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 Advising Bank
The Issuing Bank
The Exporter (Seller)
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, up to the sanctioned limit.
No, because it is not a "Debt" due from the bank to the customer.
Yes, if the limit is fully drawn.
Yes, entirely.
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 performance of a contract (e.g., building a bridge).
The quality of goods exported.
The timely delivery of goods.
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?
EBLR (External Benchmark Lending Rate)
BPLR (Benchmark Prime Lending Rate)
MCLR (Marginal Cost of Funds based Lending Rate)
PLR (Prime 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:
Export of consumables.
Overdraft protection.
Purchase of capital goods/machinery on long-term credit.
Working capital finance.
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 ensure the interest rate remains fixed.
To prevent the Demand Promissory Note (DP Note) from being treated as satisfied by repayments in a running account.
To automatically renew the limit every year.
To waive the limitation period.
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:
Every 2 years
Quarterly/Half-yearly
Daily
Only when the account becomes NPA
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:
Purchasing raw materials, processing, and packing goods meant for export.
Paying customs duty in the importing country.
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:
Build bridges.
Provide temporary finance pending the disbursement of a sanctioned term loan/equity issue.
Bridge the gap between export and import.
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:
An Exporter to an Importer.
A Bank to another Bank on behalf of a subsidiary.
The RBI to the Government.
A Borrower to the Bank.
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?
Yearly rests.
Quarterly rests (or shorter but not longer).
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:
No Objection Certificate (NOC) from the RBI.
Foreclosure letter and list of documents held by the existing bank.
Consent of the District Magistrate.
Credit Information Report from the existing bank.
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:
?2 Lakh
?10 Lakh
?9 Lakh (Average)
?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 Interest added to the interest rate.
A percentage of the loan amount deducted upfront.
Penal Charges (fixed amount), not Penal Interest.
Compound Interest.
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 if the borrower has funds in their account.
Only after the dispute is settled in court.
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:
Large Corporate Borrowers.
Individual Borrowers for purposes other than business.
All SME 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
Overdue amount
Ad-hoc Limit / TOD (Temporary Overdraft)
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.