1. As per RBI guidelines on "Loan System for Delivery of Bank Credit", for borrowers with aggregate fund-based working capital limits of ?150 Crore and above, what is the minimum component that must be in the form of a Working Capital Loan (WCL)?
Explanation:
To enforce credit discipline, RBI mandates that for large borrowers (= ?150 Cr), at least 60% of the working capital limit must be utilized as a WCL (Demand Loan) and the balance 40% as Cash Credit (CC).
2. In a Letter of Credit (LC) transaction, who is the "Applicant"?
The Importer (Buyer)
The Issuing Bank
The Exporter (Seller)
The Advising Bank
Explanation:
The LC is opened by the Issuing Bank at the request of the Buyer (Importer). Therefore, the Buyer is the Applicant who instructs the bank to open the credit in favor of the seller (Beneficiary).
3. Can a Garnishee Order attach the unutilized portion of a Cash Credit/Overdraft limit?
Yes, entirely.
Yes, if the limit is fully drawn.
Yes, up to the sanctioned limit.
No, because it is not a "Debt" due from the bank to the customer.
Explanation:
A Garnishee Order attaches debts owed BY the bank TO the customer (credit balance). An unutilized CC/OD limit is a facility to borrow; it represents money the customer CAN borrow, not money the customer OWNS. Hence, it cannot be attached.
4. A "Financial Guarantee" issued by a bank essentially secures:
The repayment of a financial debt or obligation.
The quality of goods exported.
The timely delivery of goods.
The performance of a contract (e.g., building a bridge).
Explanation:
Guarantees are of two types: Performance (ensuring work is done) and Financial (ensuring money is paid). A Financial Guarantee assures the beneficiary that the debt will be repaid if the borrower defaults.
5. Which lending rate system replaced the Base Rate system for new loans to ensure better monetary transmission?
MCLR (Marginal Cost of Funds based Lending Rate)
PLR (Prime Lending Rate)
BPLR (Benchmark Prime Lending Rate)
EBLR (External Benchmark Lending Rate)
Explanation:
MCLR replaced Base Rate in 2016. Note: EBLR later replaced MCLR for retail/MSME loans in 2019, but MCLR specifically replaced Base Rate as the internal benchmark.
6. A Deferred Payment Guarantee (DPG) is typically used for:
Overdraft protection.
Working capital finance.
Export of consumables.
Purchase of capital goods/machinery on long-term credit.
Explanation:
DPG secures the payment of installments for capital goods purchased on credit. If the buyer defaults on an installment, the bank pays.
7. Why do banks obtain a "Letter of Continuity" for Cash Credit accounts?
To automatically renew the limit every year.
To ensure the interest rate remains fixed.
To waive the limitation period.
To prevent the Demand Promissory Note (DP Note) from being treated as satisfied by repayments in a running account.
Explanation:
In a running account (CC/OD), credits reduce the debit balance. Without a Letter of Continuity, these credits could be legally argued to have discharged the original DP Note. This letter confirms that the security continues to cover the fluctuating balance.
8. Short Review of working capital limits is typically done:
Quarterly/Half-yearly
Only when the account becomes NPA
Daily
Every 2 years
Explanation:
While a full renewal/assessment is annual, banks conduct Short Reviews (Quarterly or Half-yearly) to monitor the account's performance and ensure compliance with terms, based on QIS statements.
9. "Packing Credit" is a type of Pre-shipment Finance given to exporters for:
Paying customs duty in the importing country.
Purchasing raw materials, processing, and packing goods meant for export.
Shipping the goods to the destination.
Discounting the export bill after shipment.
Explanation:
Packing Credit is a working capital advance provided *before* shipment to enable the exporter to procure raw materials, manufacture, and pack the goods based on a confirmed export order.
10. A "Bridge Loan" is sanctioned to:
Provide temporary finance pending the disbursement of a sanctioned term loan/equity issue.
Bridge the gap between export and import.
Build bridges.
Finance working capital permanently.
Explanation:
Bridge loans are temporary, short-term loans meant to tide over the period until the long-term funding (like IPO proceeds or Term Loan disbursement) is received.
11. A "Letter of Comfort" is typically issued by:
A Bank to another Bank on behalf of a subsidiary.
A Borrower to the Bank.
An Exporter to an Importer.
The RBI to the Government.
Explanation:
It is a document issued by a parent company (or bank) to a lender, indicating its support for a subsidiary's loan obligations, but it falls short of a legally binding financial guarantee.
12. Banks are required to charge interest on loans at what periodicity?
Quarterly rests (or shorter but not longer).
Yearly rests.
Daily rests.
Half-yearly rests.
Explanation:
As per RBI directives, interest on loans should be charged at quarterly or shorter rests (like monthly). Charging interest at longer rests (like yearly) is not permitted as it reduces the effective yield.
13. When a bank takes over a loan from another bank, it must obtain:
Foreclosure letter and list of documents held by the existing bank.
Credit Information Report from the existing bank.
Consent of the District Magistrate.
No Objection Certificate (NOC) from the RBI.
Explanation:
For a smooth takeover, the new bank needs the exact outstanding amount (Foreclosure letter) and details of security documents to ensure proper transfer of liability and collateral.
14. If the Sanctioned Limit of a CC account is ?10 Lakh and the Drawing Power (DP) calculated based on stock is ?8 Lakh, the borrower can withdraw up to:
?10 Lakh
?9 Lakh (Average)
?2 Lakh
?8 Lakh
Explanation:
Availability of funds is the lower of the Sanctioned Limit or the Drawing Power. Since DP (backed by assets) is lower, the borrower can only draw up to ?8 Lakh.
15. RBI guidelines on "Penal Charges" (effective 2024) state that penalty for non-compliance with loan terms should be levied as:
Penal Charges (fixed amount), not Penal Interest.
Compound Interest.
A percentage of the loan amount deducted upfront.
Penal Interest added to the interest rate.
Explanation:
RBI has directed that penalties should be treated as "Penal Charges" and not "Penal Interest" that gets added to the interest rate and capitalized. This ensures fairness and prevents capitalization of penal components.
16. If a beneficiary invokes a Bank Guarantee (BG) properly within the validity period, the bank must pay:
Regardless of any dispute between the borrower and the beneficiary.
Only after the dispute is settled in court.
Only if the borrower has funds in their account.
Only if the borrower consents.
Explanation:
A Bank Guarantee is an independent contract. The bank is obligated to pay upon proper invocation "without demur," irrespective of underlying disputes between the parties. The bank is dealing with documents, not goods or disputes.
17. RBI has mandated that banks cannot charge foreclosure charges/pre-payment penalties on floating rate term loans sanctioned to:
All SME Borrowers.
Individual Borrowers for purposes other than business.
Large Corporate Borrowers.
Partnership Firms.
Explanation:
To protect consumers, banks are prohibited from levying foreclosure charges on floating rate term loans sanctioned to individual borrowers for non-business purposes (e.g., Home Loans, Auto Loans).
18. If a borrower exceeds the Sanctioned Limit in a Cash Credit account temporarily, the excess amount is called:
Term Loan component
Ad-hoc Limit / TOD (Temporary Overdraft)
Overdue amount
NPA amount
Explanation:
Banks may allow borrowers to draw beyond the limit for urgent needs. This is known as a Temporary Overdraft (TOD) or Ad-hoc limit, usually charged at a higher interest rate.