Banking Financial Awareness · Commerce Accountancy

Credit, Debt, and Finance

1,435 Questions

This topic covers essential concepts of credit, debt, and finance including bankruptcy, debt recovery, and financial acts. These questions are frequently asked in banking and IBPS exams. Test your knowledge of financial terminology and loan classifications.

Debt recovery actsBankruptcy filing proceduresFinancial classificationsMedium term financeCredit loss management

Credit, Debt, and Finance Questions

Multiple choice

A company wants to obtain loan and for that purpose, creates charge on its assets. The registration of which of the following charges with RoC is not essential?

  1. A charge on uncalled share capital

  2. A charge to secure debenture

  3. A charge on immovable property

  4. A charge of any type on movable property
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The following charges are compulsorily registrable.

A charge for the purpose of securing any issue of any debentures

A floating charge

A charge on uncalled share capital

Charge on calls made but not paid

A charge on any immovable property

A charge on ship

A charge on book debts of the company

A charge on goodwill or on patent or on license under the patent or on trademark or copyright or on the license under the copyright

A charge other than a pledge on any movable property of the company.

Multiple choice

A customer has balance in his savings bank account. The bank’s right of set-of can be used for the recovery of a loan in which of the following cases?

  1. A bank guarantee issued by the bank

  2. A term loan has been sanctioned and the instalment is still to fall due

  3. A cash credit limit is sanctioned to the party and it is running regular

  4. Customer is guarantor in a loan account of another person and that person has defaulted in repayment of the loan.
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Sometimes, a bank will only provide credit to a customer if someone else provides a guarantee. If you agree to be a guarantor for a borrower, the bank can require you to pay the borrower’s debts if they default on their repayments. If one has guaranteed a borrower’s debts and the borrower defaults on their lending, the bank can require the one to pay the borrower’s debts. 

Multiple choice

In a factoring transaction, the factor retains the right to recover the amount from seller, if payment is not recovered from the buyer of goods. This is called

  1. without recourse factoring

  2. with recourse factoring

  3. advance factoring

  4. back factoring
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Recourse factoring makes up most of the accounts receivable financing industry. Recourse is an understanding between you and your factor that your company must buy back receivables that the factor cannot collect payment on. You, the client, must cover the cost of any invoices your customers do not pay. With a non-recourse account, however, the factor accepts more of the risk of non-payment by your customers.

Multiple choice

The process of maintenance of account books, discounting of bills and collection of bills on due date by a person other than the seller is called

  1. securitization

  2. factoring

  3. forfeiting

  4. take out finance
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Factoring is a financial transaction and a type of debtor finance in which a seller sells its accounts receivable to a third party in which the whole responsibility passes to the factor. This process is called Factoring.

Multiple choice

As per fair practice code for lenders, bankers should be constructive with a view to take care of any lender-related genuine difficulty that borrower may face, for loans up to Rs. ____.

  1. 25000

  2. 1 lac

  3. 2 lac

  4. 5 lac
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

In the case of small borrowers seeking loans up to Rs. 2 lakh, the lenders should convey in writing, the main reason(s), which in the opinion of the bank after due consideration, has/have led to rejection of the loan applications within stipulated time.

Multiple choice

Which of the following fall(s) under Tier II capital?

  1. Paid up capital

  2. Free reserves

  3. General provisions and loan loss reserves

  4. Innovative perpetual debt instruments
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Tier 2 capital represents "supplementary capital" such as undisclosed reserves, revaluation reserves, general loan-loss reserves, hybrid (debt/equity) capital instruments, and subordinated debt.

Multiple choice

When NPA loans are purchased by Asset Reconstruction Companies from banks and financial institutions and then converted into marketable securities, the process is called

  1. Dematerialization

  2. Securitization

  3. Factoring

  4. Leasing
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Securitization is the process of issuing marketable securities backed by a pool of existing assets such as auto or home loans. After an asset is converted into a marketable security, it is sold. A securitization company or reconstruction company may raise funds from only the QIB (Qualified Institutional Buyers) by forming schemes for acquiring financial assets.

Multiple choice

Which of the following situations represent(s) operational risk?

  1. Failure of computer system of loan hour

  2. Deficiency in execution of loan document

  3. Non-squaring of open position by the forex dealer

  4. All of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Operational risk has been defined by the Basel Committee on Banking Supervision as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputation risk.

Multiple choice

In which of the following types of letters of credit are the negotiations of bills by the beneficiary allowed again and again within a given time limit?

  1. Revolving LC

  2. Irrevocable LC

  3. Back to back LC

  4. Red clause LC
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

A revolving letter of credit is a special letter of credit which is structured in a way so that it revolves either in value or in time, covering multiple shipments over a long period of time under single letter of credit.

Multiple choice

Banks are required to convey to the borrowers the reasons in writing for rejection of their loan applications as part of

  1. code for banks and financial institutions

  2. fair practices code for lenders

  3. chapter for the borrowers

  4. courtesy
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

All rejection of loan applications received will be conveyed in writing giving the main reasons for rejection of the loan application, within the stipulated time as a part of fair practices code. Also, under this, the bank will verify the loan applications received within a reasonable period of time and if additional details/documents are required, the same will be intimated to the borrowers within such reasonable period of time.

Multiple choice

In the context of capital of a bank,

(a) the authorized capital means the maximum limit of share capital which the bank is authorized to have under its memorandum (b) the amount of share capital which is subscribed and received is called paid up capital (c) the amount of share capital which is issued and paid up is called subscribed capital

  1. (a) to (c) all correct

  2. (a) and (b) only are correct

  3. (a) and (c) only are correct

  4. (b) and (c) only are correct
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

“Authorised capital” or “nominal capital” means such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company. 

“Paid-up share capital” or “share capital paid-up” means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called. 

Multiple choice

Which of the following is the most appropriate difference between a deferred payment guarantee and a term loan?

  1. Term loan is sanctioned for purchase of fixed assets and DPG for purchase of current assets.

  2. TL is a fund based loan and DPG is a semi-fund based loan.

  3. In TL, funds outlay is immediate but in DPG, it is contingent.

  4. In TL, appraisal is more detailed than the appraisal of DPG proposal.
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

A term loan is a loan from a bank for a specific amount that has a specified repayment schedule and a fixed or floating interest rate. Thus, it is fund based. However, DPG is a payment guarantee issued to your exporter for deferred or timely payment of the goods, and corresponding interest. ICBC undertakes to pay your exporter in the event you are unable to pay the principal and interest as scheduled in the contract. Thus, that depends on situation, i.e. contingent.

Multiple choice

A guarantee which is issued by a bank, guaranteeing the timely payment of installment to the supplier, by the applicant (borrower), for the machinery purchased on a long term credit from the supplier, is called

  1. standby guarantee

  2. performance guarantee

  3. deferred payment guarantee

  4. statutory guarantee
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Deferred Payment Guarantee is a guarantee for a payment which has been deferred or postponed. The necessity to issue deferred payment guarantee arises in case of purchase of capital goods like machinery.