovery.
c)
Growth.
d)
Stability.
14.
Which lists the primary components of India’s corporate debt restructuring (CDR) system?
a)
Debtor-creditor agreements, inter-creditor agreements.
b)
CDR Standing Forum, CDR Empowered Group, CDR Cell.
c)
Multiple banking accounts, syndications, consortium accounts.
d)
Repayment period, repayable amount, instalment amount, interest rate.
15.
What is the benefit of setting meaningful forecast assumptions in the overall projection process?
a)
To confirm future loan payments will be achievable.
b)
Assumptions depend on the results of the projections.
c)
To reflect factors independent of management’s past performance.
d)
To enable a realistic assessment of the projected financial performance that a credit decision is substantially based on.
16.
An increase in which item will increase a borrower’s debt service coverage ratio?
a)
Loan interest.
b)
Loan collateral.
c)
Cash flow from operations.
d)
Scheduled principal repayment
17.
Which is an example of a liquidity early warning signal?
a)
Rising corporate bond prices.
b)
Non-consolidation of subsidiaries’ accounts.
c)
Frequent overdrafts that are covered in a few days.
d)
A large cheque that is returned for insufficient funds.
18.
When allowing a customer to draw under a domestic bill discounting facility, why is it important to confirm that there is an underlying movement of goods?
a)
To ensure that the transaction is not a one-off.
b)
To avoid providing financing for intergroup transactions.
c)
To reduce the possibility of providing accommodation finance.
d)
To ensure that financing is provided only for goods that have been shipped to existing customers
19.
What is a characteristic of a good business plan?
a)
Setting measurable goals.
b)
Setting business objectives.
c)
Being reactive to changing demand.
d)
Defining who is accountable to the plan
20.
Which source of external information about a company’s past behaviour can be used to assess its management integrity?
a)
Discussions with management.
b)
Details of dividends paid over the last five years.
c)
Opinion about management included in credit agency reports.
d)
Account statements showing whether the company has met its obligations to the bank on time
21.
What type of risk is the risk that credit exposure is not adequately structured?
a)
Facility risk.
b)
Financial risk
c)
Industry risk
d)
Management risk.
22.
How would you assess the repayment risk associated with a company with seasonal sales compared to one that has steadier sales throughout the year, all other things being equal?
a)
The seasonal business will have lower repayment risk.
b)
The seasonal business will have higher repayment risk.
c)
None of the above.
d)
Both businesses have the same level of risk.
23.
Tea-Shop Ltd. finance their new store leases using 2/3rd debt and 1/3rd equity. Which of these events would reduce the risk for the lending institution?
a)
Reduction in costs of tea.
b)
Increase in store maintenance costs.
c)
Decrease in credit provided by suppliers.
d)
Decrease in store sales with a constant operating margin.
24.
You see a news item that the Government has increased the minimum support price of sugarcane. Sugar production is expected to exceed the demand during the year and globally also there is abundant supply. What could be the implication sugar companies?
a)
There would be excess inventory of sugar cane with the sugar companies
b)
No implication for the sugar companies. They would push their output to their wholesalers.
c)
No major implication. The companies will offload their production when prices improve
d)
This could have serious adverse implications for the sugar companies’ profitability and may lead to losses. In case the companies hold on to their output, it will have significant carrying costs which again would affect the profitability
25.
Best Bakers LLP bake and supply breads for retailers. In looking to expand their capacity to support a growing market, which form of financing would be most appropriate and why?
a)
Extending its existing overdraft facility because this type of funding provides maximum flexibility required due to the uncertain operating conditions that the expansion will create.
b)
Raising a new term-loan that can be secured against the new assets because this type of funding will provide secure financing over the operational life of the capital asset.
c)
Raising new equity from shareholders because this type of funding is both long-term and relatively inexpensive compared to other forms of financing
d)
Reducing its operating cycle to generate greater operating cash flows because this type of funding is free financing and will maximise the returns that the new assets will generate for shareholders
26.
Describe the potential structural subordination risk of lending to a holding company.
a)
The holding company may have non-consolidated financial statements
b)
The holding company may have unrealistic projected revenues
c)
The holding company may have dated documentation
d)
The holding company may have limited operating assets
27.
Under what scenario is having insurance most likely to have a positive effect?
a)
Recession.
b)
Political turmoil.
c)
Earthquake
d)
Economic boom
28.
What is meant by the term "amount owing" on a credit agency report?
a)
The date or amount of time since the latest sale was made.
b)
The normal terms of sale extended by the supplier.
c)
The greatest amount of credit extended.
d)
The debt due by a business at the time of the survey and the status of that amount (current, amount past due).
29.
Why is it preferable to make the disbursement of a term loan directly in favour of a supplier
a)
To whom the disbursement is made is immaterial
b)
This is only logical
c)
Direct disbursement to the supplier would facilitate quicker supply of equipment
d)
This is one of the ways to ensure that the disbursed funds are used for the purpose for which the term loan is sanctioned
30.
In a UCA cash flow statement, what is the calculation for "change in cash"?
a)
Financing Surplus (Requirement) + Total External Financing.
b)
Net Income - Total External Financing.
c)
Financing Surplus (Requirement) - Total External Financing.
d)
Net Income + Total External Financing.
31.
For a lender assessing credit risk, what business is likely to have a credit agency report with the most meaningful information?
a)
A non-borrowing small business.
b)
A medium business with many suppliers.
c)
A non-borrowing large business.
d)
A small business with few suppliers
32.
What is the most important constraint in getting a pricing on a loan which is fully in accordance with the risk assessment?
a)
Bank’s pricing policy
b)
Profitability calculation
c)
Competitive scenario, since competition places a ceiling on pricing which may be acceptable to the customer
d)
Loan structuring
33.
Which statement about the cash flow coverage ratio is not correct?
a)
It uses accrual income values from the profit and loss statement.
b)
It is a broader metric than the interest coverage ratio.
c)
It is an indicator of the ability to pay interest, dividends and scheduled debt payments.
d)
It focuses on internal cash flow.
34.
Which statement is incorrect with respect to the legal documentation signed as part of the corporate debt restructuring (CDR) process?
a)
If the debtor agrees, the period of limitation can be extended beyond the standstill period.
b)
The Debtor Creditor Agreement is part of the Standstill Agreement.
c)
The standstill agreement does not apply to criminal action.
d)
The Debtor Creditor Agreement and the Inter Creditor Agreement are signed at almost the same time, at the beginning of the Corporate Debt Restructuring (CDR) process
35.
Under Section 186 of the Companies Act, 2013, loan and investment by company, a company:
a)
Can lend money to any other company.
b)
Can give a guarantee for a loan taken by any other company.
c)
Can buy the securities of another company only to the extent of 60% of its own capital and free reserves.
d)
Cannot do any of the above.
36.
Which of the following is correct with respect to a banker’s right of lien?
a)
Ownership of goods is transferred to the bank
b)
Possession of the goods remains with the borrower
c)
The right of lien is subject to the law of limitation
d)
A general lien converts to a specific lien if the bank appropriates the lien towards a specific debt of the borrower
37.
Which critical skill for executives seeks to rally people in the business to further the enterprise's mission, accomplish its plans, earn the trust of colleagues and customers, and demonstrate and foster commitment to the business and its goals?
a)
Leadership.
b)
Commitment.
c)
Communication.
d)
Knowledge
38.
You are examining a loan request for a short-term loan to cover working capital requirements. On examining the financial statements you establish that sales have fallen, the business has an operating loss, it has negative operating cash flow and there is a sharp increase in payable days outstanding. You establish that this is high risk loan application. How should you proceed with your financial analysis?
a)
You need not do further work with the financial statements and can reject the loan application.
b)
You should examine the financial statements more carefully to see if there are any off balance sheet liabilities that may increase the level of risk.
c)
You should examine the financial statements more carefully to see if there are any assets that might be sold to finance the loan.
d)
You should examine the financial statements more carefully to see if there are any opportunities to turn around the business
39.
Is it possible to compare the current inventory held by two different companies to determine which is more efficient in managing its working capital?
a)
Yes, as current inventory levels is a measure that provides a direct comparative value between companies.
b)
Yes, as current inventory held is the prime driver of working capital levels.
c)
No, for a meaningful comparison the cost of sales needs to be used.
d)
No, for a meaningful comparison the time taken to close inventory for each company needs to be worked out and used instead
40.
What is the role of credit rating agencies in the Indian market?
a)
They issue ratings that can help Indian companies raise funds from investors.
b)
They provide an independent and locally based assessment of the credit quality of all bonds issued by the Indian corporates.
c)
They provide competition to the international rating agencies.
d)
Ratings from all Indian ratings agencies can be used by banks when undertaking capital calculations for credit risk.
41.
Why are the two methods of lending recommended by the Tandon Committee still being used today?
a)
These methods of lending implicitly set minimum liquidity standards by insisting on a minimum level of funding of current assets from long-term sources and so continue to be a reliable analytic tool.
b)
Banks have not reviewed their lending criteria but prefer to use methods that they are familiar with.
c)
The two methods provide a reasonable analysis of risk and there is no reason to change them.
d)
There has been no update to the recommendations of the Tandon committee so the original methods continue to be used.
42.
Which statement provides a correct illustration of the matching principle?
a)
Expenses of a period are matched to the revenues that they generate.
b)
The total value of debit entries will equal the total value of credit entries.
c)
Total assets is matched to total liabilities plus equity.
d)
Revenue of one period equals costs plus dividends of the same period
43.
What factors influence the values that appear in a credit migration or transition matrix?
a)
The number of times that a corporate’s graded credit is upgraded and downgraded.
b)
The final and initial ratings for the corporate at the start and end of the agreed time horizon.
c)
The number of rating bands that a rating is upgraded over the selected time horizon.
d)
The number of rating bands that a bank uses in its rating scale
44.
Who is responsible for determining the quality of financial statements (for example, by defining the level of materiality and depth of disclosure)?
a)
Regulators (such as SEBI)
b)
Standards setting bodies (such as NACAS)
c)
Auditors.
d)
Management of the borrowing entity.
45.
Which activity would cause the short-term financing gap of a company to decrease?
a)
Renegotiating a revolving credit facility on more favourable terms.
b)
Implementing a just-in-time inventory management system that minimizes the levels of raw material inventories required to be held.
c)
Purchasing machinery to raise production capacity and meet increased demand.
d)
Securing supply arrangements by placing suppliers on new single source contracts with penalties for late delivery of goods.
46.
The objective of cost analysis in the pricing decision process is
a)
To ensure that the bank’s costing is optimum
b)
To estimate the floor on the pricing below which the loan is financially not desirable
c)
To get into a better negotiating position with the customer
d)
To ensure tight cost control
47.
Which statement is incorrect with respect to the Debt Recovery Tribunals (DRTs)?
a)
Only banks and financial institutions can approach the DRT for recovery of their dues.
b)
Decisions of the DRT can be appealed to the Debt Recovery Appellate Tribunal.
c)
Orders passed by recovery officers are judicial in nature.
d)
It is headed by a presiding officer who is of the same rank as a High Court Judge.
48.
What service do local rating agencies provide for investors in India?
a)
Confirmation that an issuer will meet its financial obligations.
b)
Research and opinions that address information asymmetry.
c)
Information that ensures that issues are priced correctly.
d)
They ensure that there is a liquid market for debt instruments once issued
49.
All else being equal, what business would typically carry the greatest credit risk?
a)
The one wherein liabilities are four times as great as capital.
b)
The one wherein liabilities are less than tangible net worth.
c)
The one wherein liabilities and tangible net worth are equal.
d)
The one wherein capital is four times as great as liabilities
50.
Which statement is incorrect with respect to wilful defaulters?
a)
Wilful defaulters of Rs. 1 million or more must be reported to the CIC with RBI.
b)
A borrower who has interest or principal overdue for more than 90 days is not necessarily a wilful defaulter.
c)
A case where the borrower loses diverted funds and makes a full disclosure of the diversion and loss is still a case of wilful default.
d)
An individual guarantor does not automatically become a wilful defaulter when the original borrower is identified as a wilful defaulter.
51.
In a UCA cash flow statement, what is the correct calculation for operating income?
a)
Net Sales - Cost of Goods Sold - Operating Expenses.
b)
Net Sales - Cost of Goods Sold + Operating Expenses.
c)
Net Profit + Cost of Goods Sold - Operating Expenses.
d)
Net Profit + Cost of Goods Sold + Operating Expenses
52.
What event would most likely have a neutral impact on the trade receivables days?
a)
Billings are computerised.
b)
Recession.
c)
Sales increase.
d)
Competitor terms lengthen
53.
What step in the loan decision process provides early detection of conditions to indicate that business performance is lower than assumed in projections?
a)
Grade the risk.
b)
Structure covenants.
c)
Gather data.
d)
Identify credit enhancements.
54.
Which statement concerning industry risk is correct?
a)
Emerging industries tend to be less risky than mature industries.
b)
Growing industries tend to be less risky than emerging industries.
c)
Declining industries tend to be less risky than growing industries.
d)
Declining industries tend to be less risky than mature industries
55.
Which one of the following factors are taken into account when computing both EaD and LGD?
a)
The amount initially advanced to the borrower
b)
The realisable value of the security
c)
The probability that the borrower may default
d)
The amount outstanding from the borrower at the point of default
56.
Why should the stock statement include separate details of factored invoices?
a)
It would reveal how much less margin the borrower has to contribute for working capital since margins on factored invoices are significantly lower than those prescribed by banks
b)
It would reveal the extent of lending business being lost by the bank to the factoring company
c)
It would prevent double financing of the same receivables
d)
It would reveal the extent of low risk receivables being diverted to the factor since factoring companies discount receivables only from highly rated debtors
57.
Should the bank consider the client’s past record of bank guarantees being invoked when deciding whether to grant a new bank guarantee?
a)
No, past behaviour of the client is no indication of future behaviour.
b)
Yes, the client’s previous credit history and business behaviour should be considered as well as all other relevant factors.
c)
Yes, and additionally the bank should be reluctant to offer a new bank guarantee to a client with previous history of having bank guarantees invoked.
d)
No, the historical data is not relevant in considering the request for a bank guarantee
58.
The product or service being marketed has achieved some degree of acceptance and sales levels begin to increase. Profits and cash flow also improve and the ability to support and repay liabilities begins to develop. Industry status risk is moderate and there is a neutral level of overall risk." Which life cycle stage does this paragraph describe?
a)
Maturity.
b)
Growth.
c)
Start-up.
d)
Adolescence.
59.
Assessing management's capacity for business includes which step?
a)
Make sure operating plans clearly come from the top down.
b)
Learn about and rely on management's capacity and experience to develop plans and carry them out.
c)
Quickly review tools used by management to develop plans.
d)
Evaluate management's credit risk skills in developing and implementing business plans
60.
Which step in the ''management cycle'' comes after overseeing the use of resources and monitoring the success of plans?
a)
Adjusting plans, resources, and methodologies as necessary to ensure that goals are achieved and needs are met.
b)
Aggregating and organising resources to implement plans.
c)
Developing plans to meet goals.
d)
Assessing business needs.
61.
What regulation level is most likely to lead to a decline in market (industry and business) risk?
a)
Significant.
b)
Moderate.
c)
Insignificant.
d)
Unknown.
62.
The usance period of LCs should be in line with the overall working capital cycle of the customer because
a)
This ensures that no devolvement takes place
b)
A longer usance period would mean additional credit period which implies availability of more funds than needed to run the working capital cycle. This could lead to diversion of funds
c)
LC is essentially a working capital facility
d)
A longer usance period would mean lesser credit period which implies availability of lesser funds than needed to run the working capital cycle. This would constrain the unit’s operations and lead to a shortfall in performance
63.
What event is most likely to have a neutral impact on both the operating expense percentage ratio and profit?
a)
Administrative staff reduced.
b)
Office becomes computerised.
c)
Rent increases.
d)
Recession.
64.
What factor is most likely to increase the bargaining power of suppliers?
a)
Suppliers lack the ability to integrate forward.
b)
Switching costs are low.
c)
Many competitive products or substitutes are available.
d)
Few alternative suppliers are available
65.
What sources are available to a company to finance an on-balance sheet loan?
a)
Cash in the business or through liquidation of assets
b)
Cash from operations generated during the period when the investment is paid
c)
A term bank financing
d)
All of the above
66.
All else being equal, what business would typically have the highest loan return?
a)
The one wherein liabilities are less than tangible net worth.
b)
The one wherein liabilities and tangible net worth are equal.
c)
The one wherein liabilities are four times as great as capital.
d)
The one wherein capital is three times as great as liabilities
67.
What is the definition of Common Equity Capital?
a)
The highest quality component of capital
b)
A bank's gone-concern or supplementary capital
c)
Loss absorbing capital that can be converted to common shares or written down in the event of substantial losses
d)
A bank's pure or concern capital
68.
What statement concerning the impact of foreign competition on debt repayment is most accurate?
a)
High foreign competition leads to decreased cash flow and decreased ability to repay debt as scheduled.
b)
High foreign competition leads to increased cash flow and increased ability to repay debt as scheduled.
c)
High foreign competition leads to increased cash flow and decreased ability to repay debt as scheduled.
d)
High foreign competition leads to decreased cash flow and increased ability to repay debt as scheduled.
69.
Which item would be correctly classified as a current asset?
a)
A warehouse used to store finished goods.
b)
A financial asset held for dividend income
c)
Machinery bought in the last 12 months.
d)
A receivable due from a customer in 9 months
70.
In the corporate governance process, who is responsible for determining overall business strategy by hiring managers and staff to help operate the business?
a)
Shareholders.
b)
Board of directors.
c)
Executive officers.
d)
Regulators.
71.
What determines the number of operating cycles that a business will have?
a)
Significantly different products and markets will results in multiple operating cycles.
b)
There will be a separate operating cycle for each business location.
c)
Each supplier and customer will have their own operating cycle.
d)
Accounting regulations will determine the number of operating cycles
72.
Which statement about risk drivers is most accurate?
a)
They have great impact on what balance sheet amounts, but not profit and loss statement amounts, will be in the future.
b)
They have great impact on what balance sheet and profit and loss statement amounts will be in the future.
c)
They have little impact on what profit and loss statement and balance sheet amounts will be in the future.
d)
They have great impact on what profit and loss statement amounts, but not balance sheet amounts, will be in the future.
73.
What are the four areas of the financial risk assessment process?
a)
Cash flow, market (industry and business) risk, projections, and financial statement data and notes.
b)
Market (industry and business) risk, cash flow, financial ratios, and financial statement data and notes.
c)
Financial ratios, projections, cash flow, and market (industry and business) risk.
d)
Projections, cash flow, financial ratios, and financial statement data and notes.
74.
During which stage will management begin delaying payments to creditors?
a)
Cash crunch stage.
b)
Cash crisis stage.
c)
Cash concern stage.
d)
Cash creation stage
75.
What type of question is designed to encourage a more expansive response?
a)
Reflective question.
b)
Direct question.
c)
Open-ended question.
d)
Rhetorical question
76.
What risk has recently emerged as an important factor for funding projects?
a)
Compliance with environmental guidelines.
b)
The technical know-how of the company to implement change brought about by the new project.
c)
The importance of management competence to bring the project to a close.
d)
Government policies governing the industry of the borrower
77.
You come across information that USFDA has taken some action against one of your pharmaceutical clients. You want to ascertain the details of the matter. Which would be the best source to obtain this information?
a)
RBI list of wilful defaulters
b)
Internet search for related news items and website of USFDA
c)
CRILC
d)
ECGC caution list
78.
What is the relationship between the peak selling season and repayment risk?
a)
The greater the magnitude of the peak or the shorter the duration of the peak selling season, the lower the repayment risk.
b)
The greater the magnitude of the peak, the higher the repayment risk and the shorter the duration of the peak selling season, the lower the repayment risk.
c)
The greater the magnitude of the peak, the lower the repayment risk and the shorter the duration of the peak selling season, the higher the repayment risk.
d)
The greater the magnitude of the peak or the shorter the duration of the peak selling season, the higher the repayment risk.
79.
All else being equal, what business is most likely to fail?
a)
A borrower with an individual manager responsible for all of the key administrative responsibilities.
b)
A borrower with an individual manager responsible for three of the five key administrative responsibilities
c)
A borrower with an individual manager responsible for four of the five key administrative responsibilities.
d)
A borrower with an individual manager responsible for two of the five key administrative responsibilities
80.
Which of these is NOT a purpose of credit administration?
a)
Ensure timely recovery of interest
b)
Ensure recovery of the principal’s instalments in accordance with the approved repayment schedule
c)
Ensure that the drawings in the FBWC account do not exceed the allocated drawing power
d)
Credit risk assessment of the customer
81.
Why is it important to follow the steps involved in assessing the working capital?
a)
By following the steps, the credit officer and the relationship manager will know that everything has been done properly.
b)
By following the steps, the proper paper trail is left for audit to follow.
c)
By following the steps, the company will know that it is being treated fairly.
d)
By following the steps, a clear picture of risks is built up allowing an informed credit decision to be made.
82.
How do the bargaining power of buyers and suppliers affect risk in the marketplace?
a)
The more significant the bargaining power of buyers and suppliers, the smaller the risk in the marketplace.
b)
The more significant the bargaining power of buyers and suppliers, the greater the risk in the marketplace.
c)
The more significant the bargaining power of buyers and the less significant the bargaining power of suppliers, the greater the risk in the marketplace.
d)
The more significant the bargaining power of buyers and the less significant the bargaining power of suppliers, the smaller the risk in the marketplace.
83.
What is the purpose of a covenant?
a)
To set a schedule of instalments by which the loan must be repaid.
b)
To set out terms in a loan agreement, e.g., rate of interest
c)
To set an internal trigger which requires action on the part of the lender on the happening of a certain event.
d)
To specify the manner in which a loan must be conducted and repaid
84.
All else being equal, what business would have the lowest credit risk?
a)
A business with a current ratio of 0.5:1.
b)
A business with a current ratio of 1:1.
c)
A business with a current ratio of 2:1.
d)
A business with a current ratio of 1.5:1
85.
Which business is most likely to have a gross margin of 100%?
a)
Accounting firm.
b)
Clothing store.
c)
Car manufacturer.
d)
Food wholesaler
86.
What is the most common reason for which businesses use creative accounting?
a)
To falsely improve the appearance of company performance.
b)
To become more competitive in the marketplace.
c)
Creative accounting stands to make a company look better, and there is no downside to the practice.
d)
The company doesn’t realise it is using creative accounting
87.
Which of the following actions is most likely to help mitigate the credit risk of a business that has potential environmental concerns?
a)
Decrease the working capital financial covenant.
b)
Loan covenants certifying compliance with the law.
c)
Decrease insurance coverage requirements.
d)
Increase the gearing financial covenant
88.
What action does the beneficiary need to take under a bank guarantee in case of default by the debtor?
a)
He needs to request the money from the debtor.
b)
He needs to notify the guarantor bank and request payment.
c)
He needs to ask the guarantor bank to negotiate a settlement.
d)
He only needs to wait for the guarantor bank to step in
89.
Identify one of the five management responsibilities.
a)
Competitive intelligence.
b)
Administration.
c)
Production.
d)
Market research.
90.
What is the purpose of financial covenants in term loans?
a)
They are used to give the borrower a credit rating.
b)
Financial covenants provide additional legal protection to banks. In case of breach of covenant, the bank is able to foreclose on the loan early.
c)
They help the borrower manage his finances.
d)
They are a legal requirements and must be used in all loan relationships
91.
What is likely the most critical step in the overall projections process?
a)
Construct a projected balance sheet, income (profit and loss) statement and cash flow statement.
b)
Construct a revised projected balance sheet.
c)
Setting meaningful forecast assumptions.
d)
Consider the impact on your assumptions from potential changes in the competitive landscape, economic environment, management or operations of the business
92.
What is the principal reason that lenders do not easily accept security of intangible assets?
a)
They are difficult to value and realise
b)
They are amortized, not depreciated
c)
They are not a working part of the business
d)
They do not physically exist
93.
Which statement is correct with respect to the divesting of holdings acquired under the Strategic Debt Restructuring Scheme (SDR)?
a)
Creditors may divest their holdings back to the owners of the restructured company at the market price of the shares.
b)
Creditors are required to hold their acquisition for at least 2 years to promote stability in the restructured company.
c)
The buyer to whom the shares are divested must acquire at least 51% of the equity of the restructured company.
d)
The account should continue to be classified for one year after divestment
94.
What is the main distinction between working capital and term finance products in India?
a)
Rate of Interest.
b)
Security.
c)
Tenor.
d)
Method of repayment.
95.
Which statement describes a characteristic of equity?
a)
If sufficient shareholders vote for it, dividends can be paid from any equity reserves except share capital.
b)
Common stock is repayable only after all other legal obligations have been met in the event of liquidation.
c)
It has senior rights to other creditors in the event of liquidation.
d)
The par value is repayable any time if shareholders vote for it, but the premium paid above par value is never repayable.
96.
What is meant by market overcapacity?
a)
There is too much of a given product in the marketplace and there are too many businesses of a given type in the market.
b)
There is too much of a given product in the marketplace or there are too many businesses of a given type in the market.
c)
There is too much of a given product in the marketplace but not too many businesses of a given type in the market.
d)
There are too many businesses of a given type in the market but not too much of a given product in the marketplace.
97.
How are surrounding businesses affected when an environment is dominated by two large employers?
a)
Neutral on sales and profitability.
b)
Loss of one of the employers creates high overall risk.
c)
Increased employment reduces the risk for the industry.
d)
The impact is significant only if a catastrophic market downturn occurs.
98.
What external factors outside of a business’s control can affect its liquidity levels?
a)
Credit and lending policy.
b)
Facility and loan structure.
c)
Industry and business risk.
d)
Management and key persons’ risk.
99.
What action can a lender take if the restructuring decision process for a borrower determines a need to reduce exposure?
a)
Set up and monitor qualitative triggers.
b)
Set up and monitor quantitative triggers.
c)
Liquidate and sell the borrower’s current assets.
d)
Restrict new drawdowns on committed facilities.
100.
Which is an example of a tangible fixed asset?
a)
Cash.
b)
Goodwill.
c)
Land.
d)
Trademark.
101.
Why might a business choose to expand its capital assets?
a)
To claim high levels of depreciation.
b)
To increase regular spending activities.
c)
To utilise all the available surplus cash reserves.
d)
To increase cash flow and revenue over the long term.
102.
What condition(s) must apply when opening a letter of credit (LC) for a customer?
a)
A cash margin equivalent to the value of the LC must be held.
b)
The LC cannot be issued in favour of another group company.
c)
The LC cannot be opened in favour of a supplier it has not previously dealt with.
d)
The tenor of the LC must not exceed the maximum agreed when the facility was approved
103.
What action should a business take to remain competitive and stand out amongst its peers who are offering substitute products?
a)
Freeze production costs to increase overall profitability.
b)
Reduce development costs to better control expenditures.
c)
Increase the product’s price to build perceived product superiority.
d)
Increase investments in product advertising to increase customer awareness.
104.
What is the primary purpose of setting up internal triggers for credit risk monitoring?
a)
To provide early warning signals of deteriorating credit risk.
b)
To identify breaches of contractually agreed upon covenants.
c)
To flag an issue when financial statements are ready for review.
d)
To replace contractual covenants for borrowers with high credit standing.
105.
What is the best description of liquidity for a business?
a)
Current assets exceed current liabilities.
b)
The business generates sufficient profit to cover interest.
c)
All debt obligations would be repaid in the event of liquidation.
d)
The business generates sufficient cash to meet interest expenses and make debt payments.
106.
What is an important change in Assessed Bank Finance as compared to the Maximum Permissible Bank Finance method?
a)
Greater variety of companies are now able to apply for working capital funding because of the Assessed Bank Finance method.
b)
There is less emphasis placed on profitability, asset quality and fund flow.
c)
The amount of bank financing is no longer determined on the basis of a stipulated minimum level of liquidity, but with due consideration to the company’s overall financial position and projected liquidity.
d)
Banks are able to take greater risks under Assessed Bank Finance
107.
Pick all examples of large project term loans.
a)
Company manufacturing shirts wants to have the capacity to manufacture buttons and has requested a loan for this purpose.
b)
A food packing company has requested a loan to support their plan to substantially expand their capacity.
c)
A mid-sized services company has requested a loan to buy-out a small competitor.
d)
All of the above
108.
What changes were proposed in 1997 to the management of working capital finance?
a)
To scrap the requirement to calculate working capital finance using the measure of Maximum Permissible Bank Finance.
b)
Each bank was given freedom to develop its own system of working capital finance for a faster credit delivery so as to serve various borrowers more effectively.
c)
Banks were requested to lay down transparent policy and guidelines for credit dispensation
d)
All of the above
109.
Is it ever advisable to rely solely on the technical feasability report submitted by the client?
a)
Yes, as the client will understand the project best and will have all the relevant data.
b)
If the project is not complex and involves modest expansion or modernisation of existing facilities, then the bank may be able to rely on reports drawn up solely by the client.
c)
No, as the bank needs to involve third party experts to be considered as impartial.
d)
No, as in all projects, it is important to test the information provided by the client.
110.
How is the LC limit calculated?
a)
Based on a formula with inputs of the amount of purchases, proportion of such purchased with a Letter of Credit and the average credit received. Domestic and imported purchases are calculated separately.
b)
Based on the value of the goods purchased assessed separately for domestic and imported goods.
c)
Based entirely on the credit profile of the applicant.
d)
Based on the amount of previous Letters of Credit granted to the applicant with a distinction between the purchase of domestic and imported goods.
111.
In addition to determining the working capital finance limits, what additional analysis is required prior to advancing funds?
a)
None. The two methods of calculating working capital finance limits are sufficient to understand the risks posed.
b)
An assessment of the quality of the borrower’s key current assets is required.
c)
Due diligence on the company’s management is required.
d)
An analysis of the industry in which the company operates and its competitors is required.
112.
What is the role of the guarantor in a bank guarantee?
a)
The guarantor, usually a bank, agrees to discharge the applicant’s obligations in the case of his default.
b)
The guarantor agrees to appoint a bank to settle the applicant’s obligations in case of his default.
c)
The guarantor, usually a bank, steps in to negotiate a settlement between the applicant and the beneficiary in case there are financial problems.
d)
The guarantor, usually the principal debtor, agrees to pay his debts on time.
113.
What is the last required step to conclude the working capital assessment?
a)
Evaluation of liquidity
b)
Critical scrutiny of projections for other assets and liabilities
c)
Validation of bank finance requested by the borrower
d)
Testing of projected profitability, gearing, debt levels, capital position, investment in fixed assets and other investments
114.
Select the most accurate statement concerning deal structuring and monitoring.
a)
Good deal structuring and monitoring make a bad deal an acceptable risk.
b)
Monitoring, but not good deal structuring, makes a bad deal an acceptable risk.
c)
Good deal structuring and monitoring do not make a bad deal an acceptable risk.
d)
Good deal structuring, but not monitoring, makes a bad deal an acceptable risk
115.
Who is a Hypothecatee?
a)
The person who holds the asset on behalf of the lender
b)
The person in whose favour the asset is charged
c)
The person who charges the asset in favour of the lender
d)
The official who registers the charge
116.
Which of the following are required for a corporate guarantee to be valid?
a)
A Board resolution and the guarantee document signed by the Chairman of the Board.
b)
A guarantee document signed by the Chairman of the Board and approval from the Registrar of Companies.
c)
A Board resolution and approval from the Registrar of Companies.
d)
A Board resolution and approval to issue a guarantee to be contained in the Memorandum/Articles
117.
Select the most accurate statement concerning the inclusion of a guarantee from an operating subsidiary when lending to a holding company?
a)
This will give the HC lender a secured claim on the assets and cash flows of the guarantor
b)
This will give the HC lender a first ranking claim on the assets and cash flows of the guarantor
c)
This will give the HC lender an unsecured claim on the assets and cash flows of the guarantor
d)
This will give the HC lender a subordinated claim on the assets and cash flows of the guarantor
118.
What is the most common credit risk faced when realising hypothecated assets?
a)
Legal proceedings have to be completed to realise the hypothecated assets.
b)
The borrower may not agree to hand over the hypothecated assets.
c)
The assets may not be in existence, as they have never been in the possession of the lender.
d)
There is no risk. The assets merely have to be possessed and realised.
119.
What is the difference between a covenant and a trigger?
a)
Covenants seek to reduce probability of default, while triggers do not
b)
Triggers reduce probability of default, while covenants do not
c)
There is no difference, they are the same
d)
Triggers are legally enforceable, while covenants are not
120.
Why should a lender not depend on internal triggers alone to monitor a loan?
a)
A lender may place full dependence on a well defined set of triggers.
b)
Triggers may sometimes be seen in isolation rather than in totality.
c)
Not all credit deterioration can be captured by internal triggers.
d)
Sometimes triggers may cause an over reaction on the part of the lender's staff
121.
Which of the following correctly describes EaD?
a)
The amount outstanding from the borrower at the point of default
b)
The amount which is expected to be eventually irrecoverable
c)
The amount that was initially advanced to the borrower
d)
The amount that can eventually be recovered from the borrower
122.
What is the main difference between a covenant and a trigger?
a)
A breached trigger is tantamount to default, while a breached covenant requires action internal to the lender.
b)
A covenant is a term in a loan agreement which specifies a fact of the agreement, e.g., rate of interest. A trigger requires action on the part of the lender on the happening of a certain event
c)
A breached covenant tantamounts to default, while a breached trigger requires action internal to the lender.
d)
There is no difference between them, they are the same.
123.
What statement concerning internal triggers is most accurate?
a)
They eliminate probability of default.
b)
They are legally enforceable.
c)
They do not rely on client cooperation for resolution.
d)
They provide an early warning system.
124.
In what phase of deal structuring is the lender likely to decide that "ring fencing" (legally separating/ protecting the transaction from the rest of company) is essential to the deal structure?
a)
Prospecting phase.
b)
Drawdown/monitoring phase.
c)
Design phase.
d)
Negotiation phase.
125.
Which of the following factors may be affected by a change in ownership or control of the borrower’s company?
a)
Probability of Default of the borrowing company.
b)
Borrowing documentation of the company.
c)
Method of computation of Loss Given Default of the borrowing company.
d)
Downstream guarantees issued for subsidiaries.
126.
What is the primary purpose behind completing proper lending documentation with a borrower?
a)
To enable registration of certain securities
b)
To record an informal agreement between lender and borrower
c)
To record the amount and type of facilities advanced
d)
To establish recourse to recover the debt in a court of law
127.
Which of the following associations have developed acceptable standard definitions for lending covenants?
a)
London Stock Exchange
b)
Loan Market Association
c)
Financial Accounting Standards Board
d)
Securities and Exchange Board of India
128.
Which of the following assets can usually be hypothecated as security?
a)
Inventories
b)
Goodwill
c)
Plant and machinery
d)
Land
129.
Which of the following is a collateral security?
a)
Mortgage of plant and machinery used in the business of the borrower
b)
Hypothecation of inventories of the business of the borrower
c)
Pledge of shares in the name of the borrowing entity
d)
Pledge of fixed deposit in the personal name of the owner
130.
What is the principal difference between pledge and hypothecation?
a)
In a pledge, possession of the asset goes to the lender, while in a hypothecation it remains with the borrower
b)
There is no difference, they are the same
c)
In a hypothecation, the lender can sell the asset immediately, while in a pledge the lender has to approach the courts
d)
In a pledge, possession of the asset remains with the borrower, while in a hypothecation it goes to the lender
131.
Select an example of a structural mitigant.
a)
A holding company benefits from diversification
b)
A holding company receives a guarantee from an operating subsidiary
c)
A holding company has operating assets
d)
A holding company owns a strong group
132.
Which statement is correct with respect to the law of limitation?
a)
It limits the type of advances which can be recovered from the borrower
b)
It limits the period within which the debt can be recovered from the borrower
c)
It limits the amount which can be recovered from the borrower
d)
It limits the jurisdictions in which debts can be recovered from the borrower
133.
Which of the following is a legally necessary pre-execution formality?
a)
Ensuring that loan disbursements are made to the designated purpose and beneficiary.
b)
Obtaining certified specimen signatures of the borrower's officials who will operate the facilities.
c)
Issue of cheque books for the borrower's proposed ovedraft account.
d)
Filing of charges with the Registrar of Companies.
134.
A lender lends to all companies in a group. What type of guarantee is most likely to dilute the unsecured claims of this lender’s lending to an operating subsidiary guarantor with the least impact on the claims of lending to its parent company?
a)
A cross guarantee
b)
An upstream guarantee
c)
A personal guarantee
d)
A downstream guarantee
135.
Where goods pledged to the lender are placed in a warehouse, what would be an important factor to regard the pledge as complete?
a)
The warehouse must be in the constructive possession and control of the lender
b)
The warehouse and the goods within must be insured
c)
Expired, damaged and perishable goods must not be kept in the warehouse
d)
The goods must be well maintained in the warehouse
136.
Select an example of a natural mitigant to protect from Holding company risk.
a)
Loan documentation requires that a holding company houses most of the consolidated debt
b)
A holding company has operating assets
c)
A holding company arranges a third-party collateral
d)
A holding company receives a guarantee from an operating subsidiary
137.
What is the liability of a Director who gave guarantees in his personal capacity?
a)
The Director remains liable to the lender to the extent of his shares, if any, in the company
b)
The Director is discharged upon his giving notice to the lender that his responsibilities as Director have been concluded
c)
The Director is automatically discharged when he ceases to be a director
d)
The Director remains liable until formally discharged by the lender
138.
How should unconsolidated financial covenants be defined for effective structural mitigation when lending to groups?
a)
The definition should include both the positive and negative impact of inter-company transactions
b)
The definition should include the positive and exclude the negative impact of inter-company transactions
c)
The definition should exclude the positive and include the negative impact of inter-company transactions
d)
The definition should exclude both the positive and negative impact of inter-company transactions
139.
Which of the following is an example of a negative covenant?
a)
Compliance with certain defined financial ratios
b)
Undertaking to insure plant and machinery on time
c)
Not to provide security over a borrower’s assets to other lenders
d)
Submission of audited financials
140.
With respect to the deal structure, what is the primary purpose of transaction control?
a)
To gain insight into deteriorating business and financial risk through the use of covenants
b)
To prevent subordination through the use of covenants
c)
To give the lender the right to access the data required to monitor the risk of the borrower
d)
To use trade finance and cash management products to gain insight into potential problems with the borrower’s business dealings
141.
How do banks that follow the Foundation IRB approach estimate EaD?
a)
100% of the funded outstanding only
b)
100% of the funded outstanding plus 100% of off balance sheet credits
c)
100% of the funded outstanding plus 75% of off balance sheet credits
d)
100% of the funded outstanding plus 25% of off balance sheet credits
142.
Why are securities necessary for lending?
a)
Lenders see security as a demonstration of good faith and intent on the part of the borrower
b)
Securities reduce the amount of capital required to support the corresponding lending
c)
They can be disposed off in the event of default and thus reduce the credit risk of the lender
d)
All of the above
143.
Which of the following is a joint and several guarantee?
a)
Signed by five persons who are responsible for different shares of the debt, but totalling the full debt
b)
Signed by one person who is responsible for the full debt
c)
Signed by five persons, each of whom are responsible for the full debt
d)
Signed by two persons who are responsible for 50% of the debt each
144.
Which asset is an assignment usually taken as security over?
a)
Land and building
b)
Inventories
c)
Contracting receivables
d)
Fixed deposits
145.
Which type of assets is an assignment usually created over?
a)
Plant and machinery
b)
Receivables
c)
Inventories
d)
Bonds
146.
When are artificial transactions that move assets and cash flows into group companies outside the legal reach of the lender most concerning?
a)
When the group’s current ratio is increasing
b)
When the group’s leverage is decreasing
c)
When the group’s loss given default is decreasing
d)
When the group’s probability of default is increasing
147.
Which of the following is a security over a tangible asset?
a)
Pledge over goodwill.
b)
Pledge over trademarks.
c)
Pledge over copyrights.
d)
Pledge of shares.
148.
What is an example of a cross guarantee?
a)
When a holding company guarantees a subsidiary.
b)
When a subsidiary guarantees a fellow subsidiary.
c)
When a parent company guarantees a subsidiary.
d)
When a subsidiary guarantees a holding company
149.
Which type of covenant requires submission of audited financials?
a)
Financial covenant
b)
Insurance covenant
c)
Restrictive covenant
d)
Information covenant
150.
What is a key component of structure risk?
a)
Access to the borrower’s financial statements
b)
Access to the borrower’s cash flows
c)
Access to the borrower’s articles of incorporation
d)
Access to the borrower’s budgetary projections
151.
Which statement defines the responsibility of a pledgor even after goods have been pledged to the lender?
a)
The pledgor continues to be responsible to the lender for the entire amount of the debt, irrespective of the value of the pledged goods
b)
The pledgor is discharged from the debt to the lender when the pledged goods are sold, irrespective of the amount of the sale proceeds
c)
The pledgor has no further responsibility to the lender for the debt
d)
The pledgor continues to be responsible to the lender for the entire amount of the debt, less the estimated value of the pledged goods
152.
What is the difference between a financial covenant and a financial trigger?
a)
Financial covenants are usually set at tighter levels so that their breach draws attention before the corresponding financial trigger is breached
b)
Financial triggers are usually set at tighter levels so that their breach draws attention before the corresponding financial covenant is breached
c)
There is no difference, they are the same
d)
They are the same, except that a financial covenant is contained in the loan agreement, while a financial trigger is not
153.
What are the key deal structure components before disbursement of funds?
a)
Conditions precedent and ensuring loss given default does not decrease
b)
Representations and warranties and ensuring exposure at default does not decrease
c)
Conditions precedent and representations and warranties
d)
Ensuring loss given default and exposure at default do not decrease
154.
What term is used to describe a debt provider’s access to assets, cash flow and contracts naturally ranking after another stakeholder because of circumstances?
a)
Legal Subordination
b)
Contractual Subordination
c)
Structural Subordination
d)
Effective Subordination
155.
What type of structure risk deals with a lender’s inability to enforce a guarantee due to missing signatures?
a)
Other Stakeholders
b)
Documentation
c)
Cross Border
d)
Group Structure
156.
Setting a financial covenant to monitor which of these would ensure ability to service debt?
a)
Change of ownership.
b)
Negative pledge.
c)
Leverage.
d)
Cash flow.
157.
Which of the following is a "haircut"?
a)
The eventual loss incurred on realisation of a security.
b)
A discount assumed by the lender in the realisable value of a security.
c)
The percentage by which the borrower seeks a reduction in the rate of interest.
d)
The amount by which the borrower seeks a reduction of the debt in view of his inability to pay.
158.
The concept of need-based finance implies that
a)
Bank finance is intended to supplement the funds already available to the borrower from other sources
b)
Bank finance should be made available to the borrower as and when they need it
c)
Extent of bank finance would be determined by the need as advised by the borrower without any consideration of funds already available from other sources
d)
Bank should extend finance to the borrowers in accordance with the bank’s need to
159.
Why should you check for any inventory pile-up during unit inspection?
a)
Inventory pile-up offers additional business opportunity in terms of the borrower’s need for more financing
b)
Higher inventory may pose a logistical challenge for the unit in terms of handling/storage
c)
Excess inventory, when disposed off in bulk, would lead to sudden cash inflow which would cause cash imbalance
d)
Inventory pile-up may be indicative of adverse developments such as obsolescence, reduced market acceptability, order cancellation, speculative intentions, etc.
160.
Among the following, which is a purpose of monitoring? (i) Ascertain the level of current assets (ii) Ascertain if the unit’s operations are as per the projections (iii) Be aware of events that can impact the borrower’s business
a)
Option (i)
b)
Option (i) and (iii)
c)
Option (ii) and (iii)
d)
All the options (i), (ii), and (iii)
161.
What information can be obtained from CRILC?
a)
Borrower’s loan account being reported as SMA by another bank
b)
Details of wilful default by the borrower
c)
Details of other companies with common directors
d)
Details of criminal case against the promoters
162.
Which of the following statements best describes the purpose of stock audit?
a)
The main purpose of stock audit is to get an independent third party insight on the borrower’s affairs and a detailed examination of specific issues in relation to the borrower’s business, if required
b)
Stock audit is a monitoring tool employed when the relationship team is not in a position to carry out unit inspections due to time constraint
c)
Stock audit conveys to the borrower that the bank is seriously keeping a watch on his business Stock audit is one more monitoring tool
163.
The cash credit limit of a company is Rs. 40 crore and stipuated margin on inventory and receivables is 25%. As per the latest stock statement, the inventory is Rs 25 crore and the receivable level is Rs. 35 crore. What would be the drawing power?
a)
Rs. 30 crore
b)
Rs 60 crore
c)
Rs. 45 crore
d)
Rs. 40 crore
164.
What is the relevance of stock statement in the administration of FBWC limits
a)
Stock statement contains information which is “good to have” for the bank, though not “must have”
b)
Based on a scrutiny of stock statement does a bank decide whether to renew a FBWC limit
c)
Submission of stock statement is a statutroy requirement for availing FBWC limits
d)
Stock statement contains details of inventory, receivables and creditors under LCs which are necessary to compute the drawing power which regulates the amount that can be drawn from the FBWC account
165.
Which among the following is NOT a primary objective of unit inspection?
a)
To hold discussion with the promoters and other important employees
b)
To verify the quantity and quality of inventory
c)
To solicit more business opportunities with the borrower
d)
To assess the activity level at the unit
166.
A bank guarantee can become a perpetual obligation for the bank because
a)
The applicant can obtain stay order from a court of law restraining the bank from making payment for a guarantee which has been invoked
b)
The contracts underlying bank guarantees are sometimes very complicated and beyond the understanding of bank officials
c)
The beneficiary can seek any number of extensions of validity period
d)
Bank guarantees are usually issued for long periods
167.
One of the objectives of monitoring a term loan during the project implementation stage is
a)
To ensure that adequate raw material is available
b)
To ensure that the borrower has adequate working capital limits in place
c)
To ensure that the borrower mobilises the means of financing as per the terms of sanction
d)
To ensure that the promoters have brought in their contribution towards working capital
168.
You come across a news report that an agitation has started against one of your borrowers engaged in production of aerated beverages for drawing water from a local river. What are the implications for your bank’s loan to the company?
a)
The operations can be temporarily affected since the borrower would take the legal route and get a favourable ruling ultimately
b)
No implication since such agitations are easily manageable
c)
No implications since water is a cheap resource and can be obtained from alternative sources
d)
It can have serious implications since agitation can lead to a ban on drawing water from the river. Sourcing water from elsewhere would add transportation costs which would affect the viability of the borrower
169.
You have sanctioned a term loan to a company for an expansion project. A portion of the project cost amounting to Rs 10.00 crores is to be met by internal accruals during the current year. The company has repayment obligation of Rs 4 crores towards existing term loans during the year. The internal accruals up to the first half of the year are Rs 3.00 crores. Which of the following statements is the most appropriate for this situation?
a)
While there is a possibility of shortfall, it is too early to think of any action. The actual amount of internal accruals would be known only after the year end
b)
The availability of funds for project implementation does not face any constraints
c)
The overall requirement of funds from internal accruals is Rs 14.00 crores for the current year. Going by the internal accruals up to the first half of the year, there is a likelihood of shortfall and alternative means of financing need to be identified.
d)
Difficult to say anything at this stage
170.
One of the key objectives of the loan pricing process is
a)
To ensure that the bank gets acceptable return on risk undertaken on the relationship
b)
To ensure that the potential business is not lost to the competitors at any cost
c)
To enhance the bank’s image as a customer-friendly organisation
d)
To build customer loyalty
171.
Risk premium is calculated on the basis of
a)
Expected loss to the bank in lending to a category of borrowers
b)
Expected return on capital
c)
Amount of capital to be set aside for each lending
d)
Expected loss to the borrowers in their business
172.
A letter of credit is
a)
An undertaking issued by a bank on behalf of a buyer to the seller to pay for the goods and services
b)
A letter issued by a seller to the buyer offering credit on the supplies
c)
An undertaking issued by the buyer to the seller to pay for the goods and services
d)
An undertaking issued by a bank on behalf of the seller to the buyer promising due performance of sales
173.
What is the implication of a large number of round sum transactions by a borrower?
a)
Such transactions result from netting off the discounts
b)
These are no different from other transactions and are just a coincidence
c)
Such transactions are done for accounting convenience
d)
Such transactions may not be on account of the borrower’s regular business and need to be probed
174.
Request for LC in favour of an associate concern is
a)
A cause of concern since purchases of material from associate concerns is quite unusual
b)
Unusual because the LC is resorted to by the buyer and seller where seller does not want to take a credit risk on the buyer and therefore wants to secure the payment through the LC. Such situation should not arise between associate concerns. Such request could be indicative of accomodation transaction
c)
Not a cause of concern as long as there is no record of LC devolvements in respect of the applicant
d)
Not unusual as long as the item being purchased is relevant to the business of both parties
175.
Term premium is one of the factors affecting the cost of funds of a bank because
a)
Generally long-term money is costlier than the short-term money
b)
Raising short-term money is less risky for the bank
c)
Generally short-term money is costlier than the long-term money
d)
Raising long-term money is riskier for the bank
176.
Stock audit report on one of your borrowers mentions that the inventory level shown in the stock statement was substantially higher than the actual level found in the audit. Consequently, the drawing power works out to be substantially lower and the account would be rendered irregular. What is the most appropriate action for you?
a)
Wait for the next stock statement and ask the auditor to verify the position with reference to the new stock statement
b)
Examine the matter closely. Have a detailed discussion with the borrower and the auditor. Analyse the borrower’s explanations and assess if those are justified. Finally, take action as appropriate.
c)
Immediately reduce the drawing power as indicated in the stock audit report
d)
Do nothing because reduction in drawing power would lead to irrgularity in the account which may ultimately lead to the account becoming NPA
177.
Why should you look at the external sources of information when you have already analysed all the risks of an entity thoroughly?
a)
External sources are impartial
b)
External sources are more reliable
c)
External sources cannot be managed by the borrower
d)
The information available from external sources is often not available from the internal monitoring mechanisms, though it can have substantial bearing on credit quality
178.
Credit administration is a critical activity in a bank’s lending business because
a)
It regulates flow of loan funds to the borrower in accordance with the terms and conditions of loan sanction
b)
It ensures that need-based credit lines are sanctioned to the borrower
c)
It facilitates building of a cordial relationship with the borrower and creates goodwill for the bank
d)
It improves the bank’s competitive position as compared with other banks
179.
Why should the stock statement include age-wise break-up of receivables?
a)
It is always helpful to get as much information as possible so as to be ready to meet any future requirement of such information
b)
It enables the bank to identify the receivables within and outside the sanctioned cover period. Further, it gives a sense about the pace of realisation of receivables and impending bad debts
c)
It facilitates enforcement of the bank’s security in recovery proceedings in the event of default
d)
It is manadatory as per RBI guidelines
180.
For a term loan sanctioned with debt-equity ratio of 2.00, what would be the overall margin requirement?
a)
0.25
b)
0.3333
c)
0.4
d)
0.6667
181.
An EPC (Export Packing Credit) should be liquidated by
a)
Only by long-term sources of funds
b)
There is no restriction on the source of funds for liquidation of EPC
c)
Only the regular cash flows of the borrower
d)
Only by export proceeds
182.
Competition is among the more critical elements of loan pricing because
a)
Competition places a ceiling on the pricing that the borrower is likely to accept
b)
Being competitive in pricing is helpful in attracting new business
c)
Competition enhances the efficiency of the pricing process
d)
Competition makes the Relationship Officer more market savvy
183.
Setting the pricing of a loan involves evaluation of
a)
Customer’s total relationship with the bank
b)
Only the credit risk of the customer
c)
The capability of the customer to pay
d)
Long-term trends in the movement of interest rates
184.
One of the key aspects of monitoring of a term loan post commencement of commercial production is
a)
Estimating the cost of production
b)
Checking if there are delays in submission of stock statements
c)
Keeping tab on the salaries of key executives
d)
Checking if the borrower is defaulting on loan repayments to other lenders
185.
Which factor is a reflection of a substantial problem loan portfolio and is also most likely to trigger further problems related to such a portfolio?
a)
Increased monitoring and audit checks
b)
Lowering of rating by rating agencies
c)
Increased funding costs
d)
Increased legal costs
186.
Which situation does not describe that of a wilful defaulter?
a)
The borrower is unable to pay because the project's viability has changed following government regulation.
b)
Financing for the project has been diverted to acquisition of shares.
c)
Borrowings have been used for a purpose other than that for which the advance was made.
d)
Short-term borrowings have been diverted to investment in shell subsidiaries.
187.
Which definition best fits a special mention account?
a)
An account that has been provided to the extent of 25%.
b)
An account where income recognition has been stopped.
c)
An account that has begun to show early signs of distress and can be rectified by remedial action.
d)
An account in which there are overdues for 90 days or more.
188.
Which situation would result in an account being classified as SMA-0?
a)
Projected sales shown for loan sanction falling short by 25%.
b)
Drop in internal risk rating by two or more notches in a single review.
c)
Delay of more than 60 days in submission of stock statements.
d)
Return of 2 cheques in 30 days for lack of funds.
189.
During which stage will management start selling vital assets?
a)
Cash crisis stage.
b)
Cash crunch stage.
c)
Cash clearance stage.
d)
Cash concern stage
190.
What is an early warning sign that might affect an individual business operation?
a)
Use of post-dated cheques.
b)
A period of political instability.
c)
Bad press.
d)
Changes in product quality.
191.
Which measure is not used as a penal measure in dealing with wilful defaulters?
a)
Initiating change of management of the defaulting unit.
b)
Making further advances to the defaulter to facilitate repayment of defaulted borrowings.
c)
Ensuring through RBI that wilful defaulters are debarred from institutional finance for 5 years.
d)
Initiating civil or criminal action against the borrower.
192.
What is one sign that an account should should be classified as RFA (i.e., a red flag account)?
a)
Frequent excesses over limit.
b)
Frequent past dues leading to limits being temporarily frozen.
c)
Entire account under a difficult restructuring process.
d)
One or more early warning signals from a prescribed list being met.
193.
Which characteristic describes an out-of-order account?
a)
Outstanding exceeds limit for 60 continuous days.
b)
Outstanding exceeds limit for 60 days.
c)
Outstanding exceeds limit for 30 days.
d)
Outstanding exceeds limit for 90 continuous days.
194.
Review and assess the accuracy of this statement: When initiating a DRT suit against a defaulting party, the lender must send a recall notice to the borrower with sufficient time given to the borrowers and guarantors to comply.
a)
The statement is accurate in all respects.
b)
The statement is not true.
c)
Recall notice is required to be served only on a case by case basis, based on the profile of the borrower and the urgency of the suit filing.
d)
While a recall notice needs to be served to the borrower, there is no need to offer sufficient time for them to respond as it is not required by law.
195.
What is the purpose of the Central Repository for Information on Large Credits (CRILC)?
a)
To issue credit opinions on individual borrowers to all banks.
b)
To collect information on borrowings of each lender and circulate the total number to all lenders.
c)
To collect, store, and disseminate credit data to lenders.
d)
To act as RBI's watchdog on the total borrowings by individual lenders across all banks
196.
Which statement is correct with respect to wilful defaulters?
a)
Wilful defaulters of Rs. 1 million or more must be reported to the CIC with RBI.
b)
Even one isolated instance is adequate to categorise the case as one of wilful default.
c)
A case where the borrower loses diverted funds and makes a full disclosure of the diversion and losss is still a case of wilful default
d)
A substandard or doubtful account is almost always a case of wilful default.
197.
Which statement is correct with respect to restructuring options?
a)
Taking no action is always the worst option.
b)
A judicial process is not an option in restructuring a corporate debt.
c)
One method to induce a reduction in exposure is to reduce pricing.
d)
Liquidation is rarely used for companies of material size.
198.
Why can cyclicality affect an entire industry?
a)
Pricing can change too quickly for companies to make profits.
b)
Changes can happen too quickly for costs to be cut.
c)
Capacity can increase too quickly for companies to provide inventory.
d)
Sectors can grow too quickly for companies to expand their services.
199.
If an RP involves restructuring, how should the accounts that were classified as 'standard' prior to such restructuring be re-classified?
a)
Doubtful
b)
SMA-2
c)
Sub-standard
d)
SMA-1
200.
Which item is a direct cost of problem loans?
a)
Legal expenses
b)
Damage to reputation
c)
Event risk
d)
Lost opportunities
201.
Which statement is correct with respect to provisioning on doubtful exposures?
a)
100% provision is required on the unsecured portion of the exposure.
b)
50% provision is required on the exposure when it is first classified as doubtful.
c)
100% provision is required on the full exposure, irrespective of security.
d)
No provision is required on the secured portion.
202.
Which statement with respect to a non-performing asset (NPA) is correct?
a)
Interest may continue to be recognised as income, without there being any credits to the account.
b)
The exposure should be classified as a Special Mention Account in the grading system of the bank.
c)
Past interest should be reversed out of income if not collected.
d)
A provision of 50% should be created when the exposure is first classified as an NPA.
203.
How can aggressive competition from a new entrant into the market affect a company's business and operations?
a)
It could increase market share.
b)
It could increase product pricing.
c)
It could reduce the number of competitors.
d)
It could reduce potential sales.
204.
Which rule, practice, or principle was acknowledged as the prime basis for prudential norms?
a)
Objectivity.
b)
Accounting practices.
c)
Rules set by the Ministry of Finance.
d)
Consensus of the relevant committees.
205.
What is an example of a lagging indicator?
a)
The borrower stops returning phone calls.
b)
The borrower is late submitting financial accounts.
c)
A competitor introduces a new popular product on the market.
d)
A price war has started on the marketplace.
206.
How should security be regarded when determining whether an account should be classified as a non-performing asset (NPA)?
a)
It should be ignored.
b)
None of the above.
c)
The value should be deducted from the debt, and only the net debt should be classified.
d)
The account should first be classified disregarding security and then be upgraded.
207.
With respect to the borrower's management, what does a successful restructuring require?
a)
The management should be focused, motivated and going in the same direction as the bank.
b)
The management should be competent more than anything else.
c)
The management should have a good general understanding of the situation.
d)
The management should be focused and ready to push its agenda ahead, regardless of other parties' opinions.
208.
Which statement is correct with respect to wilful defaulters and liability?
a)
Part time directors of the borrowing company are as liable as full time directors in the process of determining wilful default.
b)
An individual guarantor automatically becomes a wilful defaulter when the original borrower is identified as a wilful defaulter.
c)
A committee consisting of senior staff from relationship and credit, constituted for identification of wilful default, may issue a final judgment on the issue.
d)
Corporate guarantors within the group are held as wilful defaulters only if they do not honor claims on their guarantees.
209.
What is involved in the second step, developing an action plan, during the restructuring process?
a)
Engaging with stakeholders and securing their immediate support.
b)
Drafting detailed plans for implantation stages and timelines.
c)
Assessing the total funding required to deliver the plan.
d)
Assessing the cash position to determine the time frame
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