CAIIB ABM Module C UNIT 20 MCQ – Term Loans

Correct Answer: C. To fund the acquisition of long-term assets such as land, buildings, or machinery. Term loans are generally used for financing fixed assets, which have a long operational life, unlike working capital loans used for current assets.

Correct Answer: C. When an enterprise is unable to contribute the required Net Working Capital (NWC) from its long-term sources, leading to a liquidity crunch. A Working Capital Term Loan (WCTL) is an exceptional term loan provided to help businesses maintain required current asset levels when their long-term funds (NWC) are insufficient.

Correct Answer: B. Long-term assets, due to their repayment occurring over an agreed schedule. Banks consider term loans as long-term assets because their repayment is structured over a defined period, aligning with the long-term nature of the bank’s liability matching needs.

Correct Answer: C. Debt Service Coverage Ratio (DSCR). Since term loans are repaid from the borrower’s future cash flows generated over the loan period, the DSCR, which measures the ability to service debt obligations from operational cash flow, is critically important.

Correct Answer: C. The expected cash surplus generation pattern of the borrower. Term loan repayments are tailored to the borrower’s ability to generate cash, leading to varied structures like EMIs for stable incomes or schedules linked to cropping patterns for farmers.

Correct Answer: C. Repayment of the entire loan amount, including principal and interest, in a single lump sum at the end of the loan tenure. A bullet repayment refers to a specific term loan structure where the full principal and accumulated interest are paid back in one single instalment at maturity.

Correct Answer: B. A bank guarantee assuring a supplier that a purchaser will make payments for fixed assets over an agreed schedule. A DPG is a non-fund based facility where a bank guarantees the scheduled payments owed by a buyer to a seller of fixed assets.

Correct Answer: C. If the purchaser defaults on any scheduled payment, forcing the bank to pay the supplier. Initially non-fund based, a DPG becomes a fund-based exposure for the bank when the guaranteed party (purchaser) defaults, and the bank has to make the payment on their behalf.

Correct Answer: B. Because the risks involved in both facilities are fundamentally the same. The bank faces a similar credit risk in a DPG as in a term loan – the risk that the client (purchaser) will be unable to meet their payment obligations over time.

Correct Answer: C. Project finance appraisal. Project finance involves assessing the entire financial needs of a new venture or major expansion, including the margin money required for working capital, as part of the total long-term fund requirement.

Correct Answer: C. Detailed examination of techno-economic feasibility and Internal Rate of Return (IRR). For smaller, standalone term loans in existing businesses with limited impact, a full techno-economic or IRR analysis may not be necessary; focusing on DSCR might suffice, unlike in large projects.

Correct Answer: C. Prima Facie Acceptability Appraisal. This initial check verifies if the proposal is legally permissible, meets regulatory norms (like RBI guidelines), and aligns with the bank’s internal lending and risk management policies before proceeding further.

Correct Answer: C. Appraising the capability, integrity, and resources of the individuals leading the enterprise. Management appraisal critically examines the people (‘the man behind the project’), including owners and key personnel, assessing their competence, financial strength, and character, which is vital for project success.

Correct Answer: D. Management Appraisal. The 5 Cs provide a framework for assessing the creditworthiness and reliability of the borrower (management), forming the basis of the lender’s confidence in the individuals behind the project.

Correct Answer: C. The interaction between the project and its physical surroundings, including compliance with pollution norms. Environmental appraisal assesses the project’s impact on factors like water, air, land, and noise, and ensures necessary environmental clearances and permissions are obtained.

Correct Answer: C. Economic Appraisal. This appraisal looks at the macro-economic situation, growth patterns, and overall economic health to gauge whether the project’s output can be absorbed and if the timing is right for the venture, considering potential exceptions.

Correct Answer: C. Analysing the demand-supply situation specifically for the project’s product or service. Market appraisal delves into the specifics of the target market, assessing demand, competition, potential for growth (‘leg-room’, ‘elbow-room’, ‘head-room’), import/export factors, and absorption capacity for the project’s output.

Correct Answer: C. Technical Appraisal. This appraisal assesses the practical and technical aspects of the project, including infrastructure needs, technology selection, process suitability, resource availability (raw materials, labour), and production feasibility.

Correct Answer: C. Financial Appraisal. This involves quantifying the project’s financial aspects, including estimating the total cost (CoP), structuring the funding (MoF), projecting financial statements, analysing ratios, and assessing overall financial viability and profitability.

Correct Answer: C. Share Capital infusion. Means of Finance refers to the sources from which funds are raised to meet the project cost. Share capital (promoter’s equity) is a primary source of funding, whereas land, machinery, and pre-operative expenses are components of the project cost (CoP).

Correct Answer: C. To ascertain if the project can generate sufficient surplus to cover costs, make a profit, and repay debt. Profitability estimates are crucial to determine if the project is financially viable, capable of generating enough income to be profitable and meet its repayment obligations.

Correct Answer: D. Commercial Appraisal. This appraisal focuses on the project’s ability to succeed as a business, specifically its capacity to generate profits adequate for servicing its debt in terms of both amount and timing, and considering fallback options if issues arise.

Correct Answer: B. The level of operations where total revenue equals total costs (fixed + variable). The BEP is the operational level (in units or sales value) at which the business incurs neither a profit nor a loss; revenues exactly cover all expenses.

Correct Answer: C. Fixed Cost. Fixed costs, such as depreciation or rent, do not change in total amount with variations in production volume, up to the limits of the existing capacity.

Correct Answer: C. Contribution. The contribution is the amount each unit sold contributes towards covering fixed costs first, and then towards generating profit once fixed costs are fully covered.

Correct Answer: B. Low Risk. According to the provided risk classification, a BEP between 51% and 65% is considered to represent low risk for the business.

Correct Answer: B. To assess the adequacy of cash flow generated to meet debt repayment obligations (principal and interest). DSCR measures the cushion available between the cash generated by the business and the amount required to service its term debt obligations for a given period.

Correct Answer: C. Internal Rate of Return (IRR). IRR is a capital budgeting metric used to estimate the profitability of potential investments, representing the effective rate of return that the project is expected to yield.

Correct Answer: C. To assess the impact of adverse changes in key assumptions (like costs or prices) on the project’s financial indicators (BEP, DSCR, IRR). Sensitivity analysis tests the robustness of the project’s viability by simulating negative changes in critical variables.

Correct Answer: C. To evaluate the adequacy of security available to the lender in case the borrower defaults. These ratios help assess the ‘cushion to fall back on’, evaluating the value of the secured assets relative to the loan amount, providing insight into potential recovery prospects in a default scenario.

Correct Answer: C. Ministry of Finance, Government of India. The scope of sectors eligible for infrastructure lending is officially defined via Gazette Notifications issued by India’s Ministry of Finance.

Correct Answer: C. Inland Waterways. Inland Waterways, along with roads, ports, airports, and railway infrastructure, fall under the Transport sector definition for infrastructure lending.

Correct Answer: B. Energy. The Energy sector includes Electricity Generation, Transmission, Distribution, oil and gas pipelines, and storage facilities.

Correct Answer: D. Water & Sanitation. This category covers projects related to water supply, treatment, sewage management, irrigation, and waste management.

Correct Answer: B. Telecommunication Towers. The Communication sector includes fixed network telecommunication, telecom towers, and telecom services.

Correct Answer: C. Three-star or higher category classified hotels. Specifically, three-star or higher rated hotels located outside large cities (population > 1 million) qualify under this category.

Correct Answer: C. High debt-equity ratio. Infrastructure projects typically involve significant capital investment, leading to high leverage, characterised by a high debt-equity ratio, along with long gestation and payback periods.

Correct Answer: B. Specific guidelines addressing the unique characteristics of infrastructure financing. While basic appraisal methods apply, banks must incorporate specific regulatory guidelines addressing the unique features and risks of infrastructure financing.

Correct Answer: C. As a ‘deemed advance’. When banks invest in the equity or debt instruments of an infrastructure project as part of the financing package, it is often treated similarly to a loan advance for exposure purposes.

Correct Answer: D. Take-out Financing. Take-out financing helps banks manage asset-liability mismatches from long-tenor infrastructure loans by arranging a transfer of the loan to another FI after a certain period.

Correct Answer: B. 5 per cent of project cost. To issue such guarantees, the guaranteeing bank must usually have a minimum funded participation (e.g., 5% of project cost) and conduct its own appraisal and monitoring.

Correct Answer: C. When existing promoters are voluntarily disinvesting their majority shareholding. This exception applies specifically to acquiring shares in existing infra companies during promoter disinvestment, often to comply with regulations.

Correct Answer: C. 3:1. If banks finance a specialised entity for turning around troubled companies involved in infrastructure, this entity must usually be adequately capitalised with a Debt-Equity ratio not exceeding 3:1.

Correct Answer: B. 50 per cent. To ensure the acquiring borrower has a substantial stake, bank finance under this exception is often restricted to 50% of the funds needed to buy the promoter’s equity being disinvested.

Correct Answer: C. Tangible assets of the borrowing entity or the acquired company. The primary security should generally be the tangible assets, not the shares themselves, although shares might be accepted as additional collateral.

Correct Answer: C. Seven years. The standard maximum tenor is often set at seven years, but bank boards may approve longer tenors if deemed necessary for the project’s financial viability.

Correct Answer: C. Banking Regulation Act. Such financing must adhere to the provisions regarding holding shares in other companies as stipulated in the Banking Regulation Act, 1949.

Correct Answer: C. 40 per cent. This type of financing falls under the bank’s overall capital market exposure limit, which is commonly capped at 40% of its previous year-end net worth.

Correct Answer: C. Thorough due diligence on the project’s viability and repayment capacity. Banks must conduct satisfactory credit appraisals and viability assessments, not dilute standards based solely on the presence of a government guarantee.

Correct Answer: B. Evaluating complex project contracts, counterparty risks, and specific risk mitigation frameworks. Financing SPVs involves detailed appraisal of contracts, assessing contracting parties’ creditworthiness, and understanding the unique risk structure inherent in the SPV setup.

Correct Answer: C. Refer to the lead institution’s appraisal report or conduct a joint appraisal. To avoid duplication and delays, participating institutions may rely on the lead’s appraisal or collaborate on a joint assessment for their own evaluation.

Correct Answer: C. Asset-liability mismatch leading to potential liquidity issues. Funding long-term infrastructure assets with potentially shorter-term liabilities can create mismatches, exposing banks to liquidity risks if not managed carefully.

Correct Answer: C. Broadly accept the technical parameters laid down by leading FIs. To prevent delays from multiple technical appraisals, banks are often encouraged to generally accept the technical standards established by lead FIs involved in the project.

Correct Answer: C. Mitigating asset-liability maturity mismatches. Take-out financing is specifically designed to help banks manage the risk arising from funding long-term infrastructure assets with potentially shorter-term liabilities.

Correct Answer: B. The original lending bank. Under this scheme, the refinancing institution provides liquidity to the bank, but the ultimate credit risk of the project typically remains with the lending bank.

Correct Answer: C. The refinancing institution’s assessment of the lending bank’s creditworthiness. Since the refinancing institution takes a credit risk on the bank it is refinancing, the interest rate depends on its risk perception of that specific bank.

Correct Answer: C. Improved credit rating for the bonds, leading to better market access and terms. PCE aims to elevate the bond’s rating, making it more appealing to investors and enabling issuers to secure funds more favourably.

Correct Answer: C. A non-funded, irrevocable contingent line of credit. Banks provide PCE not as direct funding, but as a commitment (line of credit) available under specific future circumstances, and it’s usually irrevocable.

Correct Answer: B. 50 per cent. The total PCE from all participating banks for one bond issue is typically capped at 50% of the issue amount.

Correct Answer: B. 20 per cent. While the aggregate PCE limit might be 50%, any individual bank’s contribution is generally capped at a lower percentage, such as 20%, of the bond issue size.

Correct Answer: D. BBB minus. Banks can generally offer PCE only to bonds that already possess an investment-grade rating of at least BBB minus prior to the enhancement.

Correct Answer: C. The bank is generally prohibited from investing in those specific bonds. To avoid conflicts of interest, banks enhancing a bond issue are typically not permitted to be investors in the same issue.

Correct Answer: C. Lower (subordinate) priority. The PCE facility generally ranks lower in repayment priority than the claims of the bondholders whose bonds were enhanced, should the issuer face bankruptcy.

Correct Answer: C. As off-balance sheet contingent liabilities. The undrawn portion represents a potential future obligation and is usually reported as a contingent liability off the main balance sheet.

Correct Answer: C. An escrow account mechanism. To safeguard claims, project assets and cash flows associated with PCE-backed bonds should typically be ring-fenced through a formal escrow account arrangement, managed by a trustee.

Correct Answer: C. Supplement external ratings with independent internal credit analysis and due diligence. While external ratings are considered, banks are mandated to perform their own thorough, independent risk appraisal and internal rating.

Correct Answer: C. No, the bank must generally honour the full PCE commitment irrespective of other loan classifications. The PCE commitment is typically irrevocable and must be fulfilled as agreed initially, regardless of the subsequent asset classification of the borrower’s other facilities.

Correct Answer: C. Standby Credit Facility. This term refers to a pre-approved credit line, sanctioned upfront alongside the main project finance, but disbursed only if actual cost overruns materialize.

Correct Answer: C. It shares the same security and repayment schedule (ranks pari passu). Standby facilities are generally structured to rank equally with the base project loans regarding security and repayment terms.

Correct Answer: B. Two years. Specific allowances often permit funding cost overruns due to DCCO delays up to two years for infrastructure projects without classifying the loan as restructured, subject to conditions.

Correct Answer: B. One year. The permissible DCCO extension for funding cost overruns without restructuring is generally shorter for non-infrastructure projects, often limited to one year.

Correct Answer: B. 10%. Banks might fund additional Interest During Construction, plus other cost overruns up to a specific cap, frequently set at 10% of the original estimated project cost.

Correct Answer: C. The DER must remain unchanged or improve (i.e., not worsen). Funding cost overruns should not negatively impact the project’s agreed leverage ratio; it must stay the same or improve from the lender’s perspective.

Correct Answer: C. Infuse their own proportionate share of the cost overrun funds. Banks generally disburse their share only after the promoters have contributed their required equity portion towards the overrun.

Correct Answer: B. Yes, they are generally included within the overall cap for other cost overruns. The specified ceiling (e.g., 10%) often applies to all cost overruns (excluding IDC), including those caused by currency value changes linked to permitted DCCO extensions.

Correct Answer: D. Social and Commercial Infrastructure. Agricultural support infrastructure like cold storage, terminal markets, and related facilities generally fall under the Social and Commercial Infrastructure category.

Correct Answer: D. Personal Loans to individual project employees. While banks provide various facilities for the project entity (loans, investments), general personal loans to staff are distinct from financing the infrastructure project itself.

Correct Answer: B. Conduct independent credit appraisal, monitoring, and follow-up. The guaranteeing bank must perform its own due diligence and actively monitor the project, not merely rely on the primary lender or the guarantee itself.

Correct Answer: C. It is generally restricted to acquisitions in companies engaged in defined infrastructure activities. The exception allowing banks to fund promoter share purchases is typically specific to acquiring stakes in existing companies operating within the notified infrastructure sectors.

Correct Answer: C. Their exceptionally long implementation and repayment periods. The extended duration of infrastructure loans can create asset-liability mismatches for banks, making mechanisms like Take-out Financing useful for managing liquidity and maturity profiles.