Section 1: Course 01 Online Assessment

All questions are mandatory

Top of Form 1

Question (1)
What should the Articles of Association be used to verify? (Select all that apply)
a) The purpose of the loan is within the scope of the object of the company.
b) The signatories to the credit agreement and any related documents are
authorised by the Board to make borrowing decisions and bind the company
accordingly.
c) The total borrowing of the company is within the authorised borrowing limit.
d) The company is permitted to enter into contracts.
Question (2)
Which of the following are funded working capital products offered by banks in India?
(Select all that apply)
a) Packing credit.
b) Cash Management facilities.
c) Project Finance.
d) Overdraft.
Question (3)
Which of the following are forms of working capital finance? (Select all that apply)
a) Term lending for funding acquisition of plant and machinery
b) Performance guarantees
c) Short-term loans
d) Trade bill discounting facilities
Question (4)
Which of the following is not a non-funded facility? (Select all that apply)
a) Packing Credit
b) Performance Guarantee
c) Letter of Credit
d) External Commercial Borrowings. (ECBs)
Question (5)
Under Section 185 of the Companies Act, 2013, loans to company directors, a
company:
a) Can guarantee a loan taken by its 75% subsidiary.
b) Cannot give a loan to any director.
c) Can give a loan to the Managing Director.
d) Can give a loan to its 51% subsidiary.

Question (6)
Why is it important to register a security?
a) The company will know who has ownership over its assets.
 b) The Registrar of Companies is able to maintain a Register.
c) Banks must create rights over security offered to be able to enforce
ownership on it in the event the loan is not repaid.
d) It is part of the Legal Due Diligence of lending in banks.
Question (7)
Which factor has been responsible for reducing the share of total market lending by
Indian banks?
a) The entry of non-bank financial companies (NBFCs)
b) Disintermediation in the Indian financial system
c) The ability of banks to support long-term financing
d) Emergence of capital markets
Question (8)
Which of the following statements does not apply to a private limited company?
a) It can have no share capital and be a private unlimited company.
b) It can only have between two and 200 members.
c) Its shares are freely transferable and can be traded on the stock exchange.
d) It can have no share capital, but be limited by guarantee.
Question (9)
In a facility against assignment of receivables: (Select all that apply)
a) The bank advances money to the borrower’s debtor who gives it to the borrower.
b) The borrower’s debtor repays the debt directly to the bank.
c) The bank advances the borrower a percentage of the amount owed by the
borrower’s debtor against security of that debt.
d) The borrower repays the debt to the bank whether or not it is repaid by the
borrower’s debtor.
Question (10)
In the RBI Master Circular on Joint Ventures and Wholly Owned Subsidiaries:
a) Banks are permitted to lend to foreign companies having no element of Indian
ownership.
b) Banks are not permitted to provide buyers’ credit to overseas parties to facilitate
exports from India.
c) Banks are permitted to lend to foreign joint ventures and wholly owned
subsidiaries of Indian entrepreneurs.
d) Banks are permitted to offer only non-funded facilities to foreign JVs and wholly
owned subsidiaries of Indian entrepreneurs.
Question (11)
What does the RBI do in its banking supervision function?
a) Issues directives for banking conduct of all banks and institutions
b) Issues banking licences for commercial banks in India
c) Regulates interest rates of financial transactions which are outside deregulation
d) All of the above
Question (12)
In its circular on exposure limits/norms, the RBI effectively:
 a) Ensures that money is lent to deserving people and purposes.
b) Permits groups of related parties to borrow as much as they like from a bank.
c) Prevents concentration of lending to related borrowers and sectors.
d) None of the above.
Question (13)
Which is not an important credit consideration with respect to the legal structure of the
company?
a) Its ability to offer security.
b) Its ability to borrow.
c) The liability of its members.
d) The transferability of its shares.
Question (14)
When a loan is taken With Recourse, it means that:
a) The lender can recover the money only from the guarantor.
b) The lender cannot recover the loan from the borrower.
c) The lender has recourse only to the security provided by the borrower.
d) The lender can recover the loan from the borrower.
Question (15)
In which of the following company types may members be held personally liable for the
debts of the company?
a) Public unlimited Company having share capital.
b) Public Company limited by Guarantee having share capital
c) Private Company limited by Guarantee and having no share capital.
d) All of the above.
Question (16)
Why do secured facilities carry a lower capital charge than unsecured facilities?
a) The potential residual loss after realisation of security is lower.
b) Pricing on secured facilities is lower.
c) Secured facilities are usually for a shorter tenor.
d) Secured facilities are usually repaid by fixed instalments.
Question (17)
Which of the following statements is true? (Select all that apply)
a) In their role as aggregators of deposits and providers of credit, banks occupy
a position of trust.
b) The primary function of banks is to show profits for their shareholders, as is the case
in other sectors of industry.
c) The responsibility of banks to ensure prudent lending is limited. A greater
responsibility rests with the RBI in its policy making and supervision functions.
d) A potential cause for large Non Performing Assets may be inadequate credit
assessments carried out by banks.
Question (18)
What types of financial services do banks typically provide to investment companies?
(Select all that apply)
 a) Underwriting of capital.
b) Letters of credit to facilitate trade.
c) Advice on mergers and acquisitions.
d) Retail loans to employees of the company.
Question (19)
Which is not a role of the RBI as the banker to the Government?
a) All state government deposits, remittances, exchange and banking
transactions are conducted through the RBI.
b) All central government deposits, remittances, exchange and banking transactions
are conducted through the RBI.
c) The RBI provides Ways and Means Advances (WMA) to meet short-term temporary
payment mismatches and investment of surplus cash balances.
d) Management of Public Debt and adviser on monetary and banking matters.
Question (20)
Which of the following statements is true?
a) Post-shipment credits are loans to bridge the time gap from receipt of the goods by
the seller to receipt of the sales proceeds from the buyer.
b) Since exports are a priority for the country, the RBI has not specified any guidelines
for regulation of export credit.
c) Pre-shipment credit is an advance given to meet working capital needs before
shipment.
d) Pre- and post-shipment credits can be denominated only in Indian Rupees.

Question (21)
Why are banks required to be tightly regulated?
a) They conduct thorough credit assessments of borrowers whom they lend money to.
b) They print currency notes and distribute them in the economy.
c) They offer high interest rates on deposits which are an important source of income
to depositors.
d) Their borrowing and lending activities play an important role in developing the
economy.
Question (22)
What additional documentation do public limited companies require prior to being able
to commence business or borrow money?
a) Certificate of Incorporation
b) Certificate of Commencement of Business
c) Lending Limit Provisions
d) Articles of Association
Question (23)
Which of the following is a guideline issued by the RBI with respect to the issue of
guarantees?
a) Banks need not confine themselves to issuing financial guarantees and performance
 guarantees.
b) Banks shall not issue guarantees on behalf of overseas JV/WOS of Indian
companies.
c) Banks should confine themselves to the provision of performance guarantees
and exercise due caution with regard to financial guarantees.
d) Banks should prefer longer maturities over shorter maturities.
Bottom of Form 1

Section 1: Course 02 Online Assessment

All questions are mandatory
Top of Form 1

Question (1)
What sources of cash are used when undertaking the solvency test?
a) The injection of new capital by shareholders.
b) The sale of assets.
c) Sources other than day-to-day operations.
d) Arranging the refinancing of existing debts.
Question (2)
Which rating scale would generally be used to rate a five-year bond issued in India with
less than 12 months to maturity?
a) A scale ranging from A1 (SO) to D (SO)
b) A nine point scale from A1 to A4 and D for default
c) A scale ranging from AAA (SO) to D (SO)
d) A 20 point scale ranging from AAA to D
Question (3)
If a corporate is proposing to raise funds from a new five-year bond, what type of rating
would they ask a rating agency to provide in order to attract investors?
a) An issue rating
b) An obligor rating
c) A corporate family rating
d) An issuer rating
Question (4)
What is a key difference between internal and external credit ratings for corporates?
a) Internal credit ratings provide an estimate of the likely loss in the event of default.
b) Internal credit ratings primarily use statistical models with limited expert opinion
being used.
c) Rating agencies produce facility risk ratings as well as obligor credit ratings.
d) The main three ratings agencies use similar rating scales, but those used by
banks can be less granular.
Question (5)
What classification would you expect to see when a rating agency provides a rating
outlook?
a) Uncertain
b) Negative
c) Watchlisted
d) Potential upgrade
Question (6)
What control mechanisms are often used to ensure that credit underwriting decisions
have been prudently made?
a) Peer reviews of an agreed percentage of all loan decisions made each month.
b) Post-approval monitoring of loan requirements such as compliance with loan
covenants.
Poc) st-approval reviews of a sample of loan decisions undertaken by an independent
review officer.
d) Checks to confirm that credit decisions have only been made by individuals
or committees within delegated authorities.
Question (7)
What is the risk that a business is run in such a way that it fails to generate sufficient
cash to meet its debt obligations?
a) Facility Risk
b) Financial Risk
c) Industry and Business Risk
d) Management Risk
Question (8)
Which is one of the six key components of a bank’s credit underwriting framework?
a) The delegation of credit authority
b) Defining the calculation of risk adjusted returns
c) Determining policies on ethical and reputational risks
d) Facility structuring guidelines
Question (9)
What is the basic purpose of undertaking a credit analysis?
a) To confirm that the facility risks comply with the bank’s credit policy
b) To determine the correct pricing parameters when lending to a borrower
c) To calculate the expected loss if the borrower defaults
 d) To understand a borrower’s ability and willingness to service their debt
obligations when due
Question (10)
What must credit rating agencies in India do in order to comply with regulatory
requirements after they have rated a debt instrument?
a) Monitor company performance and update the rating on an annual basis.
b) Give a minimum of three months notice to the issuer before withdrawing their rating.
c) Report any changes in the rating to the regulator.
d) Continue to rate the debt instrument over its lifetime.

Question (11)
What does the liquidity test provide information about that can be used when
undertaking a credit assessment of a borrower?
a) Whether secondary sources of repayment will be sufficient to meet its debt
obligations.
b) How much the borrower is able to raise from all sources to meet all its cash needs.
c) Whether the borrower is generating sufficient cash from day-to-day operations to
cover its interest and principal obligations.
d) The ability of the borrower to generate cash from day-to-day operations to
meet all cash needs.
Question (12)
What factors influence the values that appear in a credit migration or transition matrix?
a) The final and initial ratings for the corporate at the start and end of the agreed
time horizon.
b) The number of rating bands that a bank uses in its rating scale.
c) The number of rating bands that a rating is upgraded over the selected time horizon.
d) The number of times that a corporate’s graded credit is upgraded and downgraded.
Question (13)
What service do local rating agencies provide for investors in India?
a) Information that ensures that issues are priced correctly.
b) Research and opinions that address information asymmetry.
c) They ensure that there is a liquid market for debt instruments once issued.
d) Confirmation that an issuer will meet its financial obligations.
Question (14)
A potential customer has submitted a credit request. It has passed the liquidity test but
failed the solvency test. What action is the lender most likely to take?
a) Recalculate the liquidity and solvency tests.
b) Undertake a further credit assessment.
c) Decline the credit request.
d) Approve the credit request.
Question (15)
How are credit ratings used as part of the credit underwriting process for a credit
 request?
a) They are used to determine if allowances for losses are required.
b) They are used as inputs when undertaking financial analysis.
c) They are used to determine the required level for credit approval.
d) They are used to manage portfolio credit risks.

Question (16)
Why is the basis for establishing a credit rating different in capital markets and banking
markets?
a) Capital markets facilitate capital transformation.
b) Rating agencies undertake an analysis of risk-return when investment decisions are
made rather than the banks when making credit decisions.
c) Investors bear the credit risk when they invest in debt securities.
d) Investors indirectly provide money to corporates who raise funds from capital
markets.
Question (17)
Which measure is used to measure borrower or obligor risk?
a) Maturity (M)
b) Loss Given Default (LGD)
c) Probability at Default (PD)
d) Exposure at Default (EaD)
Question (18)
A customer has defaulted with Exposure at Default of 10,000. Mitigation held is valued
at 15,000 but only 50% is recovered when it is sold and costs of 1,000 are incurred.
What is the LGD%?
a) 50%
b) 35%
c) 25%
d) 65%
Question (19)
What is the primary purpose of conducting a projections scenario analysis as part of
the lending decision process?
a) To confirm that the assumptions underlying the projections are valid.
b) To identify the impact of credit enhancements.
c) Determine whether there is a need to reassess the initial financial risk assessment.
d) To compare projected financial results with the most recently available actual
financial results.
Question (20)
In the Merton approach, at what point is default considered to have occurred?
a) When asset volatility exceeds two standard deviations.
b) When the value of a firm is less than the value of its liabilities based on
market values.
c) When the firm’s leverage ratio exceeds agreed thresholds.
 d) When the value of a firm is less than the value of its liabilities based on accounting
values.
Question (21)
What is the underlying concept on which statistical models used in credit risk
assessment are based?
a) That the weighted outputs for the identified factors can be combined to determine a
score.
b) That there is a relationship between company default and financial ratios and
other factors.
c) That regression analysis can be used to build a model.
d) That modelled scores can be mapped to empirically observed default probabilities.
Question (22)
What should banks do if income levels are such that risk-adjusted return thresholds are
not met?
a) Cancel unutilised facilities
b) Monitor the situation and seek to improve the rate of return over time.
c) Ask the customer to re-bank with another bank.
d) Reprice existing exposures
Question (23)
What is a key difference between global and Indian national ratings scales?
a) The number of ratings in each scale differs, making comparisons difficult.
b) Ratings using Indian national ratings scales and global ones are not comparable as
they use different rating methodologies.
c) Indian corporates rated using global scales will have their ratings capped
based on the country rating for India.
d) The scales use different combinations of alpha and alphanumeric symbols for each
grade.
Question (24)
Why are banks more susceptible to failure as a result of their exposure to credit risk
than other types of companies?
a) Because they have low capital ratios
b) Because credit risk is the single biggest risk that banks are exposed to
c) Because capital buffers can be insufficient if there are significant credit losses
d) Because they operate with very high leverage
Question (25)
What does a credit scorecard that uses statistical techniques enable a bank to
produce?
a) The placement of a customer in a risk bucket.
b) A score for a customer as part of the credit assessment process.
c) A credit rating
d) A credit risk grade for a customer
Question (26)
Which risk ratings provide a measure of the probability of default?
 a) Through-the-cycle risk ratings
b) Obligor risk ratings
c) Single risk ratings
d) Facility risk ratings
Question (27)
How can banks use the information provided by the external rating agencies to
improve their credit assessment processes?
a) To assess credit portfolio risks.
b) As a benchmark for comparing with model outputs when determining the rating for a
customer.
c) As comparators when designing and developing their internal ratings system.
d) To assess the customers’ attractiveness within a particular industry.
Question (28)
Which is the longest established credit rating agency in India?
a) ICRA Ltd.
b) India Rating and Research Pvt Ltd.
c) SME Rating Agency of India Ltd.
d) CRISIL Ltd.
Question (29)
Which requirement is an element of Pillar 2 of the Basel III Pillars approach?
a) Disclosing details of adequate capital and risk management processes.
b) The calculation of capital requirements for credit risk.
c) Holding capital in line with minimum capital requirements.
d) Undertaking and documenting an annual internal capital adequacy
assessment.
Question (30)
How is current market information used by the Merton approach, or contingent claims
model, to assess the credit risk for a corporate?
a) By directly revaluing the corporate’s assets using information contained in
stock prices
b) By calculating the leverage ratio for the corporate based on accounting values
c) Through highlighting the financial structure of the corporate
d) By revaluing the corporate’s liabilities
Question (31)
What is a good source of relative measures of credit risk for a corporate customer?
a) A credit rating agency rating
b) A structural credit risk model that uses equity information
c) Altman’s Z-score model
d) An expert system
Question (32)
Why is the level of bank capital a concern for regulators?
a) If a bank incurs large losses it would reduce the level of capital the bank holds
 and make it vulnerable to failure.
b) Credit risk is the largest risk that a banks face and capital is needed to protect
against large losses when they happen.
c) Holding too high a level of capital will result in poor returns for shareholders.
d) It is inevitable that a bank will incur large losses at some point in the economic
cycle.
Question (33)
As an element of portfolio credit risk, which factor has the most significant impact on
exposure credit risk?
a) Recovery rate
b) Asset correlation
c) Concentration risk
d) Correlation in exposure values
Question (34)
What is the most common definition of credit risk as it applies to banks?
a) Credit risk is the risk of economic loss that a bank incurs as a result of the
failure by a borrower to make interest and principal payments in full and on time.
b) Credit risk is the possibility of losses associated with a fall in value of traded debt
instruments.
c) Credit risk is the risk of losses on funded credit products.
d) Credit risk is the loss in value of a credit exposure as a result of a deterioration in
the creditworthiness of the obligor.
Question (35)
What is the definition of Common Equity Capital?
a) Loss absorbing capital that can be converted to common shares or written down in
the event of substantial losses
b) A bank's pure or concern capital
c) The highest quality component of capital
d) A bank's gone-concern or supplementary capital
Question (36)
What factors are included in rating agencies’ industry rating methodology?
a) An assessment of a company’s business strategy with regards to the industries they
operate in.
b) A peer comparison of financial performance for companies operating in the same
industry.
c) Factors that are considered most predictive of default for companies
operating in that particular industry.
d) The ability of management to address issues that arise in their external
environment.
Question (37)
What is a key feature of the Standardised Approach for calculating credit risk capital?
a) The ability to use greater granularity when calculating risk-weighted assets.
b) The use of a bank’s own estimates for components such as Probability of Default.
 c) The need to obtain regulatory approval before the Standardised Approach can be
used.
d) The use of external ratings to determine risk weights for credit exposures.
Bottom of Form 1

hich statement about EBITDA is correct

Section 1: Course 03 Online Assessment
All questions are mandatory
Top of Form 1

Question (1)
Which statement correctly describes the capital investment cycle?
a) Each business may have several capital investment cycles that are defined by the
periods of credit extended to it under each of its principal lending arrangements.
b) Each business may have several capital investment cycles that are defined by
the useful life of its significant fixed assets.
c) Each business has a unique capital investment cycle that is defined by the expected
life of the business.
d) Each business has a unique capital investment cycle that is defined by the average
remaining life of its outstanding debt at any point.
Question (2)
While analysing the financial statements of a private limited company, you discover
 that the enterprise has recorded revenue before completing all obligations under the
associated contract. What possible warning sign will be available in the financial
statements?
a) Positive operating cash flow in the cash flow statement.
b) Unusual increase in the unsecured loan.
c) Cash flow from operations lagging behind net income.
d) Unusual increase in trade payables.
Question (3)
Which of the component described is part of the operating cycle?
a) The average length of time a company takes to pay its bank loans.
b) The life of a piece of machinery used in the manufacturing process.
c) The length of time a company takes to sell goods to customers once they are
manufactured.
d) The length of time a company takes to repay short-term loans used to finance
inventory purchases.
Question (4)
Identify the statement that is most applicable to the funding of the operating cycle.
a) It does not matter how it is funded as the operating cycle will carry on over time, so it
can be funded by either short- or long-term debt.
b) It is normally funded by longer-term debt because this provides certainty to enable
the operations to continue over the longer term.
c) It is typically funded by shareholder loans as shareholders are likely to be closest to
the operations of the business.
d) It should be funded by short-term debt as this matches the nature of the
operating cycle and the assets being funded, which are intended to be converted
into cash as soon as possible.
Question (5)
Ramesh has applied for a loan to grow his business, which he owns jointly with his
partner Badri. The loan will be secured on machinery owned by the business, together
with a personal guarantee from Ramesh and he has submitted his Personal Balance
Sheet to support this. Which item would you exclude in the calculation of Ramesh's net
worth?
a) His bank balances.
b) The outstanding mortgage on his apartment.
c) His shares in the business.
d) His collection of rare antique toys.
Question (6)
How evident is creative accounting in a company’s financial statements?
a) Creative accounting always presents warning signs that can be found by comparing
a company’s audited balance sheet with the balance sheet that is available in the MCA
portal.
b) Creative accounting usually exhibits warning signs that can be found through
scrutiny of a company’s financial statements.
c) Creative accounting comes with warning signs that are typically best discovered by
 comparing a company’s financial statement with its income tax returns.
d) Creative accounting comes with warning signs that are typically best discovered
through interaction with company management.
Question (7)
Which statement most accurately describes why financial statements are commonly
used as the basis for credit analysis?
a) Because accounts prepared on a cash basis are not as reliable due to variables
such as exchange rate and interest rate movements.
b) Because cash-based financial statements always give a more optimistic view of a
company's profitability and should therefore be treated with caution.
c) Because lenders typically use accruals accounting to prepare their own accounts.
d) Because they show a more complete view of the assets controlled and
amounts owed by a company.
Question (8)
Why would you perform an initial analytical review of a company's financial
statements?
a) To remove credit requests that are obviously outside the bank's risk appetite.
b) To avoid conducting a full review of a company's financial statements if key financial
targets are met.
c) To make a quicker lending decision when the loan is simply being rolled over from
one period to the next.
d) To remove the need for further analysis where there is already a lending relationship
and there is currently no sign of financial distress.
Question (9)
Which non-current asset is categorised as an item of "property, plant, and equipment"?
a) Computer software
b) Goodwill
c) Investment property
d) Motor vehicle
Question (10)
As a lender, why is it important that you are able to reconcile the movement in equity to
the balance sheet?
a) Equity represents the accumulated income of a business and it is important to
understand how that has been earned.
b) Equity reserves are where a company stores its surplus cash, so it is critical to
understand how those reserves have changed over the period.
c) Changes in equity that result from unexplained items may be indicative of
poor accounting practices, indicating that the accounts may be unreliable.
d) Changes in equity are a result of increases in shareholder capital less dividends, so
reconciling the movement ensures you know what dividends have been paid.
Question (11)
Where would you look when trying to assess the operating lease commitments of a
business?
 a) By analysing the movement in reserves.
b) In the balance sheet.
c) In expenses in the statement of profit and loss and in the notes to the
accounts.
d) In the directors trading update.
Question (12)
Which statement is true regarding debit entries in double-entry accounting?
a) Debit entries increase revenue in the statement of profit and loss and increase
liabilities in the balance sheet.
b) Debit entries decrease revenue in the statement of profit and loss and
decrease liabilities in the balance sheet.
c) Debit entries decrease revenue in the statement of profit and loss and increase
liabilities in the balance sheet.
d) Debit entries increase revenue in the statement of profit and loss and decrease
liabilities in the balance sheet.
Question (13)
Why are accrual-based financial statements commonly used as the basis for credit
analysis?
a) Because accrual-based financial statements give a more conservative view of a
company's profitability.
b) Because lenders typically use accrual accounting to prepare their own accounts.
c) Because they show a more complete view of the assets owned and amounts
owed by a company.
d) Because managers can easily manipulate accounts prepared on a cash basis by
changing accounting policies.
Question (14)
Which statement is correct in relation to funding the capital investment cycle?
a) Long-term financing is a suitable means of funding capital assets because it may
allow the business to extend credit beyond the serviceable life of the asset, which can
then be used to support other funding requirements.
b) Long-term financing is a suitable means of funding capital assets because it
allows the borrower to meet the cost of financing from operating income
generated through the use of the asset.
c) Short-term financing is not a suitable means of funding capital assets because it is
more expensive than long-term funding.
d) Short-term financing is a suitable means of funding capital assets because it
provides greater flexibility to the borrower.
Question (15)
As a senior debt-holder, which of these would be a high risk indicator and would
require further investigation when monitoring financial statements?
a) A reduction in the total long-term liabilities.
b) Repayment of subordinated debt which had been held by the shareholders of
the business.
c) Dividends paid which are more than half of the retained profit for the year.
 d) A decrease in long-term debt compared to the previous year, with a portion re-
classified as a current liability.
Question (16)
What is a key risk factor when considering the risk of default on long-term loans?
a) Accepting a large order at a lower gross margin though it still returns a net profit in
excess of cost of capital.
b) Paying dividends that exceed current period net income.
c) Disposing of assets that are surplus to business requirements.
d) Taking advantage of supplier discounts by reducing the period of credit taken.
Question (17)
What is the correct definition of equity from an accounting perspective?
a) Equity is the total of nominal share capital, plus additional paid in capital plus any
other non-distributable reserves.
b) Equity is the difference between assets at fair value and the total of all liabilities
including those recognised by the business and those that are off balance sheet.
c) Equity is a residual amount that remains after all recognised liabilities are
deducted from all recognised assets.
d) Equity is the sum of capital invested by shareholders plus profits of the business.
Question (18)
Gearchange LLP has the following credit balances in its books at year end. What are
the total long-term liabilities?
- Trade payables 110
- Deferred tax 30
- Pension obligation 230
- Secured loan 160 (due in 4 equal annual instalments)
- Retained profits 75
- Shares issued 125
a) 380
b) 350
c) 420
d) 730
Question (19)
Which statement is accurate in relation to the operating cycle?
a) A company will have numerous operating cycles relating to different product
or service lines.
b) A company usually has numerous operating cycles, each relating to a different
customer.
c) The number of operating cycles will increase as a company sells more of its goods
or services.
d) A company usually has just one operating cycle.
Question (20)
In relation to fixed assets and expenses which statement is correct?
a) Fixed assets are tangible items, whilst expenses are payments made for intangibles,
 including services.
b) Fixed assets are those items expected to generate income for more than a year,
whereas all other payments are expenses.
c) Expenses are all items which will be turned into cash in less than 12 months. All
other spending is classified as fixed assets.
d) Expenses are those transactions relating to the operational activities of the
business. Fixed assets are those assets which will generate income for more
than 12 months.
Question (21)
What would you find on a typical business balance sheet that you would not normally
find on a personal statement of net worth?
a) A list of liabilities
b) Shareholders' equity
c) Tangible assets
d) A total for net assets or net worth
Question (22)
Which statement relating to the components of the operating cycle is accurate?
a) A decreasing length of the operating cycle is a sign of deteriorating performance.
b) As the company grows it is inevitable that the operating cycle will increase in length.
c) As the operating cycle gets longer, less cash is tied up.
d) A decreasing length of the operating cycle will result in less borrowing being
needed for a business.
Question (23)
Why are capital investment cycles often financed by long-term debt?
a) Short-term debt is more expensive than long-term debt, so using long-term financing
minimises the average cost.
b) It minimises the risk to the business rather than having to re-finance short-term
borrowing repeatedly during the life of the asset.
c) The loan repayments can be matched to the economic life of the asset and
spread through the statement of profit and loss over the life of the asset.
d) The cost of debt is known, whereas equity shareholders may demand higher returns
in the future.
Question (24)
Which item would be classed as an asset on the balance sheet at the year end?
a) Finished goods inventory which was sold soon after the year end.
b) Costs of researching possible new uses of biotechnology.
c) Security costs relating to warehousing facilities.
d) Rental payments on the company's head office.
Question (25)
Which statement is correct regarding assets and expenses?
a) Items purchased by a business that have a useful life of less than a year are
expenses. Items with a longer life are assets.
b) Assets are items that are not used up immediately by a business. As an asset is
 used up over time, the reduction in value is recorded as an expense.
c) Assets are physical items that a business purchases. Services that are purchased
are expenses.
d) Expenses relate to the current operating activities of a business. Investments in
capital assets are used to provide returns on funds surplus to operating requirements.

Question (26)
Which of the following statements is correct?
a) Creative accounting is not intended to mask poor financial performance.
b) Creative accounting is not intended to make reasonable performance look even
better.
c) Some level of creative accounting is present in all financial statements.
d) The use of creative accounting tends to reduce the financial statements’
quality and reliability.
Question (27)
Who decides the accounting policies used by a company in preparing financial
accounts?
a) The shareholders.
b) The company auditors.
c) Senior management of the company.
d) Local accounting standard setters.
Question (28)
Which statement is correct regarding the funding of the operating cycle?
a) Long-term funding is suitable because the funds can be used elsewhere in the
business if they are surplus to the needs of the operating cycle.
b) A long-term loan would place an unnecessary burden on the business beyond
the period that the financing is required for.
c) Equity financing is suitable because it is relatively simple to organise and investors
can have their investment returned to them if the funds are no longer required.
d) Long-term loans are suitable because they can easily be repaid if funding is no
longer required.
Question (29)
What is the purpose of financial statement notes?
a) To provide further analysis of the performance of the company.
b) To further clarify and explain the numbers found in the financial statements
and provide any other relevant information not included elsewhere.
c) To give detail of the key assumptions made in preparing the financial statements and
show the impact of using other assumptions.
d) To provide management's view of the trading environment and detail of the
performance highlights of the business.
Question (30)
You have carried out a cursory review of the financial statements of a business your
bank has lent money to and have identified some key trends. Which of the following
 would be of most concern to you?
a) Operating cash flows have turned increasingly negative, even while the
company has reported increased turnover and profits.
b) Inventory turnover has increased slightly during the last 12 months, whilst sales
have been flat.
c) Sales are flat year on year, but profit has risen due to falling cost of goods sold.
d) Sales and profit have been flat during the year but trade receivables has reduced
significantly.
Question (31)
Which factor ultimately determines the life cycle of trade receivables?
a) The speed with which the company collects cash from customers.
b) The volume of sales made.
c) The payment terms offered to customers.
d) The length of time finished goods are held before being delivered to a customer.
Question (32)
Which statement is correct regarding the classification of an item as an asset on the
balance sheet?
a) Assets sold shortly after the balance sheet date should not be included on the
balance sheet.
b) Items from which the business expects to gain an economic benefit and which
it has control over should be included.
c) Items the company has taken ownership of and is using, but which have not yet
been paid for, should not be included on the balance sheet.
d) Items on short-term lease should be included in the balance sheet.
Question (33)
Which statement accurately describes an accounting risk?
a) A risk that there may be insufficient assets to repay liabilities as they fall due.
b) A risk that the carrying amount of fixed assets may be overstated compared to their
market value.
c) A risk that a company's financial controls may be weak, leading to the
possibility of undetected fraud, waste, or inefficiency.
d) A risk that severe commodity price fluctuations will destabilise the cost base of the
business.
Question (34)
Which of these actions would cause the short-term financing gap of a company to
increase?
a) Renegotiation of a revolving credit facility on more favourable terms.
b) Purchase of new machinery to reduce production time.
c) Changing the payment terms offered to customers from 30 to 60 days.
d) Improvements in the manufacturing process to use less raw material content.

Question (35)
Which statement correctly defines the asset conversion cycle?
 a) A continuous series of operating cycles within a longer capital conversion
cycle.
b) The speed with which the business turns raw materials into cash.
c) A continuous series of capital conversion cycles within a longer operating cycle.
d) The speed with which the business recovers the cost paid for capital items such as
plant and machinery.
Question (36)
What warning sign would be a clue that a company is inflating its revenues in a given
year?
a) Trade receivables growing much more rapidly than sales in that year.
b) Bank balances growing much faster than sales in that year.
c) Trade receivables growing much more slowly than sales in that year.
d) Inventory growing much faster than sales in that year.
Question (37)
Which accounting treatment is correct?
a) Penalty imposed by the Custom Department and confirmed on appeal as having
been paid is shown as a contingent liability; payment is shown as a receivable by the
company, which has been pointed out by the auditor as being legitimately contingent in
the auditor’s report.
b) Penalty imposed by the Custom Department and confirmed on appeal as having
been paid is shown as contingent liability; payment made is shown as a receivable by
the company.
c) Penalty imposed by the Custom Department and allowed on appeal, but the amount
paid under protest is shown as liabilities and charged to the statement of profit and
loss.
d) Penalty imposed by the Custom Department and confirmed on appeal as
having been paid is shown as a provision; payment is shown as an expenditure
by the company.
Question (38)
Which of the following accurately describes a determining feature of a current liability?
a) The debt does not carry an interest charge.
b) The liability relates to items that are part of the trading activities such as payments
to suppliers.
c) The original settlement period of the liability was less than 12 months at the time the
liability was recognised.
d) The liability is expected to settle within the normal operating cycle of the
business.

Question (39)
Your client is a small group of companies that follows Ind AS. On examining the
financial statements of its main subsidiary, you notice that its accounts are not
prepared under Ind AS, but under the other accounting standards for its country of
registration. Which approach should you take in this situation?
a) There is little cause for concern, because national accounting standards are
 generally more conservative than Ind AS.
b) You should research the local accounting policies and practices, compare
them to those of Ind AS, and consider their potential impact.
c) You should ask your customer to provide an alternative set of financial statements
based on Ind AS for the subsidiary.
d) You should request disclosures to align with the requirements of Ind AS, which are
typically more stringent than others.
Question (40)
You lend a company Rs.20 lacs to buy a new piece of machinery, with the loan secured
against the asset. Shortly after the machine is purchased, another company sells a
similar machine for Rs.12 lacs. What impact does this information have?
a) The company can choose whether to reduce the carrying value of the asset.
b) None; the company should record the asset at cost because it is going to be used
over a number of years and your credit analysis is based on this valuation.
c) The company should conduct an impairment review, which might result in a
downward adjustment of the asset's value and the need for additional security.
d) The company should retain the asset at cost, but it should shorten the asset's life by
increasing future depreciation.
Question (41)
How would failure to record depreciation expense affect a company’s earnings?
a) Failure to fully record depreciation expense inflates company earnings.
b) Depreciation is only an adjustment by debiting depreciation and crediting fixed
assets and does not, therefore, impact earnings.
c) Since depreciation is a non-cash expense, company earnings are not affected one
way or the other by its inclusion in the statement of profit and loss.
d) Failure to fully record depreciation expense reduces company earnings.
Question (42)
Which of these statements explains why generic IFRS might not have been fully
adopted in India?
a) Because IFRS has yet to develop standards that are suitable for anything other than
large multi-national businesses.
b) Because IFRS accounts typically produce lower reported profits, which is unpopular
with investors.
c) Due to the reporting needs of the Indian business and banking community
that were specific to this country.
d) Because IFRS is technically more challenging than most national accounting
standards.
Question (43)
Rudolf Trading has a seasonal business and typically has a borrowing requirement
during the first quarter of the year. When you review the financial statements prepared
at the year end, which factor would be an indicator of high risk?
a) The length of the operating cycle is lower than it was the previous year.
b) Long-term loans have been re-negotiated during the last 12 months and are now
repayable on various maturity dates beginning in 3 years.
 c) The company has short-term borrowing at the year end close to its funding
limit.
d) The cash flow statement shows increased operational cash flow compared to the
previous year.
Question (44)
Which statement relating to the Income Statement (profit and loss account) is correct?
a) Differences in statement of profit and loss accounts from one period to the next
reflect activity in that period.
b) Statement of profit and loss balances are carried forward from one period to the
next.
c) The amount recorded in an account within the statement of profit and loss
reflects the value of transactions in that account during the period.
d) In the statement of profit and loss, movement in Revenue accounts is always equal
to movement in Expense accounts.
Bottom of Form 1

Section 1: Course 04 Online Assessment

All questions are mandatory
Top of Form 1

Question (1)
As far as environmental risk assessment is concerned, what is a step for which there is
no substitute?
a) A full and professional inspection of the borrower's assets and facilities.
b) A comprehensive tour of the borrower's premises by a loan officer.
c) A full-day visit to the borrower and its premises, including getting to know its
operating personnel.
d) A thorough interview of the borrower.
Question (2)
What is seasonality?
a) A predictable pattern of business activity that peaks during a particular season.
b) An unpredictable distribution of business activity that peaks during particular
seasons, months or quarters.
 c) A predictable pattern of business activity that peaks during particular
seasons, months or quarters.
d) An unpredictable distribution of business activity that peaks during a particular
season.
Question (3)
Which statement about client concentration is most accurate?
a) Concentration issues can be significant when a borrower's customers are
businesses; they may not be an issue when a borrower primarily serves
individual customers.
b) Concentration issues can be significant when a borrower's customers are individual
customers; they are not necessarily an issue when a borrower serves a very limited
number of strong clients.
c) Concentration issues are significant when a borrower's customers are individual
customers; they may not be an issue when a borrower primarily serves separate
businesses.
d) Client concentration is always an issue; it always exerts great pressure on a
business.
Question (4)
Which strategy would likely decrease the chances of a mature business's survival?
a) Avoiding different product lines or geographic markets.
b) Introducing new products or services.
c) Merging with or acquiring a competitor.
d) Re-engineering the operation to improve efficiency.
Question (5)
What is the solvency test?
a) A test that evaluates a business's ability to generate cash from ongoing operations
to pay all normal expenses, including interest and scheduled principal payments.
b) A test that is a replacement for the liquidity test and provides a short-hand view of
overall risk associated with a loan.
c) A test that is a stress test of a lender's portfolio to assess the amount of risk it can
safely take on.
d) A test that assesses the adequacy of cash from the liquidation of business
assets in distressed circumstances to pay interest and all debt.
Question (6)
Which of the following statements is most accurate with regard to insignificant
regulation?
a) Expenses and cash flow increase.
b) Expenses and profitability are not affected.
c) Capital expenditures decrease.
d) Profitability and cash flow increase.
Question (7)
How could a business located in an economically depressed area mitigate the impact
of its local economy?
 a) Even though the business could endeavour to find new clients, it has no choice but
to weather the impact of the local economy.
b) By endeavouring to develop new local contacts and clients, thereby spreading out
the economic risk on more local clients.
c) By finding or developing dealings with customers located in parts of the world
that are thriving.
d) A depressed local economy is beyond the control of any business.
Question (8)
Which factors increase the bargaining power of suppliers?

I. Provision of basic inputs.

II. Suppliers' ability to integrate forward.
III. Lack of substitute inputs.
IV. Dominance by few suppliers.
a) I and III only.
b) II, III and IV only.
c) I and IV only.
d) II and III only.
Question (9)
From a risk management perspective, what is the most reliable indicator of
profitability?
a) Total amount of profits or in terms of percentage of sales.
b) Total amount of profits or in terms of units still to be sold.
c) By the percentage of sales relatively to the number of units not sold.
d) By the actual monetary value of profits.
Question (10)
Which factor is most adversely affected by market overcapacity?
a) Number of businesses in the market.
b) Product availability.
c) Product pricing.
d) Unit sales.
Question (11)
What are some characteristics of a market in which supply and demand are equal?
a) Market is at a mature stage; products and services are widely accepted albeit with a
declining demand; new competitors have entered the market; industry status risk is
moderate and rising.
b) Market is at a mature stage; products and services are widely accepted albeit with a
declining demand; new competitors have entered the market; industry status risk is
moderate.
c) Market is at a mature stage; products and services are widely accepted; new
competitors have entered the market; industry status risk is moderate.
d) Market is at a mature stage; products and services are widely accepted; no
new competitors are entering the market; industry status risk is moderate.
Question (12)
 In which scenario would a business's sales, cash flow and financial viability be most at
risk?
a) A business that deals with many individual customers.
b) A business that deals with many large customers.
c) A business that deals with many small customers.
d) A business that deals with very few large customers.
Question (13)
How can the risks inherent in a borrower's industry be assessed?
a) Understand the stages of both the industry's and business's life cycles and their
correlation; quantify how the industry's risk profile may affect the borrower's
performance.
b) Assess the general status of the industry; understand the stages of both the
industry's and business's life cycles; quantify how the industry's risk profile may
affect the borrower's performance.
c) Assess the general status of the industry; understand the stages of the borrower's
life cycle; quantify how the industry's risk profile may affect the borrower's
performance.
d) Assess the general status of the industry; understand the stages of the industry's life
cycle; quantify how the industry's risk profile may affect the borrower's performance.
Question (14)
Which is most affected by seasonality in the operations of a business?
a) Expense levels.
b) The capital base.
c) Annual cash flow.
d) The timing of cash flows.
Question (15)
Which is the most accurate statement regarding financing the growth phase of
profitable businesses?
a) Profitable businesses may need financing for both accounts receivable (trade
debtors) and inventory (stock).
b) Profitable businesses do not need financing for either inventory (stock) or accounts
receivable (trade debtors).
c) Profitable businesses may need financing for accounts receivable (trade debtors)
but not inventory (stock).
d) Profitable businesses may need financing for inventory (stock) but not accounts
receivable (trade debtors).
Question (16)
"There is almost a non-existent risk that unforeseen events with one employer will
adversely impact a particular enterprise. Only a catastrophic set of events might cause
enough of a market disturbance to cause revenues and cash flow levels to deteriorate.
Market risk is very low and the overall risk is low." What situation does the this
commentary best describe?
a) An industry or local market is dominated by a single business that employs a
significant number of people.
 b) An industry or market has a large number of employers and there is a very
diversified economic base.
c) A number of different employers and a broad economic base.
d) Industry or marketplace remains fairly reliant on a few dominant employers.
Question (17)
What statement concerning the impact of domestic competition on debt repayment is
most accurate?
a) High domestic competition leads to increased cash flow and decreased ability to
repay debt as scheduled.
b) High domestic competition leads to decreased cash flow and decreased
ability to repay debt as scheduled.
c) High domestic competition leads to decreased cash flow and increased ability to
repay debt as scheduled.
d) High domestic competition leads to increased cash flow and increased ability to
repay debt as scheduled.
Question (18)
What statement concerning the impact of barriers to entry on debt repayment is most
accurate?
a) Low barriers to entry lead to a less competitive environment and increased ability to
repay debt as scheduled.
b) Low barriers to entry lead to a more competitive environment and decreased
ability to repay debt as scheduled.
c) Low barriers to entry lead to a less competitive environment and decreased ability to
repay debt as scheduled.
d) Low barriers to entry lead to a more competitive environment and increased ability
to repay debt as scheduled.
Question (19)
What are some characteristics of a marketplace dominated by one large supplier?
a) Because it is not the only supplier, it exerts only average influence over its products'
terms and prices. Its bargaining power could have a real impact on a buyer's cost
structure. It is more difficult for borrowers to achieve profitability and generate
adequate cash flow.
b) The supplier exerts significant influence over its products' terms and prices. Its
bargaining power has a low impact on a buyer's cost structure. It is more difficult for
borrowers to achieve profitability and generate adequate cash flow.
c) The supplier exerts significant influence over its products' terms and prices.
Its bargaining power begins to have a real impact on a buyer's cost structure. It
is much more difficult for borrowers to achieve profitability and generate
adequate cash flow.
d) It is not the only supplier in the marketplace, and exerts only average influence over
its products' terms and prices. Its bargaining power could start to have a real impact on
a buyer's cost structure. It is still easy for borrowers to achieve profitability and
generate adequate cash flow.
Question (20)
Which of the following statements is most accurate with regard to the impact
 environmental risk has on lending?
a) Environmental risk can extend a lender's liability beyond the loss of principal
and interest.
b) Environmental risk decreases the lender's risk of loss of principal and interest.
c) Despite environmental risk, a lender's liability is limited to the loss of principal and
interest.
d) Environmental risk has no impact on the extent of a lender's liability.
Question (21)
What information about a borrower's customer base would likely be most relevant to
assessing credit risk?
a) The total number of the business's customers.
b) The terms offered by the business to retain the best customers.
c) The names of the business's largest and most loyal customers.
d) The impact on cash flow if the business loses its largest customer.
Question (22)
What are the most likely consequences of significant regulation (other than barriers to
entry) on a business?
a) Expenses increase while capital expenditures decrease.
b) Expenses decrease while capital expenditures increase.
c) Expenses and capital expenditures increase.
d) Expenses and capital expenditures decrease.
Question (23)
Which of the following is most accurate regarding the relationship between sales and
business and industry health?
a) Reviewing sales over six months should yield similar results to a 10-year review.
b) Expanding sales imply a declining business or industry.
c) Sales trends are not impacted by business and industry health.
d) Declining sales imply a declining business or industry.
Question (24)
As a recession approaches, which combination of borrower characteristics would
cause a lender to be most concerned?
a) Decreasing profitability, small market share and low gearing.
b) Small market share, flat cash flow and low gearing.
c) Marginal cash flow, flat profits and small market share.
d) Declining profits, increasing gearing and declining cash flow.
Question (25)
Which of the following statements is true regarding durable products?
a) Non-durable product sales tend to lag durable product sales during a downturn.
b) Demand for durable goods decreases as the macro economy enters a recovery.
c) The most critical factor related to sales volatility is the durability of the
product being sold.
d) The durability of a product has no impact on the volatility of its sales.
Question (26)
 How do you arrive at a preliminary financial risk assessment?
a) Conduct general research, then review and analyse ratios and cash flow.
b) Conduct market research, then review and analyse ratios and projections.
c) Conduct market research, then review and analyse ratios and cash flow.
d) Conduct general research, then review and analyse ratios and projections.
Question (27)
Which risk category is typically considered critical when addressing a borrower's
overall credit risk?
a) Sovereign risk.
b) Audit risk.
c) Management risk.
d) Counterparty risk.
Question (28)
Which company below would likely be least impacted by government regulation?
a) Bar.
b) Clothing store.
c) Restaurant.
d) Airline.
Question (29)
Your borrower supplies most of its goods and services to a large steel manufacturer
that is in decline. What impact could this have on the borrower?
a) While the borrower's performance could be impacted by the state of affairs of that
manufacturer, there is no meaningful impact on credit risk: steel manufacturers will
always be around and needed.
b) The borrower's financial performance can be viewed as independent of that
manufacturer. They are two separate entities.
c) While the borrower's financial performance depends on the performance of that
manufacturer, the borrower can mitigate its decline by increasing its sales to it.
d) The borrower's financial performance depends on the steel manufacturer.
Their relationship increases the borrower's credit risk.
Question (30)
What is the impact of market overcapacity on a borrower from a lender's perspective?
a) Market over capacity has an impact on market prices, sales growth, cash flow,
loan repayment ability, and profitability.
b) Market overcapacity has some impact on market prices, sales growth, cash flow and
loan repayment ability. Profitability is not a concern.
c) This is not a concern. Over capacity means that many competitors are vying for the
existing demand. One borrower can replace another.
d) While market over capacity could have an impact on market prices and sales
growth, this is not a source of concern. A strong borrower should be able to make it
through any market situation.
Question (31)
To properly evaluate factors in market (industry and business) risk, one needs to:
 I. Understand how market (industry and business) risk can affect a borrower's liquidity.
II. Recognise the importance of the competitive marketplace.
III. Grasp how financial, market (industry and business) and management risk affect
one another.
IV. Consider the availability of liquidity in the marketplace.
a) III and IV only.
b) I, III and IV only.
c) II and IV only.
d) I, II and III only.
Question (32)
What is the effect of economies of scale on competition in an industry?
a) Economies of scale tend to encourage new competitors to enter an industry.
b) Economies of scale have no impact on competition in an industry.
c) Economies of scale tend to encourage established competitors to exit an industry.
d) Economies of scale tend to discourage new competitors from entering an
industry.
Question (33)
Which factor is most likely to increase the intensity of competition within a given
market?
a) Rapid industry growth.
b) Low fixed costs.
c) An economic recovery.
d) Diverse, successful competitors.
Question (34)
What statement concerning the impact of domestic competition on debt repayment is
most accurate?
a) Low domestic competition leads to increased cash flow and increased ability
to repay debt as scheduled.
b) Low domestic competition leads to increased cash flow and decreased ability to
repay debt as scheduled.
c) Low domestic competition leads to decreased cash flow and decreased ability to
repay debt as scheduled.
d) Low domestic competition leads to decreased cash flow and increased ability to
repay debt as scheduled.
Question (35)
For a business that has many small clients, what type of relationship is it likely to have
with individual customers?
a) Individual clients will likely exert little pressure on supplier prices.
b) Individual clients will likely exert significant pressure on supplier prices.
c) Individual clients will tend to buy more product.
d) The supplier will exert substantial pressure on individual clients to reduce their
inventory (stock) levels.
Bottom of Form 1
Section 1: Course 05 Online Assessment
All questions are mandatory
Top of Form 1

Question (1)
What typically causes position overload?
a) The need for a flatter organisational structure.
b) Traditional competitive pressures.
c) Insufficient management depth.
d) Employee dissatisfaction with supervisors.
Question (2)
What is the key risk that is evaluated in assessing a business's credit risk?
a) How changes in the economic environment affect a business's financing costs.
b) The degree of a business's earnings volatility.
c) Whether a business can repay principal and interest as scheduled.
d) The business's competitive position in its industry.
Question (3)
What statement concerning credit agency reports is most accurate?
a) Their value depends on the working relationship management has with the credit
agency.
b) Their value depends on the quantity, quality and completeness of the data
they contain.
c) They provide a complete picture of a business's financial position.
d) They provide a complete picture of a business's credit position and history.
Question (4)
In what way is management's response to past market disturbances useful in the credit
risk assessment process?
a) It is normally a useful indicator of how management might perform during
similar events in the future.
b) It reveals information about when disturbances occurred, but not about how they
were managed.
c) It is generally unhelpful since major disturbances are all different from one another.
d) It is an unhelpful indicator because there is no independent verification of past
actions.
Question (5)
What type of business plan provides the best chance for success?
a) Clear, unchanging and realistic.
b) Clear, realistic and measurable.
c) Unchanging, highly detailed and measurable.
d) Clear, highly flexible and time-tested.
Question (6)
Generally, who creates a business plan?
a) Management.
 b) Lender.
c) Payroll department.
d) Human resources department.
Question (7)
Why is integrity a critical management characteristic?
a) It is the best single indicator of repayment ability.
b) The lender's relationship is with management, not with the business.
c) It is the best single indicator of business success.
d) Most of the information needed to properly assess credit risk is provided by
management.
Question (8)
Which statement about credit agency reports is correct?
a) They are the most valuable management risk assessment tool available.
b) They almost always point to integrity issues if they show slow trade payments.
c) They are unhelpful in assessing integrity because management provides most of the
report information.
d) They almost always point to integrity issues if they show payment defaults.
Question (9)
What is the liquidity test?
a) A technique to streamline the credit risk assessment process through the use of
quantitative analytics.
b) An assessment of the business's ability to generate sufficient cash from
ongoing operations to meet debt service requirements.
c) An assessment of cash available from the distressed liquidation of a business's
assets to pay interest and amortise debt.
d) It is synonymous with a 'solvency test', in that it assesses whether a borrower's
assets exceed its liabilities.
Question (10)
What are the two considerations that need to be deliberated when mitigating against
position overload and ensuring adequate management depth?
a) Management positions should have functional overlap while ensuring managers are
not overburdened.
b) Management positions should have functional overlap while avoiding unnecessary
overhead expense.
c) Management positions should be properly staffed while ensuring managers are not
overburdened.
d) Management positions should be properly staffed while avoiding unnecessary
overhead expense.
Question (11)
Which of the following parties does not represent a typical level of oversight in the
corporate governance process?
a) Board of directors.
b) Executive officers.
 c) Regulators.
d) Shareholders.
Question (12)
What would have limited value in relation to succession planning?
a) Emphasising on-the-job experience.
b) Gathering competitive intelligence.
c) Cross training.
d) Educational seminars.
Question (13)
What does the existence of a business operating budget indicate?
a) Management emphasises strong corporate governance.
b) Management has focused attention on all revenues and expenses for the
relevant periods covered by the budget.
c) Management has a conservative bias toward future operations.
d) Management will make strong profits during the budget period.
Question (14)
Which methods are useful in assessing a business's ability to recover from
disturbances?

I. Reviewing contingency plans and insurance coverage with management.

II. Discussing suppliers during a facility tour.
III. Determining the status of labour relations.
IV. Discussing current economic, industry, and political issues when meeting with
management.
a) I and II only.
b) I, II and IV only.
c) I, II, III and IV.
d) I, III and IV only.
Question (15)
What does management risk assessment generally include?
a) Assessment of financial and market (industry and business) risk, and competition.
b) Projections analysis, cash flow analysis and corporate governance structure.
c) Management integrity, skill and execution, and scope.
d) Management integrity, general business environment, and individual business
vulnerability.
Question (16)
What attributes should objectives have in a financial plan?
a) Clear, realistic and measurable.
b) Conservative, realistic and measurable.
c) Clear, optimistic and measurable.
d) Conservative, pessimistic and measurable.
Question (17)
Identify the most desirable set of qualities that a lender should look for when evaluating
 a management team.
a) Knowledge, communication effectiveness, financial investment in the business,
commitment and sound planning ability.
b) Leadership, knowledge, risk assessment and management, communication
effectiveness, commitment, sound planning ability and a solid record of
managing to plans.
c) Leadership, detailed task performance ability, communication effectiveness,
commitment, sound planning ability and a solid record of managing to plans.
d) Leadership, knowledge, experience beyond the present industry, commitment,
sound planning ability and a solid record of managing to plans.
Question (18)
Why do lenders attempt to mitigate credit risk?
a) To justify charging higher interest rates than might otherwise be possible.
b) To transform a bad loan into a good loan.
c) To enable credit to be extended to borrowers that are otherwise considered poor
risks.
d) To minimise risk and enhances management of loans extended to
creditworthy borrowers.
Question (19)
For what business is key person insurance likely most critical?
a) Government agency.
b) Small business.
c) Publicly traded company.
d) University.

Question (20)
What is the focus of management risk?
a) Capacity, integrity, depth and staying power.
b) The competitive marketplace in which the borrower operates.
c) Stronger than anticipated business performance.
d) Loan structure.
Question (21)
Which option can mitigate work stoppages?
a) Liability insurance.
b) Alternative sources.
c) Dependable suppliers.
d) Good labour relations.
Question (22)
Which critical skill for executives deals with the creation and maintenance of loyal,
satisfied customers, dependable suppliers and dedicated employees?
a) Leadership.
 b) Knowledge.
c) Communication.
d) Commitment.
Question (23)
What would be an unusual use for the proceeds of key person insurance?
a) Purchase heirs' interest in the business.
b) Plant expansion.
c) Pay off debt.
d) Reduce debt.
Question (24)
Corporate governance provides a structure to determine business objectives and a
means of achieving and monitoring their outcomes.
FALSE
I am not sure
TRUE
Question (25)
Who is considered a principal party with respect to corporate governance?
a) Banks.
b) Management.
c) Society at large.
d) Suppliers.
Question (26)
Which of the following is not one of the five management responsibilities?
a) Production.
b) Sales.
c) Staffing.
d) Finance.
Question (27)
Why do management positions need to be properly staffed?
a) To reduce the strain on working capital by controlling payroll expenses.
b) To ensure that no employees leave for the competition.
c) To ensure liquidity and solvency remain within lending guidelines.
d) To prevent position overload and provide depth while minimising overhead
expense.
Bottom of Form 1
Section 1: Course 06 Online Assessment
All questions are mandatory
Top of Form 1

Question (1)
Why is it useful to track and analyse a company’s operating expense percentage over
a period of years?
a) It reflects management’s ability to control expenses under varying conditions
over time.
b) It is the most critical indicator of a company’s ability to meet its obligations.
c) Operating expenses always represent the biggest draw on a company’s cash flow.
d) More than any other indicator, operating expense levels give us crucial insight into
management integrity.
Question (2)
What typically provides an early warning to a lender that a borrower's performance is
falling short of projections?
a) Private investigators.
b) Properly structured covenants.
c) Interviews with borrower's customers.
d) Researching borrower's competition.
Question (3)
Acceptable levels of gearing tend to vary from one industry to another.
a) FALSE
b) TRUE
Question (4)
Why is the size and movement of the gross margin (gross profit/net sales) a good
 indicator of a business's financial health and credit risk?
a) It reflects management's ability to increase company expenses while remaining
profitable.
b) It is a dependable predictor of the business's future profitability.
c) It is a dependable predictor of a business's competitive position in the marketplace.
d) It reflects management's ability to grow sales while remaining profitable.
Question (5)
Which of the following financial indicators are NOT commonly viewed as risk (or cash)
drivers?

I. Operating expense percentage.

II. Net profit.
III. Trade payables days.
IV. Total sales.
a) II, III and IV only.
b) I and III only.
c) II and III only.
d) II and IV only.
Question (6)
The asset conversion cycle is identical from one company to another.
a) FALSE
b) TRUE
Question (7)
Capital spending falls outside normal trading activities.
a) FALSE
b) TRUE
Question (8)
A gain on the sale of fixed assets is shown in which section of a direct cash flow
statement?
a) Non-operating activities.
b) Operating activities
c) Investing activities.
d) Financing activities.
Question (9)
What is the value of establishing a range of possible projected financial outcomes of a
borrower?
a) It provides an analytically useful set of parameters within which borrower
performance is likely to fall.
b) It guarantees borrower repayment of the anticipated loan.
c) It ensures that projected cash flows will be accurate.
d) It makes it easy to adjust parameters to reach pre-determined results.
Question (10)
 Which of the following statements is correct?
a) The cash required to support inventory (stock) increases on a relative basis if
inventory (stock) turnover slows.
b) The cash required to support inventory (stock) increases on a relative basis if
inventory (stock) turnover accelerates.
c) The cash required to support inventory (stock) decreases on a relative basis if
inventory (stock) turnover slows.
d) The more quickly inventory (stock) is sold, the more funds are needed to support
inventory (stock).
Question (11)
Which projected scenarios would likely absorb the most cash flow?
A) Low sales growth, decreasing trade payables days and increasing trade receivables
and inventory (stock) days.
b) High sales growth, increasing trade payables days and decreasing trade receivables
and inventory (stock) days.
c) Minimal sales growth, increasing trade creditor days and decreasing trade
receivable and inventory (stock) days.
d) High sales growth, decreasing trade payables days and increasing trade
receivables and inventory (stock) days.
Question (12)
What is typically considered an adequate interest coverage ratio?
a) Varies based on the business's industry.
b) At least 2.
c) One that is a positive number.
d) At least 5.
Question (13)
Identify the greatest borrowing need of a service provider in a period of sustained
economic growth.
a) Finance a change in the business's ownership.
b) Finance inventory (stock) until products are sold.
c) Finance trade receivables until they are collected in cash.
d) Finance trade payables until they are paid in cash.
Question (14)
What event is most likely to decrease inventory (stock) days?
a) Automation of the inventory control process.
b) Recession.
c) Product becomes obsolete.
d) Substitute product introduced.
Question (15)
A new sales manager has been hired by the company, and she promises to double
sales within one year. How should forecast assumptions be changed?
a) The experience of a seasoned manager is priceless. Forecast assumptions are to
be improved with no delay.
 b) While past performance, the realism of plans, and the external environment must be
reviewed, such claims are usually reliable; assumptions can be changed accordingly.
c) Such claims, based on past performance and ambitious future plans, are just what
drive a company ahead. Previous assumptions can be improved accordingly.
d) Claims are not enough. Past performance, the realism of plans, and the
external environment and market must be reviewed.
Question (16)
What is the calculation for sales growth?
a) (Prior Period Sales - Recent Period Sales) / Prior Period Sales
b) (Recent Period Sales - Prior Period Sales) / Prior Period Sales
c) (Prior Period Sales - Recent Period Sales) / Recent Period Sales
d) (Recent Period Sales - Prior Period Sales) / Recent Period Sales
Question (17)
Which accounts would most likely be included in the financial statements of a service
business?

I. Cost of goods sold.

II. Inventory (stock).
III. Fixed assets.
IV. Trade receivables.
a) II and IV only.
b) I and III only.
c) III and IV only.
d) I, II and IV only.
Question (18)
What does a company's current ratio show?
a) Whether trade receivables and inventory (stock) will cover trade payables in the next
operating period.
b) Whether fixed assets exceeded current assets in the most recent operating period.
c) Whether current assets, if converted to cash, will cover short-term liabilities in
the next operating period.
d) Whether current liabilities will cover short-term assets in the next operating period.
Question (19)
How are projections most useful?
a) Pinpointing a company's future performance.
b) Helping the lender work through a variety of forecast scenarios quickly.
c) Establishing a range of likely outcomes and determining if "most likely case"
results are acceptable.
d) Establishing a range of likely outcomes and determining if the "worst case" results
are acceptable.
Question (20)
What event is most likely to increase trade receivables days?
a) Focus on collections.
b) Billings are computerised.
c) Sales increase.
d) Competing with terms.
Question (21)
Which of the following is reflected in trade payables days calculation?
a) Gross profit.
b) Gross margin.
c) Terms offered by suppliers.
d) Capital expenditures.
Question (22)
Which tasks are commonly performed by financial analysts as they assess the credit
risk of a commercial borrower?

I. Understand the root causes of changes in the company’s financial position.

II. Forecast future company performance.
III. Understand the qualitative factors that contributed to the business’s historical
financial results.
IV. Accurately assesses the business's credit needs and risks.
a) I, III only.
b) I only.
c) II and III only.
d) I, II, and IV only.
Question (23)
As a company's interest expenses rise, its operating expenses increase at the same
time.
a) TRUE
b) FALSE
Question (24)
In a UCA cash flow statement, if a business has a cash deficit after repaying debt as
scheduled, what does it likely indicate?
a) It will have eliminated its potential for going out of business in the short run.
b) It will not require additional financing to pay for fixed asset purchases.
c) It will require additional financing to pay for fixed asset purchases.
d) Its financing requirement for the period will be less than that deficit.
Question (25)
What happens to a borrower's supporting financing needs and financial risk when
inventory (stock) is sold more quickly?
a) Both decrease.
b) Both increase.
c) Expenses and inventory (stock) just build up until further notice.
 d) The borrower's supporting financing needs increase while financial risk decreases.
Question (26)
What is the formula for free cash flow?
a) Net sales + amortisation and depreciation - change in working capital - capital
expenditures.
b) Net income (NPAT) - amortisation and depreciation + change in working capital +
capital expenditures.
c) Net sales - amortisation and depreciation + change in working capital + capital
expenditures.
d) Net income (NPAT) + amortisation and depreciation - change in working
capital - capital expenditures.
Question (27)
Sales growth is a particularly useful starting point for assessing which component of a
business's overall risk profile?
a) Financial risk.
b) Market (industry and business) risk.
c) Economic risk.
d) Management risk.
Question (28)
Trade receivable days do not tend to vary from industry to industry.
a) TRUE
b) FALSE
Question (29)
Why can sensitivity analysis be a useful part of the projection process?
a) It allows the analyst to utilise intuition to set key variables at the right levels.
b) It helps identify the degree to which critical risk drivers can vary before
forecasts fall outside the range of acceptable outcomes.
c) It identifies how critical risk (cash) drivers can be optimised.
d) It allows the analyst to complete the projections process more quickly.
Question (30)
What do the business financial statements of a sole trader display as opposed to their
personal financial statements (income tax forms)?
a) Net profit on its profit and loss statement that does not include business income
taxes.
b) The salary of the sole trader in the operating expenses of the business.
c) Withdrawals in the operating expenses of the business.
d) Net profit including the sole trader's personal income taxes.
Question (31)
What is usually the first step in a traditional credit decision process?
a) Collect sufficient information to make a credit decision.
b) Spread the business's financial data.
c) Determine whether the request fits loan policy guidelines.
 d) Interview borrower management.
Question (32)
How does an increase in gearing affect a business's liquidity?
a) Improves the ability to generate profits from normal business operations.
b) Typically increases cash required to be paid to outside creditors.
c) Increases cash available to service debt.
d) Improves the ability to convert assets to enough cash to pay creditors.
Question (33)
Gross margin does not tend to vary from industry to industry.
a) TRUE
b) FALSE
Question (34)
What are the three classification categories for cash receipts and payments in the
statement of cash flows?
a) Operating activities, investing activities and financing activities.
b) Investing activities, operating activities and capital activities.
c) Investing activities, financing activities and capital activities.
d) Capital activities, operating activities and financing activities.
Question (35)
What event is most likely to reduce trade payables days?
a) Recession.
b) Competition among suppliers becomes stronger.
c) Supplier tightens terms.
d) Interest rate increases.
Question (36)
What is meant by "short-term financing gap" of the operating cycle?
a) The amount of time it takes a financial institution to fund a business's loan request.
b) The difference between the days of receivables and inventory (stock) on hand
and the days of supplier credit.
c) The difference between the sales a business generates and the amount of cash it
actually collects based on those sales.
d) The amount of time it takes a cheque to clear allowing a depositing business access
to the funds.
Question (37)
What is the formula for current ratio?
a) Current Assets / Current Liabilities
b) Current Liabilities / Current Assets
c) Current Liabilities - Current Assets
d) Current Assets + Current Liabilities
Question (38)
What analytical purpose is served by creating projections, beyond simply evaluating a
 business's projected cash flows?
a) Expediting the credit decision-making process.
b) Discovering the true motivations of borrower management.
c) Focusing attention on critical credit risk-related issues, whether internal or
external.
d) Reassessing historical solvency.
Question (39)
What form of business organisation is an extension of a sole trader?
a) Partnership.
b) Sole trader.
c) Joint stock company.
d) Company.
Question (40)
What is EBITDA best suited to measure?
a) A business's operational cash flow.
b) Comparative return on capital between businesses and industries.
c) A business's liquidity.
d) Comparative profitability between businesses and industries.
Bottom of Form 1
Section 1: Course 07 Online Assessment
All questions are mandatory
Top of Form 1

Question (1)
Why was the Tandon Committee initially established?
a) To study the Indian banking system.
b) To report to the Reserve Bank of India to whom Indian banks were lending money.
c) To make recommendations on how the Indian banking system can become more
liberal.
d) To review the then existing Indian banking system and submit
recommendations to introduce credit discipline on both borrowers and bankers.
Question (2)
In which situation would you expect to grant a grace period?
a) If the equipment purchased had broken down and the borrower was not able to
derive benefit from it.
b) If the capital expenditure investment requires a ramp up period until full cash
flow generation and if the borrower is highly rated and where there is a DSCR
cushion.
c) If the borrower was not able to meet a repayment in a particular period.
d) Grace periods are only granted for mortgages not term loans.
Question (3)
Should the term loan be granted if it is not possible to validate all information about the
financial feasibility of the equipment?
a) Yes, an accurate assessment may not always be possible. The approach should be
to validate as much as is practically feasible, while critically examining all the
components.
b) Yes, as the risk that the new equipment is not financially feasible sits with the
borrowing company.
c) No, without having a full picture on the financial feasibility of the equipment,
not all risks are known.
d) No, a full financial feasibility study on the equipment is always required.
Question (4)
How is the working capital cycle measured?
a) Working capital cycle (months) = (Current assets ÷ Inventory held) x 12
b) Working capital cycle (months) = (Current assets ÷ Net sales) x 12
c) Working capital cycle (months) = (Current assets ÷ Sales) x 12
d) Working capital cycle (months) = (Current assets x Net sales) ÷ 12
Question (5)
When using the Forms, how should future projections be treated?
a) All future projections need to be ignored as it is not possible to forecast the future.
b) Future projections should be accepted as projected as the company knows best
what their future performance is likely to be.
c) It should be ensured that projections have a basis in reality and not merely a
 number chosen to result in the desired amount of working capital facility.
d) There should be an automatic reduction applied to all futur forecasts.
Question (6)
What is the role of the Nominated Bank?
a) The nominated bank becomes the primary obligor under the Letter of Credit.
b) The nominated bank is where the Letter of Credit is available. In the majority
of the cases this is the bank which the buyer has a banking relationship.
c) The nominated bank authenticates the Letter of Credit once it is received, and
passes it on to the beneficiary.
d) The nominated bank assumes the responsibilities of the issuing bank towards the
beneficiary.
Question (7)
How is assessing working capital with the cash budget method different?
a) The banks rely entirely on the company’s forecast of its income month on month.
b) Profitability, liquidity, asset quality, and funds flow are not analyzed.
c) Audited accounts are not required from the company.
d) The amount of required working capital is assessed based on projected cash
flows and not on projected levels of assets and liabilities.
Question (8)
How is working capital financed?
a) Short-term sources only
b) Long-term sources only
c) It is not material as long as working capital is available.
d) Combination of long- and short-term sources
Question (9)
In international transactions, does import duty impact the Letter of Credit limit?
a) No, as import duty is a tax that the applicant must pay directly.
b) No, import duty must be paid by the applicant without recourse to the Letter of Credit
to prove his financial viability.
c) Yes, import duty should be deducted from the overall Letter of Credit limit calculated.
d) Yes, the amount of the raw material purchase estimated for the Letter of Credit
limit assessment should include import duty.

Question (10)
Under a financial guarantee, a bank essentially guarantees the applicant’s financial
worth, creditworthiness and capacity to take up financial risks. Is this correct?
a) No
b) Yes
Question (11)
What is Form II?
 a) Comparative Statement of Current Assets (CA) and Current Liabilities (CL)
b) Analysis of the Balance Sheet
c) Funds Flow Statement
d) Operating Statement (Profit and Loss Statement)
Question (12)
A manufacturing client wants to make a large purchase of raw materials. The seller has
requested a bank guarantee. On investigation, the client’s order book was found to be
a large multiple of his gross sales. Should a bank guarantee be granted?
a) As the order book is a large multiple of gross sales, it is clear that the client is in the
process of expanding his business. The bank should support him in this and grant the
bank guarantee.
b) As the order book is a large multiple of the gross sales, this implies the client
is overextending itself, which could adversely affect execution abilities and may
result in invocations. Further credit investigation is required.
c) As the order book is a large multiple of gross sales, it is clear that the client is not
managing the business well. The bank guarantee should not be granted.
d) As the order book is a large multiple of gross sales, it would seem that the client has
recently built new business relationships. The bank should support this development
and grant the bank guarantee.
Question (13)
If a bank guarantee is invoked by a beneficiary, must the guarantor bank always pay
out?
a) Yes, if the claim is within the claim period and the beneficiary is not satisfied
with the goods or service provided by the applicant, or if the applicant has not
fulfilled its financial obligations, the guarantor bank must make payment
immediately.
b) Yes, but the guarantor does not need to pay in full if the applicant has made partial
payment/made partial performance under the contract.
c) No, if the applicant does not have sufficient funds to make good the amount to the
guarantor bank.
d) No, if the beneficiary is also in breach of contract.
Question (14)
In which example is high working capital level not a cause for concern?
a) The company has an inventory pile up due to the price it charges for its goods.
b) The company has experienced a delay in trade receivable realisation.
c) The company has experienced an erosion of its market share.
d) The company where the amount of work in processed and finished goods is
high due to the long time required to convert raw material into finished goods.
Question (15)
What is the purpose of a letter of credit?
a) To protect the bank from loss
b) To facilitate trade
c) To offer a security
d) To guarantee performance
Question (16)
What minimum data from the borrower is used to assess working capital?
a) Financial forecast for current and next financial year
b) Previous 2 years’ audited accounts and forecast for current and next financial
year
c) Statement of Directors’ income
d) Previous 2 years’ audited accounts
Question (17)
What is a Sight/Demand Letter of Credit?
a) This type of Letter of Credit enables the seller to assign part of the Letter of Credit to
other parties.
b) In this type of Letter of Credit, the seller can request an advance for an agreed
amount of the Letter of Credit before shipment of goods and submittal of required
documents.
c) In this type of Letter of Credit, the seller allows the buyer a credit period as stated in
the documents. The buyer accepts the Letter of Credit documents, if they are found to
be in order, but no payment is required until the stated due date.
d) This type of Letter of Credit does not provide the buyer with a credit period.
The buyer has to pay immediately once the Letter of Credit documents are
received and found to be in order.
Question (18)
Why do CMA forms continue to be used in assessment?
a) Credit officers and relationship managers are familiar with the forms and find them
easy to use.
b) They are very useful in simplifying the representation of financial statements,
clarifying their content and providing a clear understanding of the credit
assessment’s purpose.
c) Companies are familiar with the information which needs to be entered in the forms
and provide the required data.
d) There have been no other forms issued to be used by the RBI.
Question (19)
In what form is a bank guarantee executed?
a) It is a gentlemen’s agreement
b) It is a verbal contract
c) It is a legal deed
d) It is a legal contract
Question (20)
What was the Tandon Committee’s approach to lending?
a) The borrower should be expected to only borrow when it could repay the borrowing
in full on time.
b) The borrower should be expected to hold a reasonable level of current assets
in relation to the requirements of his production.
c) The borrower should be expected to hold a low level of current assets in relation to
the requirement of his production.
 d) The borrower should be expected to hold a high level of current assets in relation to
the requirement of his production.
Question (21)
Should the technical aspects of equipment be evaluated prior to granting a term loan?
a) No, banks do not have expertise in the technical aspects of equipment.
b) No, banks only need to be concerned whether the loan will be repaid.
c) Yes, the bank should use a mixture of in-house knowledge, previous
experience, publicly available information and common sense to evaluate the
technical aspects of the equipment prior to granting the loan.
d) Yes, the bank should instruct an expert to act on its behalf in evaluating the technical
aspects of equipment.
Question (22)
Can a tax authority request a bank guarantee for payment of tax liabilities?
a) Yes
b) No
Question (23)
What is working capital?
a) Working capital is the funding required by a business to carry the current
assets required so the business can operate at the expected level, efficiently and
without interruption.
b) Working capital is the amount that the company employees need to work in order to
allow the business to operate at the expected level.
c) Working capital is funding received by a business from a bank to operate at
expected level, efficiently and without interruption.
d) Working capital is funding received from shareholders to enable the business to
operate at the expected level.
Question (24)
What are the different steps to a basic Letter of Credit transaction, up to but not
including shipment?
a) Contract of sale between seller and buyer, letter of credit request by buyer,
issuing bank issues letter of credit to advising bank who then advises seller of
its receipt.
b) Contract of sale between seller and buyer, letter of credit request by buyer, issuing
bank issues letter of credit to advising bank.
c) Letter of credit request by buyer, issuing bank issues letter of credit to advising bank
who then advises seller of its receipt.
d) Contract of sale between seller and buyer, issuing bank issues letter of credit to
advising bank who then advises seller of its receipt.
Question (25)
What average processing/production cycle is assumed for this method of calculation?
a) 6 months
b) 3 months
c) 1 month
 d) 9 months
Question (26)
Identify the project most likely to be financed with an off-balance sheet funding
structure.
a) Project to invest in more advanced technology platform and systems for a mid-sized
services company.
b) Project to build a new bridge
c) Project to buy-out a small competitor
d) Project to expand current small factory capacity
Question (27)
What are the primary characteristics for a term loan?
a) Indefinite period, intended for a variety of existing or new business purposes, with
possible flexible drawdowns.
b) Fixed period, intended for the purchase of real estate, with possible flexible
drawdowns.
c) Fixed period, intended for a variety of existing or new business purposes, with
possible flexible drawdowns.
d) Fixed period, intended for a variety of existing or new business purposes, with
revolving drawdowns.
Question (28)
Does Method 2 offer extra protection for banks?
a) No extra protection is offered by Method 2, it allows the calculation of Maximum
Permimssible Bank Finance for companies with varied forms of bank financings.
b) The second Method redcues the amoung of bank funding for companies with
complex funding requirements.
c) No extra protection is offered by Method 2, it is merely a different calculation for
companies with higher debt levels.
d) The second Method reduces the amount of bank funding and increases the
amount which the company needs to finance from long-term sources.
Question (29)
What is an important change in Assessed Bank Finance as compared to the Maximum
Permissible Bank Finance method?
a) Greater variety of companies are now able to apply for working capital funding
because of the Assessed Bank Finance method.
b) There is less emphasis placed on profitability, asset quality and fund flow.
c) The amount of bank financing is no longer determined on the basis of a
stipulated minimum level of liquidity, but with due consideration to the
company’s overall financial position and projected liquidity.
d) Banks are able to take greater risks under Assessed Bank Finance.
Question (30)
Pick all examples of large project term loans.
a) Company manufacturing shirts wants to have the capacity to manufacture buttons
and has requested a loan for this purpose.
 b) A food packing company has requested a loan to support their plan to
substantially expand their capacity.
c) A mid-sized services company has requested a loan to buy-out a small competitor.
d) All of the above
Question (31)
What changes were proposed in 1997 to the management of working capital finance?
a) To scrap the requirement to calculate working capital finance using the measure of
Maximum Permissible Bank Finance.
b) Each bank was given freedom to develop its own system of working capital finance
for a faster credit delivery so as to serve various borrowers more effectively.
c) Banks were requested to lay down transparent policy and guidelines for credit
dispensation.
d) All of the above
Question (32)
Is it ever advisable to rely solely on the technical feasability report submitted by the
client?
a) Yes, as the client will understand the project best and will have all the relevant data.
b) If the project is not complex and involves modest expansion or modernisation
of existing facilities, then the bank may be able to rely on reports drawn up
solely by the client.
c) No, as the bank needs to involve third party experts to be considered as impartial.
d) No, as in all projects, it is important to test the information provided by the client.
Question (33)
How is the LC limit calculated?
a) Based on a formula with inputs of the amount of purchases, proportion of
such purchased with a Letter of Credit and the average credit received. Domestic
and imported purchases are calculated separately.
b) Based on the value of the goods purchased assessed separately for domestic and
imported goods.
c) Based entirely on the credit profile of the applicant.
d) Based on the amount of previous Letters of Credit granted to the applicant with a
distinction between the purchase of domestic and imported goods.
Question (34)
In addition to determining the working capital finance limits, what additional analysis is
required prior to advancing funds?
a) None. The two methods of calculating working capital finance limits are sufficient to
understand the risks posed.
b) An assessment of the quality of the borrower’s key current assets is required.
c) Due diligence on the company’s management is required.
d) An analysis of the industry in which the company operates and its competitors is
required.
Question (35)
What is the role of the guarantor in a bank guarantee?
 a) The guarantor, usually a bank, agrees to discharge the applicant’s obligations
in the case of his default.
b) The guarantor agrees to appoint a bank to settle the applicant’s obligations in case
of his default.
c) The guarantor, usually a bank, steps in to negotiate a settlement between the
applicant and the beneficiary in case there are financial problems.
d) The guarantor, usually the principal debtor, agrees to pay his debts on time.
Question (36)
What is the last required step to conclude the working capital assessment?
a) Evaluation of liquidity
b) Critical scrutiny of projections for other assets and liabilities
c) Validation of bank finance requested by the borrower
d) Testing of projected profitability, gearing, debt levels, capital position, investment in
fixed assets and other investments
Bottom of Form 1
Section 1: Course 08 Online Assessment
All questions are mandatory
Top of Form 1

Question (1)
Select the most accurate statement concerning deal structuring and monitoring.
a) Good deal structuring and monitoring make a bad deal an acceptable risk.
b) Monitoring, but not good deal structuring, makes a bad deal an acceptable risk.
c) Good deal structuring and monitoring do not make a bad deal an acceptable
risk.
d) Good deal structuring, but not monitoring, makes a bad deal an acceptable risk.
Question (2)
Who is a Hypothecatee?
a) The person who holds the asset on behalf of the lender
b) The person in whose favour the asset is charged
c) The person who charges the asset in favour of the lender
d) The official who registers the charge
Question (3)
Which of the following are required for a corporate guarantee to be valid?
a) A Board resolution and the guarantee document signed by the Chairman of the
Board.
b) A guarantee document signed by the Chairman of the Board and approval from the
Registrar of Companies.
c) A Board resolution and approval from the Registrar of Companies.
d) A Board resolution and approval to issue a guarantee to be contained in the
Memorandum/Articles
Question (4)
Select the most accurate statement concerning the inclusion of a guarantee from an
operating subsidiary when lending to a holding company?
a) This will give the HC lender a secured claim on the assets and cash flows of the
guarantor
b) This will give the HC lender a first ranking claim on the assets and cash flows of the
guarantor
c) This will give the HC lender an unsecured claim on the assets and cash flows of the
guarantor
 d) This will give the HC lender a subordinated claim on the assets and cash
flows of the guarantor
Question (5)
What is the most common credit risk faced when realising hypothecated assets?
a) Legal proceedings have to be completed to realise the hypothecated assets.
b) The borrower may not agree to hand over the hypothecated assets.
c) The assets may not be in existence, as they have never been in the
possession of the lender.
d) There is no risk. The assets merely have to be possessed and realised.
Question (6)
What is the difference between a covenant and a trigger?
a) Covenants seek to reduce probability of default, while triggers do not
b) Triggers reduce probability of default, while covenants do not
c) There is no difference, they are the same
d) Triggers are legally enforceable, while covenants are not
Question (7)
Why should a lender not depend on internal triggers alone to monitor a loan?
a) A lender may place full dependence on a well defined set of triggers.
b) Triggers may sometimes be seen in isolation rather than in totality.
c) Not all credit deterioration can be captured by internal triggers.
d) Sometimes triggers may cause an over reaction on the part of the lender's staff.
Question (8)
Which of the following correctly describes EaD?
a) The amount outstanding from the borrower at the point of default
b) The amount which is expected to be eventually irrecoverable
c) The amount that was initially advanced to the borrower
d) The amount that can eventually be recovered from the borrower
Question (9)
What is the main difference between a covenant and a trigger?
a) A breached trigger is tantamount to default, while a breached covenant requires
action internal to the lender.
b) A covenant is a term in a loan agreement which specifies a fact of the
agreement, e.g., rate of interest. A trigger requires action on the part of the
lender on the happening of a certain event
c) A breached covenant tantamounts to default, while a breached trigger requires
action internal to the lender.
d) There is no difference between them, they are the same.
Question (10)
What statement concerning internal triggers is most accurate?
a) They eliminate probability of default.
b) They are legally enforceable.
c) They do not rely on client cooperation for resolution.
 d) They provide an early warning system.
Question (11)
In what phase of deal structuring is the lender likely to decide that "ring fencing"
(legally separating/ protecting the transaction from the rest of company) is essential to
the deal structure?
a) Prospecting phase.
b) Drawdown/monitoring phase.
c) Design phase.
d) Negotiation phase.
Question (12)
Which of the following factors may be affected by a change in ownership or control of
the borrower’s company?
a) Probability of Default of the borrowing company.
b) Borrowing documentation of the company.
c) Method of computation of Loss Given Default of the borrowing company.
d) Downstream guarantees issued for subsidiaries.
Question (13)
What is the primary purpose behind completing proper lending documentation with a
borrower?
a) To enable registration of certain securities
b) To record an informal agreement between lender and borrower
c) To record the amount and type of facilities advanced
d) To establish recourse to recover the debt in a court of law
Question (14)
Which of the following associations have developed acceptable standard definitions for
lending covenants?
a) London Stock Exchange
b) Loan Market Association
c) Financial Accounting Standards Board
d) Securities and Exchange Board of India
Question (15)
Which of the following assets can usually be hypothecated as security?
a) Inventories
b) Goodwill
c) Plant and machinery
d) Land
Question (16)
Which of the following is a collateral security?
a) Mortgage of plant and machinery used in the business of the borrower
b) Hypothecation of inventories of the business of the borrower
c) Pledge of shares in the name of the borrowing entity
d) Pledge of fixed deposit in the personal name of the owner
Question (17)
What is the principal difference between pledge and hypothecation?
a) In a pledge, possession of the asset goes to the lender, while in a
hypothecation it remains with the borrower
b) There is no difference, they are the same
c) In a hypothecation, the lender can sell the asset immediately, while in a pledge the
lender has to approach the courts
d) In a pledge, possession of the asset remains with the borrower, while in a
hypothecation it goes to the lender
Question (18)
Select an example of a structural mitigant.
a) A holding company benefits from diversification
b) A holding company receives a guarantee from an operating subsidiary
c) A holding company has operating assets
d) A holding company owns a strong group
Question (19)
Which statement is correct with respect to the law of limitation?
a) It limits the type of advances which can be recovered from the borrower
b) It limits the period within which the debt can be recovered from the borrower
c) It limits the amount which can be recovered from the borrower
d) It limits the jurisdictions in which debts can be recovered from the borrower
Question (20)
Which of the following is a legally necessary pre-execution formality?
a) Ensuring that loan disbursements are made to the designated purpose and
beneficiary.
b) Obtaining certified specimen signatures of the borrower's officials who will
operate the facilities.
c) Issue of cheque books for the borrower's proposed ovedraft account.
d) Filing of charges with the Registrar of Companies.
Question (21)
A lender lends to all companies in a group. What type of guarantee is most likely to
dilute the unsecured claims of this lender’s lending to an operating subsidiary
guarantor with the least impact on the claims of lending to its parent company?
a) A cross guarantee
b) An upstream guarantee
c) A personal guarantee
d) A downstream guarantee
Question (22)
Where goods pledged to the lender are placed in a warehouse, what would be an
important factor to regard the pledge as complete?
a) The warehouse must be in the constructive possession and control of the
lender
b) The warehouse and the goods within must be insured
 c) Expired, damaged and perishable goods must not be kept in the warehouse
d) The goods must be well maintained in the warehouse
Question (23)
Select an example of a natural mitigant to protect from Holding company risk.
a) Loan documentation requires that a holding company houses most of the
consolidated debt
b) A holding company has operating assets
c) A holding company arranges a third-party collateral
d) A holding company receives a guarantee from an operating subsidiary
Question (24)
What is the liability of a Director who gave guarantees in his personal capacity?
a) The Director remains liable to the lender to the extent of his shares, if any, in the
company
b) The Director is discharged upon his giving notice to the lender that his
responsibilities as Director have been concluded
c) The Director is automatically discharged when he ceases to be a director
d) The Director remains liable until formally discharged by the lender
Question (25)
How should unconsolidated financial covenants be defined for effective structural
mitigation when lending to groups?
a) The definition should include both the positive and negative impact of inter-company
transactions
b) The definition should include the positive and exclude the negative impact of
inter-company transactions
c) The definition should exclude the positive and include the negative impact of inter-
company transactions
d) The definition should exclude both the positive and negative impact of inter-
company transactions
Question (26)
Which of the following is an example of a negative covenant?
a) Compliance with certain defined financial ratios
b) Undertaking to insure plant and machinery on time
c) Not to provide security over a borrower’s assets to other lenders
d) Submission of audited financials
Question (27)
With respect to the deal structure, what is the primary purpose of transaction control?
a) To gain insight into deteriorating business and financial risk through the use of
covenants
b) To prevent subordination through the use of covenants
c) To give the lender the right to access the data required to monitor the risk of the
borrower
d) To use trade finance and cash management products to gain insight into
potential problems with the borrower’s business dealings
Question (28)
How do banks that follow the Foundation IRB approach estimate EaD?
a) 100% of the funded outstanding only
b) 100% of the funded outstanding plus 100% of off balance sheet credits
c) 100% of the funded outstanding plus 75% of off balance sheet credits
d) 100% of the funded outstanding plus 25% of off balance sheet credits
Question (29)
Why are securities necessary for lending?
a) Lenders see security as a demonstration of good faith and intent on the part of the
borrower
b) Securities reduce the amount of capital required to support the corresponding
lending
c) They can be disposed off in the event of default and thus reduce the credit risk of the
lender
d) All of the above
Question (30)
Which of the following is a joint and several guarantee?
a) Signed by five persons who are responsible for different shares of the debt, but
totalling the full debt
b) Signed by one person who is responsible for the full debt
c) Signed by five persons, each of whom are responsible for the full debt
d) Signed by two persons who are responsible for 50% of the debt each
Question (31)
Which asset is an assignment usually taken as security over?
a) Land and building
b) Inventories
c) Contracting receivables
d) Fixed deposits
Question (32)
Which type of assets is an assignment usually created over?
a) Plant and machinery
b) Receivables
c) Inventories
d) Bonds
Question (33)
When are artificial transactions that move assets and cash flows into group companies
outside the legal reach of the lender most concerning?
a) When the group’s current ratio is increasing
b) When the group’s leverage is decreasing
c) When the group’s loss given default is decreasing
d) When the group’s probability of default is increasing
Question (34)
 Which of the following is a security over a tangible asset?
a) Pledge over goodwill.
b) Pledge over trademarks.
c) Pledge over copyrights.
d) Pledge of shares.
Question (35)
What is an example of a cross guarantee?
a) When a holding company guarantees a subsidiary.
b) When a subsidiary guarantees a fellow subsidiary.
c) When a parent company guarantees a subsidiary.
d) When a subsidiary guarantees a holding company.
Question (36)
Which type of covenant requires submission of audited financials?
a) Financial covenant
b) Insurance covenant
c) Restrictive covenant
d) Information covenant
Question (37)
What is a key component of structure risk?
a) Access to the borrower’s financial statements
b) Access to the borrower’s cash flows
c) Access to the borrower’s articles of incorporation
d) Access to the borrower’s budgetary projections
Question (38)
Which statement defines the responsibility of a pledgor even after goods have been
pledged to the lender?
a) The pledgor continues to be responsible to the lender for the entire amount of
the debt, irrespective of the value of the pledged goods
b) The pledgor is discharged from the debt to the lender when the pledged goods are
sold, irrespective of the amount of the sale proceeds
c) The pledgor has no further responsibility to the lender for the debt
d) The pledgor continues to be responsible to the lender for the entire amount of the
debt, less the estimated value of the pledged goods
Question (39)
What is the difference between a financial covenant and a financial trigger?
a) Financial covenants are usually set at tighter levels so that their breach draws
attention before the corresponding financial trigger is breached
b) Financial triggers are usually set at tighter levels so that their breach draws
attention before the corresponding financial covenant is breached
c) There is no difference, they are the same
d) They are the same, except that a financial covenant is contained in the loan
agreement, while a financial trigger is not
Question (40)
 What are the key deal structure components before disbursement of funds?
a) Conditions precedent and ensuring loss given default does not decrease
b) Representations and warranties and ensuring exposure at default does not
decrease
c) Conditions precedent and representations and warranties
d) Ensuring loss given default and exposure at default do not decrease
Question (41)
What term is used to describe a debt provider’s access to assets, cash flow and
contracts naturally ranking after another stakeholder because of circumstances?
a) Legal Subordination
b) Contractual Subordination
c) Structural Subordination
d) Effective Subordination
Question (42)
What type of structure risk deals with a lender’s inability to enforce a guarantee due to
missing signatures?
a) Other Stakeholders
b) Documentation
c) Cross Border
d) Group Structure
Question (43)
Setting a financial covenant to monitor which of these would ensure ability to service
debt?
a) Change of ownership.
b) Negative pledge.
c) Leverage.
d) Cash flow.
Question (44)
Which of the following is a "haircut"?
a) The eventual loss incurred on realisation of a security.
b) A discount assumed by the lender in the realisable value of a security.
c) The percentage by which the borrower seeks a reduction in the rate of interest.
d) The amount by which the borrower seeks a reduction of the debt in view of his
inability to pay.
Bottom of Form 1
Section 1: Course 09 Online Assessment
All questions are mandatory
Top of Form 1

Question (1)
The concept of need-based finance implies that
Bank finance is intended to supplement the funds already available to the
borrower from other sources
Bank finance should be made available to the borrower as and when they need it
Extent of bank finance would be determined by the need as advised by the borrower
without any consideration of funds already available from other sources
Bank should extend finance to the borrowers in accordance with the bank’s need to
lend
Question (2)
Why should you check for any inventory pile-up during unit inspection?
Inventory pile-up offers additional business opportunity in terms of the borrower’s need
for more financing
Higher inventory may pose a logistical challenge for the unit in terms of
handling/storage
Excess inventory, when disposed off in bulk, would lead to sudden cash inflow which
would cause cash imbalance
Inventory pile-up may be indicative of adverse developments such as
obsolescence, reduced market acceptability, order cancellation, speculative
intentions, etc.
Question (3)
Among the following, which is a purpose of monitoring? (i) Ascertain the level of current
assets (ii) Ascertain if the unit’s operations are as per the projections (iii) Be aware of
events that can impact the borrower’s business
Option (i)
Option (i) and (iii)
Option (ii) and (iii)
All the options (i), (ii), and (iii)
Question (4)
What information can be obtained from CRILC?
Borrower’s loan account being reported as SMA by another bank
Details of wilful default by the borrower
Details of other companies with common directors
Details of criminal case against the promoters
Question (5)
Which of the following statements best describes the purpose of stock audit?
The main purpose of stock audit is to get an independent third party insight on
the borrower’s affairs and a detailed examination of specific issues in relation to
the borrower’s business, if required
 Stock audit is a monitoring tool employed when the relationship team is not in a
position to carry out unit inspections due to time constraint
Stock audit conveys to the borrower that the bank is seriously keeping a watch on his
business
Stock audit is one more monitoring tool
Question (6)
The cash credit limit of a company is Rs. 40 crore and stipuated margin on inventory
and receivables is 25%. As per the latest stock statement, the inventory is Rs 25 crore
and the receivable level is Rs. 35 crore. What would be the drawing power?
Rs. 30 crore
Rs 60 crore
Rs. 45 crore
Rs. 40 crore
Question (7)
What is the relevance of stock statement in the administration of FBWC limits
Stock statement contains information which is “good to have” for the bank, though not
“must have”
Based on a scrutiny of stock statement does a bank decide whether to renew a FBWC
limit
Submission of stock statement is a statutroy requirement for availing FBWC limits
Stock statement contains details of inventory, receivables and creditors under
LCs which are necessary to compute the drawing power which regulates the
amount that can be drawn from the FBWC account
Question (8)
Which among the following is NOT a primary objective of unit inspection?
To hold discussion with the promoters and other important employees
To verify the quantity and quality of inventory
To solicit more business opportunities with the borrower
To assess the activity level at the unit
Question (9)
A bank guarantee can become a perpetual obligation for the bank because
The applicant can obtain stay order from a court of law restraining the bank from
making payment for a guarantee which has been invoked
The contracts underlying bank guarantees are sometimes very complicated and
beyond the understanding of bank officials
The beneficiary can seek any number of extensions of validity period
Bank guarantees are usually issued for long periods

Question (10)
One of the objectives of monitoring a term loan during the project implementation stage
is
To ensure that adequate raw material is available
To ensure that the borrower has adequate working capital limits in place
 To ensure that the borrower mobilises the means of financing as per the terms of
sanction
To ensure that the promoters have brought in their contribution towards working capital
margin
Question (11)
You come across a news report that an agitation has started against one of your
borrowers engaged in production of aerated beverages for drawing water from a local
river. What are the implications for your bank’s loan to the company?
The operations can be temporarily affected since the borrower would take the legal
route and get a favourable ruling ultimately
No implication since such agitations are easily manageable
No implications since water is a cheap resource and can be obtained from alternative
sources
It can have serious implications since agitation can lead to a ban on drawing
water from the river. Sourcing water from elsewhere would add transportation
costs which would affect the viability of the borrower
Question (12)
You have sanctioned a term loan to a company for an expansion project. A portion of
the project cost amounting to Rs 10.00 crores is to be met by internal accruals during
the current year. The company has repayment obligation of Rs 4 crores towards
existing term loans during the year. The internal accruals up to the first half of the year
are Rs 3.00 crores. Which of the following statements is the most appropriate for this
situation?
While there is a possibility of shortfall, it is too early to think of any action. The actual
amount of internal accruals would be known only after the year end
The availability of funds for project implementation does not face any constraints
The overall requirement of funds from internal accruals is Rs 14.00 crores for the
current year. Going by the internal accruals up to the first half of the year, there
is a likelihood of shortfall and alternative means of financing need to be
identified.
Difficult to say anything at this stage
Question (13)
One of the key objectives of the loan pricing process is
To ensure that the bank gets acceptable return on risk undertaken on the
relationship
To ensure that the potential business is not lost to the competitors at any cost
To enhance the bank’s image as a customer-friendly organisation
To build customer loyalty
Question (14)
Risk premium is calculated on the basis of
Expected loss to the bank in lending to a category of borrowers
Expected return on capital
Amount of capital to be set aside for each lending
Expected loss to the borrowers in their business
Question (15)
A letter of credit is
An undertaking issued by a bank on behalf of a buyer to the seller to pay for the
goods and services
A letter issued by a seller to the buyer offering credit on the supplies
An undertaking issued by the buyer to the seller to pay for the goods and services
An undertaking issued by a bank on behalf of the seller to the buyer promising due
performance of sales
Question (16)
What is the implication of a large number of round sum transactions by a borrower?
Such transactions result from netting off the discounts
These are no different from other transactions and are just a coincidence
Such transactions are done for accounting convenience
Such transactions may not be on account of the borrower’s regular business
and need to be probed
Question (17)
Request for LC in favour of an associate concern is
A cause of concern since purchases of material from associate concerns is quite
unusual
Unusual because the LC is resorted to by the buyer and seller where seller does
not want to take a credit risk on the buyer and therefore wants to secure the
payment through the LC. Such situation should not arise between associate
concerns. Such request could be indicative of accomodation transaction
Not a cause of concern as long as there is no record of LC devolvements in respect of
the applicant
Not unusual as long as the item being purchased is relevant to the business of both
parties
Question (18)
Term premium is one of the factors affecting the cost of funds of a bank because
Generally long-term money is costlier than the short-term money
Raising short-term money is less risky for the bank
Generally short-term money is costlier than the long-term money
Raising long-term money is riskier for the bank
Question (19)
Stock audit report on one of your borrowers mentions that the inventory level shown in
the stock statement was substantially higher than the actual level found in the audit.
Consequently, the drawing power works out to be substantially lower and the account
would be rendered irregular. What is the most appropriate action for you?
Wait for the next stock statement and ask the auditor to verify the position with
reference to the new stock statement
Examine the matter closely. Have a detailed discussion with the borrower and
the auditor. Analyse the borrower’s explanations and assess if those are
justified. Finally, take action as appropriate.
Immediately reduce the drawing power as indicated in the stock audit report
 Do nothing because reduction in drawing power would lead to irrgularity in the account
which may ultimately lead to the account becoming NPA

Question (20)
Why should you look at the external sources of information when you have already
analysed all the risks of an entity thoroughly?
External sources are impartial
External sources are more reliable
External sources cannot be managed by the borrower
The information available from external sources is often not available from the
internal monitoring mechanisms, though it can have substantial bearing on
credit quality
Question (21)
Credit administration is a critical activity in a bank’s lending business because
It regulates flow of loan funds to the borrower in accordance with the terms and
conditions of loan sanction
It ensures that need-based credit lines are sanctioned to the borrower
It facilitates building of a cordial relationship with the borrower and creates goodwill for
the bank
It improves the bank’s competitive position as compared with other banks
Question (22)
Why should the stock statement include age-wise break-up of receivables?
It is always helpful to get as much information as possible so as to be ready to meet
any future requirement of such information
It enables the bank to identify the receivables within and outside the sanctioned
cover period. Further, it gives a sense about the pace of realisation of
receivables and impending bad debts
It facilitates enforcement of the bank’s security in recovery proceedings in the event of
default
It is manadatory as per RBI guidelines
Question (23)
For a term loan sanctioned with debt-equity ratio of 2.00, what would be the overall
margin requirement?
0.25
0.3333
0.4
0.6667
Question (24)
An EPC (Export Packing Credit) should be liquidated by
Only by long-term sources of funds
 There is no restriction on the source of funds for liquidation of EPC
Only the regular cash flows of the borrower
Only by export proceeds

Question (25)
Competition is among the more critical elements of loan pricing because
Competition places a ceiling on the pricing that the borrower is likely to accept
Being competitive in pricing is helpful in attracting new business
Competition enhances the efficiency of the pricing process
Competition makes the Relationship Officer more market savvy
Question (26)
Setting the pricing of a loan involves evaluation of
Customer’s total relationship with the bank
Only the credit risk of the customer
The capability of the customer to pay
Long-term trends in the movement of interest rates
Question (27)
One of the key aspects of monitoring of a term loan post commencement of
commercial production is
Estimating the cost of production
Checking if there are delays in submission of stock statements
Keeping tab on the salaries of key executives
Checking if the borrower is defaulting on loan repayments to other lenders
Bottom of Form 1
Section 1: Course 10 Online Assessment
• Question (1)
Which factor is a reflection of a substantial problem loan portfolio and is also most likely to
trigger further problems related to such a portfolio?

Increased monitoring and audit checks

Lowering of rating by rating agencies
Increased funding costs
Increased legal costs

• Question (2)
Which situation does not describe that of a wilful defaulter?

The borrower is unable to pay because the project's viability has changed following
government regulation.
Financing for the project has been diverted to acquisition of shares.
Borrowings have been used for a purpose other than that for which the advance was made.
Short-term borrowings have been diverted to investment in shell subsidiaries.

• Question (3)
Which definition best fits a special mention account?

An account that has been provided to the extent of 25%.

An account where income recognition has been stopped.
An account that has begun to show early signs of distress and can be rectified by remedial
action.
An account in which there are overdues for 90 days or more.

• Question (4)
Which situation would result in an account being classified as SMA-0?

Projected sales shown for loan sanction falling short by 25%.

Drop in internal risk rating by two or more notches in a single review.
Delay of more than 60 days in submission of stock statements.
Return of 2 cheques in 30 days for lack of funds.

• Question (5)
During which stage will management start selling vital assets?
 Cash crisis stage.
Cash crunch stage.
Cash clearance stage.
Cash concern stage.

• Question (6)
What is an early warning sign that might affect an individual business operation?

Use of post-dated cheques.

A period of political instability.
Bad press.
Changes in product quality.

• Question (7)
Which measure is not used as a penal measure in dealing with wilful defaulters?

Initiating change of management of the defaulting unit.

Making further advances to the defaulter to facilitate repayment of defaulted borrowings.
Ensuring through RBI that wilful defaulters are debarred from institutional finance for 5
years.
Initiating civil or criminal action against the borrower.

• Question (8)
What is one sign that an account should should be classified as RFA (i.e., a red flag account)?

Frequent excesses over limit.

Frequent past dues leading to limits being temporarily frozen.
Entire account under a difficult restructuring process.
One or more early warning signals from a prescribed list being met.

• Question (9)
Which characteristic describes an out-of-order account?

Outstanding exceeds limit for 60 continuous days.

Outstanding exceeds limit for 60 days.
Outstanding exceeds limit for 30 days.
 Outstanding exceeds limit for 90 continuous days.

• Question (10)
Review and assess the accuracy of this statement: When initiating a DRT suit against a
defaulting party, the lender must send a recall notice to the borrower with sufficient time given
to the borrowers and guarantors to comply.

The statement is accurate in all respects.

The statement is not true.
Recall notice is required to be served only on a case by case basis, based on the profile of
the borrower and the urgency of the suit filing.
While a recall notice needs to be served to the borrower, there is no need to offer sufficient
time for them to respond as it is not required by law.

• Question (11)
How can you reduce exposure to potential losses with new clients?
This is a mulitiple choice question.
Reduce pricing on uncommitted letter of credit.
Replace existing facilities with lower-risk products.
Restrict new draw-downs on committed facilities.
Offer additional facilities on a cash-secured basis.

• Question (12)
What is the purpose of the Central Repository for Information on Large Credits (CRILC)?

To issue credit opinions on individual borrowers to all banks.

To collect information on borrowings of each lender and circulate the total number to all
lenders.
To collect, store, and disseminate credit data to lenders.
To act as RBI's watchdog on the total borrowings by individual lenders across all banks.
• Question (13)
Which statement is correct with respect to wilful defaulters?

Wilful defaulters of Rs. 1 million or more must be reported to the CIC with RBI.
Even one isolated instance is adequate to categorise the case as one of wilful default.
A case where the borrower loses diverted funds and makes a full disclosure of the diversion
and loss is still a case of wilful default.
A substandard or doubtful account is almost always a case of wilful default.

• Question (14)
 Which statement is correct with respect to restructuring options?

Taking no action is always the worst option.

A judicial process is not an option in restructuring a corporate debt.
One method to induce a reduction in exposure is to reduce pricing.
Liquidation is rarely used for companies of material size.

• Question (15)
Why can cyclicality affect an entire industry?

Pricing can change too quickly for companies to make profits.

Changes can happen too quickly for costs to be cut.
Capacity can increase too quickly for companies to provide inventory.
Sectors can grow too quickly for companies to expand their services.

• Question (16)
If an RP involves restructuring, how should the accounts that were classified as 'standard' prior
to such restructuring be re-classified?

Doubtful
SMA-2
Sub-standard
SMA-1

• Question (17)
Which item is a direct cost of problem loans?

Legal expenses
Damage to reputation
Event risk
Lost opportunities

• Question (18)
Which statement is correct with respect to provisioning on doubtful exposures?

100% provision is required on the unsecured portion of the exposure.

 50% provision is required on the exposure when it is first classified as doubtful.
100% provision is required on the full exposure, irrespective of security.
No provision is required on the secured portion.

• Question (19)
Which statement with respect to a non-performing asset (NPA) is correct?

Interest may continue to be recognised as income, without there being any credits to the
account.
The exposure should be classified as a Special Mention Account in the grading system of
the bank.
Past interest should be reversed out of income if not collected.
A provision of 50% should be created when the exposure is first classified as an NPA.

• Question (20)
How can aggressive competition from a new entrant into the market affect a company's business
and operations?

It could increase market share.

It could increase product pricing.
It could reduce the number of competitors.
It could reduce potential sales.

• Question (21)
Which rule, practice, or principle was acknowledged as the prime basis for prudential norms?

Objectivity.
Accounting practices.
Rules set by the Ministry of Finance.
Consensus of the relevant committees.

• Question (22)
What is an example of a lagging indicator?

The borrower stops returning phone calls.

The borrower is late submitting financial accounts.
A competitor introduces a new popular product on the market.
 A price war has started on the marketplace.

• Question (23)
Which item is an early warning signal listed by the RBI?

An onerous clause in the issue of BG/LC/ standby letters of credit

A formal request made to the bank to restructure a loan.
In merchanting trade, evidence that an import leg was not revealed to the bank.
A request received from the borrower to postpone the inspection of the godown for flimsy
reasons.

• Question (24)
How should security be regarded when determining whether an account should be classified as
a non-performing asset (NPA)?

It should be ignored.
None of the above.
The value should be deducted from the debt, and only the net debt should be classified.
The account should first be classified disregarding security and then be upgraded.

• Question (25)
With respect to the borrower's management, what does a successful restructuring require?

The management should be focused, motivated and going in the same direction as the bank.
The management should be competent more than anything else.
The management should have a good general understanding of the situation.
The management should be focused and ready to push its agenda ahead, regardless of other
parties' opinions.

• Question (26)
Which statement is correct with respect to wilful defaulters and liability?

Part time directors of the borrowing company are as liable as full time directors in the
process of determining wilful default.
An individual guarantor automatically becomes a wilful defaulter when the original
borrower is identified as a wilful defaulter.
A committee consisting of senior staff from relationship and credit, constituted for
identification of wilful default, may issue a final judgment on the issue.
 Corporate guarantors within the group are held as wilful defaulters only if they do not
honor claims on their guarantees.

• Question (27)
What is involved in the second step, developing an action plan, during the restructuring
process?

Engaging with stakeholders and securing their immediate support.

Drafting detailed plans for implantation stages and timelines.
Assessing the total funding required to deliver the plan.
Assessing the cash position to determine the time frame.

Question (1) which financial trigger can be set up internally as an early signal of a
borrower’s probability of default?
a) Change in profit projections.
b) Change in ownership structure.
c) Unexpected change in dividend policy.
d) Emergence of new competitive entrants in the market.
Question (2) What is the difference between operating cash flow and earnings before
interest, taxes, depreciation and amortisation (EBITDA)?
a) EBITDA considers interest expense.
b) EBITDA considers capital expenditures.
c) EBITDA considers changes in cash flow.
d) EBITDA adds back depreciation and amortisation.
Question (3) What external factors outside of a business’s control can affect its
liquidity levels?
a) Credit and lending policy.
b) Facility and loan structure.
c) Industry and business risk.
d) Management and key persons’ risk.
Question (4) Which industry factor increases the need for a company to compete for a
high volume of sales to remain profitable?
a) High fixed costs.
b) Few competitors.
c) High switching costs.
d) Rapid demand growth.
Question (5) Which action might a company take when it is in the cash concern stage
of financial distress?
 a) Selling vital assets.
b) Cancelling bonuses.
c) Laying off key employees.
d) Eliminating management positions.
Question (6) What does a current ratio of 1.33 indicate about a company’s current
assets?
a) Current assets are less than net working capital.
b) Current assets are able to cover double the current liabilities.
c) Very few current assets have been funded from current liabilities.
d) A portion of current assets has been funded from long-term sources.
Question (7) In which condition can a local business perform well while the local
economy is in recession?
a) Local competition is weak.
b) The business has a high profit margin.
c) The business sells high quality and durable products.
d) The local economy of business’s customers is thriving.
Question (8) Which is likely to be false of a company with a low gearing ratio?.
a) It has a high debt load.
b) It has high interest costs.
c) It has high repayment ability.
d) It has a high repayment obligation.
Question (9) What information in a credit agency report can help a bank assess a
company’s management integrity?
a) Opinion about the company management.
b) Information about the financial performance.
c) How freely the management shares information.
d) Details on covenant compliance for the bank loans.
Question (10) What is the starting point in the process of projecting a business’s
financial performance?
a) Evaluate economic factors.
b) Complete sensitivity analysis.
c) Project future values for the risk drivers.
d) Review historic levels of the risk drivers.
Question (11) What does the credit risk premium attributed to in the credit pricing
process?
a) The bank’s risk appetite.
b) Expected return on equity.
c) The bank’s growth strategy.
d) Losses incurred due to default.
Question (12) Based on these information: current secured INR 35,000 and current
unsecured INR 20,000; non-current secured INR 75,000 and non-current unsecured INR
60,000, what is this company’s total amount of subordinated debt outstanding?
a) INR 55,000
b) INR 80,000
c) INR 110,000
d) INR 135,000
Question (13) What would describe a non-fund-based facility?
a) A facility that is lower risk than a fund-based facility.
b) A credit facility that incurs a monetary obligation when draw down occurs.
 c) A facility that is similar to a fund-based facility in terms of how it is recorded in a bank’s
books.
d) A facility that may result in a funded obligation if the customer fails to settle any
payments due.
Question (14) How are surrounding businesses affected when an environment is
dominated by two large employers?
a) Neutral on sales and profitability.
b) Loss of one of the employers creates high overall risk.
c) Increased employment reduces the risk for the industry.
d) The impact is significant only if a catastrophic market downturn occurs.
Question (15) What type of capital investment is intangible and financial in nature?
a) Applying for patents.
b) Developing new products.
c) Listing securities on a stock exchange.
d) Replacing existing plant and equipment.

Question (16) For how many days can an account remain continuously in excess of the
sanctioned limit before it is considered out of order?
a) 30
b) 60
c) 90
d) 120
Question (17) Which party enforces a bank guarantee in the event of default?
a) Applicant.
b) Beneficiary.
c) Government.
d) Guarantor.
Question (18) Which factor will most likely reduce loss given default?
a) Amount of the loan.
b) Duration of the loan.
c) Industry of the borrower.
d) Seniority of the loan.
Question (19) During which implementation phase of deal structure is counsel
instructed on documentation and covenant definition issues?
a) Design.
b) Drawdown.
c) Monitoring.
d) Negotiation.
Question (20) Which is an example of an insurance covenant in a credit agreement?
a) Prohibition on providing other creditors security over any assets.
b) Restriction on incurring new debt above a pre-determined amount.
c) Requirement to pay premiums on schedule to avoid a lapse of coverage.
d) Obligation to submit security valuations performed by an independent appraiser.
Question (21) At the beginning of the year, ZXV Inc. acquires computer equipment at a
cost of INR 500,000. Using a 40% declining balance depreciation rate each year, what is
the depreciation charge for this equipment in the second year?
a) INR 120,000
b) INR 180,000
c) INR 200,000
 d) INR 300,000
Question (22) Which result of an increase in management risk will most negatively
affect a company’s financial performance?
a) Managers’ increased focus on their own compensation packages.
b) Managers fail to take timely or correct decisions that affect sales or costs.
c) Managers fail to take full advantage of favourable developments in the external
environment.
d) Managers are less transparent in their dealings with external stakeholders, such as
banks.

Question (23) What is the number of inventory days for a company with sales of INR
500,000, inventory of INR 60,000, cost of goods sold of INR 300,000 and trade
receivables of INR 125,000?
a) 73
b) 152
c) 175
d) 219
Question (24) What is the primary reason for assessing a business’s financial
performance before extending credit?
a) To determine what a company’s key ratios are.
b) To determine how a business generates cash flow.
c) To determine how a company spends its free cash flow.
d) To determine why a business has achieved certain results.
Question (25) For which type of banking products does the Reserve Bank of India
regulate interest rates?
a) Savings accounts.
b) Chequing accounts held by residents.
c) Personal loans of more than INR 200,000.
d) Commercial loans of more than INR 200,000.
Question (26) What is the most effective measure of a business’s operating efficiency?
a) Increase in sales.
b) Increase in profits.
c) Absolute level of operating expenses.
d) Trends in operating expenses as a percentage of sales.

Question (27) A company that records the market value of its equipment on its balance
sheet has not followed which accounting principle?
a) Cost.
b) Matching.
c) Conservatism.
d) Going concern.
Question (28) What test is used to determine whether a borrower will generate enough
cash flow from day-to-day operations to cover its debt obligations?
a) Bias to fail test.
b) Liquidity test.
c) Secondary source test.
d) Solvency test.
Question (29) Special Mention Accounts were introduced as a new asset category
between which two categories?
 a) Doubtful and Loss.
b) Standard and Doubtful.
c) Sub-standard and Doubtful.
d) Standard and Sub-standard.

Question (30) Which type of structural mitigation is used to ensure that all
intercompany transactions occur at arm’s length?
a) Collateral.
b) Guarantee.
c) Monitoring.
d) Restrictive covenant.

Question (31) What type of credit rating will most likely cause a borrower’s credit score
to be adjusted downward because of an expected downturn in the borrower’s
industry?
a) Fail grade rating.
b) Single risk rating.
c) Facility risk rating.
d) External international rating.
Question (32) Which describes the absolute priority rule with respect to payments
made to creditors at default?
a) Subordinated debt is paid before insolvency-related costs.
b) Available funds are paid first to the lowest ranked class until the borrower’s obligations
are fully satisfied.
c) Available funds are paid first to the highest ranked class until the borrower’s
obligations are fully satisfied.
d) Distributions to each ranked class are paid out proportionately based on its percentage
in the company's capital structure.
Question (33) What is the profit before tax and financial costs for a company with sales
of INR 5,000,000, cost of goods sold of INR 2,600,000, operating expenses of INR
1,400,000, interest expense of INR 60,000 and tax expenses of INR 125,000?
a) INR 815,000
b) INR 940,000
c) INR 1,000,000
d) INR 1,185,000
Question (34) What is meant by the term “excess borrowings” under the Tandon
Committee approach to lending?
a) The amount borrowed exceeds current liabilities.
b) The liquidity level exceeds the minimum required.
c) The maximum permissible bank borrowings exceed current assets.
d) The minimum required net working capital exceeds the actual amount.
Question (35) What type of credit rating is most appropriate to evaluate the credit risk
of a group of borrowers that has never borrowed money before?
a) Corporate family rating.
b) Issue rating.
c) Issuer rating.
d) Short-term rating.
Question (36) Which item is evaluated more substantively when determining the
amount of financing available to a company under the assessed bank finance method
as compared to the maximum permissible bank finance method?
a) Assets.
b) Current ratio.
c) Liquidity.
d) Trade payables.
Question (37) How should a customer’s account activity be monitored to ensure end-
use of funds?
a) Review a percentage of all the transactions.
b) Scrutinise all the transactions regardless of value.
c) Review the transactions above a threshold amount.
d) Browse through the account and investigate any unusual transaction.
Question (38) Companies operating in which industry are most likely to have a high
investment in fixed infrastructure assets, with little inventory?
a) Electric utility.
b) Food retailing.
c) Home construction.
d) Financial services consulting.

Question (39) Which factor will decrease a buyer’s market risk in the long term in
conditions where the supplier has high bargaining power?
a) Buyer’s ability to pay.
b) Increase in supplier’s market share.
c) Availability of substitute products in the market.
d) High demand skilled workers are employed by the supplier.
Question (40) What information should be reviewed in the periodic progress reports on
implementation of a project to assess likelihood of meeting the loan repayment
obligations?
a) The project implementation is on schedule.
b) Funding is available to cover any cost overruns.
c) There are orders for the project outputs once completed.
d) Project reports have been approved by the lender’s engineer
Question (41) Why is management integrity the most critical factor when assessing the
impact of management risk on a company’s credit risk?
a) Management lacking integrity may prioritise payments to other external stakeholders.
b) A lack of integrity can result in a company using cash flows for purposes other than
interest or loan payments.
c) A lack of integrity can result in a company’s underperformance and subsequent
inability to meet its payment obligations.
d) A positive assessment of management integrity is necessary for a lender to be
confident in the reliability of the information provided by the company.
Question (42) What governing body for the Insolvency and Bankruptcy Code would set
up accreditation for insolvency professionals and information utilities?
a) Adjudicating Authority.
b) Debt Recovery Tribunal.
c) Insolvency Professional Agency.
d) Insolvency and Bankruptcy Board of India.

Question (43) Which proposition is least likely to be considered for a term loan for its
financing requirements?
a) Expansion of a fleet of vehicles.
b) Capital expenditure for a power plant.
c) An instalment financing construction project.
d) Daily working capital requirements for a small business.
Question (44) What is the primary reason for reviewing external information when
assessing a company’s credit quality?
a) To evaluate any adverse press coverage of the company.
b) To assess the company’s vulnerability to natural disasters.
c) To review any gradual economic changes that may affect the company’s industry.
d) To evaluate what developments may create opportunities for the company or
adversely affect its performance.
Question (45) Which factor will most likely affect the length of time it takes to convert
inventory to sales?
a) New products.
b) Increased financing.
c) Management decisions.
d) Accounts payable growth.
Question (46) What is the difference between a partnership firm and a Limited Liability
Partnership (LLP)?
a) If a partner dies a partnership firm continues to exist and an LLP dissolves.
b) An LLP is a separate legal entity from its members and a partnership is not a
separate legal entity.
c) An LLP is governed by the Indian Partnership Act and a partnership firm is governed
by the Companies Act.
d) The income from a partnership firm stays within the firm and LLP income is personal
income for the partners.
Question (47) How many days is the short-term financing gap for a company with 47
trade receivables days, 68 inventory days and 63 trade payables days?
a) 42
b) 52
c) 84
d) 178
Question (48) What is the first step for a management team in order to achieve results
through the efforts of others?
a) Set the strategic direction.
b) Source the necessary resources.
c) Incentivise the organisation in an effective manner.
d) Manage the critical business operations on a daily and long-term basis.
Question (49) What type of non-fund-based lending facility would a buyer of goods and
services use to guarantee a one-time payment?
a) Export credit.
b) Letter of credit.
c) Overdraft.
d) Term loan.

Question (50) Which costs related to environmental hazards can have a significant
negative impact on a company’s credit risk?
a) Cost of insurance premiums.
 b) Cost of hazardous waste clean-up.
c) Cost of compliance with environmental laws.
d) Cost of professional assessment of facilities for safety.
Question (51) What general inference can be made about a company that has positive
cash flow from operations, and that is borrowing and investing?
a) It is starting up.
b) It is closing down.
c) It is restructuring.
d) It is acquiring other companies.
Question (52) If net sales for a company over three Fiscal Year Ends (FYE) was
FYE 1: INR 1,25,00,885,
FYE 2: INR 1,37,45,473 and
FYE 3: INR 1,40,25,992,
what is this company’s sales growth for FYE 3 compared to FYE 2?
a) 2.0%
b) 2.04%
c) 8.87%
d) 10.0%
Question (53) Which action by a borrower’s management could have an adverse effect
on its cash flow and ability to meet its obligations?
a) Adopting a conservative financing strategy.
b) Executing plans to ensure short-term goals are met.
c) Increasing the rate of depreciation resulting in reduced net income.
d) Disclosing information to other stakeholders on need to know basis.
Question (54) What is the impact of low market entry barriers on competition within an
industry and the financial performance of businesses’ operating within the industry?
a) Increased competition, increased cash flow.
b) Increased competition, decreased cash flow.
c) Decreased competition, decreased cash flow.
d) Decreased competition, increased cash flow.
Question (55) In an initial review of a company’s financial statements, which ratios can
be reviewed to uncover opportunities and identify potential risk flags?
1. Net income.
2. Gross margin.
3. Inventory days.
4. Return on equity.
a) 1 and 2.
b) 1 and 4.
c) 2 and 3. d) 3 and 4.
Question (56) Which organisational structure can inhibit management’s ability to take
decisions thus adversely affecting the company’s performance and credit risk?
a) A pyramidal structure.
b) A centralised decision-making process.
c) A structure that has distinct divisions between different functions.
d) A structure in which roles and responsibilities are clearly documented.
Question (57) XYZ trucking company (XYZ) has recently entered into an arrangement
with an online sales business to deliver their general consumer goods and expect that
this partnership will improve their sales. XYZ has sought enhanced financing to
support this new business. The transportation industry is in a decline due to a
recession, and XYZ’s most recent annual financial statement shows relatively weak
sales performance. What is the next step in assessing XYZ’s credit application?
a) The assessment should end, and credit should be declined.
b) The assessment should be postponed until the industry enters the recovery stage.
c) The assessment should continue and focus on total profit as a measure of success.
d) The assessment should continue with more focus on the sales projections
scenarios and cash flow impact.
Question (58) Why does a special purpose vehicle expose a lender to more risk than
conventional financing?
a) The loan has no security guaranteed.
b) The sponsor has no established track record.
c) The sponsor is the only party liable for the loan.
d) The loan is repaid only from the project’s cash flows.
Question (59) A company has INR 11,304,950 in Cost of Goods Sold (COGS) and INR
1,091,070 in trade payables as of its most recent fiscal year-end. The company claimed
no depreciation in COGS. How many days on average did it take this company to pay
its trade creditors during the fiscal year?
a) 9
b) 10
c) 35
d) 38
Question (60) Which activity can reduce a company’s cash flow position?
a) Sale of assets.
b) Collection of receivables.
c) Purchase of investments.
d) Increase in owner’s equity.
Question (61) What type of early warning signals may be indicated as a result of
technology changes?
a) Business.
b) Fundamental.
c) Market.
d) Operational.
Question (62) which element in the development of a business plan would indicate a
high degree of management risk?
a) Set business objectives are easy to meet.
b) Reports on progress implementation are often late.
c) No consultation with stakeholders in setting up the plan.
d) Finalisation of the business plan only a few days before the start date.
Question (63) Titan Ltd. is a lumber exporter with annual sales of INR 750,000, 45
inventory days, 35 trade receivables days, and 40 trade payables days. What
approximate amount of external financing will Titan Ltd. need to support its operating
cycle?
a) INR 61,644
b) INR 82,192
c) INR 102,740
d) INR 246,575
Question (64) What is the basic function of credit monitoring?
a) To ensure the borrower continues to be a good credit risk.
b) To ensure the borrower is operating within the credit limits.
 c) To determine if the credit facilities are being used for the intended purpose
d) To determine what actions should be taken where there is a cause for concern.
Question (65) Why must a company’s management plan for unexpected events even if
they are unlikely to occur?
a) Robust planning can reduce costs as an alternative to obtaining insurance coverage.
b) Contingency planning is a prerequisite to obtain insurance coverage and business
loans.
c) Many improbable unexpected events can have a significant effect on the
business operations.
d) Adequate planning can help minimise the impact of disturbances relating to economic
cycles and technological changes.
Question (66) Under what circumstances might weak succession planning affect a
borrower’s credit risk when a key management member leaves unexpectedly?
a) The nominated successor lacks management integrity.
b) The nominated successor has not completed all required training.
c) The nominated successor cannot take up the position for a few weeks.
d) Details of the nominated successor were not provided to the borrower’s bank.
Question (67) Which is the best description of the gearing ratio?
a) An indication of current assets to current liabilities.
b) An indication of net worth compared to total assets.
c) An indication of how much cash is available to cover payments.
d) An indication of how a business’s assets are funded between owners and
creditors.
Question (68) At what point during an asset purchase do a company’s capital
expenditures most affect its operational cash flow?
a) Before the purchase while saving for the down payment.
b) At the time of purchase and beyond due to financing costs.
c) When the asset purchased generates expenses such as taxes and insurance.
d) Capital expenditures do not affect cash flow as they are outside normal operational
activities.
Question (69) Which risk driver is most sensitive to economic factors such as a
recession?
a) Capital expenditures.
b) Sales growth figures.
c) Trade receivable days.
d) Operating profit margin.

Question (70) In what type of security charge are goods and raw materials commonly
pledged as assets?
a) Assignment.
b) Hypothecation.
c) Lien.
d) Mortgage.
Question (71) What is considered as one of the three levels of oversight in the
corporate governance process?
a) The media.
b) The regulators.
 c) The board of directors.
d) Banks and other lenders.
Question (72) Which type of charge is appropriate when the security is a factory?
a) Hypothecation.
b) Lien.
c) Mortgage.
d) Pledge.
Question (73) How does industry risk affect the credit risk of a particular business
enterprise that operates within that industry?
a) The effect is limited to industry-specific regulations.
b) The effect is substantial only if the industry is in a decline phase.
c) The effect is insignificant as long as the particular business performs well and
generates enough cash.
d) The effect is significant as industry risk includes factors that determine capital
requirements and cash flow.
Question (74) Which party issues a letter of credit in a goods and services transaction?
a) Applicant.
a) Bank.
b) Beneficiary.
c) Seller.
Question (75) which factor can be excluded from the cost analysis during the pricing
decision process?
a) External financial market conditions.
b) The borrower’s total business with the bank.
c) The borrower’s past and current financial performance.
d) The bank’s minimum returns requirements for the transaction.
Question (76) what is the primary purpose of calculating drawing power in a funds-
based working capital facility?
a) To determine the amount the customer can draw on.
b) To ensure that bank funds are not tied up in obsolete stocks.
c) To ensure that drawings are being used to fund current assets.
d) To check that the value of eligible assets is at least equal to the approved credit limit.

Question (77) What causes market overcapacity?

a) Industry growth.
b) Weak competition.
c) Drop in a sales price.
d) Low product demand.
Question (78) What projected information is best to use to assess working capital
limits?
a) Sales.
b) Balance sheet.
c) Labour expenses.
d) Profit and loss statement.
Question (79) What is the first step in the process of restructuring a loan?
a) Take control.
b) Develop an action plan.
c) Resolve future financing.
 d) Implement the action plan.
Question (80) In which scenario would customer concentration cause significant cash
flow risk for a business?
a) The business sells clothing to individual consumers.
b) The business distributes flour to most bakeries in the region.
c) The business supplies specialised parts to the largest auto maker.
d) The business provides cleaning services to schools, offices and residential buildings.

Question (1)
What year-over-year change in gross margin represents positive financial risk?

No change represents stability.

Gross margin does not affect risk.

A decrease represents profit growth.

An increase represents profit growth.

Question (2)
Which is a major risk for a business in the mature stage of its life cycle?

Failure to repay debt.

Filing for bankruptcy.

Merger with a competitor.

Inability to invest in new products.

Question (3)
Which company related issue can result in a problem loan?

Deregulation.
Globalisation.

Illiquidity.

Seasonality.

Question (4)
Which figure is likely to increase for a business after a seasonal peak sales period?

Sales.

Inventory.

Trade payables.

Trade receivables.

Question (5)
What is a generally acceptable gearing ratio for a business in India?

1.00
2.00
3.00
4.00

Question (6)
Which is a long-term source of working capital financing?

Accrued expenses.

Customer advances.

Term loans.

Trade payables.

Question (7)
What does the trade receivables days ratio measure?

Actual time it takes to pay suppliers.

Average time it takes to pay suppliers.

Actual time it takes to collect cash from customers.

Average time it takes to collect cash from customers.

Question (8)
What projected information is best to use to assess working capital limits?

Sales.

Balance sheet.

Labour expenses.

Profit and loss statement.

Question (9)
On what basis is the risk premium for a loan calculated?

Expected loss.

Loss given default.

Exposure at default.

Probability of default.

Question (10)
Which industry factor increases the need for a company to compete for a high volume of
sales to remain profitable?

High fixed costs.

Few competitors.

High switching costs.

Rapid demand growth.

Question (11)
Which source of external information can help a relationship manager identify changes that
might affect the outlook for a borrower’s industry?

Credit bureau reports.

Stock market announcements.

Reports of parties that have defaulted.

Government announcements of new or amended regulations.

Question (12)
What is a sign of incipient stress which may result in an account being classified as Special
Mention Account (SMA) under the SMA-0 sub-category?
Delay of 30 days in submission of stock statements.

Decrease in frequency of overdrafts in current accounts.

Actual sales and operating profits falling short of projections accepted for loan sanction by
20%.

Return of three cheques issued by borrowers in 30 days on grounds of non-availability

of balance.

Question (13)
Which is an appropriate source of capital investment financing?

Line of credit.

Letter of credit.

Government grant.

Working capital loan.

Question (14)
What is the best time to pay a creditor to optimise cash flow?

Immediately.

On the due date.

30-60 days after the due date.

60-90 days after the due date.

Question (15)
Which statement is correct regarding the effect of a debit or credit on the particular type of
financial account?

A credit to an asset account increases it.

A debit to a liability account decreases it.

A debit to a revenue account increases it.

A credit to an equity account decreases it.

Question (16)
What is drawing power?
.
The approved fund-based working capital limit to finance a company’s inventory and
receivables.

The value of eligible inventory and receivables detailed in a company’s latest stock statement
that can be drawn against.

A company’s credit limit based on the value of eligible items from its latest stock statement
multiplied by the agreed margin.

The lower of a company’s approved fund-based working capital limit and the lending
value calculated based on its latest stock statement and usance letters of credit
issued.

Question (17)
What is the order of quality of financial statements from lowest to highest?

Audited, reviewed, positive assurance, prepared.

Positive assurance, prepared, reviewed, audited.

Prepared, reviewed, audited, positive assurance.

Reviewed, positive assurance, prepared, audited

Question (18)
What term refers to the amount that a lender expects to be outstanding at the time of default?

Expected default loss.

Exposure at default.

Loss given default.

Probability of default.

Question (19)
Which is a negative effect of sales fluctuations for seasonal businesses?

Falling sale prices.

Increased inventories.

Incapacity to compete.

Inability to repay loans.

Question (20)
What three categories are cash payments classified by in the statement of cash flows?

Direct, indirect and Uniform Credit Analysis.

Cash receipts, cash payments and capital expenditures.

Operating activities, investing activities and financing activities.

Operating activities, management activities and financing activities.

Question (21)
What information should be reviewed in the periodic progress reports on implementation of a
project to assess likelihood of meeting the loan repayment obligations?

The project implementation is on schedule.

Funding is available to cover any cost overruns.

There are orders for the project outputs once completed.

Project reports have been approved by the lender’s engineer

Question (22)
What information must be collected and analysed before a personal guarantee on a loan can
be accepted?

Evidence that the guarantor has a higher net worth than the borrower.

Proof that the guarantor is employed showing the gross and net pay received.

Confirmation that the guarantor has no other outstanding guarantees.

The amount of the guarantor’s obligations to banks, including pending loan

applications.

Question (23)
Under what circumstances might weak succession planning affect a borrower’s credit risk
when a key management member leaves unexpectedly?

The nominated successor lacks management integrity.

The nominated successor has not completed all required training.

The nominated successor cannot take up the position for a few weeks.

Details of the nominated successor were not provided to the borrower’s bank.
Question (24)
What activity would provide the least useful information when conducting an inspection?

Holding discussions with the borrower.

Assessing the borrower’s activity level.

Establishing the existence of borrower’s capital stock.

Updating the Bank’s existing knowledge about the borrower’s operations.

Question (25)
What are the three key reference points that form the foundation of most projections?

Start-up, expansion, and succession.

Inventory, sales growth, and rate of return.

Liquidity, profitability, and capital expenditures.

Past results, management plans, and economic environments.

Question (26)
What type of credit facility will typically have a lower interest rate?

Fund-based.

Non-fund-based.

Secured.

Unsecured.

Question (27)
What would allow a positive view to be taken of management‘s ability to develop a robust and
implementable business plan?

Plans are developed in a top-down manner.

There is a well-defined and balanced planning process.

Corrective actions are taken quickly where targets are not being met.

Plans are communicated to all relevant parties within the first month of the new financial year.

Question (28)
What can be reasonably assumed when a business’s debt to tangible worth ratio is higher
than 1.00?
Gearing is low.

Financial risk is unfavourable.

Creditors support assets more than the owners.

The owners support assets more than creditors.

Question (29)
Which can occur as a result of including a group cross-default covenant in the credit
agreement that involves a loan guarantor?

The guarantor is protected if the borrower defaults.

The borrower is protected if the guarantor defaults.

Allows action if the borrower and guarantor default.

Allows action against the borrower if the guarantor defaults.

Question (30)
Which is considered a financing activity when using the indirect method of structuring a cash
flow statement?

Purchases of fixed assets.

Long-term loans and advances.

Proceeds from sale of fixed assets.

Proceeds from sale of share capital.

Question: 31.
What would describe a non-fund-based facility?

A facility that is lower risk than a fund-based facility.

A credit facility that incurs a monetary obligation when draw down occurs.

A facility that is similar to a fund-based facility in terms of how it is recorded in a bank’s books.

A facility that may result in a funded obligation if the customer fails to settle any
payments due

Question (32)
Which is the most effective type of covenant in a credit agreement?

Balance sheet.
Cash flow.

Event-based.

Non-financial.

Question (33)
Which existing market condition can act as a key barrier to entry for a business that wants to
expand into a new market?

Slow market growth.

Product standardisation.

Expensive local manpower.

Well-established competitor.

Question (34)
What does a current ratio of 1.33 indicate about a company’s current assets?

Current assets are less than net working capital.

Current assets are able to cover double the current liabilities.

Very few current assets have been funded from current liabilities.

A portion of current assets has been funded from long-term sources.

Question (35)
Which Master Circular of the Reserve Bank of India aims to ensure that low-income
individuals are able to benefit from the country’s economic growth?

Exposure Norms.

Statutory Restrictions.

Priority Sector Lending.

Prudential Norms on Income Recognition.

Question (36)
Which type of supplier is lowest risk with reference to customer concentration and the
business’s position as a supplier?

Core supplier with low interdependency with the buyer.

Core supplier with high interdependency with the buyer.

Peripheral supplier with low interdependency with the buyer.
Peripheral supplier with high interdependency with the buyer.

Question (37)
Which risk driver refers to the average time it takes a business to collect its sales in cash?

Sales growth.

Gross margin.

Accounts payable days.

Accounts receivable days.

Question (38)
What are scorecards widely used to assess?

Changes in the price of credit default swaps.

Liquidity mismatches in institutional financing.

Default probability based regression analysis.

Credit applications for small business borrowers.

What type of credit rating will most likely cause a borrower’s credit score to be adjusted
downward because of an expected downturn in the borrower’s industry?

Fail grade rating.

Single risk rating.

Facility risk rating.

External international rating.

Question (40)
A company is facing financial difficulties and is in the process of corporate debt restructuring
(CDR). What is one of the options a minority lender to this company has if the lender does not
want to commit additional funding?

Demand repayment by stipulating a recompense clause.

Obtain approval from the CDR Core Group to be excluded from the process.

Arrange for its share of funding to be provided by another lender, either existing or
new.

Agree to defer principal and interest payments for one year before the CDR package
becomes effective.

Question (41)
If net sales for a company over three Fiscal Year Ends (FYE) was
FYE 1: INR 1,25,00,885,
FYE 2: INR 1,37,45,473
and FYE 3: INR 1,40,25,992,
what is this company’s sales growth for FYE 3 compared to FYE 2?

2.0%
2.04%
8.87%
10.0%

Question (42)
In what type of letter of credit is payment delayed until a specified future date?

Contract.

Demand.

Sight.

Usance.

Question (43)
Which occurs immediately after a bank guarantee is invoked?

The bank makes payment.

The beneficiary discharges the guarantee.

The bank removes the guarantee from its books.

The beneficiary enters into a contract with the applicant.

Question (44)
What previous management action is likely to raise doubt about management integrity and
whether to enter into a credit relationship with a business?

Tax planning.

Making tweaks to reported accounts to mask a declining financial performance.

Marginally increasing the dividend payout ratio compared to the previous financial year.

Making changes to the board of directors and audit committee to increase the proportion of
independent directors.
Question (45)
What is the primary source of cash flow used in calculating debt repayment capacity?

Sale of an asset.

Peripheral rental fees.

Extraordinary income.

Cash generated from operations.

Question (46)
Which activity of a borrower is an example of siphoning funds?

Using short-term capital for long-term purposes.

Routing funds through a bank other than the lender bank.

Investing in other companies without the approval of lenders.

Using borrowed funds for purposes unrelated to the operations of the borrower.

Question (47)
What type of business organisation lodges its own tax returns and is responsible for its own
taxes?

Company.

Partnership.

Sole trader.

Wholesaler.

Question (48)
What strategy can management adopt to minimise the impact of work stoppages?

Employ additional staff.

Obtain appropriate insurance.

Engage regularly with staff to ensure good labour relations.

Hold sufficient stocks so that orders can be fulfilled if production is lost during the stoppage.

Question (49)
Titan Ltd. is a lumber exporter with annual sales of INR 750,000, 45 inventory days, 35 trade
receivables days, and 40 trade payables days. What approximate amount of external
financing will Titan Ltd. need to support its operating cycle?
INR 61,644

INR 82,192

INR 102,740

INR 246,575

Question (50)
A note in the auditor's report for TGH Ltd. indicates that an asset reserve was credited INR
50,000, instead of expensed, as a result of creative accounting. What effect will this entry
have on TGH Ltd.’s financial statements?

Profit will be overstated.

Liabilities will be overstated.

Liabilities will be understated.

Shareholder's equity will be understated.

Question (51)
Under what circumstances would a company typically seek external debt financing?

When it is cash rich.

When its structure allows for new equity investors.

When equity holders are willing to take on additional risk.

When existing owners are unwilling to dilute their ownership interest.

Question (52)
What is the typical loan-to-value ratio for companies with lower levels of financial risk or high
levels of available equity finance?

60%

80%

50%

30%

Question (53)
Which activity can reduce a company’s cash flow position?

Sale of assets.
Collection of receivables.

Purchase of investments.

Increase in owner’s equity.

Question (54)
Which type of equity shares can be repaid at the discretion of the issuer?

Common stock.

Convertible preference shares.

Cumulative preference shares.
Redeemable preference shares.

Question (55)
What aspect of a business must be considered when performing an industry and business
risk assessment?

Its future cash flows.

Its vulnerability within the competitive marketplace

Management’s capacity to run the business profitably.

Its ability to generate cash through its daily operations.

Question (56)
What is the main purpose of conducting a competitive analysis during the loan pricing
decision process?

To calculate the lowest lending rate the bank is willing to apply to the loan.

To determine the probability of loss based on the competitor’s rate pricing.

To persuade the relevant committee to approve a lending rate lower than those of
competitors.

To determine whether the lending rate should be adjusted based on the ceiling
established by other lenders.

Question (57)
What part of the loan pricing process sets an interest rate floor, below which the loan is
financially undesirable?

Cost analysis.

Loan structuring.
Loan accounting.

Competitive analysis.

Question (58)
What is meant by the term “excess borrowings” under the Tandon Committee approach to
lending?

The amount borrowed exceeds current liabilities.

The liquidity level exceeds the minimum required.

The maximum permissible bank borrowings exceed current assets.

The minimum required net working capital exceeds the actual amount.

Question (59)
Which describes the absolute priority rule with respect to payments made to creditors at
default?

Subordinated debt is paid before insolvency-related costs.

Available funds are paid first to the lowest ranked class until the borrower’s obligations are
fully satisfied.

Available funds are paid first to the highest ranked class until the borrower’s
obligations are fully satisfied.

Distributions to each ranked class are paid out proportionately based on its percentage in the
company's capital structure.

Question (60)
At what stage in the management cycle should the management consider the effect of
changes in the external environment on the company’s business goals?

Assessing business needs.

Developing plans to meet goals.

Aggregating and organising resources.

Adjusting plans, resources, and methodologies.

Question (61)
What factor plays a key role in influencing the industry due to a large bargaining power of a
significant supplier?
Labour disruptions.

Liberal credit terms.

Decreased sales prices.

Improved service levels

Question (62)
How might an inadequate management succession plan affect a business’s cash flow?

Training the new managers to address their skill gaps may result in excessive costs.

Cost of hiring for the positions vacated due to promotion of the new managers will impact the
cash flow.

Weak relationship of the new managers with the bank staff may result in the credit facilities
not being renewed.

Poor decisions of the new managers that lack sufficient skills or experience might
result in weaker business performance.

Question (63)
Which best describes the effect that political decisions and frequent legislation changes in
India have on its business and industry risk?
This is a single choice question. Selections are automatically selected as you use arrow to
move.
Banks absorb most of the impact and businesses are less affected as a result.

Taxation policies cause businesses to be less transparent in their financial reporting.

Opportunistic decisions that influence monetary policy can negatively affect a business’s
financial performance.

Demonetisation of high denomination currency notes is an example of legislation that

negatively affects small businesses working with cash.

Question (64)
What is considered as one of the three levels of oversight in the corporate governance
process?

The media.

The regulators.

The board of directors.

Banks and other lenders.

Question (65)

How can a company’s management best minimise the impact of potential interruptions in the
input supplies?

Obtain supplier insurance.

Hold large stocks for all key supply inputs.

Maintain good personal rapport with the key input suppliers.

Ensure that there is an alternate supply source for all key inputs.

Question (66)
Which state of the economy has a neutral impact on credit risk?

Contraction.

Recovery.

Growth.

Stability.

Question (67)
Which proposition is least likely to be considered for a term loan for its financing
requirements?

Expansion of a fleet of vehicles.

Capital expenditure for a power plant.

An instalment financing construction project.

Daily working capital requirements for a small business.

Question (68)
Which lists the primary components of India’s corporate debt restructuring (CDR) system?

Debtor-creditor agreements, inter-creditor agreements.

CDR Standing Forum, CDR Empowered Group, CDR Cell.

Multiple banking accounts, syndications, consortium accounts.

Repayment period, repayable amount, instalment amount, interest rate.

Q: What is the benefit of setting meaningful forecast assumptions in the overall projection
process?

To confirm future loan payments will be achievable.

Assumptions depend on the results of the projections.

To reflect factors independent of management’s past performance.

To enable a realistic assessment of the projected financial performance that a credit

decision is substantially based on.

Question (70)
XYZ trucking company (XYZ) has recently entered into an arrangement with an online sales
business to deliver their general consumer goods and expect that this partnership will improve
their sales. XYZ has sought enhanced financing to support this new business. The
transportation industry is in a decline due to a recession, and XYZ’s most recent annual
financial statement shows relatively weak sales performance. What is the next step in
assessing XYZ’s credit application?

The assessment should end, and credit should be declined.

The assessment should be postponed until the industry enters the recovery stage.

The assessment should continue and focus on total profit as a measure of success.

The assessment should continue with more focus on the sales projections scenarios
and cash flow impact.

Question (71)
In what type of security charge are goods and raw materials commonly pledged as assets?

Assignment.

Hypothecation.

Lien.

Mortgage.
Question (72)
An increase in which item will increase a borrower’s debt service coverage ratio?

Loan interest.

Loan collateral.

Cash flow from operations.

Scheduled principal repayment.

Question (73)
Which is an example of a liquidity early warning signal?

Rising corporate bond prices.

Non-consolidation of subsidiaries’ accounts.

Frequent overdrafts that are covered in a few days.

A large cheque that is returned for insufficient funds.

Question 74
When allowing a customer to draw under a domestic bill discounting facility, why is it
important to confirm that there is an underlying movement of goods?

To ensure that the transaction is not a one-off.

To avoid providing financing for intergroup transactions.

To reduce the possibility of providing accommodation finance.

To ensure that financing is provided only for goods that have been shipped to existing
customers

Question (75)
During which implementation phase of deal structure is counsel instructed on documentation
and covenant definition issues?
This is a single choice question. Selections are automatically selected as you use arrow to
move.
Design.

Drawdown.

Monitoring.

Negotiation.

Question (76)
In what type of feasibility assessment is a project’s maximum debt to equity ratio reviewed?

Cost of project.

Economic viability.

Means of finance.
Technical viability.

Question (77)
What is a characteristic of a good business plan?

Setting measurable goals.

Setting business objectives.

Being reactive to changing demand.

Defining who is accountable to the plan

Question (78)
Which source of external information about a company’s past behaviour can be used to
assess its management integrity?

Discussions with management.

Details of dividends paid over the last five years.

Opinion about management included in credit agency reports.

Account statements showing whether the company has met its obligations to the bank on time

Question (79)
What causes market overcapacity?

Industry growth.

Weak competition.

Drop in a sales price.

Low product demand.

Question (80)
What type of risk is the risk that credit exposure is not adequately structured?

Facility risk.

Financial risk

Industry risk

Management risk.
• How would you assess the repayment risk associated with a company with seasonal sales
compared to one that has steadier sales throughout the year, all other things being equal?

The seasonal business will have lower repayment risk.

The seasonal business will have higher repayment risk.
None of the above.
Both businesses have the same level of risk.

• Tea-Shop Ltd. finance their new store leases using 2/3rd debt and 1/3rd equity. Which of these
events would reduce the risk for the lending institution?

Reduction in costs of tea.

Increase in store maintenance costs.
Decrease in credit provided by suppliers.
Decrease in store sales with a constant operating margin.

e) You see a news item that the Government has increased the minimum support price of
sugarcane. Sugar production is expected to exceed the demand during the year and globally also
there is abundant supply. What could be the implication sugar companies?

There would be excess inventory of sugar cane with the sugar companies
 No implication for the sugar companies. They would push their output to their wholesalers.
No major implication. The companies will offload their production when prices improve
This could have serious adverse implications for the sugar companies’ profitability and may
lead to losses. In case the companies hold on to their output, it will have significant carrying costs
which again would affect the profitability.

e) Best Bakers LLP bake and supply breads for retailers. In looking to expand their capacity to
support a growing market, which form of financing would be most appropriate and why?

Extending its existing overdraft facility because this type of funding provides maximum flexibility
required due to the uncertain operating conditions that the expansion will create.
Raising a new term-loan that can be secured against the new assets because this type of
funding will provide secure financing over the operational life of the capital asset.
Raising new equity from shareholders because this type of funding is both long-term and relatively
inexpensive compared to other forms of financing.
Reducing its operating cycle to generate greater operating cash flows because this type of funding
is free financing and will maximise the returns that the new assets will generate for shareholders.

• Describe the potential structural subordination risk of lending to a holding company.

The holding company may have non-consolidated financial statements

The holding company may have unrealistic projected revenues
The holding company may have dated documentation
The holding company may have limited operating assets

• Under what scenario is having insurance most likely to have a positive effect?

Recession.
Political turmoil.
Earthquake
Economic boom

• What is meant by the term "amount owing" on a credit agency report?

The date or amount of time since the latest sale was made.
The normal terms of sale extended by the supplier.
The greatest amount of credit extended.
The debt due by a business at the time of the survey and the status of that amount (current,
amount past due).
 e) Why is it preferable to make the disbursement of a term loan directly in favour of a supplier

To whom the disbursement is made is immaterial

This is only logical
Direct disbursement to the supplier would facilitate quicker supply of equipment
This is one of the ways to ensure that the disbursed funds are used for the purpose for which
the term loan is sanctioned

• In a UCA cash flow statement, what is the calculation for "change in cash"?

Financing Surplus (Requirement) + Total External Financing.

Net Income - Total External Financing.
Financing Surplus (Requirement) - Total External Financing.
Net Income + Total External Financing.

e) For a lender assessing credit risk, what business is likely to have a credit agency report with the
most meaningful information?

A non-borrowing small business.

A medium business with many suppliers.
A non-borrowing large business.
A small business with few suppliers

e) What is the most important constraint in getting a pricing on a loan which is fully in accordance
with the risk assessment?

Bank’s pricing policy

Profitability calculation
Competitive scenario, since competition places a ceiling on pricing which may be acceptable
to the customer
Loan structuring

e) Which statement about the cash flow coverage ratio is not correct?

It uses accrual income values from the profit and loss statement.
It is a broader metric than the interest coverage ratio.
It is an indicator of the ability to pay interest, dividends and scheduled debt payments.
It focuses on internal cash flow.
 e) Which statement is incorrect with respect to the legal documentation signed as part of the
corporate debt restructuring (CDR) process?

If the debtor agrees, the period of limitation can be extended beyond the standstill period.
The Debtor Creditor Agreement is part of the Standstill Agreement.
The standstill agreement does not apply to criminal action.
The Debtor Creditor Agreement and the Inter Creditor Agreement are signed at almost the same
time, at the beginning of the Corporate Debt Restructuring (CDR) process

• Under Section 186 of the Companies Act, 2013, loan and investment by company, a company:

Can lend money to any other company.

Can give a guarantee for a loan taken by any other company.
Can buy the securities of another company only to the extent of 60% of its own capital and
free reserves.
Cannot do any of the above.

• Which of the following is correct with respect to a banker’s right of lien?

Ownership of goods is transferred to the bank

Possession of the goods remains with the borrower
The right of lien is subject to the law of limitation
A general lien converts to a specific lien if the bank appropriates the lien towards a specific
debt of the borrower

• Which critical skill for executives seeks to rally people in the business to further the enterprise's
mission, accomplish its plans, earn the trust of colleagues and customers, and demonstrate and
foster commitment to the business and its goals?

Leadership.
Commitment.
Communication.
Knowledge.

• You are examining a loan request for a short-term loan to cover working capital requirements.
On examining the financial statements you establish that sales have fallen, the business has an
operating loss, it has negative operating cash flow and there is a sharp increase in payable days
outstanding. You establish that this is high risk loan application. How should you proceed with
your financial analysis?
 You need not do further work with the financial statements and can reject the loan
application.
You should examine the financial statements more carefully to see if there are any off balance sheet
liabilities that may increase the level of risk.
You should examine the financial statements more carefully to see if there are any assets that might
be sold to finance the loan.
You should examine the financial statements more carefully to see if there are any opportunities to
turn around the business

e) Is it possible to compare the current inventory held by two different companies to determine
which is more efficient in managing its working capital?

Yes, as current inventory levels is a measure that provides a direct comparative value between
companies.
Yes, as current inventory held is the prime driver of working capital levels.
No, for a meaningful comparison the cost of sales needs to be used.
No, for a meaningful comparison the time taken to close inventory for each company needs to
be worked out and used instead

• What is the role of credit rating agencies in the Indian market?

They issue ratings that can help Indian companies raise funds from investors.
They provide an independent and locally based assessment of the credit quality of all bonds issued
by the Indian corporates.
They provide competition to the international rating agencies.
Ratings from all Indian ratings agencies can be used by banks when undertaking capital
calculations for credit risk.

e) Why are the two methods of lending recommended by the Tandon Committee still being used
today?

These methods of lending implicitly set minimum liquidity standards by insisting on a

minimum level of funding of current assets from long-term sources and so continue to be a
reliable analytic tool.
Banks have not reviewed their lending criteria but prefer to use methods that they are familiar with.
The two methods provide a reasonable analysis of risk and there is no reason to change them.
There has been no update to the recommendations of the Tandon committee so the original
methods continue to be used.
 e) Which statement provides a correct illustration of the matching principle?

Expenses of a period are matched to the revenues that they generate.

The total value of debit entries will equal the total value of credit entries.
Total assets is matched to total liabilities plus equity.
Revenue of one period equals costs plus dividends of the same period

e) What factors influence the values that appear in a credit migration or transition matrix?

The number of times that a corporate’s graded credit is upgraded and downgraded.
The final and initial ratings for the corporate at the start and end of the agreed time horizon.
The number of rating bands that a rating is upgraded over the selected time horizon.
The number of rating bands that a bank uses in its rating scale

e) Who is responsible for determining the quality of financial statements (for example, by defining
the level of materiality and depth of disclosure)?

Regulators (such as SEBI)

Standards setting bodies (such as NACAS)
Auditors.
Management of the borrowing entity.

• Which activity would cause the short-term financing gap of a company to decrease?

Renegotiating a revolving credit facility on more favourable terms.

Implementing a just-in-time inventory management system that minimizes the levels of raw
material inventories required to be held.
Purchasing machinery to raise production capacity and meet increased demand.
Securing supply arrangements by placing suppliers on new single source contracts with penalties
for late delivery of goods.

e) The objective of cost analysis in the pricing decision process is

To ensure that the bank’s costing is optimum

To estimate the floor on the pricing below which the loan is financially not desirable
To get into a better negotiating position with the customer
To ensure tight cost control

• Which statement is incorrect with respect to the Debt Recovery Tribunals (DRTs)?
 Only banks and financial institutions can approach the DRT for recovery of their dues.
Decisions of the DRT can be appealed to the Debt Recovery Appellate Tribunal.
Orders passed by recovery officers are judicial in nature.
It is headed by a presiding officer who is of the same rank as a High Court Judge.

e) What service do local rating agencies provide for investors in India?

Confirmation that an issuer will meet its financial obligations.

Research and opinions that address information asymmetry.
Information that ensures that issues are priced correctly.
They ensure that there is a liquid market for debt instruments once issued

• All else being equal, what business would typically carry the greatest credit risk?

The one wherein liabilities are four times as great as capital.

The one wherein liabilities are less than tangible net worth.
The one wherein liabilities and tangible net worth are equal.
The one wherein capital is four times as great as liabilities

e) Which statement is incorrect with respect to wilful defaulters?

Wilful defaulters of Rs. 1 million or more must be reported to the CIC with RBI.
A borrower who has interest or principal overdue for more than 90 days is not necessarily a wilful
defaulter.
A case where the borrower loses diverted funds and makes a full disclosure of the diversion and
loss is still a case of wilful default.
An individual guarantor does not automatically become a wilful defaulter when the original
borrower is identified as a wilful defaulter.

e) In a UCA cash flow statement, what is the correct calculation for operating income?

Net Sales - Cost of Goods Sold - Operating Expenses.

Net Sales - Cost of Goods Sold + Operating Expenses.
Net Profit + Cost of Goods Sold - Operating Expenses.
Net Profit + Cost of Goods Sold + Operating Expenses.
 e) What event would most likely have a neutral impact on the trade receivables days?

Billings are computerised.

Recession.
Sales increase.
Competitor terms lengthen.

e) What step in the loan decision process provides early detection of conditions to indicate that
business performance is lower than assumed in projections?

Grade the risk.

Structure covenants.
Gather data.
Identify credit enhancements.

• Which statement concerning industry risk is correct?

Emerging industries tend to be less risky than mature industries.

Growing industries tend to be less risky than emerging industries.
Declining industries tend to be less risky than growing industries.
Declining industries tend to be less risky than mature industries

e) Which one of the following factors are taken into account when computing both EaD and LGD?

The amount initially advanced to the borrower

The realisable value of the security
The probability that the borrower may default
The amount outstanding from the borrower at the point of default

• Why should the stock statement include separate details of factored invoices?

It would reveal how much less margin the borrower has to contribute for working capital since
margins on factored invoices are significantly lower than those prescribed by banks
It would reveal the extent of lending business being lost by the bank to the factoring company
 It would prevent double financing of the same receivables
It would reveal the extent of low risk receivables being diverted to the factor since factoring
companies discount receivables only from highly rated debtors

• Should the bank consider the client’s past record of bank guarantees being invoked when
deciding whether to grant a new bank guarantee?

No, past behaviour of the client is no indication of future behaviour.

Yes, the client’s previous credit history and business behaviour should be considered as well
as all other relevant factors.
Yes, and additionally the bank should be reluctant to offer a new bank guarantee to a client with
previous history of having bank guarantees invoked.
No, the historical data is not relevant in considering the request for a bank guarantee

e) The product or service being marketed has achieved some degree of acceptance and sales levels
begin to increase. Profits and cash flow also improve and the ability to support and repay
liabilities begins to develop. Industry status risk is moderate and there is a neutral level of
overall risk." Which life cycle stage does this paragraph describe?

Maturity.
Growth.
Start-up.
Adolescence.

• Assessing management's capacity for business includes which step?

Make sure operating plans clearly come from the top down.
Learn about and rely on management's capacity and experience to develop plans and carry
them out.
Quickly review tools used by management to develop plans.
Evaluate management's credit risk skills in developing and implementing business plans

• Which step in the ''management cycle'' comes after overseeing the use of resources and
monitoring the success of plans?

Adjusting plans, resources, and methodologies as necessary to ensure that goals are achieved
and needs are met.
Aggregating and organising resources to implement plans.
Developing plans to meet goals.
Assessing business needs.
 e) What regulation level is most likely to lead to a decline in market (industry and business) risk?

Significant.
Moderate.
Insignificant.
Unknown.

d) The usance period of LCs should be in line with the overall working capital cycle of the
customer because

This ensures that no devolvement takes place

A longer usance period would mean additional credit period which implies availability of
more funds than needed to run the working capital cycle. This could lead to diversion of funds
LC is essentially a working capital facility
A longer usance period would mean lesser credit period which implies availability of lesser funds
than needed to run the working capital cycle. This would constrain the unit’s operations and lead to a
shortfall in performance

e) What event is most likely to have a neutral impact on both the operating expense percentage
ratio and profit?

Administrative staff reduced.

Office becomes computerised.
Rent increases.
Recession.

• What factor is most likely to increase the bargaining power of suppliers?

Suppliers lack the ability to integrate forward.

Switching costs are low.
Many competitive products or substitutes are available.
Few alternative suppliers are available

• What sources are available to a company to finance an on-balance sheet loan?

Cash in the business or through liquidation of assets

Cash from operations generated during the period when the investment is paid for
A term bank financing
All of the above
 • All else being equal, what business would typically have the highest loan return?

The one wherein liabilities are less than tangible net worth.
The one wherein liabilities and tangible net worth are equal.
The one wherein liabilities are four times as great as capital.
The one wherein capital is three times as great as liabilities

• What is the definition of Common Equity Capital?

The highest quality component of capital

A bank's gone-concern or supplementary capital
Loss absorbing capital that can be converted to common shares or written down in the event of
substantial losses
A bank's pure or concern capital

e) What statement concerning the impact of foreign competition on debt repayment is most
accurate?

High foreign competition leads to decreased cash flow and decreased ability to repay debt as
scheduled.
High foreign competition leads to increased cash flow and increased ability to repay debt as
scheduled.
High foreign competition leads to increased cash flow and decreased ability to repay debt as
scheduled.
High foreign competition leads to decreased cash flow and increased ability to repay debt as
scheduled.

e) Which item would be correctly classified as a current asset?

A warehouse used to store finished goods.

A financial asset held for dividend income
Machinery bought in the last 12 months.
A receivable due from a customer in 9 months

e) In the corporate governance process, who is responsible for determining overall business
strategy by hiring managers and staff to help operate the business?

Shareholders.
Board of directors.
 Executive officers.
Regulators.

• What determines the number of operating cycles that a business will have?

Significantly different products and markets will results in multiple operating cycles.
There will be a separate operating cycle for each business location.
Each supplier and customer will have their own operating cycle.
Accounting regulations will determine the number of operating cycles

e) Which statement about risk drivers is most accurate?

They have great impact on what balance sheet amounts, but not profit and loss statement amounts,
will be in the future.
They have great impact on what balance sheet and profit and loss statement amounts will be
in the future.
They have little impact on what profit and loss statement and balance sheet amounts will be in the
future.
They have great impact on what profit and loss statement amounts, but not balance sheet amounts,
will be in the future.

• What are the four areas of the financial risk assessment process?

Cash flow, market (industry and business) risk, projections, and financial statement data and notes.
Market (industry and business) risk, cash flow, financial ratios, and financial statement data and
notes.
Financial ratios, projections, cash flow, and market (industry and business) risk.
Projections, cash flow, financial ratios, and financial statement data and notes.

• During which stage will management begin delaying payments to creditors?

Cash crunch stage.

Cash crisis stage.
Cash concern stage.
Cash creation stage.

• What type of question is designed to encourage a more expansive response?

Reflective question.
 Direct question.
Open-ended question.
Rhetorical question.

e) What account is typically included in the financial statements of a service business?

Inventory (stock) – finished goods.

Trade payables.
Inventory (stock) – work in progress.
Cost of goods sold.

e) What risk has recently emerged as an important factor for funding projects?

Compliance with environmental guidelines.

The technical know-how of the company to implement change brought about by the new project.
The importance of management competence to bring the project to a close.
Government policies governing the industry of the borrower

e) You come across information that USFDA has taken some action against one of your
pharmaceutical clients. You want to ascertain the details of the matter. Which would be the best
source to obtain this information?

RBI list of wilful defaulters

Internet search for related news items and website of USFDA
CRILC
ECGC caution list

e) What is the relationship between the peak selling season and repayment risk?

The greater the magnitude of the peak or the shorter the duration of the peak selling season, the
lower the repayment risk.
The greater the magnitude of the peak, the higher the repayment risk and the shorter the duration of
the peak selling season, the lower the repayment risk.
The greater the magnitude of the peak, the lower the repayment risk and the shorter the duration of
the peak selling season, the higher the repayment risk.
 The greater the magnitude of the peak or the shorter the duration of the peak selling season,
the higher the repayment risk.

• All else being equal, what business is most likely to fail?

A borrower with an individual manager responsible for all of the key administrative
responsibilities.
A borrower with an individual manager responsible for three of the five key administrative
responsibilities.
A borrower with an individual manager responsible for four of the five key administrative
responsibilities.
A borrower with an individual manager responsible for two of the five key administrative
responsibilities

• Which of these is NOT a purpose of credit administration?

Ensure timely recovery of interest

Ensure recovery of the principal’s instalments in accordance with the approved repayment schedule
Ensure that the drawings in the FBWC account do not exceed the allocated drawing power
Credit risk assessment of the customer

e) Why is it important to follow the steps involved in assessing the working capital?

By following the steps, the credit officer and the relationship manager will know that everything
has been done properly.
By following the steps, the proper paper trail is left for audit to follow.
By following the steps, the company will know that it is being treated fairly.
By following the steps, a clear picture of risks is built up allowing an informed credit decision
to be made.

e) How do the bargaining power of buyers and suppliers affect risk in the marketplace?

The more significant the bargaining power of buyers and suppliers, the smaller the risk in the
marketplace.
The more significant the bargaining power of buyers and suppliers, the greater the risk in the
marketplace.
The more significant the bargaining power of buyers and the less significant the bargaining power
of suppliers, the greater the risk in the marketplace.
The more significant the bargaining power of buyers and the less significant the bargaining power
of suppliers, the smaller the risk in the marketplace.
 e) What is the purpose of a covenant?

To set a schedule of instalments by which the loan must be repaid.

To set out terms in a loan agreement, e.g., rate of interest
To set an internal trigger which requires action on the part of the lender on the happening of a
certain event.
To specify the manner in which a loan must be conducted and repaid

• All else being equal, what business would have the lowest credit risk?

A business with a current ratio of 1:1.

A business with a current ratio of 0.5:1.
A business with a current ratio of 2:1.
A business with a current ratio of 1.5:1

e) Which business is most likely to have a gross margin of 100%?

Accounting firm.
Clothing store.
Car manufacturer.
Food wholesaler

e) What is the most common reason for which businesses use creative accounting?

To falsely improve the appearance of company performance.

To become more competitive in the marketplace.
Creative accounting stands to make a company look better, and there is no downside to the
practice.
The company doesn’t realise it is using creative accounting

• Which of the following actions is most likely to help mitigate the credit risk of a business that
has potential environmental concerns?

Decrease the working capital financial covenant.

Loan covenants certifying compliance with the law.
Decrease insurance coverage requirements.
Increase the gearing financial covenant

• What action does the beneficiary need to take under a bank guarantee in case of default by the
 debtor?

He needs to request the money from the debtor.

He needs to notify the guarantor bank and request payment.
He needs to ask the guarantor bank to negotiate a settlement.
He only needs to wait for the guarantor bank to step in

e) Identify one of the five management responsibilities.

Competitive intelligence.
Administration.
Production.
Market research.

e) What is the purpose of financial covenants in term loans?

They are used to give the borrower a credit rating.

Financial covenants provide additional legal protection to banks. In case of breach of
covenant, the bank is able to foreclose on the loan early.
They help the borrower manage his finances.
They are a legal requirements and must be used in all loan relationships.

e) What is likely the most critical step in the overall projections process?

Construct a projected balance sheet, income (profit and loss) statement and cash flow statement.
Construct a revised projected balance sheet.
Setting meaningful forecast assumptions.
Consider the impact on your assumptions from potential changes in the competitive
landscape, economic environment, management or operations of the business

e) What is the principal reason that lenders do not easily accept security of intangible assets?

They are difficult to value and realise

They are amortized, not depreciated
They are not a working part of the business
They do not physically exist
 • Which statement is correct with respect to the divesting of holdings acquired under the Strategic
Debt Restructuring Scheme (SDR)?

Creditors may divest their holdings back to the owners of the restructured company at the market
price of the shares.
Creditors are required to hold their acquisition for at least 2 years to promote stability in the
restructured company.
The buyer to whom the shares are divested must acquire at least 51% of the equity of the
restructured company.
The account should continue to be classified for one year after divestment

• What is the main distinction between working capital and term finance products in India?

Rate of Interest.
Security.
Tenor.
Method of repayment.

• Which statement describes a characteristic of equity?

If sufficient shareholders vote for it, dividends can be paid from any equity reserves except share
capital.
Common stock is repayable only after all other legal obligations have been met in the event of
liquidation.
It has senior rights to other creditors in the event of liquidation.
The par value is repayable any time if shareholders vote for it, but the premium paid above par
value is never repayable.

• What is meant by market overcapacity?

There is too much of a given product in the marketplace and there are too many businesses of a
given type in the market.
There is too much of a given product in the marketplace or there are too many businesses of a
given type in the market.
There is too much of a given product in the marketplace but not too many businesses of a given
type in the market.
There are too many businesses of a given type in the market but not too much of a given product in
the marketplace.
Question (1)
Why is management integrity the most critical factor when assessing the impact of
management risk on a company’s credit risk?
Management lacking integrity may prioritise payments to other external stakeholders.
A lack of integrity can result in a company using cash flows for purposes other than interest or
loan payments.
A lack of integrity can result in a company’s underperformance and subsequent inability to
meet its payment obligations.
A positive assessment of management integrity is necessary for a lender to be
confident in the reliability of the information provided by the company.

Question (2)
Which financial trigger can be set up internally as an early signal of a borrower’s probability of
default?
Change in profit projections.
Change in ownership structure.
Unexpected change in dividend policy.
Emergence of new competitive entrants in the market.

Question (3)
In an initial review of a company’s financial statements, which ratios can be reviewed to
uncover opportunities and identify potential risk flags?
1. Net income.
2. Gross margin.
3. Inventory days.
4. Return on equity.

1 and 2.
1 and 4.
2 and 3.
3 and 4.

Question (4)
Which action by a borrower’s management could have an adverse effect on its cash flow and
ability to meet its obligations?
Adopting a conservative financing strategy.
Executing plans to ensure short-term goals are met.
Increasing the rate of depreciation resulting in reduced net income.
Disclosing information to other stakeholders on need to know basis.

Question (5)
What is the impact of low market entry barriers on competition within an industry and the
financial performance of businesses’ operating within the industry?
Increased competition, increased cash flow.
Increased competition, decreased cash flow.
Decreased competition, decreased cash flow.
Decreased competition, increased cash flow.

Question (6)
Which activity can reduce a company’s cash flow position?
Sale of assets.
Collection of receivables.
Purchase of investments.
Increase in owner’s equity.

Question (7)
What type of credit rating will most likely cause a borrower’s credit score to be adjusted
downward because of an expected downturn in the borrower’s industry?
Fail grade rating.
Single risk rating.
Facility risk rating.
External international rating.

Question (8)
Which type of structural mitigation is used to ensure that all intercompany transactions occur
at arm’s length?
Collateral.
Guarantee.
Monitoring.
Restrictive covenant.

Question (9)
At the beginning of the year, ZXV Inc. acquires computer equipment at a cost of INR 500,000.
Using a 40% declining balance depreciation rate each year, what is the depreciation charge
for this equipment in the second year?
INR 120,000
INR 180,000
INR 200,000
INR 300,000

Question (10)
What test is used to determine whether a borrower will generate enough cash flow from day-
to-day operations to cover its debt obligations?
Bias to fail test.
Liquidity test.
Secondary source test.
Solvency test.

Question (11)
What is meant by the term “excess borrowings” under the Tandon Committee approach to
lending?
The amount borrowed exceeds current liabilities.
The liquidity level exceeds the minimum required.
The maximum permissible bank borrowings exceed current assets.
The minimum required net working capital exceeds the actual amount.

Question (12)
How many days is the short-term financing gap for a company with 47 trade receivables days,
68 inventory days and 63 trade payables days?
42
52
84
178

Question (13)
Based on these information: current secured INR 35,000 and current unsecured INR 20,000;
non-current secured INR 75,000 and non-current unsecured INR 60,000, what is this
company’s total amount of subordinated debt outstanding?
INR 55,000
INR 80,000 m
INR 110,000
INR 135,000

Question (14)
What information in a credit agency report can help a bank assess a company’s management
integrity?
Opinion about the company management.
Information about the financial performance.
How freely the management shares information.
Details on covenant compliance for the bank loans.

Question (15)
Which factor can be excluded from the cost analysis during the pricing decision process?
External financial market conditions.
The borrower’s total business with the bank.
The borrower’s past and current financial performance.
The bank’s minimum return requirements for the transaction.

Question (16)
At what point during an asset purchase do a company’s capital expenditures most affect its
operational cash flow?
Before the purchase while saving for the down payment
At the time of purchase and beyond due to financing costs.
When the asset purchased generates expenses such as taxes and insurance.
Capital expenditures do not affect cash flow as they are outside normal operational activities.

Question (17)
What would describe a non-fund-based facility?
A facility that is lower risk than a fund-based facility.
A credit facility that incurs a monetary obligation when draw down occurs.
A facility that is similar to a fund-based facility in terms of how it is recorded in a bank’s books.
A facility that may result in a funded obligation if the customer fails to settle any
payments due.

Question (18)
What does the credit risk premium attributed to in the credit pricing process?
The bank’s risk appetite.
Expected return on equity.
The bank’s growth strategy.
Losses incurred due to default.

Question (19)
During which implementation phase of deal structure is counsel instructed on documentation
and covenant definition issues?
Design.
Drawdown.
Monitoring.
Negotiation.

Question (20)
Which risk driver is most sensitive to economic factors such as a recession?
Capital expenditures.
Sales growth figures.
Trade receivable days.
Operating profit margin.

Question (21)
What is the primary reason for assessing a business’s financial performance before extending
credit?
To determine what a company’s key ratios are.
To determine how a business generates cash flow.
To determine how a company spends its free cash flow.
To determine why a business has achieved certain results.

Question (22)
What type of non-fund-based lending facility would a buyer of goods and services use to
guarantee a one-time payment?
Export credit.
Letter of credit.
Overdraft.
Term loan.

Question (23)
What is the starting point in the process of projecting a business’s financial performance?
Evaluate economic factors.
Complete sensitivity analysis.
Project future values for the risk drivers.
Review historic levels of the risk drivers.

Question (24)
Titan Ltd. is a lumber exporter with annual sales of INR 750,000, 45 inventory days, 35 trade
receivables days, and 40 trade payables days. What approximate amount of external
financing will Titan Ltd. need to support its operating cycle?
INR 61,644
INR 82,192
INR 102,740
INR 246,575

Question (25)
What information should be reviewed in the periodic progress reports on implementation of a
project to assess likelihood of meeting the loan repayment obligations?
The project implementation is on schedule.
Funding is available to cover any cost overruns.
There are orders for the project outputs once completed.
Project reports have been approved by the lender’s engineer

Question (26)
Which describes the absolute priority rule with respect to payments made to creditors at
default?
Subordinated debt is paid before insolvency-related costs.
Available funds are paid first to the lowest ranked class until the borrower’s obligations are
fully satisfied.
Available funds are paid first to the highest ranked class until the borrower’s
obligations are fully satisfied.
Distributions to each ranked class are paid out proportionately based on its percentage in the
company's capital structure.

Question (27)
What is the difference between a partnership firm and a Limited Liability Partnership (LLP)?
If a partner dies a partnership firm continues to exist and an LLP dissolves.
An LLP is a separate legal entity from its members and a partnership is not a separate
legal entity.
An LLP is governed by the Indian Partnership Act and a partnership firm is governed by the
Companies Act.
The income from a partnership firm stays within the firm and LLP income is personal income
for the partners.

Question (28)
What is the first step for a management team in order to achieve results through the efforts of
others?
Set the strategic direction.
Source the necessary resources.
Incentivise the organisation in an effective manner.
Manage the critical business operations on a daily and long-term basis.

Question (29)
Why must a company’s management plan for unexpected events even if they are unlikely to
occur?
Robust planning can reduce costs as an alternative to obtaining insurance coverage.
Contingency planning is a prerequisite to obtain insurance coverage and business loans.
Many improbable unexpected events can have a significant effect on the business
operations.
Adequate planning can help minimise the impact of disturbances relating to economic cycles
and technological changes.

Question (30)
Which organisational structure can inhibit management’s ability to take decisions thus
adversely affecting the company’s performance and credit risk?
A pyramidal structure.
A centralised decision-making process.
A structure that has distinct divisions between different functions.
A structure in which roles and responsibilities are clearly documented.

Question (31)
Which element in the development of a business plan would indicate a high degree of
management risk?
Set business objectives are easy to meet.
Reports on progress implementation are often late.
No consultation with stakeholders in setting up the plan.
Finalisation of the business plan only a few days before the start date.

Question (32)
How should a customer’s account activity be monitored to ensure end-use of funds?
Review a percentage of all the transactions.
Scrutinise all the transactions regardless of value.
Review the transactions above a threshold amount.
Browse through the account and investigate any unusual transaction.

Question (33)
In which scenario would customer concentration cause significant cash flow risk for a
business?
The business sells clothing to individual consumers.
The business distributes flour to most bakeries in the region.
The business supplies specialised parts to the largest auto maker.
The business provides cleaning services to schools, offices and residential buildings.

Question (34)
Which action might a company take when it is in the cash concern stage of financial distress?
Selling vital assets.
Cancelling bonuses.
Laying off key employees.
Eliminating management positions.

Question (35)
Under what circumstances might weak succession planning affect a borrower’s credit risk
when a key management member leaves unexpectedly?
The nominated successor lacks management integrity.
The nominated successor has not completed all required training.
The nominated successor cannot take up the position for a few weeks.
Details of the nominated successor were not provided to the borrower’s bank.

Question (36)
Which is likely to be false of a company with a low gearing ratio?
It has a high debt load.
It has high interest costs.
It has high repayment ability.
It has a high repayment obligation.

Question (37)
How are surrounding businesses affected when an environment is dominated by two large
employers?
Neutral on sales and profitability.
Loss of one of the employers creates high overall risk.
Increased employment reduces the risk for the industry.
The impact is significant only if a catastrophic market downturn occurs.

Question (38)
In what type of security charge are goods and raw materials commonly pledged as assets?
Assignment.
Hypothecation.
Lien.
Mortgage.

Question (39)
Why does a special purpose vehicle expose a lender to more risk than conventional
financing?
The loan has no security guaranteed.
The sponsor has no established track record.
The sponsor is the only party liable for the loan.
The loan is repaid only from the project’s cash flows.

Question (40)
What external factors outside of a business’s control can affect its liquidity levels?
Credit and lending policy.
Facility and loan structure.
Industry and business risk.
Management and key persons’ risk.

Question (41)
Which item is evaluated more substantively when determining the amount of financing
available to a company under the assessed bank finance method as compared to the
maximum permissible bank finance method?
Assets.
Current ratio.
Liquidity.
Trade payables.
Question (42)
What is the primary purpose of calculating drawing power in a funds-based working capital
facility?
To determine the amount the customer can draw on.
To ensure that bank funds are not tied up in obsolete stocks.
To ensure that drawings are being used to fund current assets.
To check that the value of eligible assets is at least equal to the approved credit limit.

Question (43)
A company that records the market value of its equipment on its balance sheet has not
followed which accounting principle?
Cost.
Matching.
Conservatism.
Going concern.

Question (44)
What projected information is best to use to assess working capital limits?
Sales.
Balance sheet.
Labour expenses.
Profit and loss statement.

Question (45)
Which is the best description of the gearing ratio?
An indication of current assets to current liabilities.
An indication of net worth compared to total assets.
An indication of how much cash is available to cover payments.
An indication of how a business’s assets are funded between owners and creditors.

Question (46)
What is the number of inventory days for a company with sales of INR 500,000, inventory of
INR 60,000, cost of goods sold of INR 300,000 and trade receivables of INR 125,000?
73
152
175
219

Question (47)
What is the difference between operating cash flow and earnings before interest, taxes,
depreciation and amortisation (EBITDA)?
EBITDA considers interest expense.
EBITDA considers capital expenditures.
EBITDA considers changes in cash flow.
EBITDA adds back depreciation and amortisation.
Question (48)
What is the profit before tax and financial costs for a company with sales of INR 5,000,000,
cost of goods sold of INR 2,600,000, operating expenses of INR 1,400,000, interest expense
of INR 60,000 and tax expenses of INR 125,000?
INR 815,000
INR 940,000
INR 1,000,000.
INR 1,185,000

Question (49)
For how many days can an account remain continuously in excess of the sanctioned limit
before it is considered out of order?
30
60
90.
120

Question (50)
What is the primary reason for reviewing external information when assessing a company’s
credit quality?
To evaluate any adverse press coverage of the company.
To assess the company’s vulnerability to natural disasters.
To review any gradual economic changes that may affect the company’s industry.
To evaluate what developments may create opportunities for the company or adversely affect
its performance.

Question (51)
For which type of banking products does the Reserve Bank of India regulate interest rates?
Savings accounts.
Chequing accounts held by residents.
Personal loans of more than INR 200,000.
Commercial loans of more than INR 200,000.

Question (52)
What does a current ratio of 1.33 indicate about a company’s current assets?
Current assets are less than net working capital.
Current assets are able to cover double the current liabilities.
Very few current assets have been funded from current liabilities.
A portion of current assets has been funded from long-term sources.

Question (53)
Which party issues a letter of credit in a goods and services transaction?
Applicant.
Bank.
Beneficiary.
Seller.
Question (54)
What is the first step in the process of restructuring a loan?
Take control.
Develop an action plan.
Resolve future financing.
Implement the action plan.

Question (55)
What is the basic function of credit monitoring?
To ensure the borrower continues to be a good credit risk.
To ensure the borrower is operating within the credit limits.
To determine if the credit facilities are being used for the intended purpose.
To determine what actions should be taken where there is a cause for concern.

Question (56)
Companies operating in which industry are most likely to have a high investment in fixed
infrastructure assets, with little inventory?
Electric utility.
Food retailing.
Home construction.
Financial services consulting.
Mark for review

Question (57)
Which result of an increase in management risk will most negatively affect a company’s
financial performance?
Managers’ increased focus on their own compensation packages.
Managers fail to take timely or correct decisions that affect sales or costs.
Managers fail to take full advantage of favourable developments in the external environment.
Managers are less transparent in their dealings with external stakeholders, such as banks.

Question (58)
What is the most effective measure of a business’s operating efficiency?
Increase in sales.
Increase in profits.
Absolute level of operating expenses.
Trends in operating expenses as a percentage of sales.

Question (59)
What is considered as one of the three levels of oversight in the corporate governance
process?
The media.
The regulators.
The board of directors.
Banks and other lenders.
Question (60)
In which condition can a local business perform well while the local economy is in recession?
Local competition is weak.
The business has a high profit margin.
The business sells high quality and durable products.
The local economy of business’s customers is thriving.

Question (61)
Which party enforces a bank guarantee in the event of default?
Applicant.
Beneficiary.
Government.
Guarantor.

Question (62)
Special Mention Accounts were introduced as a new asset category between which two
categories?
Doubtful and Loss.
Standard and Doubtful.
Sub-standard and Doubtful.
Standard and Sub-standard.

Question (63)
Which proposition is least likely to be considered for a term loan for its financing
requirements?
Expansion of a fleet of vehicles.
Capital expenditure for a power plant.
An instalment financing construction project.
Daily working capital requirements for a small business.

Question (64)
Which factor will most likely reduce loss given default?
Amount of the loan.
Duration of the loan.
Industry of the borrower.
Seniority of the loan.

Question (65)
What type of capital investment is intangible and financial in nature?
Applying for patents.
Developing new products.
Listing securities on a stock exchange.
Replacing existing plant and equipment.

Question (66)
What causes market overcapacity?
Industry growth.
Weak competition.
Drop in a sales price.
Low product demand.
Question (67)
If net sales for a company over three Fiscal Year Ends (FYE) was
FYE 1: INR 1,25,00,885,
FYE 2: INR 1,37,45,473
and FYE 3: INR 1,40,25,992,
what is this company’s sales growth for FYE 3 compared to FYE 2?
2.0%
2.04%
8.87%
10.0%

Question (68)
Which factor will decrease a buyer’s market risk in the long term in conditions where the
supplier has high bargaining power?
Buyer’s ability to pay.
Increase in supplier’s market share.
Availability of substitute products in the market.
High demand skilled workers are employed by the supplier.

Question (69)
Which is an example of an insurance covenant in a credit agreement?
Prohibition on providing other creditors security over any assets.
Restriction on incurring new debt above a pre-determined amount.
Requirement to pay premiums on schedule to avoid a lapse of coverage.
Obligation to submit security valuations performed by an independent appraiser.

Question (70)
Which costs related to environmental hazards can have a significant negative impact on a
company’s credit risk?
Cost of insurance premiums.
Cost of hazardous waste clean-up.
Cost of compliance with environmental laws.
Cost of professional assessment of facilities for safety.

Question (71)
A company has INR 11,304,950 in Cost of Goods Sold (COGS) and INR 1,091,070 in trade
payables as of its most recent fiscal year-end. The company claimed no depreciation in
COGS. How many days on average did it take this company to pay its trade creditors during
the fiscal year?
9
10
35
38
Question (72)
What type of credit rating is most appropriate to evaluate the credit risk of a group of
borrowers that has never borrowed money before?
Corporate family rating.
Issue rating.
Issuer rating.
Short-term rating.

Question (73)
How does industry risk affect the credit risk of a particular business enterprise that operates
within that industry?
The effect is limited to industry-specific regulations.
The effect is substantial only if the industry is in a decline phase.
The effect is insignificant as long as the particular business performs well and generates
enough cash.
The effect is significant as industry risk includes factors that determine capital
requirements and cash flow.

Question (74)
Which factor will most likely affect the length of time it takes to convert inventory to sales?
New products.
Increased financing.
Management decisions.
Accounts payable growth.

Question (75)
What type of early warning signals may be indicated as a result of technology changes?
Business.
Fundamental.
Market.
Operational.

Question (76)
What governing body for the Insolvency and Bankruptcy Code would set up accreditation for
insolvency professionals and information utilities?
Adjudicating Authority.
Debt Recovery Tribunal.
Insolvency Professional Agency.
Insolvency and Bankruptcy Board of India.

Question (77)
What general inference can be made about a company that has positive cash flow from
operations, and that is borrowing and investing?
It is starting up.
It is closing down.
It is restructuring.
It is acquiring other companies.
Question (78)
XYZ trucking company (XYZ) has recently entered into an arrangement with an online sales
business to deliver their general consumer goods and expect that this partnership will improve
their sales. XYZ has sought enhanced financing to support this new business. The
transportation industry is in a decline due to a recession, and XYZ’s most recent annual
financial statement shows relatively weak sales performance. What is the next step in
assessing XYZ’s credit application?
The assessment should end, and credit should be declined.
The assessment should be postponed until the industry enters the recovery stage.
The assessment should continue and focus on total profit as a measure of success.
The assessment should continue with more focus on the sales projections scenarios
and cash flow impact.

Question (79)
Which industry factor increases the need for a company to compete for a high volume of
sales to remain profitable?
High fixed costs
Few competitors
High switching costs
Rapid demand growth

Question (80)
Which type of charge is appropriate when the security is a factory?
Hypothecation
Lien
Mortgage
Pledge
1. What action can a lender take if the restructuring decision process for a borrower
determines a need to reduce exposure?

Set up and monitor qualitative triggers.

Set up and monitor quantitative triggers.

Liquidate and sell the borrower’s current assets.

Restrict new drawdowns on committed facilities.

2. What is the number of inventory days for a company with sales of INR 500,000, inventory
of INR 60,000, cost of goods sold of INR 300,000 and trade receivables of INR 125,000?

73

152

175

219

3. Which is an example of a tangible fixed asset?

Cash.

Goodwill.

Land.

Trademark.

4. What type of credit rating is most appropriate to evaluate the credit risk of a group of
borrowers that has never borrowed money before?

Corporate family rating.

Issue rating.

Issuer rating.

Short-term rating.
5. Why might a business choose to expand its capital assets?

To claim high levels of depreciation.

To increase regular spending activities.

To utilise all the available surplus cash reserves.

To increase cash flow and revenue over the long term.

6.What condition(s) must apply when opening a letter of credit (LC) for a customer?

A cash margin equivalent to the value of the LC must be held.

The LC cannot be issued in favour of another group company.

The LC cannot be opened in favour of a supplier it has not previously dealt with.

The tenor of the LC must not exceed the maximum agreed when the facility was
approved.

7. What action should a business take to remain competitive and stand out amongst its peers
who are offering substitute products?

Freeze production costs to increase overall profitability.

Reduce development costs to better control expenditures.

Increase the product’s price to build perceived product superiority.

Increase investments in product advertising to increase customer awareness.

8. If net sales for a company over three Fiscal Year Ends (FYE) was
FYE 1: INR 1,25,00,885,
FYE 2: INR 1,37,45,473
and FYE 3: INR 1,40,25,992,
what is this company’s sales growth for FYE 3 compared to FYE 2?

2.0%

2.04%

8.87%

10.0%
9. What is the primary purpose of setting up internal triggers for credit risk monitoring?

To provide early warning signals of deteriorating credit risk.

To identify breaches of contractually agreed upon covenants.

To flag an issue when financial statements are ready for review.

To replace contractual covenants for borrowers with high credit standing.

10. In which scenario would customer concentration cause significant cash flow risk for a
business?

The business sells clothing to individual consumers.

The business distributes flour to most bakeries in the region.

The business supplies specialised parts to the largest auto maker.

The business provides cleaning services to schools, offices and residential buildings.

11. What term refers to the amount that a lender expects to be outstanding at the time of
default?

Expected default loss.

Exposure at default.

Loss given default.

Probability of default.

12. What is the best description of liquidity for a business?

Current assets exceed current liabilities.

The business generates sufficient profit to cover interest.

All debt obligations would be repaid in the event of liquidation.

The business generates sufficient cash to meet interest expenses and make debt
payments.
13. Which factor affecting the cost of funds will lead to a surplus to the lender if positive?

Profit margin.

Risk premium.

Term of funds.

Cost of capital.

14. In what type of repayment structure is a loan repaid by only one payment at the end of the
loan period?

Annuity.

Balloon.

Bullet.

Equal.

15. What is the first step for a management team in order to achieve results through the
efforts of others?

Set the strategic direction.

Source the necessary resources.

Incentivise the organisation in an effective manner.

Manage the critical business operations on a daily and long-term basis.

16. What effect does the number of a company’s trade receivable days have on its cash flow?

Number of trade receivable days does not affect cash flow.

Stable trade receivable days results in increased cash flow.

A decrease in trade receivable days results in increased cash flow.

An increase in trade receivable days results in increased cash flow.

17. What is the difference between a partnership firm and a Limited Liability Partnership
(LLP)?

If a partner dies a partnership firm continues to exist and an LLP dissolves.

An LLP is a separate legal entity from its members and a partnership is not a separate
legal entity.

An LLP is governed by the Indian Partnership Act and a partnership firm is governed by the
Companies Act.

The income from a partnership firm stays within the firm and LLP income is personal income
for the partners.

18. Which risk driver refers to the average time it takes a business to collect its sales in cash?

Sales growth.

Gross margin.

Accounts payable days.

Accounts receivable days.

19. Which Basel II guidelines-based ratings approach permits the recognition of certain types
of credit risk mitigation, such as collateral and guarantees, when calculating underlying risk
exposure?

Standardised.

Internal ratings-based.

Foundation internal ratings-based.

Capital requirement for credit risk.

20. According to the Indian Companies Act, within what period of the creation of a security
charge must it be registered, including the maximum permitted period of condonable delay?
This is a single choice question. Selections are automatically selected as you use arrow to
move.
30 days.

300 days.

1 year.

5 years.
21. Which source of external information about a company’s past behaviour can be used to
assess its management integrity?

Discussions with management.

Details of dividends paid over the last five years.

Opinion about management included in credit agency reports.

Account statements showing whether the company has met its obligations to the bank on
time.

22. What is free cash flow?

Net cash available after depreciation and amortisation.

Net cash generated from sales without associated costs.

Net cash after operations, interest expense, and dividends.

Net cash remaining after spending to maintain or expand assets.

23. At the beginning of the year, ZXV Inc. acquires computer equipment at a cost of INR
500,000. Using a 40% declining balance depreciation rate each year, what is the depreciation
charge for this equipment in the second year?

INR 120,000

INR 180,000

INR 200,000

INR 300,000

24. What is the most favourable scenario for a buyer in the supplier market?

Unchanging supplier market.

Frequent entry of new suppliers.

Exclusive relationship with a large supplier.

Presence of a few highly specialised suppliers.

25. What is a sign of incipient stress which may result in an account being classified as
Special Mention Account (SMA) under the SMA-0 sub-category?

Delay of 30 days in submission of stock statements.

Decrease in frequency of overdrafts in current accounts.

Actual sales and operating profits falling short of projections accepted for loan sanction by
20%.

Return of three cheques issued by borrowers in 30 days on grounds of non-availability

of balance.

26. In an initial review of a company’s financial statements, which ratios can be reviewed to
uncover opportunities and identify potential risk flags?
1. Net income.
2. Gross margin.
3. Inventory days.
4. Return on equity.

1 and 2.

1 and 4.

2 and 3.

3 and 4.

27. When determining a company’s management risk, what details should be assessed
before meeting with the company’s management?

The competitors’ performance.

The company’s goal planning process.

The company’s most recent annual report.

The economic outlook for the next couple of years.

28. What is an example of an administrative expense in dealing with a problem loan?

Litigation restructuring costs.

Increased frequency of audits.

Costs to train new employees.

Loss of management control of the company.

29. What is considered a critical management skill for key executives of a business?

Effective leadership style.

Aggressive in taking risks.

Able to tailor communication style to the audience.

Able to contribute to the annual business planning process.

30 What is the most important reason for a lender to monitor pending business-altering laws
during a credit risk assessment?

To ensure informed decisions on future loan requests.

To determine the laws’ impact on future operations and cash flow.

To understand how the political landscape will change in the future.

To estimate the competition’s performance compared to that of the borrower.

31. Company A had outstanding trade payable for an average of 44 days in Fiscal Year-End
(FYE) 1 and 41 days in FYE 2. Company B had outstanding trade payable for an average of
52 days in FYE 1 and 55 days in FYE 2. Which of Company A or Company B is most likely to
borrow funds, and why?

Company A due to reduced cash flow.

Company B due to reduced cash flow.

Company A due to increased cash flow.

Company B due to increased cash flow.

32. What is the result when a project’s discount rate equals its internal rate of return?

A net present value of zero.

A net present value that is commercially viable.

Discounted cash outflows will be greater than discounted cash inflows.

Discounted cash inflows will be greater than discounted cash outflows.

33. What is the result when a project’s discount rate equals its internal rate of return?

A net present value of zero.

A net present value that is commercially viable.

Discounted cash outflows will be greater than discounted cash inflows.

Discounted cash inflows will be greater than discounted cash outflows.

34. Which term refers to the amount of risk that a new loan adds to a portfolio of loans?

Concentration.

Correlation.

Individual exposure.

Risk contribution.

35. When disbursing term loans, which strategy should be used to ensure that the funds are
utilised for the intended purposes?

Pay disbursements directly to the suppliers.

Pay disbursements to the borrower’s current account.

Ensure the undrawn limit is equal to the amount requested to be drawn.

Require the customer to provide funds after disbursal to ensure that the required debt-equity
ratio is met.

36. XYZ trucking company (XYZ) has recently entered into an arrangement with an online
sales business to deliver their general consumer goods and expect that this partnership will
improve their sales. XYZ has sought enhanced financing to support this new business. The
transportation industry is in a decline due to a recession, and XYZ’s most recent annual
financial statement shows relatively weak sales performance. What is the next step in
assessing XYZ’s credit application?

The assessment should end, and credit should be declined.

The assessment should be postponed until the industry enters the recovery stage.

The assessment should continue and focus on total profit as a measure of success.

The assessment should continue with more focus on the sales projections scenarios
and cash flow
37. Which part of the financial statements does the Uniform Credit Analysis primarily focus
on?

Balance Sheet.

Cash Flow Statement.

Income Statement.

Net Worth Statement.

38. What is a key principle of the strategic debt restructuring scheme (SDR)?

The decision to invoke an SDR should be made within 360 days of the initial account review.

After the conversion, all lenders must collectively hold 49% or more of the equity shares of the
company.

The invocation of an SDR is not treated as restructuring for the purpose of asset
classification and provisioning norms.

Equity shares acquired and held by banks under an SDR are exempt from the periodic mark-
to-market requirement for 12 months after the reference date.

39. Which component within a deal structure reflects the nature of the credit purpose being
financed?

Covenant.

Guarantee.

Pricing.

Tenor.

40. What is most important to assess when determining how an industry regulation will affect
a company’s industry and business risk?

If the regulation is a Federal regulation.

If the regulation is a proposed regulation.

If the company’s cash flows will be affected.

If the company is operating in a free market.

41. What does the right to claim indemnity entitle the guarantor to do?

Pay the debt to the creditor voluntarily.

Ask the borrower to be relieved of its obligation.

Receive from the borrower the amount paid under the guarantee.

Ask the borrower to notify the creditor that the guarantor has been relieved of any obligation.

42. Which is likely to be false of a company with a low gearing ratio?

It has a high debt load.

It has high interest costs.

It has high repayment ability.

It has a high repayment obligation.

43. Which is a long-term source of working capital financing?

Accrued expenses.

Customer advances.

Term loans.

Trade payables.

44. Using the turnover method (Nayak committee method), what percentage of projected
annual turnover must a borrower provide as margin to finance working capital?

5%

16%

25%

32%

45. How do a business’s operating expenses affect the level of its cash flow?

Operating expenses do not affect cash flow.

Lower operating expenses result in lower cash flow.

Lower operating expenses result in higher cash flow.

Higher operating expenses result in higher cash flow.

46. What is a way to conduct an inventory check when verifying the entire inventory is not
feasible?

Conduct an ABC analysis.

Review work in progress records.

Review Central Excise taxation records.

Check for boards indicating which assets are charged to the bank.

47. What is drawing power?

The approved fund-based working capital limit to finance a company’s inventory and
receivables.

The value of eligible inventory and receivables detailed in a company’s latest stock statement
that can be drawn against.

A company’s credit limit based on the value of eligible items from its latest stock statement
multiplied by the agreed margin.

The lower of a company’s approved fund-based working capital limit and the lending
value calculated based on its latest stock statement and usance letters of credit
issued.

48. What should a lender consider when using projections in the credit risk assessment
process?

Select assumptions that will confirm the desired results.

Avoid the tendency to include information on price trends.

Understand that past projections and results have no impact on forecast assumptions.

Set assumptions based on past performance, management performance, and the

external environment.

49. Which party issues a letter of credit in a goods and services transaction?

Applicant.

Bank.

Beneficiary.

Seller.
50. What describes the primary reason(s) that companies need sound corporate
governance?

To formulate appropriate business strategy.

To identify business activities that are not being run efficiently.

To ensure that senior management is appropriately compensated.

To ensure there is adequate oversight and to prevent excessive risk-taking.

51. What is the profit before tax and financial costs for a company with sales of INR
5,000,000, cost of goods sold of INR 2,600,000, operating expenses of INR 1,400,000,
interest expense of INR 60,000 and tax expenses of INR 125,000?

INR 815,000

INR 940,000

INR 1,000,000

INR 1,185,000

53. What type of credit rating will most likely cause a borrower’s credit score to be adjusted
downward because of an expected downturn in the borrower’s industry?

Fail grade rating.

Single risk rating.

Facility risk rating.

External international rating.

54. What type of transactions would require further investigation in a cash credit account?

Debits for salaries.

Credits for sales turnover.

Debits of round figure sums.

Debits for frequent suppliers.

55. How can a company’s management best minimise the impact of potential interruptions
in the input supplies?

Obtain supplier insurance.

Hold large stocks for all key supply inputs.

Maintain good personal rapport with the key input suppliers.

Ensure that there is an alternate supply source for all key inputs.

56. What can be reasonably assumed when a business’s debt to tangible worth ratio is
higher than 1.00?

Gearing is low.

Financial risk is unfavourable.

Creditors support assets more than the owners.

The owners support assets more than creditors.

57. Which factor can make it difficult to project a business’s financial performance based on
historic trends?

Past operating results.

Management’s future plans.

Economic and competitive environments.

Minimum rate for the lender’s return on assets.

58. Which is a major risk for a business in the mature stage of its life cycle?

Failure to repay debt.

Filing for bankruptcy.

Merger with a competitor.

Inability to invest in new products.

59. What external factors outside of a business’s control can affect its liquidity levels?
Credit and lending policy.

Facility and loan structure.

Industry and business risk.

Management and key persons’ risk.

60. What variable will most likely decrease as a market approaches overcapacity?

Loan defaults.

Price of products.

Loan applications.

Availability of products.

61. Companies operating in which industry are most likely to have a high investment in fixed
infrastructure assets, with little inventory?

Electric utility.

Food retailing.

Home construction.

Financial services consulting.

62. What information in a credit agency report can help a bank assess a company’s
management integrity?

Opinion about the company management.

Information about the financial performance.

How freely the management shares information.

Details on covenant compliance for the bank loans.

63. Which type of financial statement provides the best insight into the seasonality of a
business’s operating cycle?

Monthly.

Quarterly.

Semi-annual.
Annual.

64. How many days is the short-term financing gap for a company with 47 trade receivables
days, 68 inventory days and 63 trade payables days?

42

52

84

178

65. What three categories are cash payments classified by in the statement of cash flows?

Direct, indirect and Uniform Credit Analysis.

Cash receipts, cash payments and capital expenditures.

Operating activities, investing activities and financing activities.

Operating activities, management activities and financing activities.

66. What is a characteristic of a good business plan?

Setting measurable goals.

Setting business objectives.

Being reactive to changing demand.

Defining who is accountable to the plan.

67. A company that records the market value of its equipment on its balance sheet has not
followed which accounting principle?

Cost.

Matching.

Conservatism.

Going concern.

68. What type of credit covenant requires the borrower to provide updates to the lender at
certain intervals?
Affirmative.

Enhancement.

Information.

Restrictive.

69. What is the main purpose of conducting a competitive analysis during the loan pricing
decision process?

To calculate the lowest lending rate the bank is willing to apply to the loan.

To determine the probability of loss based on the competitor’s rate pricing.

To persuade the relevant committee to approve a lending rate lower than those of
competitors.

To determine whether the lending rate should be adjusted based on the ceiling
established by other lenders.

70. What type of capital investment is intangible and financial in nature?

Applying for patents.

Developing new products.

Listing securities on a stock exchange.

Replacing existing plant and equipment.

71. Which proposition is least likely to be considered for a term loan for its financing
requirements?

Expansion of a fleet of vehicles.

Capital expenditure for a power plant.

An instalment financing construction project.

Daily working capital requirements for a small business.

QUESTION: What action should be taken after filing a civil suit to recover loan proceeds?

Serve a recall notice.

Ensure documents are properly stamped.
File an application for the sale of hypothecated goods.
Check to ensure the period of limitations has not expired.

QUESTION: Inventory is categorised as what type of asset?

Tangible and fixed.

Tangible and current.
Intangible and fixed.
Intangible and current.

QUESTION: What is the typical loan-to-value ratio for companies with lower levels of financial
risk or high levels of available equity finance?

60%
80%
50%
30%

QUESTION: What would be most impacted if a dominant employer makes a significant

number of its staff redundant?

Availability of skilled workers.

Supply of goods and services.
Lobbying power with local authorities.
The level of competition in the industry.

QUESTION: Which type of credit risk measurement is used to calculate a percentage

probability of default for a specific firm?

Absolute.
Implied.
Ordinal.
Ranking.

QUESTION: What is one advantage of using a national credit rating scale instead of a global
credit rating scale?

It allows for better peer comparisons.

Fewer companies are eligible to be rated.
There is a natural cap on the global ratings.
It allows comparisons across different countries.

QUESTION: What is the most favourable scenario for a buyer in the supplier market?

Unchanging supplier market.

Frequent entry of new suppliers.
Exclusive relationship with a large supplier.
Presence of a few highly specialised suppliers.

QUESTION: Based on these information: current secured INR 35,000 and current unsecured
INR 20,000; non-current secured INR 75,000 and non-current unsecured INR 60,000, what is
this company’s total amount of subordinated debt outstanding?

INR 55,000
INR 80,000
INR 1,10,000
INR 1,35,000

QUESTION: What effect does the number of a company’s trade receivable days have on its
cash flow?

Number of trade receivable days does not affect cash flow.

Stable trade receivable days results in increased cash flow.
A decrease in trade receivable days results in increased cash flow.
An increase in trade receivable days results in increased cash flow.

QUESTION: What external factors outside of a business’s control can affect its liquidity
levels?

Credit and lending policy.

Facility and loan structure.
Industry and business risk.
Management and key persons’ risk.

QUESTION: What can a company do to finance a project through off-balance sheet

financing?

Liquidate fixed assets

Sell account receivables
Use cash from operations
Obtain a non-recourse loan (1261)

QUESTION: Which is a warning sign of cash flow manipulation using creative accounting?

Receivables growing faster than sales.

Converting trade receivables into notes.
Stretching out the life of a depreciable asset.
Disclosure about timing of inventory purchases (600)

QUESTION: Which type of structural mitigation is used to ensure that all intercompany
transactions occur at arm’s length?
Collateral
Guarantee.
Monitoring
Restrictive covenant

QUESTION: Which factor is unlikely to affect a business’s ability to penetrate a market with
high entry barriers?

Capital available to the business

Level of skill of the business’s workforce
Uniqueness of products sold by the business
Government regulation affecting the business’s industry

QUESTION: Which financial trigger can be set up internally as an early signal of a borrower’s
probability of default?

Change in profit projections.

Change in ownership structure.
Unexpected change in dividend policy.
Emergence of new competitive entrants in the market.

QUESTION: What is most important to assess when determining how an industry regulation
will affect a company’s industry and business risk?

If the regulation is a Federal regulation.

If the regulation is a proposed regulation.
If the company’s cash flows will be affected.
If the company is operating in a free market.

QUESTION: Which source of information can likely be used to obtain details of a business’s
management succession plan?

Credit agency reports.

Stock exchange announcements.
The business’s chief executive officer. (5.8)
The company’s accounts or annual reports.

QUESTION:On what basis is the risk premium for a loan calculated?

Expected loss.
Loss given default.
Exposure at default.
Probability of default.

QUESTION: In which situation is the company likely to have the lowest amount of working
capital?
Seasonal company currently in its off season for sales.(1207/1208)
Manufacturing company that is testing a product prior to installation.
Accounting company that is having difficulty collecting its account receivables.
Computer manufacturing company whose inventory is accumulating due to obsolescence.

QUESTION: When determining a company’s management risk, what details should be

assessed before meeting with the company’s management?

The competitors’ performance.

The company’s goal planning process.
The company’s most recent annual report.
The economic outlook for the next couple of years.

QUESTION: Which element of business planning, if not properly addressed, have cash flow
implications for a business?

Clear accountabilities.
Taking prompt corrective action.
Measurable performance targets.
Clearly defined business goals and objectives.

QUESTION: What would be considered a warning signal when monitoring stock statements
for a company experiencing sales growth?

Late submission.
An increase in inventory levels.
An increase in over-aged receivables.
A fall in the value of outstanding usance letters of credit.

QUESTION: Which figure is likely to increase for a business after a seasonal peak sales
period?

Sales.
Inventory.
Trade payables.
Trade receivables.

QUESTION: Which is a long-term source of working capital financing?

Accrued expenses.
Customer advances.
Term loans.
Trade payables.

QUESTION: What can be reasonably assumed when a business’s debt to tangible worth ratio
is higher than 1.00?
Gearing is low.
Financial risk is unfavourable.
Creditors support assets more than the owners.
The owners support assets more than creditors.

QUESTION: How can a company’s management best minimise the impact of potential
interruptions in the input supplies?

Obtain supplier insurance.

Hold large stocks for all key supply inputs.
Maintain good personal rapport with the key input suppliers.
Ensure that there is an alternate supply source for all key inputs.

QUESTION: What type of transaction usually requires a bank guarantee for 5% of the
contract value?

Earnest deposit.
Retention money.
Mobilisation advance.
Performance assurance.

QUESTION: Which can occur as a result of including a group cross-default covenant in the
credit agreement that involves a loan guarantor?

The guarantor is protected if the borrower defaults.

The borrower is protected if the guarantor defaults.
Allows action if the borrower and guarantor default.
Allows action against the borrower if the guarantor defaults.

QUESTION: Which risk driver refers to the average time it takes a business to collect its sales
in cash?

Sales growth.
Gross margin.
Accounts payable days.
Accounts receivable days.

QUESTION: Which factor is not considered when determining the impact of evolving external
regulations on a borrower’s financial performance?

Impact on local competition.

Impact on other businesses.
Cost of maintaining compliance.
Financial impact for non-compliance.

QUESTION: Companies operating in which industry are most likely to have a high investment
in fixed infrastructure assets, with little inventory?

Electric utility.
Food retailing.
Home construction.
Financial services consulting.

QUESTION: Which type of business operation adds value to a tangible product or natural
resource?

Corporation.
Manufacturer.
Retailer.
Wholesaler.

QUESTION: What regulatory issues could a bank that has a large number of problem loans
encounter?

Run on deposits.
Insolvency charges.
Loss of good employees.
Loss of control of the bank.

QUESTION: What is a characteristic of a good business plan?

Setting measurable goals.

Setting business objectives.
Being reactive to changing demand.
Defining who is accountable to the plan.

QUESTION: For how many days can an account remain continuously in excess of the
sanctioned limit before it is considered out of order?

30
60
90
120

QUESTION: Special Mention Accounts were introduced as a new asset category between
which two categories?

Doubtful and Loss.

Standard and Doubtful.
Sub-standard and Doubtful.
Standard and Sub-standard.
QUESTION: What process for addressing non-performing assets is timely, transparent and
outside of legal proceedings?

Joint lenders’ forum.

Strategic debt restructuring.
Corporate debt restructuring.
Scheme for sustainable structuring of stressed assets.

QUESTION: Which statement is correct regarding the effect of a business’s management

structure on its performance and cash flow?

Informal business structures tend to result in weaker business performance than more formal
structures.
A structure that is too centralised can result in poor management decisions and weak
business performance.
Decentralisation of decision-making tends to result in weaker business performance than a
centralised structure.
A management structure with clearly assigned responsibilities is necessary to achieve
sound business performance.

QUESTION: What information does using the gearing ratio provide?

Current assets to current liabilities.

Net worth compared to total assets.
How much cash is available to cover payments.
The relative amount of funding provided by owners and creditors.

QUESTION: In which industry would you typically expect to see a higher percentage of
selling, general and administrative expenses?

Manufacturing.
Retail.
Service.
Wholesale.

QUESTION: What is the primary reason for reviewing external information when assessing a
company’s credit quality?

To evaluate any adverse press coverage of the company.

To assess the company’s vulnerability to natural disasters.
To review any gradual economic changes that may affect the company’s industry.
To evaluate what developments may create opportunities for the company or adversely
affect its performance.

QUESTION: How is a fixed asset recorded on a company’s balance sheet at the time of its
acquisition?

As a debit to the fixed asset account using the cost of the asset.
As a credit to the fixed asset account using the cost of the asset.
As a debit to the fixed asset account using the market value of the asset.
As a credit to the fixed asset account using the market value of the asset.

QUESTION: What is free cash flow?

Net cash available after depreciation and amortisation.

Net cash generated from sales without associated costs.
Net cash before interest, taxes, depreciation and amortisation.
Net cash remaining after spending to maintain or expand assets.

QUESTION: What type of non-fund-based lending facility would a buyer of goods and
services use to guarantee a one-time payment?

Export credit.
Letter of credit.
Overdraft.
Term loan.

QUESTION: During which implementation phase of deal structure is counsel instructed on

documentation and covenant definition issues?

Design.
Drawdown.
Monitoring.
Negotiation.

QUESTION: What is drawing power?

The approved fund-based working capital limit to finance a company’s inventory and
receivables.
The value of eligible inventory and receivables detailed in a company’s latest stock statement
that can be drawn gainst.
A company’s credit limit based on the value of eligible items from its latest stock statement
multiplied by the agreed margin.
The lower of a company’s approved fund-based working capital limit and the lending
value calculated based on its latest stock statement and usance letters of credit
issued.

QUESTION: Which statement is correct regarding the effect of a debit or credit on the
particular type of financial account?

A credit to an asset account increases it.

A debit to a liability account decreases it.
A debit to a revenue account increases it.
A credit to an equity account decreases it.
QUESTION: In what type of feasibility assessment is a project’s maximum debt to equity ratio
reviewed?

Cost of project.
Economic viability.
Means of finance.
Technical viability.

QUESTION: What describes the primary reason(s) that companies need sound corporate
governance?

To formulate appropriate business strategy.

To identify business activities that are not being run efficiently.
To ensure that senior management is appropriately compensated.
To ensure there is adequate oversight and to prevent excessive risk-taking.

QUESTION: Which factor increases the riskiness of a borrower’s industry?

Reduced regulation.
Lack of competition.
Longer and stable life cycle.
Shorter and frequent life cycle.

QUESTION: Which industry factor increases the need for a company to compete for a high
volume of sales to remain profitable?

High fixed costs.

Few competitors.
High switching costs.
Rapid demand growth.

QUESTION: Which describes the absolute priority rule with respect to payments made to
creditors at default?

Subordinated debt is paid before insolvency-related costs.

Available funds are paid first to the lowest ranked class until the borrower’s obligations are
fully satisfied.
Available funds are paid first to the highest ranked class until the borrower’s
obligations are fully satisfied.
Distributions to each ranked class are paid out proportionately based on its percentage in the
company's capital structure.

QUESTION: Company A had outstanding trade payable for an average of 44 days in Fiscal
Year-End (FYE) 1 and 41 days in FYE 2. Company B had outstanding trade payable for an
average of 52 days in FYE 1 and 55 days in FYE 2. Which of Company A or Company B is
most likely to borrow funds, and why?

Company A due to reduced cash flow.

Company B due to reduced cash flow.
Company A due to increased cash flow.
Company B due to increased cash flow.

QUESTION: What will have the biggest effect on the risk premium when pricing a loan?

The term of the loan.

The bank’s growth strategy.
The expected loss of the loan.
The expected return on equity.

QUESTION: What must a lender do to assess the effect of a company’s capital expenditures
on its cash flow?

Use accumulated depreciation to estimate net cash flow.

Determine asset value and compare to expected revenues.
Review increased capital assets and evaluate serviceability.
Understand the purpose of spending and changes in cash flow.

QUESTION: What effect would a decrease in a business’s sales growth during a recession
have on cash flow?

Long-term decrease.
Long-term increase.
Short-term decrease.
Remains consistent.

QUESTION: Which factor can make it difficult to project a business’s financial performance
based on historic trends?

Past operating results.

Management’s future plans.
Economic and competitive environments.
Minimum rate for the lender’s return on assets.

QUESTION: In which scenario would customer concentration cause significant cash flow risk
for a business?

The business sells clothing to individual consumers.

The business distributes flour to most bakeries in the region.
The business supplies specialised parts to the largest auto maker.
The business provides cleaning services to schools, offices and residential buildings.

QUESTION: What is the primary function of stock statements in the administration of fund-
based working capital limits?

To calculate drawing power.

To provide evidence that can be used in legal proceedings.
To provide monthly movement in the level and quality of inventory and receivables.
To indicate the aging profile of inventory and receivables for calculation of the eligible items.

QUESTION: What type of opinion does an auditor provide when it disagrees with the
information and/or conclusions in a company’s financial report?

Adverse.
Strong.
Qualified.
Unqualified.

QUESTION: According to the Indian Companies Act, within what period of the creation of a
security charge must it be registered, including the maximum permitted period of condonable
delay?

30 days.
300 days.
1 year.
5 years.

QUESTION: What is the primary purpose of calculating drawing power in a funds-based

working capital facility?

To determine the amount the customer can draw on.

To ensure that bank funds are not tied up in obsolete stocks.
To ensure that drawings are being used to fund current assets.
To check that the value of eligible assets is at least equal to the approved credit limit.

QUESTION: Which type of security can be used in a pledge charge?

Building.
Finished goods.
Heavy equipment.
Life insurance contract.

QUESTION: What information in a credit agency report can help a bank assess a company’s
management integrity?

Opinion about the company management.

Information about the financial performance.
How freely the management shares information.
Details on covenant compliance for the bank loans.

QUESTION: What is one benefit of cash accounting?

It provides a cash-flow-based statement of profit and loss.

It records cash and non-cash components of a transaction.
It records all transactions of a particular accounting period.
It gives a complete view of the financial status of a business.

QUESTION: Why does a special purpose vehicle expose a lender to more risk than
conventional financing?

The loan has no security guaranteed.

The sponsor has no established track record.
The sponsor is the only party liable for the loan.
The loan is repaid only from the project’s cash flows.

QUESTION: Which action might a company take when it is in the cash concern stage of
financial distress?

Selling vital assets.

Cancelling bonuses.
Laying off key employees.
Eliminating management positions.

QUESTION: What is a way to conduct an inventory check when verifying the entire inventory
is not feasible?

Conduct an ABC analysis.

Review work in progress records.
Review Central Excise taxation records.
Check for boards indicating which assets are charged to the bank.

QUESTION: At which stage of a business’s life cycle is it considered the most risky for credit
approval?

Start-up.
Adolescence.
Growth.
Maturity.

QUESTION: What previous management action is likely to raise doubt about management
integrity and whether to enter into a credit relationship with a business?

Tax planning.
Making tweaks to reported accounts to mask a declining financial performance.
Marginally increasing the dividend payout ratio compared to the previous financial year.
Making changes to the board of directors and audit committee to increase the proportion of
independent directors.

QUESTION: Which party enforces a bank guarantee in the event of default?

Applicant.
Beneficiary.
Government.
Guarantor.

QUESTION: What is the primary source of cash flow used in calculating debt repayment
capacity?

Sale of an asset.
Peripheral rental fees.
Extraordinary income.
Cash generated from operations.

QUESTION: What is meant by the term “excess borrowings” under the Tandon Committee
approach to lending?

The amount borrowed exceeds current liabilities.

The liquidity level exceeds the minimum required.
The maximum permissible bank borrowings exceed current assets.
The minimum required net working capital exceeds the actual amount (1221)

QUESTION: What is the primary purpose of the loan pricing process?

To assess the probability of loss in the event of default.

To calculate the profitability of the loan transaction for the bank.
To determine appropriate interest rate and fees in line with the risk assumed.
To support the lender’s position in the negotiation process with the borrower.

QUESTION: Which method of inventory valuation maximises a company’s net income during
periods of inflation?

Average cost.
First-in, first-out. (385)
Last-in, first out.
Weighted average.

QUESTION: Which action by a borrower’s management team could have an adverse effect
on its cash flow and ability to meet its obligations?

Adopting a conservative business planning strategy.

Setting business plan objectives that are overly aggressive.
Increasing the rate of depreciation resulting in reduced net income.
Disclosing confidential information to other stakeholders on a need to know basis.

QUESTION: What causes market overcapacity?

Industry growth.
Weak competition.
Drop in a sales price.
Low product demand.

QUESTION: Which part of the financial statements does the Uniform Credit Analysis primarily
focus on?

Balance Sheet.
Cash Flow Statement.
Income Statement.
Net Worth Statement.

QUESTION: What type of risk is the risk that credit exposure is not adequately structured?

Facility risk.
Financial risk
Industry risk
Management risk.

QUESTION: How is a business’s risk affected when a business environment is dominated by

a few large and wealthy clients?

Sales and profitability increases.

Loss of one client creates the risk of lost revenues.
Large and steady sales minimise risk for the supplier.
The impact is significant only if a client declares bankruptcy.

QUESTION: Which is a primary purpose of adding covenants to a lending agreement?

To protect the lender in the event of the borrower’s bankruptcy.

To immediately call the loan if the borrower’s credit profile deteriorates.
To prevent a change in ownership of the borrower during the term of the agreement.
To ensure that the borrower continues to repay the loan to maturity when a technical
default occurs.

QUESTION: What does the cash flow coverage ratio of a company measure?

The amount of cash collected after sales.

Its profitability relative to interest expenses.
Its ability to pay interest, debt payments and dividends.
The amount of cash available to cover its debt payments.

QUESTION: Which factor affecting the cost of funds will lead to a surplus to the lender if
positive?

Profit margin.
Risk premium.
Term of funds.
Cost of capital.

QUESTION: Which does the Reserve Bank of India consider to be an early warning signal
indicator?

Lack of related party transactions.

Decrease in unbilled revenue year after year.
Increase in borrowings despite large cash holdings.
Project costs are closely aligned with benchmark costs.

QUESTION: What variable will most likely decrease as a market approaches overcapacity?

Loan defaults.
Price of products.
Loan applications.
Availability of products.

QUESTION: What role do projections play in the financial risk assessment process?

Confirm future ability to repay.

Estimate cash inflows and outflows.
Determine likelihood of future liquidity and solvency.
Forecast minimum rate for the lender’s return on assets.

QUESTION: Which factor increases the riskiness of a borrower’s industry?

Reduced regulation.
Lack of competition.
Longer and stable life cycle.
Shorter and frequent life cycle.

QUESTION: What is a common reason for companies to use creative accounting?

To mask poor performance.

To increase dividends payable.
To avoid a voluntary disclosure in the notes to accounts.
To increase the gap between actual performance and analysts’ expectations

QUESTION: Which type of risk can arise from the way a loan is structured?

Group.
Deal-specific. (8.1)
Documentation.
Other stakeholders.

QUESTION: Which factor would improve a business’s probability to obtain financing for an
expansion project?
Strong past performance.
Highly specialised products.
Lack of significant competition.
Current compliance with debt repayment.

QUESTION: What is the best course of action when the assumptions used to make
projections for a business do not yield the desired results?

Change the assumptions.

Adjust the risk driver values.
Accept the implications of the results.
Dismiss the implications of the results.

QUESTION: What type of transaction usually requires a bank guarantee for 5% of the
contract value?

Earnest deposit.
Retention money.
Mobilisation advance.
Performance assurance.

QUESTION: According to the contingent claims model, default occurs when what variable is
less than the value of a firm’s liabilities?

The firm’s gross profit.

The firm’s shareholders’ equity.
The firm’s market value of assets. (128)
The firm’s net book value of assets.

QUESTION: What is the primary purpose of setting up internal triggers for credit risk
monitoring?

To provide early warning signals of deteriorating credit risk.

To identify breaches of contractually agreed upon covenants.
To flag an issue when financial statements are ready for review.
To replace contractual covenants for borrowers with high credit standing.

QUESTION: Which management decision will most likely affect credit risk through an adverse
impact on the company’s performance?

Limited disclosures in the annual reports.

Increasing dividend payouts during an economic downturn.
Replacing senior management with family members who have limited experience.
Implementing a management compensation package focused on medium-term goals.

QUESTION: Based on the working capital information provided below, which of these
companies has the highest level of business risk?
Company Working Capital Cycle Peers’ Working Capital Cycle
(Months) (Months)
 A 5 4
B 2 3
C 10 5
D 10 10
Company A.
Company B.
Company C.
Company D.

QUESTION: When issuing a term loan, what source of information can be used to benchmark
the cost of customized, non-standard equipment?

Suppliers’ invoices.
Other firms in the industry.
Information available on the internet.
Comparisons with similar equipment.

QUESTION: What describes the primary reason(s) that companies need sound corporate
governance?

To formulate appropriate business strategy.

To identify business activities that are not being run efficiently.
To ensure that senior management is appropriately compensated.
To ensure there is adequate oversight and to prevent excessive risk-taking.

QUESTION: Which typically occurs in the expansion phase of the economy?

Inflation increases.
Receivables increase.
Borrowing decreases.
Inventories decrease.

QUESTION: Which is an example of a loan covenant?

Personal guarantee.
Mortgage of immovable asset.
Hypothecation of movable asset.
Restrictions on future borrowings.

QUESTION: What action should be taken after filing a civil suit to recover loan proceeds?

Serve a recall notice.

Ensure documents are properly stamped.
File an application for the sale of hypothecated goods.
Check to ensure the period of limitations has not expired.

QUESTION: What is one disadvantage of accrual accounting?

It hides any obligation to pay other parties.

It does not record all transactions of a particular accounting period.
Financial statements may not be directly comparable between businesses.
It overlooks future cash flows arising from transactions conducted in previous periods.

QUESTION: What year-over-year change in gross margin represents positive financial risk?

No change represents stability.

Gross margin does not affect risk.
A decrease represents profit growth.
An increase represents profit growth.

QUESTION: What activity would provide the least amount of information when conducting an
inspection?

Holding discussions with the borrower.

Assessing the borrower’s activity level.
Establishing the existence of the borrower’s capital stock.
Randomly checking the valuations of the borrower’s raw materials.

QUESTION: How might an inadequate management succession plan affect a business’s cash
flow?

Training the new managers to address their skill gaps may result in excessive costs.
Cost of hiring for the positions vacated due to promotion of the new managers will impact the
cash flow.
Weak relationship of the new managers with the bank staff may result in the credit facilities
not being renewed.
Poor decisions of the new managers that lack sufficient skills or experience might
result in weaker business performance.

QUESTION: If the stock auditor discovers discrepancies during the audit, what should they do
next?

Seek clarification from the borrower.

Raise them immediately with the bank.
Report them in their report on the audit.
Make recommendations on follow-up actions in their report.