CAIIB ABM Module C UNIT 22 MCQ - Credit Control and Monitoring

CAIIB ABM Module C UNIT 22 MCQ – Credit Control and Monitoring.

Question 1: What is a key reason why the risk of default on an advance may increase over time, even with excellent credit appraisal and documentation?

A. Banks fail to conduct proper documentation.
B. The business environment is statiC.
C. Assumptions made during appraisal may become invaliD.
D. Borrowers always intend to misuse funds.

Show Explanation

Correct Answer: C. Assumptions made during appraisal may become invalid. The dynamic nature of the business environment can cause the initial assumptions of a credit appraisal to become outdated.

Question 2: What is the primary purpose of credit control and monitoring, also known as Loan Review Mechanism (LRM)?

A. To provide more advances to borrowers.
B. To ensure funds are used as intended.
C. To decrease bank profits.
D. To complicate the borrower’s business operations.

Show Explanation

Correct Answer: B. To ensure funds are used as intended. Credit control and monitoring ensure that bank funds are used properly and for their intended purpose.

Question 3: What action should a bank take if it detects a diversion of funds by a borrower?

A. Sanction additional funds.
B. Ignore the diversion.
C. Detect and stop the unauthorised use.
D. Delay any action.

Show Explanation

Correct Answer: C. Detect and stop the unauthorised use. The bank should detect and prevent any unauthorised use or diversion of funds.

Question 4: What should a bank do if a borrower’s business is not performing as projected?

A. Immediately recall the advance without consultation.
B. Ascertain the deterioration and initiate appropriate action.
C. Provide more funds.
D. Ignore the situation.

Show Explanation

Correct Answer: B. Ascertain the deterioration and initiate appropriate action. The bank should monitor performance, identify any deterioration, and take suitable action in consultation with the borrower.

Question 5: When should a bank consider taking harsh actions like recalling an advance or seizing security?

A. If the business is performing well.
B. If there is a minor deviation from projections.
C. If the deterioration continues despite appropriate action.
D. Only after a long delay.

Show Explanation

Correct Answer: C. If the deterioration continues despite appropriate action. Harsh actions are considered if the business continues to decline despite the bank’s efforts.

Question 6: Why is early detection of problems important in credit monitoring?

A. To delay recovery.
B. To increase the available security.
C. To prevent deterioration of security and improve recovery chances.
D. It is not important.

Show Explanation

Correct Answer: C. To prevent deterioration of security and improve recovery chances. Early detection helps in taking timely action to protect the bank’s interests.

Question 7: What does the RBI advise banks about relying on for monitoring credit?

A. Solely depend on borrower statements.
B. Solely depend on certificates from Chartered Accountants.
C. Not to depend entirely on certificates from Chartered Accountants or borrower statements.
D. Avoid monitoring credit.

Show Explanation

Correct Answer: C. Not to depend entirely on certificates from Chartered Accountants or borrower statements. The RBI advises banks to use a variety of monitoring methods.

Question 8: What action can a bank take if it discovers an incorrect certification?

A. Accept the certification.
B. Provide more facilities.
C. Withdraw sanctioned facilities and take legal recourse.
D. Ignore the incorrect certification.

Show Explanation

Correct Answer: C. Withdraw sanctioned facilities and take legal recourse. Banks can take strong action in response to incorrect certifications.

Question 9: Which of the following provides useful information about the financial health and fund usage of a business?

A. Borrower’s personal accounts.
B. Conduct of the accounts with the bank.
C. Competitor’s accounts.
D. Employee’s accounts.

Show Explanation

Correct Answer: B. Conduct of the accounts with the bank. The way a borrower operates their account provides insights into their financial status.

Question 10: Which of the following is an unsatisfactory feature in the conduct of a borrower’s account?

A. High turnover.
B. Timely submission of statements.
C. Frequent overdrawings.
D. Regular payments.

Show Explanation

Correct Answer: C. Frequent overdrawings. Frequent overdrawings indicate potential financial instability.

Question 11: What measure might a bank take to strengthen its monitoring system in case of unsatisfactory features?

A. Reduce inspections.
B. Allow routing of transactions with any bank.
C. Insist on hypothecation instead of pledge.
D. Ensure sale proceeds are routed through the bank’s account.

Show Explanation

Correct Answer: D. Ensure sale proceeds are routed through the bank’s account. This helps the bank to keep track of the borrower’s finances.

Question 12: What type of information is submitted by the borrower at regular intervals to help the bank calculate Drawing Power (DP)?

A. Personal expenses.
B. Statements of stock and receivables.
C. Employee salaries.
D. Competitor information.

Show Explanation

Correct Answer: B. Statements of stock and receivables. These statements are crucial for calculating the borrower’s Drawing Power.

Question 13: What is the purpose of scrutinising stock and receivables statements?

A. To delay calculations.
B. To verify correctness and detect non-moving items.
C. To approve more advances.
D. To complicate the borrower’s operations.

Show Explanation

Correct Answer: B. To verify correctness and detect non-moving items. Scrutiny helps in accurate calculation of Drawing Power and identifying potential issues.

Question 14: Why is detecting non-moving stocks and old receivables important?

A. Only for calculating Drawing Power.
B. Only to help the borrower.
C. For correct calculation of Drawing Power and to detect danger signals.
D. It is not important.

Show Explanation

Correct Answer: C. For correct calculation of Drawing Power and to detect danger signals. This detection helps in assessing the borrower’s business health.

Question 15: How do bank officials verify the stock and receivables statements during periodic inspections?

A. By ignoring the records.
B. By comparing with competitor records.
C. By cross-checking with records and physical verification.
D. By relying solely on borrower statements.

Show Explanation

Correct Answer: C. By cross-checking with records and physical verification. This ensures the accuracy of the statements.

Question 16: When is a stock audit typically used by a bank?

A. Only for small accounts.
B. For all accounts.
C. For medium and large size accounts.
D. Never used by banks.

Show Explanation

Correct Answer: C. For medium and large size accounts. Stock audits are useful when verifying stocks is not feasible during normal inspections.

Question 17: What is the primary purpose of stock and receivables audits?

A. To sanction more loans.
B. To complicate the borrower’s work.
C. To cross-check the reliability of borrower statements.
D. To avoid inspections.

Show Explanation

Correct Answer: C. To cross-check the reliability of borrower statements. Audits ensure the accuracy of the information provided by the borrower.

Question 18: How often are financial statements of the business and auditors’ reports typically available?

A. Monthly.
B. Quarterly.
C. Annually.
D. Daily.

Show Explanation

Correct Answer: C. Annually. These statements provide a yearly overview of the borrower’s financial situation.

Question 19: What information does an analysis of financial statements provide?

A. Employee details.
B. Use/diversion of funds and financial health.
C. Competitor activities.
D. Customer feedback.

Show Explanation

Correct Answer: B. Use/diversion of funds and financial health. This analysis helps in understanding the borrower’s financial management.

Question 20: What is one of the purposes of periodic visits and inspections by the bank?

A. To annoy the borrower.
B. To assess the activity level.
C. To provide more loans.
D. To avoid checking charged assets.

Show Explanation

Correct Answer: B. To assess the activity level. These visits help in verifying the operational status of the borrower’s business.

Question 21: What does a field visit help in finding out?

A. Competitor information.
B. The position of stocks and bank’s charge over assets.
C. Employee satisfaction.
D. Customer complaints.

Show Explanation

Correct Answer: B. The position of stocks and bank’s charge over assets. Field visits verify the assets charged to the bank.

Question 22: Besides visits, what other method can a bank use to monitor a borrower?

A. Ignoring the borrower.
B. Interaction with select creditors and debtors.
C. Providing more advances.
D. Avoiding scrutiny of books of accounts.

Show Explanation

Correct Answer: B. Interaction with select creditors and debtors. This provides additional insights into the borrower’s business relationships.

Question 23: What is the purpose of periodic scrutiny of borrowers’ books of accounts?

A. To avoid monitoring.
B. To understand employee details.
C. To gain insight into financial transactions.
D. To sanction more loans.

Show Explanation

Correct Answer: C. To gain insight into financial transactions. Scrutiny of these records helps in detailed monitoring.

Question 24: Where can banks obtain market reports about the borrower and the business segment?

A. From the borrower only.
B. From employees.
C. From industry associations and rating agencies.
D. From customers.

Show Explanation

Correct Answer: C. From industry associations and rating agencies. These reports offer an external perspective on the borrower’s business.

Question 25: In what situation might a bank appoint a nominee on a company’s board?

A. In all cases.
B. In exceptional cases or for large limits.
C. Never.
D. Only for small limits.

Show Explanation

Correct Answer: B. In exceptional cases or for large limits. This allows the bank to have closer oversight of critical decisions.

Question 26: What is credit audit?

A. An audit of the borrower’s accounts by an external agency.
B. An examination of various credit functions of the bank.
C. A process of sanctioning more loans.
D. A review of employee performance.

Show Explanation

Correct Answer: B. An examination of various credit functions of the bank. It focuses on the bank’s internal credit processes.

Question 27: Who normally conducts the credit audit?

A. External auditors.
B. Internal staff with credit experience.
C. Borrowers.
D. Customers.

Show Explanation

Correct Answer: B. Internal staff with credit experience. This ensures that those conducting the audit understand the bank’s credit operations.

Question 28: What does credit audit primarily examine?

A. Borrower’s financial statements.
B. Compliance with sanction and post-sanction processes.
C. Employee satisfaction.
D. Customer feedback.

Show Explanation

Correct Answer: B. Compliance with sanction and post-sanction processes. It verifies that the bank’s credit policies and procedures are being followed.

Question 29: Who formulates the policies and procedures for credit audit?

A. RBI.
B. Each bank.
C. Borrowers.
D. External auditors.

Show Explanation

Correct Answer: B. Each bank. Banks create their own specific frameworks for credit audit.

Question 30: What is one of the objectives of credit audit according to RBI guidelines?

A. To sanction more loans.
B. To complicate credit processes.
C. To improve the quality of the credit portfolio.
D. To reduce regulatory compliance.

Show Explanation

Correct Answer: C. To improve the quality of the credit portfolio. Credit audit aims to enhance the bank’s lending practices and asset quality.

Question 31: Which of the following is a function of the Credit Audit Department?

A. To sanction loans.
B. To process Credit Audit Reports.
C. To avoid following up on findings.
D. To ignore responses received.

Show Explanation

Correct Answer: B. To process Credit Audit Reports. This department handles the documentation and analysis of audit findings.

Question 32: What should the scope of credit audit be broadened to include?

A. Only account-level reviews.
B. Overall portfolio and credit process reviews.
C. Employee performance.
D. Customer feedback.

Show Explanation

Correct Answer: B. Overall portfolio and credit process reviews. This broader perspective helps in identifying systemic issues.

Question 33: What does a portfolio review in credit audit involve?

A. Reviewing only large accounts.
B. Examining credit quality and suggesting improvement measures.
C. Ignoring concentrations in certain sectors.
D. Sanctioning more loans.

Show Explanation

Correct Answer: B. Examining credit quality and suggesting improvement measures. This review assesses the overall health of the bank’s credit portfolio.

Question 34: What does loan review include?

A. Reviewing only old accounts.
B. Reviewing the sanction process and post-sanction procedures.
C. Avoiding fresh proposals.
D. Focusing only on large accounts.

Show Explanation

Correct Answer: B. Reviewing the sanction process and post-sanction procedures. This ensures that loans are being processed correctly.

Question 35: What action points are included in a loan review?

A. Ignoring compliance.
B. Verifying compliance with policies and examining documentation.
C. Avoiding credit risk assessment.
D. Overlooking irregularities.

Show Explanation

Correct Answer: B. Verifying compliance with policies and examining documentation. These actions ensure that the bank’s rules are being followed.

Question 36: How should the frequency of loan review vary?

A. It should be the same for all accounts.
B. Depending on the magnitude of risk.
C. Only for low-risk accounts.
D. Only for high-value accounts.

Show Explanation

Correct Answer: B. Depending on the magnitude of risk. Higher-risk accounts should be reviewed more frequently.

Question 37: What does the procedure for credit audit involve?

A. Conducting audits at the borrower’s premises.
B. Conducting audits on-site at the branch.
C. Avoiding report on conduct of accounts.
D. Relying solely on borrower statements.

Show Explanation

Correct Answer: B. Conducting audits on-site at the branch. This allows for direct examination of the bank’s records and processes.

Question 38: Where are reports on the conduct of accounts of allocated limits obtained from?

A. From the borrowers’ premises.
B. From corresponding branches.
C. From external auditors.
D. They are not required.

Show Explanation

Correct Answer: B. From corresponding branches. This ensures a comprehensive view of the account’s operation.

Question 39: Are credit auditors required to visit borrowers’ factory/office premises?

A. Yes, always.
B. No, not normally.
C. Only for small accounts.
D. Only for high-risk accounts.

Show Explanation

Correct Answer: B. No, not normally. Credit audits focus on the bank’s internal processes and do not typically involve visiting borrower premises.

Question 40: What is the purpose of post-disbursal control, supervision, and monitoring?

A. To complicate bank advances.
B. To ensure the safety of bank advances.
C. To avoid checking fund usage.
D. To delay recovery proceedings.

Show Explanation

Correct Answer: B. To ensure the safety of bank advances. These measures are crucial for protecting the bank’s financial interests.

Question 1: What is a key reason why the risk of default on an advance may increase over time, even with excellent credit appraisal and documentation?

Question 2: What is the primary purpose of credit control and monitoring, also known as Loan Review Mechanism (LRM)?

Question 3: What action should a bank take if it detects a diversion of funds by a borrower?

Question 4: What should a bank do if a borrower’s business is not performing as projected?

Question 5: When should a bank consider taking harsh actions like recalling an advance or seizing security?

Question 6: Why is early detection of problems important in credit monitoring?

Question 7: What does the RBI advise banks about relying on for monitoring credit?

Question 8: What action can a bank take if it discovers an incorrect certification?

Question 9: Which of the following provides useful information about the financial health and fund usage of a business?

Question 10: Which of the following is an unsatisfactory feature in the conduct of a borrower’s account?

Question 11: What measure might a bank take to strengthen its monitoring system in case of unsatisfactory features?

Question 12: What type of information is submitted by the borrower at regular intervals to help the bank calculate Drawing Power (DP)?

Question 13: What is the purpose of scrutinising stock and receivables statements?

Question 14: Why is detecting non-moving stocks and old receivables important?

Question 15: How do bank officials verify the stock and receivables statements during periodic inspections?

Question 16: When is a stock audit typically used by a bank?

Question 17: What is the primary purpose of stock and receivables audits?

Question 18: How often are financial statements of the business and auditors’ reports typically available?

Question 19: What information does an analysis of financial statements provide?

Question 20: What is one of the purposes of periodic visits and inspections by the bank?

Question 21: What does a field visit help in finding out?

Question 22: Besides visits, what other method can a bank use to monitor a borrower?

Question 23: What is the purpose of periodic scrutiny of borrowers’ books of accounts?

Question 24: Where can banks obtain market reports about the borrower and the business segment?

Question 25: In what situation might a bank appoint a nominee on a company’s board?

Question 26: What is credit audit?

Question 27: Who normally conducts the credit audit?

Question 28: What does credit audit primarily examine?

Question 29: Who formulates the policies and procedures for credit audit?

Question 30: What is one of the objectives of credit audit according to RBI guidelines?

Question 31: Which of the following is a function of the Credit Audit Department?

Question 32: What should the scope of credit audit be broadened to include?

Question 33: What does a portfolio review in credit audit involve?

Question 34: What does loan review include?

Question 35: What action points are included in a loan review?

Question 36: How should the frequency of loan review vary?

Question 37: What does the procedure for credit audit involve?

Question 38: Where are reports on the conduct of accounts of allocated limits obtained from?

Question 39: Are credit auditors required to visit borrowers’ factory/office premises?

Question 40: What is the purpose of post-disbursal control, supervision, and monitoring?

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