Unit 3: Basics of bank lending - Practice Quiz

1 Which of the following is a core principle of sound bank lending?

2 The lending principle of liquidity refers to the bank's ability to:

3 The principle of diversification of advances means that a bank should:

4 A bank's loan policy is primarily meant to:

5 Which of the following is typically specified in a bank's loan policy?

6 Loan appraisal is the process of:

7 In the popular 5 C's of credit, what does the first C, Character, refer to?

8 Which of the following is NOT one of the traditional 5 C's of credit?

9 In lending, a credit decision finally determines whether to:

10 A credit score is mainly used in credit decision-making to:

11 Credit review of a loan account is carried out to:

12 Regular credit review helps a bank mainly to:

13 A cash credit facility is usually granted against:

14 An overdraft allows a customer to:

15 A term loan is generally repaid:

16 A loan is generally classified as a Non-Performing Asset (NPA) when interest or principal remains overdue for more than:

17 Which of the following best describes a Non-Performing Asset?

18 Which asset classification represents the best quality advance?

19 Which of the following is a common method for managing or recovering NPAs?

20 The SARFAESI Act helps banks manage NPAs by allowing them to:

21 A bank refuses to sanction a loan to a borrower whose project depends entirely on a single untested market with no backup revenue stream. Which principle of lending is the bank primarily applying?

22 A bank keeps a portion of its advances in short-term, easily recoverable loans so it can meet depositor withdrawals. This practice reflects which principle of sound lending?

23 Why do banks apply the principle of 'diversification of advances' rather than concentrating loans in one industry?

24 A bank's loan policy document specifies maximum exposure limits per borrower and per industry. What is the main purpose of including such limits?

25 Which of the following is NOT typically a component of a bank's loan policy?

26 During appraisal, a credit officer evaluates whether the borrower's past repayment record and reputation justify trust. Which of the '5 Cs of credit' is being assessed?

27 A firm requests a term loan. The appraisal shows a projected Debt Service Coverage Ratio (DSCR) of . What does this most likely indicate?

28 In technical appraisal of a project loan, which aspect is the banker chiefly concerned with?

29 A bank uses a credit scoring model that assigns points to income, repayment history and existing debt. What is the primary advantage of such a model in credit decision-making?

30 A proposal is beyond a branch manager's sanctioning authority. Based on sound credit decision-making practice, what should happen?

31 The purpose of a periodic credit review of an existing loan account is primarily to:

32 Which of the following would a credit review MOST likely flag as an early warning signal of a deteriorating account?

33 A business is sanctioned a limit against which it can draw, repay and redraw funds up to the limit, with interest charged only on the amount actually used. This describes which type of advance?

34 A trader sells goods on credit and takes the resulting bill of exchange to the bank to receive funds immediately, less a charge, before the bill matures. This facility is called:

35 Which statement best distinguishes a term loan from an overdraft?

36 As per the standard norm, a term loan is classified as a Non-Performing Asset (NPA) when interest or principal instalment remains overdue for a period of more than:

37 An NPA account has remained non-performing for 18 months. Into which asset category does it fall?

38 Which of the following best describes a 'loss asset'?

39 A bank restructures a stressed loan by extending its repayment tenure and reducing the instalment size to help a viable but struggling borrower. This recovery approach is an example of:

40 Under the SARFAESI Act, which action can a secured creditor take against a defaulting borrower without court intervention?

41 A bank sanctions a working capital loan to a firm with excellent profitability but whose assets are almost entirely specialized machinery with no secondary market. Under the classical principles of lending, which principle is most directly compromised, even though safety and profitability appear satisfied?

42 A banker observes a conflict: a highly profitable lending opportunity carries elevated credit risk, while a safe opportunity offers thin margins. Which statement best captures the correct resolution under sound lending principles?

43 A bank's loan policy sets an internal single-borrower exposure ceiling stricter than the regulatory limit. A relationship manager argues this costs business. From a policy-governance perspective, what is the strongest justification for retaining the stricter internal ceiling?

44 A loan policy specifies delegation of sanctioning powers by hierarchy and loan size. What is the primary risk-control rationale behind tying larger exposures to higher authority levels and committee approval?

45 During appraisal of a manufacturing unit, the current ratio is a healthy 2.5 but the quick ratio is only 0.6. What does this divergence most likely signal to the appraising officer?

46 A project is appraised using DSCR. Projected annual cash available for debt service is lakh and annual debt obligation (interest + principal) is lakh. If the bank requires a minimum DSCR of 1.75, what is the appraisal conclusion?

47 Under the Maximum Permissible Bank Finance (MPBF) second method of lending (Tandon Committee), a firm has current assets of lakh and current liabilities (other than bank borrowing) of lakh. What is the MPBF?

48 A credit committee reviews a borrower scoring well on all 5 Cs except 'Conditions', which is weak due to a cyclical industry downturn. Which decision best reflects sound credit judgment?

49 A bank uses a credit scoring model with a cut-off score. A borrower scores just above the cut-off but exhibits a sharp recent deterioration in a key financial trend not captured by the model. What is the appropriate decision-making response?

50 A post-sanction credit review discovers that a standard account's drawing power has consistently exceeded the sanctioned limit for several months, though interest is paid on time. What is the most accurate interpretation?

51 Why is an independent loan review mechanism (separate from the originating/sanctioning function) considered essential for credit risk governance?

52 A trader needs funds against goods dispatched but not yet paid for by buyers, where the bank purchases the usance bills drawn on buyers. Which facility is most precisely described?

53 A borrower requires flexible, revolving short-term finance where interest is charged only on the amount actually utilized and operations are secured against hypothecated stock. Which facility fits best, and why not an overdraft?

54 A letter of credit and a bank guarantee are both non-fund-based facilities. Which statement correctly distinguishes their nature of obligation?

55 A term loan's interest installment due on 15 January 2025 remains unpaid. Applying the standard 90-day overdue norm, from which date would the account be classified as an NPA?

56 An asset was classified as sub-standard on 1 April 2024 and remains non-performing without any realization of security. As per standard asset classification norms, what is its classification status on 1 July 2025?

57 A cash credit (working capital) account is treated as 'out of order'. Which condition does NOT by itself render such an account out of order?

58 A bank holds a secured NPA where the borrower is uncooperative and the outstanding exceeds the minimum threshold. The bank wishes to enforce security without court intervention. Which legal route is most appropriate?

59 A bank sells an NPA to an Asset Reconstruction Company (ARC) partly for cash and partly against Security Receipts (SRs). What is the key implication of receiving SRs rather than full cash?

60 The Unified Lending Interface (ULI) aims to streamline credit delivery, especially for small and rural borrowers. What is its most fundamental functional contribution to loan appraisal?