Banking: Credit Facilities and Loan Application Process

What is the primary goal of the RM during the initial discussion with the customer?

To ensure the customer applies for credit in the prescribed format
To select a good borrower from the expected business segment/sector (correct)
To sanction credit to the customer
To determine the scope of lending to the client

What is the purpose of scrutinizing the submitted loan application?

To select a good borrower
To collect additional information from different parties (correct)
To determine the customer's creditworthiness
To sanction credit to the customer

Why is it important to select a good borrower?

To prevent bad credit (correct)
To sanction credit to the customer
To ensure loan repayment
To increase the bank's revenue

What is the main purpose of credit investigation?

To preventively measure loan repayment (C) Signup and view all the answers

Why is it better to not sanction any credit rather than sanctioning a bad credit?

To prevent bad credit (B) Signup and view all the answers

What is the benefit of taking preventive measures over curative measures?

They are more cost-effective (D) Signup and view all the answers

What is the role of the Credit Information Bureau (CIB) report in the credit process?

To provide additional information to the RM (B) Signup and view all the answers

What is the ultimate goal of the credit process?

To create good credit (B) Signup and view all the answers

What is the primary objective of the credit appraisal process in financial institutions?

To determine the technical and financial viability of a project (C) Signup and view all the answers

What is the significance of proper borrower selection in credit risk management?

It reduces the risk of default (C) Signup and view all the answers

What is the main advantage of delegating approval authority?

It allows for more efficient and timely decision-making (D) Signup and view all the answers

What is the primary function of the approval authority?

To evaluate credit proposals and make approval decisions (A) Signup and view all the answers

What is the main reason for centralizing credit approval authority?

To increase the efficiency of the decision-making process (D) Signup and view all the answers

Which section of the credit proposal should get more importance at the time of reviewing a proposal?

Non-financial section (C) Signup and view all the answers

What is the benefit of a detailed credit appraisal process?

It reduces the risk of investment by evaluating the project's feasibility (D) Signup and view all the answers

What is the purpose of credit appraisal in investment decision-making?

To evaluate the technical and financial viability of a project (C) Signup and view all the answers

What is measured by the Gross Margin ratio?

Income or profit (B) Signup and view all the answers

What is the rule of thumb for the Operating Profit Margin ratio?

Higher is better (D) Signup and view all the answers

What does the Return on Assets ratio measure?

Profitability of investments (B) Signup and view all the answers

What is the general rule of thumb for the Depreciation ratio?

Lower is better (A) Signup and view all the answers

Which ratio measures the earning power on shareholders' equity?

Return on Equity (D) Signup and view all the answers

What is the general rule of thumb for the Interest Expense ratio?

Lower is better (A) Signup and view all the answers

What is the formula for the Cushion ratio?

((GP-SG&A) / Sales) × 100 (D) Signup and view all the answers

What is the general rule of thumb for the Dividend Payout Rate ratio?

Lower is better (B) Signup and view all the answers

What is the main component of Cash Flow from Operations?

Cash transactions related to daily business activities (D) Signup and view all the answers

What is the source of cash inflow from return on loans?

Interest income from lending to others (C) Signup and view all the answers

What is the payback period for Project A?

2.4 years (B) Signup and view all the answers

What is an example of a Cash Outflow in Operating Activities?

Cash paid to suppliers for inventory (A) Signup and view all the answers

What is the main limitation of the payback period method?

It ignores the time value of money (B) Signup and view all the answers

What is the purpose of Cash Flow from Investing?

To track cash transactions related to acquisition and disposal of long-term assets (D) Signup and view all the answers

What is an example of a Cash Inflow in Investing Activities?

Cash received from sale of fixed assets (C) Signup and view all the answers

What is the decision rule if the payback period is equal to the standard period?

The decision is indifferent (B) Signup and view all the answers

What is the main objective of Cash Flow from Financing?

To track cash transactions related to financing activities, such as borrowing and repayment (B) Signup and view all the answers

What does a shorter payback period indicate?

The project is more feasible (C) Signup and view all the answers

What is an example of a Cash Outflow in Financing Activities?

Cash paid to repay the amounts borrowed (B) Signup and view all the answers

What is the cumulative net cash flow for Project A at the end of year 2?

-300 (C) Signup and view all the answers

What is the purpose of the payback period method?

To determine the feasibility of a project (A) Signup and view all the answers

What is the purpose of the Cash Flow Statement?

To provide a comprehensive picture of a company's inflows and outflows of cash (A) Signup and view all the answers

What is the payback period for Project B?

3.27 years (B) Signup and view all the answers

What is the formula used to calculate the payback period?

Years before full recovery + Unrecovered cost at start of full recovery year / Total cash flow during full recovery year (D) Signup and view all the answers