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CBI Credit Officer practice questions

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Question 1Credit appraisal and lending (retail, agriculture, MSME, corporate)

Under RBI norms for agricultural advances, a crop loan to a farmer with a Kisan Credit Card is treated as a direct agricultural advance when the loan is granted for which of the following purposes?

  1. Financing the raising of crops including inputs and cultivation expenses Correct answer.
  2. Purchase of gold ornaments for the farmer's daughter's wedding
  3. Purchase of a tractor for custom hiring to other farmers
  4. Construction of a farmhouse for the cultivator's family

Explanation

Direct agricultural advances are those where the loan is granted for agricultural operations such as raising crops, including inputs, cultivation, and allied activities like dairy and poultry. Loans for farm machinery may qualify as indirect or direct depending on the purpose and end use, but the defining test is the agricultural purpose of the loan.

Question 2Credit appraisal and lending (retail, agriculture, MSME, corporate)

A bank sanctions a working capital limit to a small manufacturing unit and fixes the drawing power each month. Which of the following best describes the purpose of a drawing power calculation?

  1. To fix the penal interest rate applicable on overdue instalments
  2. To determine the maximum term loan the borrower may avail over the repayment period
  3. To arrive at the amount the borrower may draw based on the current value of current assets after prescribed margins and charge Correct answer.
  4. To set the maximum permissible exposure of the bank to the single borrower

Explanation

Drawing power is recomputed from the latest stock and book debt statements, applying the stipulated margins and excluding unpaid or ineligible items. It caps the amount the borrower can actually draw under a sanctioned cash credit limit and is distinct from the sanctioned limit itself.

Question 3Credit appraisal and lending (retail, agriculture, MSME, corporate)

In the credit appraisal of an MSME term loan, a debt service coverage ratio of 1.25 is computed. What does this ratio indicate?

  1. The firm's net profit is 1.25 times its net worth
  2. The firm's projected cash accruals cover debt service obligations 1.25 times over Correct answer.
  3. The firm's total debt is 1.25 times its equity
  4. The firm's current assets are 1.25 times its current liabilities

Explanation

DSCR compares the cash available for debt servicing, usually profit after tax plus depreciation and interest on term loans, with the total debt service comprising interest and principal repayments. A ratio of 1.25 means a cushion of 25 percent above the required debt service, which is normally considered acceptable for MSME term lending.

Question 4Credit appraisal and lending (retail, agriculture, MSME, corporate)

A retail home loan applicant has a gross monthly income of 80,000 and existing EMI obligations of 12,000. The bank applies a fixed obligation to income ratio of 50 percent. What is the maximum additional EMI the bank can permit?

  1. 52,000
  2. 40,000
  3. 12,000
  4. 28,000 Correct answer.

Explanation

The FOIR cap is 50 percent of gross monthly income, which is 40,000. Since the applicant already services EMIs of 12,000, the additional EMI capacity is 40,000 minus 12,000, that is 28,000. This is the standard retail income assessment logic used for home and personal loans.

Question 5Credit appraisal and lending (retail, agriculture, MSME, corporate)

A corporate borrower requests a fund-based limit against the security of its plant and machinery. Which of the following best describes a first charge by way of hypothecation?

  1. A charge on the movable assets without transfer of ownership or possession, with the bank having a right to enforce on default Correct answer.
  2. A pledge where the bank takes physical possession of the machinery
  3. Transfer of ownership of the machinery to the bank with the borrower retaining possession
  4. A mortgage of immovable property created by deposit of title deeds

Explanation

Hypothecation creates a charge over movable assets such as stock and machinery without transferring ownership or possession to the lender. The borrower retains the assets for use but the bank can enforce the charge on default, and the charge is registered where required.

Question 6Credit appraisal and lending (retail, agriculture, MSME, corporate)

While appraising a proposal for financing a dairy unit under priority sector lending, the bank must verify the borrower's status. Which of the following borrowers would normally qualify as a small and marginal farmer for priority sector classification?

  1. A farmer cultivating 5 acres of irrigated land Correct answer.
  2. A farmer with more than 10 hectares of irrigated land
  3. A corporate entity cultivating 3 acres of irrigated land
  4. A farmer cultivating 2 hectares of irrigated land

Explanation

Small and marginal farmers are defined by landholding thresholds, generally up to 2 hectares of irrigated land, which is roughly 5 acres. Holdings above that are treated as other farmers, and corporate entities do not qualify as small and marginal farmers regardless of area.

Question 7Credit appraisal and lending (retail, agriculture, MSME, corporate)

A bank is assessing a loan against property for a self-employed professional. Which of the following best explains the role of the loan to value ratio in such lending?

  1. It determines the interest rate applicable to the loan
  2. It caps the loan amount as a proportion of the appraised market value of the mortgaged property Correct answer.
  3. It measures the borrower's income relative to the loan amount
  4. It fixes the tenure of the loan based on the borrower's age

Explanation

LTV is the ratio of the loan amount to the appraised value of the property offered as security. Banks cap LTV to limit loss given default, since a lower LTV provides a larger cushion if the property must be sold to recover dues.

Question 8Credit appraisal and lending (retail, agriculture, MSME, corporate)

An agricultural borrower requests a loan for a combine harvester to be used on his own farm and also hired out to neighbouring farmers. How should the bank classify this advance for priority sector purposes?

  1. As a direct agricultural advance
  2. As a housing loan
  3. As a retail consumption loan
  4. As an indirect agricultural advance Correct answer.

Explanation

Loans for agricultural machinery and implements are classified as indirect agricultural advances because the financing supports mechanisation rather than the cultivation of crops directly. Indirect advances count toward priority sector targets under the agriculture segment but are tracked separately from direct crop lending.

Question 9Credit appraisal and lending (retail, agriculture, MSME, corporate)

In a project appraisal for a greenfield manufacturing unit, the promoter's contribution is required to be brought in before disbursement. Which of the following best explains the rationale for insisting on promoter contribution?

  1. It ensures the project meets the minimum capital adequacy requirement of the bank
  2. It guarantees that the project will generate positive cash flows in the first year
  3. It is required only for projects above 100 crore
  4. It demonstrates the promoter's financial stake and reduces the bank's risk of loss on the project Correct answer.

Explanation

Promoter contribution, often called margin, ensures that the promoter has meaningful equity at risk in the project. This aligns incentives, absorbs initial losses before the lender, and reduces the bank's loss given default, which is why it is verified before and during disbursement.

Question 10Credit appraisal and lending (retail, agriculture, MSME, corporate)

A borrower's cash credit account shows frequent excess drawings beyond the sanctioned limit. Which of the following is the most appropriate immediate action by the bank?

  1. Close the account and initiate recovery proceedings immediately
  2. Increase the sanctioned limit automatically to accommodate the drawings
  3. Convert the entire cash credit limit into a term loan
  4. Regularise the excess by seeking additional security or adjusting the limit, and charge penal interest as per sanction terms Correct answer.

Explanation

Excess drawings indicate a mismatch between the limit and the borrower's working capital cycle, or diversion of funds. The standard response is to regularise the excess by reviewing the limit and obtaining additional security where warranted, while applying penal interest for the irregular period.

Question 11Credit appraisal and lending (retail, agriculture, MSME, corporate)

A bank is evaluating a loan proposal from a partnership firm with three partners. Which of the following is the primary advantage of obtaining a personal guarantee from each partner?

  1. It eliminates the need for any collateral security
  2. It converts the partnership into a limited liability entity
  3. It gives the bank recourse to the partners' personal assets if the firm defaults Correct answer.
  4. It reduces the interest rate by at least 2 percent

Explanation

A personal guarantee makes each partner jointly and severally liable to the bank for the firm's dues, allowing the bank to proceed against personal assets on default. It supplements, rather than replaces, the primary security and does not change the legal nature of the firm.

Question 12Credit appraisal and lending (retail, agriculture, MSME, corporate)

In the appraisal of a commercial real estate loan, the bank computes the debt service coverage ratio using net operating income. Which of the following items should be excluded from net operating income?

  1. Rental income from leased units
  2. Property tax and insurance on the property
  3. Interest expense on the proposed loan Correct answer.
  4. Repairs and maintenance expenses

Explanation

Net operating income is computed before financing costs, so interest expense on the proposed loan is excluded from the numerator. This allows the coverage ratio to measure the property's ability to service debt independently of the specific financing structure being proposed.

Question 13Credit appraisal and lending (retail, agriculture, MSME, corporate)

A bank's agricultural branch receives a proposal for financing the purchase of a power tiller by a farmer holding one hectare of irrigated land. Which of the following is the most relevant consideration for the bank's appraisal?

  1. The expected incremental income from the tiller relative to its repayment obligation Correct answer.
  2. The number of family members dependent on the farmer
  3. The farmer's social status in the village
  4. The farmer's membership of a cooperative society

Explanation

Agricultural machinery loans are appraised on the incremental income the asset generates and whether that income can service the instalments. The bank assesses the borrower's repayment capacity from the projected additional yield or hire income, along with the residual value of the asset.

Question 14Credit appraisal and lending (retail, agriculture, MSME, corporate)

A corporate borrower has a debt-equity ratio of 2.5 after a proposed term loan. The bank's policy prescribes a maximum of 2.0 for the industry. Which of the following is the most appropriate appraisal conclusion?

  1. The proposal is acceptable because the ratio is within the industry norm
  2. The loan should be sanctioned at a higher interest rate to compensate for the leverage
  3. The proposal requires additional equity infusion or a restructuring of the funding plan to bring the ratio within policy Correct answer.
  4. The proposal should be rejected outright without further discussion

Explanation

When the projected debt-equity ratio breaches the bank's policy limit, the appraisal should identify the shortfall and require additional promoter equity or a revised funding plan. Pricing adjustments do not cure a breach of leverage policy, and outright rejection is not the first step.

Question 15Credit appraisal and lending (retail, agriculture, MSME, corporate)

Which of the following best describes the purpose of a stock audit in the credit administration of a working capital account?

  1. To verify the existence, condition, and value of the hypothecated stock and detect any diversion of funds Correct answer.
  2. To determine the income tax liability of the borrower
  3. To assess the credit rating of the borrower's suppliers
  4. To compute the depreciation on the borrower's plant and machinery

Explanation

A stock audit verifies that the hypothecated inventory exists, is in good condition, and is valued in accordance with the sanction terms. It also helps detect slow-moving or obsolete stock, shortfalls against drawing power, and diversion of working capital funds.

Question 16Credit appraisal and lending (retail, agriculture, MSME, corporate)

A retail borrower applies for a personal loan with a credit bureau score of 720 and no existing delinquencies. Which of the following best explains how the bureau score is used in the credit decision?

  1. It determines the maximum tenure the bank may offer
  2. It automatically guarantees approval of the loan
  3. It is one input in the credit assessment, along with income, obligations, and policy norms Correct answer.
  4. It replaces the need for income verification

Explanation

A credit bureau score summarises the borrower's past repayment behaviour and predicts the likelihood of default, but it is only one input. Banks also assess income, existing obligations, FOIR, employment stability, and internal policy before deciding.

Question 17Credit appraisal and lending (retail, agriculture, MSME, corporate)

In the appraisal of a term loan to an MSME, the bank computes the break-even point. Which of the following best describes the break-even level of sales?

  1. The sales level at which the firm's current ratio equals one
  2. The sales level at which total contribution equals fixed costs, so profit before interest and tax is zero Correct answer.
  3. The sales level at which the firm repays its entire term loan
  4. The sales level at which the firm's net worth becomes zero

Explanation

Break-even sales are those at which contribution, that is sales minus variable costs, exactly covers fixed costs. At that level the firm makes neither profit nor loss before interest and tax, and the margin of safety above break-even indicates the cushion available to absorb a sales decline.

Question 18Credit appraisal and lending (retail, agriculture, MSME, corporate)

A bank sanctions a housing loan jointly to a husband and wife. Which of the following is the primary reason for taking both as co-borrowers rather than one borrower and one guarantor?

  1. It exempts the loan from stamp duty
  2. It doubles the eligible loan amount regardless of income
  3. It allows both incomes to be considered and both to be jointly liable for repayment Correct answer.
  4. It removes the need for property valuation

Explanation

Co-borrowers are jointly and severally liable for the loan, and their combined income can be used to assess repayment capacity. This is different from a guarantor, whose income is generally not clubbed with the borrower's for eligibility, though the guarantor provides additional security.

Question 19Credit appraisal and lending (retail, agriculture, MSME, corporate)

A corporate borrower proposes to fund a long-term project with a cash credit facility. Which of the following is the most appropriate appraisal objection?

  1. Cash credit requires no repayment at all
  2. Cash credit facilities cannot be secured by hypothecation
  3. Cash credit is meant for working capital, so funding a long-term asset creates an asset-liability mismatch Correct answer.
  4. Cash credit is available only to agricultural borrowers

Explanation

Cash credit is a short-term working capital facility repayable on demand and meant to finance the operating cycle. Using it to fund a long-term project creates a mismatch between short-term liabilities and long-term assets, which is a classic cause of repayment stress and is a valid appraisal objection.

Question 20Credit appraisal and lending (retail, agriculture, MSME, corporate)

Under the RBI's guidelines on priority sector lending, which of the following categories is included within the priority sector?

  1. Loans to large corporate borrowers for expansion
  2. Loans to micro, small, and medium enterprises Correct answer.
  3. Loans to foreign banks' overseas branches
  4. Loans for purchase of luxury cars by high net worth individuals

Explanation

Priority sector lending includes agriculture, micro, small, and medium enterprises, education, housing, export credit, and certain other categories such as renewable energy and social infrastructure. Loans to MSMEs are a core component of the priority sector.

Question 21Credit appraisal and lending (retail, agriculture, MSME, corporate)

A bank is appraising a loan to a start-up with negative net worth but strong promoter background and a credible business plan. Which of the following best describes the appropriate appraisal approach?

  1. Reject the proposal because negative net worth automatically disqualifies the borrower
  2. Sanction only if the loan is converted into equity
  3. Assess the business model, promoter track record, projected cash flows, and available security, and structure the loan with suitable covenants and monitoring Correct answer.
  4. Sanction the loan without conditions because the promoter background is strong

Explanation

Negative net worth is a risk factor but not an automatic disqualification, particularly for start-ups with credible promoters and business models. The appraisal should focus on projected cash flows, the viability of the business plan, security cover, and covenants such as milestone-based disbursement and monitoring.

Question 22Credit appraisal and lending (retail, agriculture, MSME, corporate)

A bank's credit officer is reviewing the financial statements of a borrower and notices that debtors have increased much faster than sales. Which of the following is the most likely credit concern?

  1. The borrower's profitability has definitely improved
  2. The borrower may be extending longer credit terms or facing collection problems, which can strain liquidity Correct answer.
  3. The borrower is collecting receivables faster than before
  4. The borrower has reduced its working capital requirement

Explanation

A debtor growth rate outpacing sales suggests slower collections, longer credit terms, or deteriorating customer quality. This can tie up working capital, increase the drawing power requirement, and signal potential liquidity stress, so the credit officer should investigate the ageing of receivables.

Question 23Credit appraisal and lending (retail, agriculture, MSME, corporate)

A borrower offers a third-party guarantee from a financially strong relative instead of mortgaging property. Which of the following is the most significant limitation of relying solely on a personal guarantee as security?

  1. A guarantee does not create a charge on specific assets and its value depends on the guarantor's continued solvency Correct answer.
  2. A guarantee cannot be taken for MSME loans
  3. A guarantee is unenforceable in law
  4. A guarantee automatically reduces the interest rate

Explanation

A personal guarantee is a contractual promise to pay and does not create a charge on any specific asset. Its realisable value depends on the guarantor's solvency and willingness at the time of enforcement, which makes it weaker than a mortgage or hypothecation with a registered charge.

Question 24Credit appraisal and lending (retail, agriculture, MSME, corporate)

A bank is reviewing an agricultural loan portfolio and finds that a large number of crop loans were not repaid on time despite a good monsoon. Which of the following is the most useful diagnostic step?

  1. Stop lending to all farmers in the region
  2. Convert all crop loans into long-term loans
  3. Increase the interest rate on all crop loans
  4. Analyse whether the loans were diverted to non-agricultural purposes and whether the crop insurance claims were settled Correct answer.

Explanation

When crop loans default despite favourable weather, the likely causes are diversion of funds, over-financing, or delays in insurance settlement. A portfolio diagnostic should examine end-use verification, scale of finance, and insurance claim status before deciding on corrective action.

Question 25Credit appraisal and lending (retail, agriculture, MSME, corporate)

A bank is assessing a loan proposal from a trader with a high turnover but thin margins. Which of the following ratios is most useful in evaluating whether the business can service a proposed working capital facility?

  1. The fixed asset turnover ratio alone
  2. The debt-equity ratio alone
  3. Gross profit margin alone
  4. The operating cycle, including inventory holding and receivable collection periods Correct answer.

Explanation

For a trading business, the operating cycle determines how long funds are locked in inventory and receivables and therefore the size and tenure of the working capital requirement. Analysing the cycle alongside margins and turnover helps assess whether the proposed facility matches the business's cash conversion pattern.

Question 26Credit appraisal and lending (retail, agriculture, MSME, corporate)

A retail borrower applies for a home loan. The bank's policy requires a maximum loan-to-value (LTV) ratio of 80% for loans up to INR 30 lakh. If the property is valued at INR 50 lakh, what is the maximum loan amount the bank can sanction under this policy?

  1. INR 25 lakh
  2. INR 50 lakh
  3. INR 40 lakh Correct answer.
  4. INR 30 lakh

Explanation

The LTV ratio is the loan amount divided by the property value. With a maximum LTV of 80% and a property value of INR 50 lakh, the maximum loan is 0.80 × 50 = INR 40 lakh. The policy cap of INR 30 lakh applies to the loan amount for the 80% LTV slab, but the computed maximum is INR 40 lakh, which is within the slab.

Question 27Credit appraisal and lending (retail, agriculture, MSME, corporate)

While appraising a crop loan for a paddy farmer, the credit officer estimates the cost of cultivation per hectare and the expected yield. Which of the following is the most appropriate method to determine the scale of finance for the crop loan?

  1. Based on the farmer's total annual income from all sources
  2. Based on the district-level average cost of cultivation per hectare for the crop Correct answer.
  3. Based on the farmer's past repayment record only
  4. Based on the market value of the farmer's land

Explanation

Scale of finance is the district-level per-hectare cost of cultivation for a crop, commonly fixed by the District Level Technical Committee. It is used to determine the loan amount per hectare, which is then multiplied by the area cultivated. Past repayment record and land value are relevant for creditworthiness and security but do not set the scale of finance.

Question 28Credit appraisal and lending (retail, agriculture, MSME, corporate)

A micro-enterprise applies for a working capital facility. The bank's policy requires a minimum current ratio of 1.33. The enterprise's current assets are INR 8 lakh and current liabilities are INR 6 lakh. What is the current ratio, and does it meet the policy requirement?

  1. 1.00, does not meet the requirement
  2. 1.33, meets the requirement exactly Correct answer.
  3. 1.25, does not meet the requirement
  4. 1.50, meets the requirement

Explanation

The current ratio is current assets divided by current liabilities: 8/6 = 1.33. Since the policy requires a minimum of 1.33, the enterprise meets the requirement exactly. A ratio below 1.33 would indicate insufficient liquidity relative to the policy benchmark.

Question 29Credit appraisal and lending (retail, agriculture, MSME, corporate)

A corporate borrower has a term loan outstanding of INR 200 lakh and a cash credit limit of INR 50 lakh. The bank's policy requires that long-term loans should not be funded by short-term facilities. Which of the following best describes the risk if the cash credit is used to repay the term loan installment?

  1. It reduces the interest cost for the borrower
  2. It creates an asset-liability mismatch for the borrower Correct answer.
  3. It increases the debt service coverage ratio
  4. It improves the current ratio of the borrower

Explanation

Using a short-term facility like cash credit to fund long-term obligations creates a mismatch because the repayment source is not aligned with the long-term nature of the asset. This can lead to liquidity stress when the cash credit is recalled or renewed. It does not improve the current ratio or reduce interest cost in a sustainable manner.

Question 30Credit appraisal and lending (retail, agriculture, MSME, corporate)

A bank is evaluating a proposal for financing a commercial vehicle under a retail loan scheme. The borrower has a stable income but no prior credit history. Which of the following is the most appropriate step for the credit officer to assess repayment capacity?

  1. Analyze the borrower's bank statement and income proof to estimate cash flows Correct answer.
  2. Rely solely on the vehicle's resale value as security
  3. Sanction the loan based on the dealer's recommendation
  4. Reject the proposal due to lack of credit history

Explanation

Repayment capacity is best assessed through an analysis of the borrower's income and cash flows, including bank statements and income proof. Security and dealer recommendations are supplementary and cannot substitute for cash flow analysis. Absence of credit history does not automatically disqualify a borrower if income is adequate.

Question 31Credit appraisal and lending (retail, agriculture, MSME, corporate)

An agricultural borrower seeks a loan for a tractor. The bank's policy allows financing up to 80% of the tractor's cost, with repayment over 7 years. The tractor costs INR 6 lakh. The borrower can repay annually from farm income. Which of the following is the maximum loan amount and the first-year principal repayment (assuming equal annual installments)?

  1. INR 5.0 lakh loan; INR 71,429 first-year principal
  2. INR 4.8 lakh loan; INR 80,000 first-year principal
  3. INR 4.8 lakh loan; INR 68,571 first-year principal Correct answer.
  4. INR 4.5 lakh loan; INR 64,286 first-year principal

Explanation

The maximum loan is 80% of INR 6 lakh = INR 4.8 lakh. With equal annual principal installments over 7 years, the first-year principal is 4,80,000 / 7 = INR 68,571 (rounded). This assumes no moratorium and equal principal repayment, which is a common simplification for such loans.

Question 32Credit appraisal and lending (retail, agriculture, MSME, corporate)

A partnership firm applies for a term loan. The bank's appraisal shows that the firm's debt-equity ratio is 2.8, while the bank's policy prescribes a maximum of 2.0. Which of the following is the most appropriate action for the credit officer?

  1. Advise the firm to reduce debt or infuse additional equity to meet the policy norm Correct answer.
  2. Sanction the loan as the firm has sufficient collateral
  3. Reject the proposal outright without further discussion
  4. Approve the loan with a higher interest rate to compensate for the risk

Explanation

The debt-equity ratio exceeding the policy maximum indicates higher leverage and financial risk. The appropriate action is to advise the borrower to bring in additional equity or reduce debt to align with policy. Outright rejection or pricing adjustments may be considered but are not the first step; collateral does not override leverage norms.

Question 33Credit appraisal and lending (retail, agriculture, MSME, corporate)

A bank is assessing a working capital proposal from a trading company. The company's inventory turnover ratio is 4 times, and its receivables turnover ratio is 6 times. The bank's policy requires a minimum inventory turnover of 3 times and receivables turnover of 5 times. Which of the following is the correct interpretation?

  1. The company fails to meet the inventory turnover requirement
  2. The company fails to meet both requirements
  3. The company fails to meet the receivables turnover requirement
  4. The company meets both policy requirements Correct answer.

Explanation

Inventory turnover of 4 times exceeds the minimum of 3 times, and receivables turnover of 6 times exceeds the minimum of 5 times. Therefore, the company meets both policy requirements. These ratios indicate efficient management of inventory and receivables.

Question 34Credit appraisal and lending (retail, agriculture, MSME, corporate)

A corporate borrower requests a fund-based working capital limit. The bank's appraisal includes a cash budget to determine the peak deficit. Which of the following best explains why a cash budget is prepared for working capital assessment?

  1. To assess the borrower's tax liability
  2. To determine the depreciation on fixed assets
  3. To estimate the maximum working capital gap during the operating cycle Correct answer.
  4. To calculate the borrower's net worth

Explanation

A cash budget projects cash inflows and outflows to identify the peak working capital requirement during the operating cycle. It helps the bank set the drawing power and limit based on the maximum deficit. Net worth, depreciation, and tax liability are derived from financial statements, not primarily from a cash budget.

Question 35Credit appraisal and lending (retail, agriculture, MSME, corporate)

A bank is evaluating a loan against property for a self-employed professional. The property is valued at INR 1 crore, and the bank's policy allows a maximum LTV of 65% for such loans. The borrower seeks a loan of INR 70 lakh. Which of the following is the correct decision?

  1. Sanction INR 70 lakh as the property value is sufficient
  2. Sanction INR 50 lakh due to income limitations
  3. Sanction INR 65 lakh as per LTV cap Correct answer.
  4. Reject the loan as LTV exceeds the cap

Explanation

The maximum loan under the 65% LTV policy is 65% of INR 1 crore = INR 65 lakh. The borrower's request of INR 70 lakh exceeds this cap, so the loan should be restricted to INR 65 lakh, subject to income assessment. Rejection is not automatic because the eligible amount can be offered.

Question 36Credit appraisal and lending (retail, agriculture, MSME, corporate)

An MSME borrower's project has a break-even point of 60% of capacity utilization. The projected capacity utilization is 70%. Which of the following best describes the margin of safety?

  1. The project has no margin of safety
  2. The project has a margin of safety of 70 percentage points
  3. The project has a margin of safety of 10 percentage points Correct answer.
  4. The project has a margin of safety of 60 percentage points

Explanation

The margin of safety is the difference between projected capacity utilization and break-even utilization. Here, 70% - 60% = 10 percentage points. This indicates the project can withstand a 10% drop in utilization before incurring losses.

Question 37Credit appraisal and lending (retail, agriculture, MSME, corporate)

A bank's agricultural portfolio shows that many crop loans were repaid late due to delayed harvests. Which of the following is the most appropriate risk mitigation measure for the bank?

  1. Increase the interest rate on all crop loans
  2. Require collateral for all crop loans
  3. Link loan repayment to the harvesting season and provide a flexible repayment schedule Correct answer.
  4. Reduce the loan amount for all farmers

Explanation

Aligning repayment with the harvesting season addresses the cash flow mismatch that causes late repayment. Flexible schedules, such as bullet repayment at harvest, are a recognized mitigation for crop loans. Uniform interest rate increases or collateral requirements do not directly solve the timing issue.

Question 38Credit appraisal and lending (retail, agriculture, MSME, corporate)

A corporate borrower has a debt service coverage ratio (DSCR) of 1.1, while the bank's policy requires a minimum of 1.5. The borrower argues that its cash flows are stable. Which of the following is the most appropriate credit decision?

  1. Sanction the loan with a covenant to maintain DSCR above 1.5
  2. Sanction the loan as DSCR is above 1.0
  3. Advise the borrower to reduce debt or increase cash flows to achieve DSCR of 1.5 Correct answer.
  4. Reject the loan outright without further analysis

Explanation

A DSCR of 1.1 is below the policy minimum of 1.5, indicating insufficient cash flow to service debt with an adequate cushion. The appropriate action is to advise the borrower to improve the DSCR by reducing debt or increasing cash flows. Sanctioning with a covenant may not be sufficient if the current DSCR is inadequate.

Question 39Credit appraisal and lending (retail, agriculture, MSME, corporate)

A bank is appraising a project with a debt-equity ratio of 3:1. The project's expected return on investment (ROI) is 12%, and the cost of debt is 10%. The bank's policy requires a minimum ROI of 15% for projects with D/E above 2:1. Which of the following is the most appropriate conclusion?

  1. The project is viable as ROI exceeds cost of debt
  2. The project is not viable as ROI is below the policy minimum Correct answer.
  3. The project is not viable as the cost of debt is too high
  4. The project is viable as the D/E ratio is within limits

Explanation

The policy requires a minimum ROI of 15% for projects with D/E above 2:1. The project's ROI of 12% is below this threshold, so it does not meet the policy norm. Although ROI exceeds the cost of debt, the policy requirement is not satisfied.

Question 40Credit appraisal and lending (retail, agriculture, MSME, corporate)

A bank is evaluating a proposal for financing a dairy unit under a government subsidy scheme. The total project cost is INR 20 lakh, and the subsidy is 25% of the project cost. The bank's policy requires a promoter's margin of 10% of the project cost. What is the maximum term loan the bank can sanction?

  1. INR 18 lakh
  2. INR 14 lakh
  3. INR 13 lakh Correct answer.
  4. INR 15 lakh

Explanation

Subsidy is 25% of INR 20 lakh = INR 5 lakh. Promoter's margin is 10% of INR 20 lakh = INR 2 lakh. The balance, which can be funded by the term loan, is 20 - 5 - 2 = INR 13 lakh. This ensures the subsidy and margin are deducted before determining the loan amount.

Question 41Banking and financial awareness

Under RBI norms, a loan account is generally classified as a Non-Performing Asset (NPA) when interest or principal has remained overdue for more than how many days?

  1. 180 days
  2. 90 days Correct answer.
  3. 60 days
  4. 30 days

Explanation

The RBI's asset classification framework treats an account as an NPA once interest or instalment remains overdue for more than 90 days. This 90-day benchmark applies to term loans, overdrafts and cash credit accounts, with sub-categories such as sub-standard, doubtful and loss assets layered on top of it.

Question 42Banking and financial awareness

In a term loan sanctioned by a bank, the 'moratorium period' refers to which of the following?

  1. A phase in which the borrower is exempt from paying both principal and interest Correct answer.
  2. The period allowed to the borrower to submit collateral documents after disbursement
  3. The post-maturity window in which the bank may recall the loan
  4. The period during which the borrower must pay only interest and no principal

Explanation

A moratorium is a holiday granted at the start of a loan during which neither principal nor interest is payable, though interest usually accrues and is added to the repayment schedule. It is common in project and education loans where cash flows begin only after construction or study completion.

Question 43Banking and financial awareness

Which regulator supervises Primary (Urban) Co-operative Banks in India, while their registration and management aspects remain with the Registrar of Co-operative Societies?

  1. IRDAI
  2. SEBI
  3. NABARD
  4. Reserve Bank of India Correct answer.

Explanation

The Reserve Bank of India regulates the banking functions of urban co-operative banks under the Banking Regulation Act, as amended, while the Registrar of Co-operative Societies handles incorporation and management matters. NABARD's supervisory role covers rural co-operative banks and RRBs rather than urban co-operative banks.

Question 44Banking and financial awareness

Which of the following instruments is a money market instrument with an original maturity of up to one year?

  1. Commercial Paper Correct answer.
  2. Zero Coupon Bond of five-year tenor
  3. Debenture
  4. Cumulative Preference Share

Explanation

Commercial Paper is an unsecured promissory note issued by corporates to raise short-term funds, with maturities typically ranging from a few days to one year. Money market instruments are defined by their short tenor, so debentures, preference shares and five-year bonds fall outside that category.

Question 45Banking and financial awareness

Under the Negotiable Instruments Act, 1881, a cheque is defined as a bill of exchange drawn on a specified banker and payable on demand. Which feature follows directly from this definition?

  1. A cheque is payable on demand and does not require acceptance by the drawee bank Correct answer.
  2. A cheque must bear the signature of the drawee bank to be valid
  3. A cheque must always be crossed before it can be presented
  4. A cheque is payable only to the drawer personally

Explanation

Because a cheque is payable on demand and is drawn on a banker, it requires no acceptance by the drawee bank before payment. This distinguishes it from a usance bill of exchange, which is payable after a stated period and must be accepted.

Question 46Banking and financial awareness

A borrower's credit score of 780 on a scale of 300 to 900 most likely indicates which of the following to a credit officer?

  1. A mandatory referral to the bank's recovery department
  2. A high probability of default requiring enhanced collateral
  3. An error in the bureau report because scores above 750 are not issued
  4. A strong repayment history that supports favourable pricing and faster approval Correct answer.

Explanation

Credit scores near the top of the 300-900 band reflect a strong track record of timely repayment and lower perceived default risk. Lenders typically use such scores to offer better pricing, higher limits and streamlined processing rather than to demand extra collateral.

Question 47Banking and financial awareness

In banking terminology, 'CRAR' as prescribed under Basel norms refers to which of the following?

  1. Current Ratio of Assets and Reserves
  2. Credit Risk Assessment Report
  3. Capital to Risk-weighted Assets Ratio Correct answer.
  4. Cash Reserve Adjustment Ratio

Explanation

CRAR measures a bank's capital expressed as a percentage of its risk-weighted assets, and it is the key prudential metric under Basel capital adequacy rules. A higher ratio indicates a larger capital cushion against credit, market and operational risks.

Question 48Banking and financial awareness

A bank extends a cash credit limit of Rs 50 lakh against hypothecation of stock. Which of the following best describes the bank's security interest?

  1. The bank holds physical possession of the pledged goods
  2. The bank has a charge over the goods while the borrower retains possession Correct answer.
  3. The bank has an unsecured claim with no charge over the goods
  4. The bank owns the goods outright until the loan is repaid

Explanation

Hypothecation creates a charge over movable assets while the borrower continues to hold and use them, unlike a pledge where possession passes to the lender. The bank's remedy lies in enforcing the charge if the borrower defaults.

Question 49Banking and financial awareness

An exporter approaches a bank to discount a bill of exchange accepted by an overseas buyer's bank. Which facility is the bank most likely to provide?

  1. Bank guarantee for performance
  2. Export packing credit
  3. Export bill discounting Correct answer.
  4. Letter of undertaking

Explanation

Discounting an accepted export bill converts the receivable into immediate cash for the exporter, with the bank realising proceeds from the overseas buyer at maturity. Packing credit, by contrast, is pre-shipment finance advanced before goods are shipped.

Question 50Banking and financial awareness

A bank's gross NPA ratio rises from 4% to 6% while its provision coverage ratio falls. Which conclusion is most consistent with these movements?

  1. Asset quality has deteriorated and the bank's cushion against loan losses has weakened Correct answer.
  2. The bank has increased its capital adequacy without raising fresh capital
  3. The bank has recovered more bad loans than it wrote off
  4. Asset quality has improved but profitability has declined

Explanation

A rising gross NPA ratio indicates a larger share of the loan book has turned bad, while a falling provision coverage ratio means the bank holds less provisioning against those bad loans. Together they point to weakening asset quality and a thinner buffer against credit losses.