SET - 1

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.
SET – 2
Question (1)
What year-over-year change in gross margin represents positive financial risk?
a) No change represents stability.
b) Gross margin does not affect risk.
c) A decrease represents profit growth.
d) An increase represents profit growth.

Question (2)
Which is a major risk for a business in the mature stage of its life cycle?
a) Failure to repay debt.
b) Filing for bankruptcy.
c) Merger with a competitor.
d) Inability to invest in new products.

Question (3)
Which company related issue can result in a problem loan?
a) Deregulation.
b) Globalisation.
c) Illiquidity.
d) Seasonality.

Question (4)
Which figure is likely to increase for a business after a seasonal peak sales period?
a) Sales.
b) Inventory.
c) Trade payables.
d) Trade receivables.

Question (5)
What is a generally acceptable gearing ratio for a business in India?
a) 1.00
b) 2.00
c) 3.00
d) 4.00
Question (6)
Which is a long-term source of working capital financing?
a) Accrued expenses.
b) Customer advances.
c) Term loans.
d) Trade payables.

Question (7)
What does the trade receivables days ratio measure?
a) Actual time it takes to pay suppliers.
b) Average time it takes to pay suppliers.
c) Actual time it takes to collect cash from customers.
d) Average time it takes to collect cash from customers.

Question (8)
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 (9)
On what basis is the risk premium for a loan calculated?
a) Expected loss.
b) Loss given default.
c) Exposure at default.
d) 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?
a) High fixed costs.
b) Few competitors.
c) High switching costs.
d) 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?

a) Credit bureau reports.

b) Stock market announcements.
c) Reports of parties that have defaulted.
d) 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?
a) Delay of 30 days in submission of stock statements.
b) Decrease in frequency of overdrafts in current accounts.
c) Actual sales and operating profits falling short of projections accepted for loan sanction by
20%.
d) 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?
a) Line of credit.
b) Letter of credit.
c) Government grant.
d) Working capital loan.

Question (14)
What is the best time to pay a creditor to optimise cash flow?
a) Immediately.
b) On the due date.
c) 30-60 days after the due date.
d) 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) A credit to an asset account increases it.
b) A debit to a liability account decreases it.
c) A debit to a revenue account increases it.
d) A credit to an equity account decreases it.

Question (16)
What is drawing power?
a) The approved fund-based working capital limit to finance a company’s inventory and
receivables.
b) The value of eligible inventory and receivables detailed in a company’s latest stock
statement that an be drawn against.
c) A company’s credit limit based on the value of eligible items from its latest stock statement
multiplied by the agreed margin.
d) 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?
a) Audited, reviewed, positive assurance, prepared.
b) Positive assurance, prepared, reviewed, audited.
c) Prepared, reviewed, audited, positive assurance.
d) 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?
a) Expected default loss.
b) Exposure at default.
c) Loss given default.
d) Probability of default.

Question (19)
Which is a negative effect of sales fluctuations for seasonal businesses?
a) Falling sale prices.
b) Increased inventories.
c) Incapacity to compete.
d) Inability to repay loans.

Question (20)
What three categories are cash payments classified by in the statement of cash flows?
a) Direct, indirect and Uniform Credit Analysis.
b) Cash receipts, cash payments and capital expenditures.
c) Operating activities, investing activities and financing activities.
d) 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?

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 (22)
What information must be collected and analysed before a personal guarantee on a loan can be
accepted?
a) Evidence that the guarantor has a higher net worth than the borrower.
b) Proof that the guarantor is employed showing the gross and net pay received.
c) Confirmation that the guarantor has no other outstanding guarantees.
d) 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?
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 (24)
What activity would provide the least useful information when conducting an inspection?
a) Holding discussions with the borrower.
b) Assessing the borrower’s activity level.
c) Establishing the existence of borrower’s capital stock.
d) 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?
a) Start-up, expansion, and succession.
b) Inventory, sales growth, and rate of return.
c) Liquidity, profitability, and capital expenditures.
d) Past results, management plans, and economic environments.

Question (26)
What type of credit facility will typically have a lower interest rate?
 a) Fund-based.
b) Non-fund-based.
c) Secured.
d) Unsecured.

Question (27)
What would allow a positive view to be taken of management‘s ability to develop a robust and
implementable business plan?
a) Plans are developed in a top-down manner.
b) There is a well-defined and balanced planning process.
c) Corrective actions are taken quickly where targets are not being met.
d) 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?
a) Gearing is low.
b) Financial risk is unfavourable.
c) Creditors support assets more than the owners.
d) 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?
a) The guarantor is protected if the borrower defaults.
b) The borrower is protected if the guarantor defaults.
c) Allows action if the borrower and guarantor default.
d) 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?
a) Purchases of fixed assets.
b) Long-term loans and advances.
c) Proceeds from sale of fixed assets.
d) Proceeds from sale of share capital.

Question: 31.
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 (32)
Which is the most effective type of covenant in a credit agreement?
a) Balance sheet.
b) Cash flow.
c) Event-based.
d) 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?
a) Slow market growth.
b) Product standardisation.
c) Expensive local manpower.
d) Well-established competitor.

Question (34)
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 (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?
a) Exposure Norms.
b) Statutory Restrictions.
c) Priority Sector Lending.
d) 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?
a) Core supplier with low interdependency with the buyer.
b) Core supplier with high interdependency with the buyer.
c) Peripheral supplier with low interdependency with the buyer.
 d) 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?
a) Sales growth.
b) Gross margin.
c) Accounts payable days.
d) Accounts receivable days.

Question (38)
What are scorecards widely used to assess?
a) Changes in the price of credit default swaps.
b) Liquidity mismatches in institutional financing.
c) Default probability based regression analysis.
d) 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?
a) Fail grade rating.
b) Single risk rating.
c) Facility risk rating.
d) 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?
a) Demand repayment by stipulating a recompense clause.
b) Obtain approval from the CDR Core Group to be excluded from the process.
c) Arrange for its share of funding to be provided by another lender, either existing or
new.
d) 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?

a) 2.0%
b) 2.04%
c) 8.87%
d) 10.0%

Question (42)
In what type of letter of credit is payment delayed until a specified future date?
a) Contract.
b) Demand.
c) Sight.
d) Usance.

Question (43)
Which occurs immediately after a bank guarantee is invoked?
a) The bank makes payment.
b) The beneficiary discharges the guarantee.
c) The bank removes the guarantee from its books.
d) 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?
a) Tax planning.
b) Making tweaks to reported accounts to mask a declining financial performance.
c) Marginally increasing the dividend payout ratio compared to the previous financial year.
d) 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?
a) Sale of an asset.
b) Peripheral rental fees.
c) Extraordinary income.
d) Cash generated from operations.

Question (46)
Which activity of a borrower is an example of siphoning funds?
 a) Using short-term capital for long-term purposes.
b) Routing funds through a bank other than the lender bank.
c) Investing in other companies without the approval of lenders.
d) 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?
a) Company.
b) Partnership.
c) Sole trader.
d) Wholesaler.

Question (48)
What strategy can management adopt to minimise the impact of work stoppages?
a) Employ additional staff.
b) Obtain appropriate insurance.
c) Engage regularly with staff to ensure good labour relations.
d) 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?
a) INR 61,644
b) INR 82,192
c) INR 102,740
d) 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?
a) Profit will be overstated.
b) Liabilities will be overstated.
c) Liabilities will be understated.
d) Shareholder's equity will be understated.

Question (51)
Under what circumstances would a company typically seek external debt financing?
a) When it is cash rich.
 b) When its structure allows for new equity investors.
c) When equity holders are willing to take on additional risk.
d) 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?
a) 60%
b) 80%
c) 50%
d) 30%

Question (53)
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 (54)
Which type of equity shares can be repaid at the discretion of the issuer?
a) Common stock.
b) Convertible preference shares.
c) Cumulative preference shares.
d) Redeemable preference shares.

Question (55)
What aspect of a business must be considered when performing an industry and business risk
assessment?
a) Its future cash flows.
b) Its vulnerability within the competitive marketplace
c) Management’s capacity to run the business profitably.
d) 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?
a) To calculate the lowest lending rate the bank is willing to apply to the loan.
b) To determine the probability of loss based on the competitor’s rate pricing.
c) To persuade the relevant committee to approve a lending rate lower than those of
competitors.
 d) 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?
a) Cost analysis.
b) Loan structuring.
c) Loan accounting.
d) Competitive analysis.

Question (58)
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 (59)
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 (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?
a) Assessing business needs.
b) Developing plans to meet goals.
c) Aggregating and organising resources.
d) 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?
 a) Labour disruptions.
b) Liberal credit terms.
c) Decreased sales prices.
d) Improved service levels

Question (62)
How might an inadequate management succession plan affect a business’s cash flow?
a) Training the new managers to address their skill gaps may result in excessive costs.
b) Cost of hiring for the positions vacated due to promotion of the new managers will impact
the cash flow.
c) Weak relationship of the new managers with the bank staff may result in the credit facilities
not being renewed.
d) 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?
a) This is a single choice question. Selections are automatically selected as you use arrow to
move.
b) Banks absorb most of the impact and businesses are less affected as a result.
c) Taxation policies cause businesses to be less transparent in their financial reporting.
d) 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?
a) The media.
b) The regulators.
c) The board of directors.
d) Banks and other lenders.

Question (65)
How can a company’s management best minimise the impact of potential interruptions in the input
supplies?
a) Obtain supplier insurance.
b) Hold large stocks for all key supply inputs.
c) Maintain good personal rapport with the key input suppliers.
d) 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?
a) Contraction.
b) Recovery.
c) Growth.
d) Stability.

Question (67)
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 (68)
Which lists the primary components of India’s corporate debt restructuring (CDR) system?
a) Debtor-creditor agreements, inter-creditor agreements.
b) CDR Standing Forum, CDR Empowered Group, CDR Cell.
c) Multiple banking accounts, syndications, consortium accounts.
d) Repayment period, repayable amount, instalment amount, interest rate.

Q: What is the benefit of setting meaningful forecast assumptions in the overall projection
process?
a) To confirm future loan payments will be achievable.
b) Assumptions depend on the results of the projections.
c) To reflect factors independent of management’s past performance.
d) 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?
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 (71)
In what type of security charge are goods and raw materials commonly pledged as assets?
a) Assignment.
b) Hypothecation.
c) Lien.
d) Mortgage.
Question (72)
An increase in which item will increase a borrower’s debt service coverage ratio?
a) Loan interest.
b) Loan collateral.
c) Cash flow from operations.
d) Scheduled principal repayment.

Question (73)
Which is an example of a liquidity early warning signal?
a) Rising corporate bond prices.
b) Non-consolidation of subsidiaries’ accounts.
c) Frequent overdrafts that are covered in a few days.
d) 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?
a) To ensure that the transaction is not a one-off.
b) To avoid providing financing for intergroup transactions.
c) To reduce the possibility of providing accommodation finance.
d) 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.
a) Design.
b) Drawdown.
c) Monitoring.
d) Negotiation.

Question (76)
In what type of feasibility assessment is a project’s maximum debt to equity ratio reviewed?
 a) Cost of project.
b) Economic viability.
c) Means of finance.
d) Technical viability.

Question (77)
What is a characteristic of a good business plan?
a) Setting measurable goals.
b) Setting business objectives.
c) Being reactive to changing demand.
d) 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?
a) Discussions with management.
b) Details of dividends paid over the last five years.
c) Opinion about management included in credit agency reports.
d) 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?
a) Facility risk.
b) Financial risk
c) Industry risk
d) Management risk.
SET – 3

1. 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.

2. 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.

• 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.

• 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).

• 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.

• 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

• 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

• 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.

• 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

• 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.

• 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.

• 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

• 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

• 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.

• 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.

• 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

• 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.

• 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.

• What event would most likely have a neutral impact on the trade receivables days?

Billings are computerised.

Recession.
Sales increase.
Competitor terms lengthen.

• 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

• 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

• 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.

• What regulation level is most likely to lead to a decline in market (industry and business)
risk?

Significant.
Moderate.
Insignificant.
Unknown.

• 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

• 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

• 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.

• 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

• 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

• 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.

• 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.

• 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

• 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

• 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

• 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.

• 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.

• 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

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

Accounting firm.
Clothing store.
Car manufacturer.
Food wholesaler

• 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

• Identify one of the five management responsibilities.

Competitive intelligence.
Administration.
Production.
Market research.

• 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.

• 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

• 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.
SET – 4
Question (1)
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 (2)
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 (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.

a) 1 and 2.
b) 1 and 4.
c) 2 and 3.
d) 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?
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 (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?
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 (6)
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 (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?

a) Fail grade rating.

b) Single risk rating.
c) Facility risk rating.
d) External international rating.

Question (8)
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 (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?
a) INR 120,000
b) INR 180,000
c) INR 200,000
d) 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?
a) Bias to fail test.
b) Liquidity test.
c) Secondary source test.
d) Solvency test.

Question (11)
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 (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?
a) 42
b) 52
c) 84
d) 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?
a) INR 55,000
b) INR 80,000 m
c) INR 110,000
d) INR 135,000

Question (14)
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 (15)
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 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?
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 (17)
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 (18)
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 (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 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 (21)
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 (22)
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 (23)
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 (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?
a) INR 61,644
b) INR 82,192
c) INR 102,740
d) 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?
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 (26)
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 (27)
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 (28)
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 (29)
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 (30)
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 (31)
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 (32)
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 (33)
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 (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?
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 (36)
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 (37)
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 (38)
In what type of security charge are goods and raw materials commonly pledged as assets?
a) Assignment.
b) Hypothecation.
c) Lien.
d) Mortgage.

Question (39)
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 (40)
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 (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?
a) Assets.
b) Current ratio.
c) Liquidity.
d) Trade payables.

Question (42)
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 (43)
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 (44)
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 (45)
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 (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?
a) 73
b) 152
c) 175
d) 219

Question (47)
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 (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?
a) INR 815,000
b) INR 940,000
c) INR 1,000,000.
d) 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?
a) 30
b) 60
c) 90.
d) 120

Question (50)
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 (51)
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 (52)
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 (53)
Which party issues a letter of credit in a goods and services transaction?
a) Applicant.
b) Bank.
c) Beneficiary.
d) Seller.

Question (54)
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 (55)
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 (56)
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 (57)
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 (58)
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 (59)
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 (60)
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 (61)
Which party enforces a bank guarantee in the event of default?
a) Applicant.
b) Beneficiary.
c) Government.
d) Guarantor.

Question (62)
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 (63)
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 (64)
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 (65)
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 (66)
What causes market overcapacity?
a) Industry growth.
b) Weak competition.
c) Drop in a sales price.
d) 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?
a) 2.0%
b) 2.04%
c) 8.87%
d) 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?
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 (69)
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 (70)
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 (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?
a) 9
b) 10
 c) 35
d) 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?
a) Corporate family rating.
b) Issue rating.
c) Issuer rating.
d) Short-term rating.

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

Question (76)
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 (77)
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 (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?
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 (79)
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 (80)
Which type of charge is appropriate when the security is a factory?
a) Hypothecation
b) Lien
c) Mortgage
d) Pledge
SET – 5

1. What action can a lender take if the restructuring decision process for a borrower determines a
need to reduce exposure?

a) Set up and monitor qualitative triggers.

b) Set up and monitor quantitative triggers.
c) Liquidate and sell the borrower’s current assets.
d) 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?

a) 73
b) 152
c) 175
d) 219

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

a) Cash.
b) Goodwill.
c) Land.
d) 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?

a) Corporate family rating.

b) Issue rating.
c) Issuer rating.
d) Short-term rating.

5. Why might a business choose to expand its capital assets?

a) To claim high levels of depreciation.

b) To increase regular spending activities.
c) To utilise all the available surplus cash reserves.
d) 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) A cash margin equivalent to the value of the LC must be held.

b) The LC cannot be issued in favour of another group company.
c) The LC cannot be opened in favour of a supplier it has not previously dealt with.
d) 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?
 a) Freeze production costs to increase overall profitability.
b) Reduce development costs to better control expenditures.
c) Increase the product’s price to build perceived product superiority.
d) 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?

a) 2.0%
b) 2.04%
c) 8.87%
d) 10.0%

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

a) To provide early warning signals of deteriorating credit risk.

b) To identify breaches of contractually agreed upon covenants.
c) To flag an issue when financial statements are ready for review.
d) 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?

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.

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

a) Expected default loss.

b) Exposure at default.
c) Loss given default.
d) Probability of default.

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

a) Current assets exceed current liabilities.

b) The business generates sufficient profit to cover interest.
c) All debt obligations would be repaid in the event of liquidation.
d) 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?

a) Profit margin.
b) Risk premium.
c) Term of funds.
d) 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?

a) Annuity.
b) Balloon.
c) Bullet.
d) Equal.

15. 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.

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

a) Number of trade receivable days does not affect cash flow.

b) Stable trade receivable days results in increased cash flow.
c) A decrease in trade receivable days results in increased cash flow.
d) 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)?

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.

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

a) Sales growth.
b) Gross margin.
c) Accounts payable days.
d) 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?

a) Standardised.
b) Internal ratings-based.
c) Foundation internal ratings-based.
d) 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.

a) 30 days.
b) 300 days.
c) 1 year.
d) 5 years.

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

a) Discussions with management.

b) Details of dividends paid over the last five years.
c) Opinion about management included in credit agency reports.
d) Account statements showing whether the company has met its obligations to the bank on
time.

22. What is free cash flow?

a) Net cash available after depreciation and amortisation.

b) Net cash generated from sales without associated costs.
c) Net cash after operations, interest expense, and dividends.
d) 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?

a) INR 120,000
b) INR 180,000
c) INR 200,000
d) INR 300,000

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

a) Unchanging supplier market.

b) Frequent entry of new suppliers.
c) Exclusive relationship with a large supplier.
d) 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?

a) Delay of 30 days in submission of stock statements.

b) Decrease in frequency of overdrafts in current accounts.
c) Actual sales and operating profits falling short of projections accepted for loan sanction by
20%.
d) 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.

a) 1 and 2.
b) 1 and 4.
c) 2 and 3.
d) 3 and 4.

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

a) The competitors’ performance.

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

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

a) Litigation restructuring costs.

b) Increased frequency of audits.
c) Costs to train new employees.
d) Loss of management control of the company.

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

a) Effective leadership style.

b) Aggressive in taking risks.
c) Able to tailor communication style to the audience.
d) 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?

a) To ensure informed decisions on future loan requests.

b) To determine the laws’ impact on future operations and cash flow.
c) To understand how the political landscape will change in the future.
d) 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?

a) Company A due to reduced cash flow.

b) Company B due to reduced cash flow.
c) Company A due to increased cash flow.
d) 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) A net present value of zero.

 b) A net present value that is commercially viable.
c) Discounted cash outflows will be greater than discounted cash inflows.
d) 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) A net present value of zero.

b) A net present value that is commercially viable.
c) Discounted cash outflows will be greater than discounted cash inflows.
d) 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?

a) Concentration.
b) Correlation.
c) Individual exposure.
d) Risk contribution.

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

a) Pay disbursements directly to the suppliers.

b) Pay disbursements to the borrower’s current account.
c) Ensure the undrawn limit is equal to the amount requested to be drawn.
d) 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?

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

37. Which part of the financial statements does the Uniform Credit Analysis primarily focus on?

a) Balance Sheet.
b) Cash Flow Statement.
c) Income Statement.
d) Net Worth Statement.

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

a) The decision to invoke an SDR should be made within 360 days of the initial account
review.
b) After the conversion, all lenders must collectively hold 49% or more of the equity shares of
 the company.
c) The invocation of an SDR is not treated as restructuring for the purpose of asset
classification and provisioning norms.
d) 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?

a) Covenant.
b) Guarantee.
c) Pricing.
d) Tenor.

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

a) If the regulation is a Federal regulation.

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

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

a) Pay the debt to the creditor voluntarily.

b) Ask the borrower to be relieved of its obligation.
c) Receive from the borrower the amount paid under the guarantee.
d) 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?

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.

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

a) Accrued expenses.
b) Customer advances.
c) Term loans.
d) 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?

a) Operating expenses do not affect cash flow.

b) Lower operating expenses result in lower cash flow.
c) Lower operating expenses result in higher cash flow.
d) 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?

a) Conduct an ABC analysis.

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

47. What is drawing power?

a) The approved fund-based working capital limit to finance a company’s inventory and
receivables.
b) The value of eligible inventory and receivables detailed in a company’s latest stock
statement that can be drawn against.
c) A company’s credit limit based on the value of eligible items from its latest stock statement
multiplied by the agreed margin.
d) 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?

a) Select assumptions that will confirm the desired results.

b) Avoid the tendency to include information on price trends.
c) Understand that past projections and results have no impact on forecast assumptions.
d) 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?

a) Applicant.
b) Bank.
c) Beneficiary.
d) Seller.

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

a) To formulate appropriate business strategy.

b) To identify business activities that are not being run efficiently.
c) To ensure that senior management is appropriately compensated.
d) 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?
 a) INR 815,000
b) INR 940,000
c) INR 1,000,000
d) 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?

a) Fail grade rating.

b) Single risk rating.
c) Facility risk rating.
d) External international rating.

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

a) Debits for salaries.

b) Credits for sales turnover.
c) Debits of round figure sums.
d) Debits for frequent suppliers.

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

a) Obtain supplier insurance.

b) Hold large stocks for all key supply inputs.
c) Maintain good personal rapport with the key input suppliers.
d) 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?

a) Gearing is low.
b) Financial risk is unfavourable.
c) Creditors support assets more than the owners.
d) 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?

a) Past operating results.

b) Management’s future plans.
c) Economic and competitive environments.
d) 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?

a) Failure to repay debt.

b) Filing for bankruptcy.
c) Merger with a competitor.
d) Inability to invest in new products.
59. 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.

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

a) Loan defaults.
b) Price of products.
c) Loan applications.
d) Availability of products.

61. 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.

62. 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.

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

a) Monthly.
b) Quarterly.
c) Semi-annual.
d) 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?

a) 42
b) 52
c) 84
d) 178

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

a) Direct, indirect and Uniform Credit Analysis.

b) Cash receipts, cash payments and capital expenditures.
c) Operating activities, investing activities and financing activities.
d) Operating activities, management activities and financing activities.
66. What is a characteristic of a good business plan?

a) Setting measurable goals.

b) Setting business objectives.
c) Being reactive to changing demand.
d) 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?

a) Cost.
b) Matching.
c) Conservatism.
d) Going concern.

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

a) Affirmative.
b) Enhancement.
c) Information.
d) Restrictive.

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

a) To calculate the lowest lending rate the bank is willing to apply to the loan.
b) To determine the probability of loss based on the competitor’s rate pricing.
c) To persuade the relevant committee to approve a lending rate lower than those of
competitors.
d) 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?

a) Applying for patents.

b) Developing new products.
c) Listing securities on a stock exchange.
d) Replacing existing plant and equipment.

71. 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.
SET – 6

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

a) Serve a recall notice.

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

QUESTION: Inventory is categorised as what type of asset?

a) Tangible and fixed.

b) Tangible and current.
c) Intangible and fixed.
d) 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?

a) 60%
b) 80%
c) 50%
d) 30%

QUESTION: What would be most impacted if a dominant employer makes a significant number of
its staff redundant?

a) Availability of skilled workers.

b) Supply of goods and services.
c) Lobbying power with local authorities.
d) 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?

a) Absolute.
b) Implied.
c) Ordinal.
d) Ranking.

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

a) It allows for better peer comparisons.

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

QUESTION: What is the most favourable scenario for a buyer in the supplier market?
 a) Unchanging supplier market.
b) Frequent entry of new suppliers.
c) Exclusive relationship with a large supplier.
d) 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?

a) INR 55,000
b) INR 80,000
c) INR 1,10,000
d) INR 1,35,000

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

a) Number of trade receivable days does not affect cash flow.

b) Stable trade receivable days results in increased cash flow.
c) A decrease in trade receivable days results in increased cash flow.
d) 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?

a) Credit and lending policy.

b) Facility and loan structure.
c) Industry and business risk.
d) Management and key persons’ risk.

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

a) Liquidate fixed assets

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

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

a) Receivables growing faster than sales.

b) Converting trade receivables into notes.
c) Stretching out the life of a depreciable asset.
d) 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?

a) Collateral
b) Guarantee.
c) Monitoring
d) Restrictive covenant
QUESTION: Which factor is unlikely to affect a business’s ability to penetrate a market with high
entry barriers?

a) Capital available to the business

b) Level of skill of the business’s workforce
c) Uniqueness of products sold by the business
d) 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?

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

a) If the regulation is a Federal regulation.

b) If the regulation is a proposed regulation.
c) If the company’s cash flows will be affected.
d) 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?

a) Credit agency reports.

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

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

a) Expected loss.
b) Loss given default.
c) Exposure at default.
d) Probability of default.

QUESTION: In which situation is the company likely to have the lowest amount of working
capital?

a) Seasonal company currently in its off season for sales.(1207/1208)

b) Manufacturing company that is testing a product prior to installation.
c) Accounting company that is having difficulty collecting its account receivables.
d) 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?
 a) The competitors’ performance.
b) The company’s goal planning process.
c) The company’s most recent annual report.
d) 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?

a) Clear accountabilities.
b) Taking prompt corrective action.
c) Measurable performance targets.
d) Clearly defined business goals and objectives.

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

a) Late submission.
b) An increase in inventory levels.
c) An increase in over-aged receivables.
d) 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?

a) Sales.
b) Inventory.
c) Trade payables.
d) Trade receivables.

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

a) Accrued expenses.
b) Customer advances.
c) Term loans.
d) Trade payables.

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

a) Gearing is low.
b) Financial risk is unfavourable.
c) Creditors support assets more than the owners.
d) 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?

a) Obtain supplier insurance.

b) Hold large stocks for all key supply inputs.
c) Maintain good personal rapport with the key input suppliers.
d) 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?

a) Earnest deposit.
b) Retention money.
c) Mobilisation advance.
d) 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?

a) The guarantor is protected if the borrower defaults.

b) The borrower is protected if the guarantor defaults.
c) Allows action if the borrower and guarantor default.
d) 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?

a) Sales growth.
b) Gross margin.
c) Accounts payable days.
d) Accounts receivable days.

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

a) Impact on local competition.

b) Impact on other businesses.
c) Cost of maintaining compliance.
d) 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?

a) Electric utility.
b) Food retailing.
c) Home construction.
d) Financial services consulting.

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

a) Corporation.
b) Manufacturer.
c) Retailer.
d) Wholesaler.

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

a) Run on deposits.
 b) Insolvency charges.
c) Loss of good employees.
d) Loss of control of the bank.

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

a) Setting measurable goals.

b) Setting business objectives.
c) Being reactive to changing demand.
d) 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?

a) 30
b) 60
c) 90
d) 120

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

a) Joint lenders’ forum.

b) Strategic debt restructuring.
c) Corporate debt restructuring.
d) 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?

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

QUESTION: What information does using the gearing ratio provide?

a) Current assets to current liabilities.

b) Net worth compared to total assets.
c) How much cash is available to cover payments.
 d) 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?

a) Manufacturing.
b) Retail.
c) Service.
d) Wholesale.

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

a) As a debit to the fixed asset account using the cost of the asset.
b) As a credit to the fixed asset account using the cost of the asset.
c) As a debit to the fixed asset account using the market value of the asset.
d) As a credit to the fixed asset account using the market value of the asset.

QUESTION: What is free cash flow?

a) Net cash available after depreciation and amortisation.

b) Net cash generated from sales without associated costs.
c) Net cash before interest, taxes, depreciation and amortisation.
d) 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?

a) Export credit.
b) Letter of credit.
c) Overdraft.
d) Term loan.

QUESTION: 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: What is drawing power?

 a) The approved fund-based working capital limit to finance a company’s inventory and
receivables.
b) The value of eligible inventory and receivables detailed in a company’s latest stock
statement that can be drawn gainst.
c) A company’s credit limit based on the value of eligible items from its latest stock statement
multiplied by the agreed margin.
d) 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) A credit to an asset account increases it.

b) A debit to a liability account decreases it.
c) A debit to a revenue account increases it.
d) 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?

a) Cost of project.
b) Economic viability.
c) Means of finance.
d) Technical viability.

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

a) To formulate appropriate business strategy.

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

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

a) Reduced regulation.
b) Lack of competition.
c) Longer and stable life cycle.
d) 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?

a) High fixed costs.

b) Few competitors.
c) High switching costs.
d) Rapid demand growth.

QUESTION: 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: 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?

a) Company A due to reduced cash flow.

b) Company B due to reduced cash flow.
c) Company A due to increased cash flow.
d) Company B due to increased cash flow.

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

a) The term of the loan.

b) The bank’s growth strategy.
c) The expected loss of the loan.
d) 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?

a) Use accumulated depreciation to estimate net cash flow.

b) Determine asset value and compare to expected revenues.
c) Review increased capital assets and evaluate serviceability.
d) 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?

a) Long-term decrease.
b) Long-term increase.
c) Short-term decrease.
d) Remains consistent.

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

a) Past operating results.

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

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

a) To calculate drawing power.

b) To provide evidence that can be used in legal proceedings.
c) To provide monthly movement in the level and quality of inventory and receivables.
d) 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?

a) Adverse.
b) Strong.
c) Qualified.
d) 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?

a) 30 days.
b) 300 days.
c) 1 year.
d) 5 years.

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

a) Building.
b) Finished goods.
c) Heavy equipment.
d) Life insurance contract.

QUESTION: 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: What is one benefit of cash accounting?

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

b) It records cash and non-cash components of a transaction.
c) It records all transactions of a particular accounting period.
d) 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?

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

a) Conduct an ABC analysis.

b) Review work in progress records.
c) Review Central Excise taxation records.
d) 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?

a) Start-up.
b) Adolescence.
c) Growth.
d) 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?

a) Tax planning.
b) Making tweaks to reported accounts to mask a declining financial performance.
c) Marginally increasing the dividend payout ratio compared to the previous financial year.
d) 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?

a) Applicant.
b) Beneficiary.
c) Government.
d) Guarantor.

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

a) Sale of an asset.
b) Peripheral rental fees.
c) Extraordinary income.
d) Cash generated from operations.

QUESTION: 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 (1221)

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

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

b) To calculate the profitability of the loan transaction for the bank.
c) To determine appropriate interest rate and fees in line with the risk assumed.
d) 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?

a) Average cost.
b) First-in, first-out. (385)
c) Last-in, first out.
d) 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?

a) Adopting a conservative business planning strategy.

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

QUESTION: What causes market overcapacity?

a) Industry growth.
 b) Weak competition.
c) Drop in a sales price.
d) Low product demand.

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

a) Balance Sheet.
b) Cash Flow Statement.
c) Income Statement.
d) Net Worth Statement.

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

a) Facility risk.
b) Financial risk
c) Industry risk
d) Management risk.

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

few large and wealthy clients?

a) Sales and profitability increases.

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

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

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

b) To immediately call the loan if the borrower’s credit profile deteriorates.
c) To prevent a change in ownership of the borrower during the term of the agreement.
d) 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?

a) The amount of cash collected after sales.

b) Its profitability relative to interest expenses.
c) Its ability to pay interest, debt payments and dividends.
d) 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?

a) Profit margin.
b) Risk premium.
c) Term of funds.
d) Cost of capital.

QUESTION: Which does the Reserve Bank of India consider to be an early warning signal
indicator?
 a) Lack of related party transactions.
b) Decrease in unbilled revenue year after year.
c) Increase in borrowings despite large cash holdings.
d) Project costs are closely aligned with benchmark costs.

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

a) Loan defaults.
b) Price of products.
c) Loan applications.
d) Availability of products.

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

a) Confirm future ability to repay.

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

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

a) Reduced regulation.
b) Lack of competition.
c) Longer and stable life cycle.
d) Shorter and frequent life cycle.

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

a) To mask poor performance.

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

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

a) Group.
b) Deal-specific. (8.1)
c) Documentation.
d) Other stakeholders.

QUESTION: Which factor would improve a business’s probability to obtain financing for an
expansion project?

a) Strong past performance.

b) Highly specialised products.
c) Lack of significant competition.
d) 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?
 a) Change the assumptions.
b) Adjust the risk driver values.
c) Accept the implications of the results.
d) Dismiss the implications of the results.

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

a) Earnest deposit.
b) Retention money.
c) Mobilisation advance.
d) Performance assurance.

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

a) The firm’s gross profit.

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

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

a) To provide early warning signals of deteriorating credit risk.

b) To identify breaches of contractually agreed upon covenants.
c) To flag an issue when financial statements are ready for review.
d) 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?

a) Limited disclosures in the annual reports.

b) Increasing dividend payouts during an economic downturn.
c) Replacing senior management with family members who have limited experience.
d) 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

a) Company A.
b) Company B.
c) Company C.
 d) Company D.

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

a) Suppliers’ invoices.
b) Other firms in the industry.
c) Information available on the internet.
d) Comparisons with similar equipment.

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

a) To formulate appropriate business strategy.

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

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

a) Inflation increases.
b) Receivables increase.
c) Borrowing decreases.
d) Inventories decrease.

QUESTION: Which is an example of a loan covenant?

a) Personal guarantee.
b) Mortgage of immovable asset.
c) Hypothecation of movable asset.
d) Restrictions on future borrowings.

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

a) Serve a recall notice.

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

QUESTION: What is one disadvantage of accrual accounting?

a) It hides any obligation to pay other parties.

b) It does not record all transactions of a particular accounting period.
c) Financial statements may not be directly comparable between businesses.
d) 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?

a) No change represents stability.

b) Gross margin does not affect risk.
c) A decrease represents profit growth.
 d) An increase represents profit growth.

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

a) Holding discussions with the borrower.

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

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

a) Training the new managers to address their skill gaps may result in excessive costs.
b) Cost of hiring for the positions vacated due to promotion of the new managers will impact
the cash flow.
c) Weak relationship of the new managers with the bank staff may result in the credit facilities
not being renewed.
d) 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?

a) Seek clarification from the borrower.

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