CAIIB ABM Module C UNIT 21 MCQ - Credit Delivery and Straight Through Processing

CAIIB ABM Module C UNIT 21 MCQ – Credit Delivery and Straight Through Processing

Question 1: When a partner executes loan documents on behalf of a partnership firm, in what capacity must they sign?

A. In their individual capacity only
B. In the capacity of a partner representing the firm
C. In both individual and partnership capacity simultaneously
D. In the capacity decided by the bank

Show Explanation

Correct Answer: B. In the capacity of a partner representing the firm. Explanation: Documents must be executed by parties with the necessary authority; a partner acts for the firm, not personally, in such transactions.

Question 2: What essential condition must be met regarding the state of mind of a person signing loan documents?

A. They must be a major shareholder
B. They must understand the financial implications
C. They must be signing with their own free will
D. They must have consulted a legal advisor

Show Explanation

Correct Answer: C. They must be signing with their own free will. Explanation: It is crucial to ensure that the signatory executes the documents voluntarily and without coercion.

Question 3: What is the correct sequence regarding the filling and signing of loan documents?

A. Signing can happen before the document is filled
B. Filling and signing can occur simultaneously
C. The document must be completely filled in before it is signed
D. Partially filled documents can be signed

Show Explanation

Correct Answer: C. The document must be completely filled in before it is signed. Explanation: To ensure clarity and prevent disputes, all details must be entered in the documents prior to execution by the signatories.

Question 4: For a charge created by a company, within what timeframe from the date of document execution must it generally be registered with the Registrar of Companies (ROC)?

A. 15 days
B. 30 days
C. 60 days
D. 90 days

Show Explanation

Correct Answer: B. 30 days. Explanation: Registration of charges with the ROC for companies is mandatory within 30 days of executing the relevant documents.

Question 5: Which entity mandates the registration of most security interests and mortgage charges under the SARFAESI Act?

A. Registrar of Companies (ROC)
B. Reserve Bank of India (RBI)
C. Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI)
D. Sub-registrar’s Office

Show Explanation

Correct Answer: C. Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI). Explanation: Section 26D of the SARFAESI Act requires registration with CERSAI for secured creditors to enforce security interests under the Act.

Question 6: Besides CERSAI, where does a charge over an aircraft need to be additionally registered?

A. Mercantile Marine Department
B. Director General of Civil Aviation
C. Airport Authority of India
D. Ministry of Defence

Show Explanation

Correct Answer: B. Director General of Civil Aviation. Explanation: Certain assets require registration with specific authorities; for aircraft, this includes the Director General of Civil Aviation.

Question 7: What is the primary purpose of obtaining third-party guarantees when lending?

A. To increase the loan amount
B. To lower the interest rate
C. To provide additional safety against default
D. To satisfy a regulatory requirement only

Show Explanation

Correct Answer: C. To provide additional safety against default. Explanation: Third-party guarantees serve as an additional recourse for the bank if the primary borrower fails to repay the loan.

Question 8: Why are personal guarantees of proprietors or partners generally not insisted upon for loans to sole proprietorships or partnerships?

A. Because their liability is limited to business assets
B. Because they possess unlimited liability for business debts
C. Because the loan amounts are usually small
D. Because regulations prohibit taking their guarantees

Show Explanation

Correct Answer: B. Because they possess unlimited liability for business debts. Explanation: Proprietors and partners are personally liable for the debts of the firm, meaning their personal assets can be attached for recovery, unlike directors of companies.

Question 9: In which type of company might personal guarantees of directors be particularly helpful, irrespective of other factors?

A. Large, widely-held public limited companies rated as first class
B. Companies where management is vested by court order
C. Closely-held companies (private or public)
D. Government-owned companies

Show Explanation

Correct Answer: C. Closely-held companies (private or public). Explanation: In closely-held companies, guarantees from principal members holding shares can align their interests with the repayment of the loan.

Question 10: Under what circumstance might a bank seek personal guarantees from directors even if a company is not closely held?

A. To ensure continuity of management
B. To secure a lower interest rate
C. Only if the advance is unsecured
D. If the company operates internationally

Show Explanation

Correct Answer: A. To ensure continuity of management. Explanation: Guarantees can protect the lender if a change in management might jeopardise the loan, ensuring stability or the lender’s consent for changes.

Question 11: When might a bank obtain a guarantee from a parent company?

A. When the subsidiary requires a very large loan
B. When the subsidiary’s own financial condition is unsatisfactory
C. When the parent company requests it
D. Only for foreign currency loans

Show Explanation

Correct Answer: B. When the subsidiary’s own financial condition is unsatisfactory. Explanation: If a subsidiary company is financially weak, a guarantee from the stronger parent company provides better security for the lender.

Question 12: What undertaking do banks typically obtain from borrowers and guarantors regarding payments between them for the guarantee provided?

A. That a standard commission will be paid
B. That no consideration (commission, fee, etC. ) will be paid or received
C. That any payment must be approved by the bank board
D. That payment is allowed only if the guarantor is a director

Show Explanation

Correct Answer: B. That no consideration (commission, fee, etc.) will be paid or received. Explanation: Banks require an undertaking to prevent hidden costs or arrangements related to the provision of guarantees, ensuring transparency.

Question 13: Who has the legal right to create a charge over an asset offered as security?

A. The bank providing the loan
B. The borrower only
C. The owner of the asset
D. Any director of the borrowing company

Show Explanation

Correct Answer: C. The owner of the asset. Explanation: A fundamental principle is that only the person or entity holding legal ownership title to an asset can create a valid charge (like a mortgage or pledge) over it.

Question 14: Which type of charge involves the transfer of legal possession of goods to the lender, although constructive possession might be allowed?

A. Hypothecation
B. Mortgage
C. Lien
D. Pledge

Show Explanation

Correct Answer: D. Pledge. Explanation: Pledge typically involves the lender taking possession of the goods, though constructive possession (where the borrower holds goods as the bank’s agent) is possible.

Question 15: In which type of charge over movable goods does the possession typically remain with the borrower?

A. Pledge
B. Mortgage
C. Hypothecation
D. Lien

Show Explanation

Correct Answer: C. Hypothecation. Explanation: Under hypothecation, the borrower retains possession of the goods while creating a charge in favour of the lender.

Question 16: How are drawings in a cash credit account regulated by banks in sole banking arrangements?

A. By the total sanctioned limit only
B. Through the system of ‘Drawing Power’ (DP) calculated periodically
C. Based on the borrower’s verbal request
D. By the amount of fixed assets mortgaged

Show Explanation

Correct Answer: B. Through the system of ‘Drawing Power’ (DP) calculated periodically. Explanation: Drawing Power is calculated based on the value of current assets like stock and receivables, less margins and creditors, ensuring drawings are backed by sufficient current assets within the sanctioned limit.

Question 17: What information is typically used by banks for the periodic calculation of Drawing Power (DP) in a cash credit account?

A. Statement of fixed assets and long-term liabilities
B. Audited annual financial statements only
C. Statement of stocks, book-debts/receivables, and sundry creditors
D. Profit and loss account projection for the next quarter

Show Explanation

Correct Answer: C. Statement of stocks, book-debts/receivables, and sundry creditors. Explanation: Due to the impracticality of frequent full current asset/liability statements, banks rely on monthly statements of key current assets (stock, receivables) and liabilities (creditors) to compute DP.

Question 18: What is a primary reason for banks to bifurcate a working capital limit into a ‘Loan Component’ and a ‘Cash Credit Component’?

A. To increase the overall interest income
B. To simplify documentation
C. To encourage borrowers to use funds fully
D. To ensure more stable utilisation of limits and better fund management for the bank

Show Explanation

Correct Answer: D. To ensure more stable utilisation of limits and better fund management for the bank. Explanation: A fixed loan component reduces volatility in fund utilisation compared to a fully flexible cash credit limit, aiding the bank’s liquidity management.

Question 19: For borrowers with working capital limits of ₹150 crore and above from the banking system, what is the generally stipulated minimum percentage for the loan component?

A. 40 per cent
B. 50 per cent
C. 60 per cent
D. 75 per cent

Show Explanation

Correct Answer: C. 60 per cent. Explanation: Regulatory guidelines suggest that for large borrowers (limits ₹150 crore and above), at least 60% of the working capital limit should be in the form of a loan component.

Question 20: What types of credit facilities are typically excluded before bifurcating the working capital limit into loan and cash credit components for large borrowers?

A. Term loans and letters of credit
B. Export credit limits and bills limit for inland sales
C. Bank guarantees and overdrafts
D. Personal loans and vehicle loans

Show Explanation

Correct Answer: B. Export credit limits and bills limit for inland sales. Explanation: Specific limits like export credit (pre/post-shipment) and inland bills limits are excluded from the total working capital limit before applying the loan/cash credit component bifurcation rule.

Question 21: What is the minimum tenor prescribed for the loan component when bifurcating working capital limits?

A. 3 days
B. 7 days
C. 15 days
D. 30 days

Show Explanation

Correct Answer: B. 7 days. Explanation: The loan component within the working capital limits must have a minimum tenor of seven days.

Question 22: When disbursing a term loan for a project executed over time, how is the disbursement typically handled?

A. Entire amount disbursed upfront
B. Disbursement is linked to the progress of the project
C. Disbursed only after project completion
D. Disbursed equally every month

Show Explanation

Correct Answer: B. Disbursement is linked to the progress of the project. Explanation: To ensure funds are used for the intended purpose and correlate with project advancement, term loan disbursements for projects are phased according to completion stages.

Question 23: What risk is associated with a promoter funding arrangement where equity is brought in proportionately as the bank finances the debt portion?

A. Interest rate risk
B. Foreign exchange risk
C. Higher equity funding risk for the bank
D. Market risk

Show Explanation

Correct Answer: C. Higher equity funding risk for the bank. Explanation: If promoters fail to bring in their equity portion as agreed during the project, the bank might face pressure or be implicitly forced to fund that gap, increasing its risk exposure beyond the intended debt.

Question 24: To mitigate equity funding risk in project finance, what should banks ensure regarding the infusion of equity by promoters?

A. That promoters bring in only 50% equity upfront
B. That the stipulated Debt Equity Ratio (DER) is maintained at all times
C. That promoters provide additional collateral
D. That equity is infused only after debt disbursement

Show Explanation

Correct Answer: B. That the stipulated Debt Equity Ratio (DER) is maintained at all times. Explanation: Maintaining the agreed DER throughout the project ensures that the promoter’s stake relative to debt remains at the planned level, reducing the risk of equity shortfalls.

Question 25: What Credit Conversion Factor (CCF) applies to the undrawn portion of cash credit/overdraft limits sanctioned to large borrowers (subject to the loan component rule), regardless of whether cancellable or not?

A. 0 per cent
B. 20 per cent
C. 50 per cent
D. 100 per cent

Show Explanation

Correct Answer: B. 20 per cent. Explanation: For capital adequacy purposes, the undrawn part of these commitments carries a risk weight, calculated using a 20% credit conversion factor.

Question 26: When a term loan is disbursed in one go for purchasing a ready asset, what is the typical procedure involving the borrower’s margin?

A. The margin is paid directly to the seller by the borrower.
B. The bank disburses the full loan amount and collects the margin later.
C. The borrower deposits the margin with the bank before the bank disburses the loan.
D. The margin amount is added to the loan principal.

Show Explanation

Correct Answer: C. The borrower deposits the margin with the bank before the bank disburses the loan. Explanation: Typically, the borrower contributes their share (margin) upfront to the bank, which then combines it with the loan amount for payment to the seller.

Question 27: If a borrower provides satisfactory proof of having already paid a portion of the asset’s cost to the seller before the bank disburses the term loan, how is this amount usually treated?

A. It is ignored by the bank.
B. It is considered as part of the borrower’s margin contribution.
C. It is deducted from the loan amount sanctioneD.
D. The bank reimburses this amount directly to the borrower.

Show Explanation

Correct Answer: B. It is considered as part of the borrower’s margin contribution. Explanation: Prior payments made by the borrower towards the asset, if properly documented, are typically counted towards their required margin or equity contribution.

Question 28: For project loans where execution occurs over time, how are disbursements generally timed?

A. The full loan amount is given at the beginning.
B. Disbursements are made in equal monthly instalments.
C. Disbursement is linked to the physical or financial progress of the project.
D. Disbursements occur only after the project is fully completed.

Show Explanation

Correct Answer: C. Disbursement is linked to the physical or financial progress of the project. Explanation: To ensure funds are utilized appropriately for the project, banks usually release term loan instalments based on stages of completion or milestones achieved.

Question 29: Which method of promoter equity infusion for projects is generally considered by banks to carry a greater equity funding risk?

A. Promoters bringing the entire contribution upfront.
B. Promoters bringing 40-50% upfront and the balance in stages.
C. Promoters bringing in equity funds proportionately as the bank finances the debt portion.
D. Promoters providing a corporate guarantee instead of cash equity.

Show Explanation

Correct Answer: C. Promoters bringing in equity funds proportionately as the bank finances the debt portion. Explanation: The risk is higher in proportional funding because if the promoter fails to bring their share later, the project funding structure is compromised, potentially impacting the bank.

Question 30: To mitigate equity funding risk in project finance, what key financial ratio should banks ensure is maintained at all times through promoter equity infusion?

A. Current Ratio
B. Quick Ratio
C. Debt Equity Ratio (DER)
D. Interest Coverage Ratio

Show Explanation

Correct Answer: C. Debt Equity Ratio (DER). Explanation: Banks stipulate a Debt Equity Ratio and require promoters’ equity infusion to occur in a way that this ratio is maintained throughout the project lifecycle.

Question 31: What situation might lead a bank to prefer involving other banks in financing an enterprise, leading to multiple banking or consortium arrangements?

A. The borrower requests a lower interest rate.
B. The financing requirement grows beyond the single bank’s comfort level or internal limits.
C. The bank wishes to reduce documentation workloaD.
D. The borrower is a new, unknown entity.

Show Explanation

Correct Answer: B. The financing requirement grows beyond the single bank’s comfort level or internal limits. Explanation: Banks use multi-bank arrangements when exposure to a single borrower becomes large relative to prudential norms or perceived risk concentration.

Question 32: What distinguishes a consortium arrangement from a multiple banking arrangement?

A. Consortium involves only two banks, while multiple banking involves more than two.
B. Multiple banking involves foreign banks, while consortium involves domestic banks.
C. Consortium is a formal arrangement with a designated lead bank, while multiple banking is informal.
D. Consortium is used for term loans, while multiple banking is for working capital.

Show Explanation

Correct Answer: C. Consortium is a formal arrangement with a designated lead bank, while multiple banking is informal. Explanation: A consortium has a formal structure and coordination led by one bank, whereas in multiple banking, banks lend independently, although they might share information informally.

Question 33: What role does the ‘Lead Bank’ typically play in a consortium arrangement?

A. Provides the entire loan amount itself.
B. Only monitors the borrower’s account.
C. Arranges meetings, coordinates assessment, documentation, and monitoring among member banks.
D. Sets the interest rate for all member banks unilaterally.

Show Explanation

Correct Answer: C. Arranges meetings, coordinates assessment, documentation, and monitoring among member banks. Explanation: The lead bank acts as the coordinator for the group of lending banks in a consortium.

Question 34: Following concerns raised about frauds, what key measure were banks advised to strengthen in consortium/multiple banking arrangements?

A. Increase collateral security requirements.
B. Implement stricter prudential norms.
C. Improve the sharing and dissemination of information among participating banks.
D. Reduce the number of banks involved in any single arrangement.

Show Explanation

Correct Answer: C. Improve the sharing and dissemination of information among participating banks. Explanation: Lack of effective information sharing about borrowers’ credit history and account conduct among banks was identified as a major factor contributing to frauds.

Question 35: What declaration should banks obtain from borrowers when granting fresh facilities under multiple banking arrangements?

A. A declaration of their expected profitability.
B. A declaration about credit facilities already enjoyed from other banks.
C. A declaration of their net worth certified by an auditor.
D. A declaration promising timely repayment.

Show Explanation

Correct Answer: B. A declaration about credit facilities already enjoyed from other banks. Explanation: To get a complete picture of the borrower’s indebtedness, banks must obtain a formal declaration of all existing credit arrangements with other lenders.

Question 36: How frequently should banks under consortium or multiple banking arrangements exchange information about the conduct of the borrowers’ accounts?

A. Annually
B. Semi-annually
C. At least at quarterly intervals
D. Only when an account shows signs of stress

Show Explanation

Correct Answer: C. At least at quarterly intervals. Explanation: Regular, quarterly exchange of information on account conduct, including derivative transactions and unhedged exposures, is advised for effective monitoring.

Question 37: Which professionals are typically suggested for providing regular certification regarding a borrower’s compliance with various statutory prescriptions?

A. Lawyers and Notaries
B. Company Secretary, Chartered Accountant, or Cost Accountant
C. Engineers and Architects
D. Internal Auditors of the bank

Show Explanation

Correct Answer: B. Company Secretary, Chartered Accountant, or Cost Accountant. Explanation: Independent certification by these professionals provides assurance regarding the borrower’s adherence to statutory requirements.

Question 38: To address confidentiality issues related to sharing borrower information, what should banks incorporate into their loan agreements?

A. Stricter penalty clauses for default.
B. Clauses requiring borrower approval for each information exchange.
C. Suitable clauses explicitly permitting the exchange of credit information.
D. Clauses limiting information sharing only to the lead bank.

Show Explanation

Correct Answer: C. Suitable clauses explicitly permitting the exchange of credit information. Explanation: Loan agreements should contain clauses that authorize the bank to share necessary credit information with other lenders, overcoming confidentiality constraints.

Question 39: What action must banks take regarding information sharing before sanctioning any fresh loans, ad hoc loans, or renewing existing loans under multiple banking arrangements?

A. Assume information is already shared.
B. Obtain/share necessary information only if the loan amount is large.
C. Ensure necessary information is obtained/shared before making the credit decision.
D. Share information only after the loan is disbursed.

Show Explanation

Correct Answer: C. Ensure necessary information is obtained/shared before making the credit decision. Explanation: Information exchange is a prerequisite for making informed credit decisions regarding new or renewed facilities.

Question 40: What is loan syndication primarily used for?

A. Financing small retail loans
B. Sharing large, long-term loans among multiple banks
C. Providing unsecured personal loans
D. Managing microfinance operations

Show Explanation

Correct Answer: B. Sharing large, long-term loans among multiple banks. Explanation: Syndication is a mechanism for multiple banks to jointly fund large credit requirements, typically for long-term projects, thereby sharing the associated risk.

Question 41: In loan syndication, what is the role of the bank that receives the mandate from the borrower?

A. It underwrites the entire loan amount itself.
B. It acts as the ‘Lead Bank’ to arrange the total loan amount from various participating banks.
C. It only provides advisory services to the borrower.
D. It guarantees the loan repayment on behalf of the borrower.

Show Explanation

Correct Answer: B. It acts as the ‘Lead Bank’ to arrange the total loan amount from various participating banks. Explanation: The mandated bank, or lead bank, takes responsibility for structuring the deal and inviting other banks to participate.

Question 42: Who typically pays the ‘Syndication Fee’ in a loan syndication process?

A. The participating banks pay the lead bank.
B. The lead bank pays the participating banks.
C. The borrower pays the lead bank.
D. The fee is shared equally among all parties.

Show Explanation

Correct Answer: C. The borrower pays the lead bank. Explanation: The lead bank charges a fee from the borrower for its services in arranging and managing the syndicated loan.

Question 43: What facilitated the establishment of new generation private sector banks in India in the early 1990s?

A. Nationalisation of major banks
B. Introduction of Basel norms
C. Liberalisation, Privatisation, Globalisation, and banking reforms
D. Merger of cooperative banks

Show Explanation

Correct Answer: C. Liberalisation, Privatisation, Globalisation, and banking reforms. Explanation: The economic reforms of the early 1990s opened up the banking sector, leading to the entry of new private banks.

Question 44: What was a key feature of the process model adopted by new generation private sector banks, particularly for personal segment loans?

A. Decentralised processing at branch level
B. Manual processing with multiple checks
C. Centralised processing of loan proposals
D. Outsourcing of loan processing to third parties

Show Explanation

Correct Answer: C. Centralised processing of loan proposals. Explanation: These banks often used centralised units to process loans, aiming for uniformity, compliance, and efficiency.

Question 45: What is the definition of Straight-Through Processing (STP) in the context of loans?

A. Manual processing without any verification.
B. Processing loans only for existing customers.
C. Full automation of the entire loan cycle with minimal manual intervention.
D. A process where loans are approved instantly without checks.

Show Explanation

Correct Answer: C. Full automation of the entire loan cycle with minimal manual intervention. Explanation: STP aims to automate the loan process from application to disbursement using technology, reducing manual handling.

Question 46: What is a major benefit of using Straight-Through Processing (STP) for banks?

A. Increased need for manual checks.
B. Ability to process more loans in minimum time, scaling up business.
C. Higher interest rates on loans processed through STP.
D. Reduced reliance on technology.

Show Explanation

Correct Answer: B. Ability to process more loans in minimum time, scaling up business. Explanation: STP increases efficiency and speed, allowing banks to handle larger volumes and enhance customer service.

Question 47: For which types of lending is Straight-Through Processing (STP) now being actively used, beyond its initial application in personal loans?

A. Only for agricultural loans
B. Only for large corporate loans
C. For MSME and other commercial lending as well
D. Only for educational loans

Show Explanation

Correct Answer: C. For MSME and other commercial lending as well. Explanation: While initially popular for personal loans, the benefits of STP have led to its adoption in processing loans for Micro, Small, and Medium Enterprises (MSME) and other commercial borrowers.

Question 48: What is a crucial first step for successfully automating credit processing using software?

A. Ensuring the software is the cheapest available.
B. Thorough synchronisation between the software developer (maker) and the lender (user).
C. Using software developed only by international companies.
D. Limiting the software’s features to basic calculations.

Show Explanation

Correct Answer: B. Thorough synchronisation between the software developer (maker) and the lender (user). Explanation: The software must accurately reflect the lender’s specific needs, policies, and processes, requiring close collaboration between the developer and the user.

Question 49: How does STP handle the complexities involved in commercial lending, such as ratio analysis?

A. It bypasses ratio analysis completely.
B. It requires manual calculation of all ratios outside the system.
C. Numerical parameters, including financial ratios and sensitivities, can be programmed into the system.
D. It uses simplified, generic ratios for all commercial loans.

Show Explanation

Correct Answer: C. Numerical parameters, including financial ratios and sensitivities, can be programmed into the system. Explanation: Although complex, quantitative analysis tools like ratio calculation and sensitivity analysis can be built into STP software.

Question 50: In personal segment lending, what elements play a vital role in the credit decision process facilitated by STP?

A. Only the loan amount requested.
B. Verification of KYC, credit score, EMI/NMI ratio, LTV ratio, etC.
C. The borrower’s educational qualifications.
D. The number of dependents the borrower has.

Show Explanation

Correct Answer: B. Verification of KYC, credit score, EMI/NMI ratio, LTV ratio, etc. Explanation: STP in personal lending heavily relies on processing verifiable data points like identity, credit history, repayment capacity ratios, and loan-to-value ratios.

Question 51: How can linking STP software to entities like the Unique Identification Authority of India (UIDAI) benefit the loan process?

A. It allows banks to access borrowers’ private emails.
B. It enables instant, first-hand verification of identity documents like Aadhaar.
C. It automatically calculates the borrower’s income tax liability.
D. It provides details of the borrower’s family members.

Show Explanation

Correct Answer: B. It enables instant, first-hand verification of identity documents like Aadhaar. Explanation: Integration with official databases like UIDAI allows for quick and reliable verification of customer credentials, saving time for both the bank and the customer.

Question 52: What is a significant outcome of implementing STP regarding the time taken for loan processing?

A. It generally increases the processing time due to system checks.
B. The Turn-Around Time (TAT) is considerably reduced due to minimal human intervention.
C. It only reduces time for data entry but not for decision making.
D. The TAT remains unchanged compared to manual processing.

Show Explanation

Correct Answer: B. The Turn-Around Time (TAT) is considerably reduced due to minimal human intervention. Explanation: Automation streamlines the process, reducing delays associated with manual handling and movement of files, thus shortening the overall time from application to decision.

Question 53: For effective risk mitigation, what capability must an STP software possess?

A. It should ignore potential risks to speed up processing.
B. It must be developed to account for various identified risk elements (e.g., financial, business, management risks).
C. It should only focus on mitigating credit score risk.
D. It relies solely on the borrower’s declaration regarding risks.

Show Explanation

Correct Answer: B. It must be developed to account for various identified risk elements (e.g., financial, business, management risks). Explanation: A robust STP system needs to incorporate checks and parameters designed to identify and assess the multitude of risks involved in lending.

Question 54: Why is the integration of STP software with third-party services and data sources considered important?

A. To increase the cost of the software.
B. To access real-time transactional data and other relevant information about a prospective borrower for risk assessment.
C. To allow third parties to make lending decisions.
D. To fulfill a basic regulatory requirement without practical use.

Show Explanation

Correct Answer: B. To access real-time transactional data and other relevant information about a prospective borrower for risk assessment. Explanation: Accessing external data (like credit bureaus, account aggregators, official registries) provides a broader and more current view of the borrower’s profile and associated risks.

Question 55: What technologies are considered key for a contemporary STP software to effectively use extensive third-party data?

A. Basic spreadsheet software and email
B. Manual data entry and verification
C. Big Data analytics and Artificial Intelligence (AI)
D. Traditional statistical analysis tools only

Show Explanation

Correct Answer: C. Big Data analytics and Artificial Intelligence (AI). Explanation: Handling and deriving insights from vast amounts of data (Big Data) requires advanced analytical techniques, often powered by AI, for effective risk assessment and decision making within STP.

Question 56: What role do Credit Information Companies (CICs) play in the lending ecosystem supported by STP?

A. They provide loans directly to borrowers.
B. They aggregate, analyse, and share data on borrower transactions and behaviour patterns with lenders.
C. They audit the banks’ STP systems.
D. They set the interest rates for loans processed through STP.

Show Explanation

Correct Answer: B. They aggregate, analyse, and share data on borrower transactions and behaviour patterns with lenders. Explanation: CICs compile credit histories from various lenders and provide credit reports and scores, which are crucial inputs for STP systems in assessing default risk.

Question 57: In “Machine Lending” driven by STP, what forms the basis of the lending decisions when human interference is minimised?

A. The personal judgement of the bank manager.
B. Random selection of applications.
C. Algorithms coded into the program based on a defined set of parameters or rules.
D. Recommendations from sales agents.

Show Explanation

Correct Answer: C. Algorithms coded into the program based on a defined set of parameters or rules. Explanation: Machine lending relies on pre-defined rules and parameters (quantitative and qualitative) embedded in the software’s algorithms to make credit decisions.

Question 58: Why is flexibility in the parameterisation of STP rules considered important?

A. So that programmers can constantly change the code.
B. Because the operating environments for lenders and borrowers are dynamic and rules may need adjustments.
C. To allow borrowers to set their own loan terms.
D. To make the system less reliable.

Show Explanation

Correct Answer: B. Because the operating environments for lenders and borrowers are dynamic and rules may need adjustments. Explanation: Business conditions, regulations, and bank policies change, requiring the STP system’s parameters to be adaptable, ideally with authorised user control rather than constant reprogramming.

Question 59: How does STP help in preventing unintentional errors (omissions) in the lending process?

A. By requiring more manual checks.
B. By being rule-based automation, ensuring predefined steps and checks are consistently followed.
C. By slowing down the process to allow for careful review.
D. By involving multiple layers of human approval.

Show Explanation

Correct Answer: B. By being rule-based automation, ensuring predefined steps and checks are consistently followed. Explanation: Automated workflows ensure that necessary steps, validations, and data checks defined in the rules are not missed, reducing the chance of human error or oversight.

Question 60: Compared to subjective human judgement, how might STP provide a value statement on a borrower’s previous track record?

A. By providing a simple “satisfactory” or “unsatisfactory” rating.
B. By relying only on the borrower’s self-assessment.
C. By analysing data from CIC reports, bank statements, etc., to provide a definite, data-backed assessment.
D. By asking for references from the borrower’s acquaintances.

Show Explanation

Correct Answer: C. By analysing data from CIC reports, bank statements, etc., to provide a definite, data-backed assessment. Explanation: STP aims for objective assessment by processing actual data from various sources rather than relying on potentially biased or vague human judgements.

Question 1: When a partner executes loan documents on behalf of a partnership firm, in what capacity must they sign?

Question 2: What essential condition must be met regarding the state of mind of a person signing loan documents?

Question 3: What is the correct sequence regarding the filling and signing of loan documents?

Question 4: For a charge created by a company, within what timeframe from the date of document execution must it generally be registered with the Registrar of Companies (ROC)?

Question 5: Which entity mandates the registration of most security interests and mortgage charges under the SARFAESI Act?

Question 6: Besides CERSAI, where does a charge over an aircraft need to be additionally registered?

Question 7: What is the primary purpose of obtaining third-party guarantees when lending?

Question 8: Why are personal guarantees of proprietors or partners generally not insisted upon for loans to sole proprietorships or partnerships?

Question 9: In which type of company might personal guarantees of directors be particularly helpful, irrespective of other factors?

Question 10: Under what circumstance might a bank seek personal guarantees from directors even if a company is not closely held?

Question 11: When might a bank obtain a guarantee from a parent company?

Question 12: What undertaking do banks typically obtain from borrowers and guarantors regarding payments between them for the guarantee provided?

Question 13: Who has the legal right to create a charge over an asset offered as security?

Question 14: Which type of charge involves the transfer of legal possession of goods to the lender, although constructive possession might be allowed?

Question 15: In which type of charge over movable goods does the possession typically remain with the borrower?

Question 16: How are drawings in a cash credit account regulated by banks in sole banking arrangements?

Question 17: What information is typically used by banks for the periodic calculation of Drawing Power (DP) in a cash credit account?

Question 18: What is a primary reason for banks to bifurcate a working capital limit into a ‘Loan Component’ and a ‘Cash Credit Component’?

Question 19: For borrowers with working capital limits of ₹150 crore and above from the banking system, what is the generally stipulated minimum percentage for the loan component?

Question 20: What types of credit facilities are typically excluded before bifurcating the working capital limit into loan and cash credit components for large borrowers?

Question 21: What is the minimum tenor prescribed for the loan component when bifurcating working capital limits?

Question 22: When disbursing a term loan for a project executed over time, how is the disbursement typically handled?

Question 23: What risk is associated with a promoter funding arrangement where equity is brought in proportionately as the bank finances the debt portion?

Question 24: To mitigate equity funding risk in project finance, what should banks ensure regarding the infusion of equity by promoters?

Question 25: What Credit Conversion Factor (CCF) applies to the undrawn portion of cash credit/overdraft limits sanctioned to large borrowers (subject to the loan component rule), regardless of whether cancellable or not?

Question 26: When a term loan is disbursed in one go for purchasing a ready asset, what is the typical procedure involving the borrower’s margin?

Question 27: If a borrower provides satisfactory proof of having already paid a portion of the asset’s cost to the seller before the bank disburses the term loan, how is this amount usually treated?

Question 28: For project loans where execution occurs over time, how are disbursements generally timed?

Question 29: Which method of promoter equity infusion for projects is generally considered by banks to carry a greater equity funding risk?

Question 30: To mitigate equity funding risk in project finance, what key financial ratio should banks ensure is maintained at all times through promoter equity infusion?

Question 31: What situation might lead a bank to prefer involving other banks in financing an enterprise, leading to multiple banking or consortium arrangements?

Question 32: What distinguishes a consortium arrangement from a multiple banking arrangement?

Question 33: What role does the ‘Lead Bank’ typically play in a consortium arrangement?

Question 34: Following concerns raised about frauds, what key measure were banks advised to strengthen in consortium/multiple banking arrangements?

Question 35: What declaration should banks obtain from borrowers when granting fresh facilities under multiple banking arrangements?

Question 36: How frequently should banks under consortium or multiple banking arrangements exchange information about the conduct of the borrowers’ accounts?

Question 37: Which professionals are typically suggested for providing regular certification regarding a borrower’s compliance with various statutory prescriptions?

Question 38: To address confidentiality issues related to sharing borrower information, what should banks incorporate into their loan agreements?

Question 39: What action must banks take regarding information sharing before sanctioning any fresh loans, ad hoc loans, or renewing existing loans under multiple banking arrangements?

Question 40: What is loan syndication primarily used for?

Question 41: In loan syndication, what is the role of the bank that receives the mandate from the borrower?

Question 42: Who typically pays the ‘Syndication Fee’ in a loan syndication process?

Question 43: What facilitated the establishment of new generation private sector banks in India in the early 1990s?

Question 44: What was a key feature of the process model adopted by new generation private sector banks, particularly for personal segment loans?

Question 45: What is the definition of Straight-Through Processing (STP) in the context of loans?

Question 46: What is a major benefit of using Straight-Through Processing (STP) for banks?

Question 47: For which types of lending is Straight-Through Processing (STP) now being actively used, beyond its initial application in personal loans?

Question 48: What is a crucial first step for successfully automating credit processing using software?

Question 49: How does STP handle the complexities involved in commercial lending, such as ratio analysis?

Question 50: In personal segment lending, what elements play a vital role in the credit decision process facilitated by STP?

Question 51: How can linking STP software to entities like the Unique Identification Authority of India (UIDAI) benefit the loan process?

Question 52: What is a significant outcome of implementing STP regarding the time taken for loan processing?

Question 53: For effective risk mitigation, what capability must an STP software possess?

Question 54: Why is the integration of STP software with third-party services and data sources considered important?

Question 55: What technologies are considered key for a contemporary STP software to effectively use extensive third-party data?

Question 56: What role do Credit Information Companies (CICs) play in the lending ecosystem supported by STP?

Question 57: In “Machine Lending” driven by STP, what forms the basis of the lending decisions when human interference is minimised?

Question 58: Why is flexibility in the parameterisation of STP rules considered important?

Question 59: How does STP help in preventing unintentional errors (omissions) in the lending process?

Question 60: Compared to subjective human judgement, how might STP provide a value statement on a borrower’s previous track record?

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