1. What is the primary focus of credit risk management in banks?
A. Increasing branch network
B. Marketing bank products aggressively
C. Minimising losses arising from borrower defaults
D. Reducing operational costs
Credit risk management is primarily concerned with minimising potential losses due to borrower defaults or credit exposure.
2. Which of the following is a key component of a Credit Risk Management Framework?
A. Employee satisfaction surveys
B. Credit risk identification, measurement, monitoring, and mitigation
C. Office infrastructure planning
D. Advertising campaigns
A robust Credit Risk Management Framework includes identification, measurement, monitoring, and mitigation of credit risk.
3. In a typical bank, who is primarily responsible for overseeing credit risk at a strategic level?
A. Board of Directors / Risk Management Committee
B. Front desk sales officer
C. Branch security staff
D. IT support team
The Board of Directors or Risk Management Committee sets the strategic direction and oversight for credit risk in the bank.
4. Which of the following is an example of credit risk mitigation?
A. Increasing interest rates without assessment
B. Reducing staff salaries
C. Marketing more loans
D. Taking collateral or guarantees against loans
Collateral, guarantees, and credit derivatives are common tools used to mitigate credit risk.
5. What is the main role of the credit risk department in a bank’s organisational structure?
A. Managing cash logistics
B. Handling customer complaints
C. Monitoring, assessing, and reporting credit exposures
D. IT infrastructure management
The credit risk department monitors and reports credit exposures, assesses risk, and ensures compliance with the bank’s risk policies.
6. Which of the following best describes “credit risk”?
A. Risk due to system failures
B. Risk of loss due to borrower failing to meet obligations
C. Risk of interest rate fluctuations
D. Risk arising from legal disputes
Credit risk is the potential loss a bank faces when a borrower or counterparty fails to meet their contractual obligations.
7. What is the purpose of segregation of duties in credit risk management?
A. To prevent conflicts of interest and ensure independent credit assessment
B. To increase marketing efficiency
C. To reduce IT costs
D. To manage branch security
Segregation of duties ensures that the same person does not approve, disburse, and monitor a credit, reducing risk of fraud and error.
8. What is the first step in managing credit risk?
A. Risk mitigation
B. Credit exposure reporting
C. Risk identification
D. Collateral valuation
Risk identification is the first step in credit risk management, where potential sources of loss are recognized.
9. Which of the following tools is commonly used for measuring credit risk?
A. Customer satisfaction survey
B. Credit scoring models and probability of default analysis
C. Branch audit checklists
D. Marketing efficiency ratios
Credit scoring models, probability of default (PD), loss given default (LGD), and exposure at default (EAD) are key tools for measuring credit risk.
10. What does ‘Credit Risk Monitoring’ primarily involve?
A. Tracking borrower performance and exposure to detect early signs of default
B. Marketing new loan products
C. Setting interest rates randomly
D. Conducting IT system audits
Monitoring involves continuous tracking of borrower’s financial performance, repayment behavior, and exposure limits to manage credit risk.
11. Which metric is used to measure potential loss in case of borrower default?
A. Net Interest Margin
B. Return on Assets
C. Capital Adequacy Ratio
D. Loss Given Default (LGD)
Loss Given Default (LGD) quantifies the potential loss a bank may face if a borrower defaults, after considering collateral recovery.
12. Exposure at Default (EAD) refers to:
A. Total number of borrowers in default
B. The outstanding amount a bank is exposed to when a borrower defaults
C. The interest income earned from performing loans
D. Capital allocated for operational risk
Exposure at Default (EAD) represents the total value a bank stands to lose if the borrower defaults at a point in time.
13. Which of the following is a key control in credit risk management?
A. Offering discounts to all borrowers
B. Marketing loans aggressively
C. Setting credit limits and periodic reviews of accounts
D. Random branch audits
Key controls include setting credit limits, regular review of exposures, collateral verification, and adherence to credit policy.
14. Early warning signals in credit risk monitoring help banks to:
A. Detect potential defaults before they occur
B. Increase branch profitability
C. Reduce IT downtime
D. Improve marketing campaigns
Early warning indicators like delayed payments, deteriorating financial ratios, and credit rating downgrades help detect potential problem accounts early.
15. At the transaction level, credit risk policies mainly focus on:
A. Macro-economic analysis only
B. Individual borrower assessment, collateral requirements, and loan structuring
C. Branch network expansion
D. Marketing new loan products
Transaction-level policies ensure that individual credit proposals are evaluated for risk, collateral adequacy, and compliance with credit standards.
16. Credit control at the portfolio level primarily involves:
A. Conducting marketing campaigns
B. Issuing more loans without assessment
C. Monitoring aggregate exposures, sectoral concentrations, and portfolio diversification
D. Increasing interest rates arbitrarily
Portfolio-level control ensures that the bank’s credit exposures are balanced across sectors, geographies, and borrower types to manage overall credit risk.
17. Which of the following is a key guideline for credit risk at the transaction level?
A. Total branch deposits
B. Marketing ROI
C. IT system uptime
D. Credit appraisal and sanctioning limits
Transaction-level guidelines include thorough credit appraisal, adherence to sanctioning limits, and proper documentation for each borrower.
18. Portfolio-level credit monitoring helps the bank in:
A. Identifying sectoral or borrower concentration risks early
B. Marketing more loans
C. Improving branch interiors
D. Increasing collateral values arbitrarily
Portfolio-level monitoring tracks overall exposure across sectors and borrowers, helping prevent excessive concentration and associated losses.
19. Which action is part of effective credit control at the portfolio level?
A. Approving loans without risk assessment
B. Ignoring NPA trends
C. Regular review of large exposures and sector limits
D. Focusing solely on new customer acquisition
Effective portfolio-level control requires continuous review of large exposures, monitoring sectoral limits, and identifying early warning signals.
20. Why is it important to have separate credit policies at transaction and portfolio levels?
A. To reduce staff training requirements
B. Because individual transaction risk and overall portfolio risk require different controls and monitoring approaches
C. To increase marketing efficiency
D. To comply only with IT audit requirements
Transaction-level policies manage individual loan risk, while portfolio-level policies manage aggregated exposure, diversification, and concentration risk.
21. What is the primary goal of active credit portfolio management?
A. Expanding branch networks
B. Reducing marketing costs
C. Optimizing risk-return balance across the entire loan portfolio
D. Increasing collateral values
Active credit portfolio management focuses on balancing risk and return, diversifying exposures, and monitoring portfolio performance to minimize potential losses.
22. Which of the following is a key component of controlling credit risk through a Loan Review Mechanism (LRM)?
A. Increasing branch deposits
B. Independent review of large and risky loans to ensure compliance with credit policies
C. Marketing new loan products
D. IT system monitoring
Loan Review Mechanism involves an independent assessment of large or high-risk loans to identify weaknesses, ensure policy compliance, and recommend corrective actions.
23. What is the primary benefit of using LRM in banks?
A. Reduces staff training requirements
B. Improves branch marketing efficiency
C. Increases interest income automatically
D. Early detection of potential problem accounts and corrective action
LRM helps banks detect early warning signals in loans, allowing corrective measures before loans become non-performing.
24. Active management of credit portfolio typically includes:
A. Random loan approvals
B. Focusing only on high-value loans
C. Rebalancing exposures, selling or restructuring loans, and risk diversification
D. Increasing interest rates for all loans
Active credit portfolio management involves optimizing risk-return, diversifying exposures, and taking actions such as loan restructuring or sale to maintain portfolio quality.
25. Which of the following is a key principle of Loan Review Mechanism (LRM)?
A. LRM is only optional for small loans
B. Independent and periodic review of large and stressed loans
C. LRM focuses on marketing performance
D. LRM ignores portfolio-level exposures
The key principle of LRM is an independent, regular assessment of large or stressed loans to ensure compliance and detect potential problem accounts.
26. Which of the following is a common technique for mitigating credit risk?
A. Taking collateral, guarantees, or insurance against loans
B. Increasing branch marketing
C. Reducing IT infrastructure
D. Offering discounts to borrowers
Credit risk mitigation includes methods like collateral, guarantees, and insurance to reduce potential losses from borrower defaults.
27. What is the main purpose of securitisation in credit risk management?
A. Increase branch network
B. Reduce staff training costs
C. Convert illiquid loans into marketable securities and transfer risk
D. Increase interest rates on all loans
Securitisation converts loans into tradable securities, allowing banks to transfer credit risk and improve liquidity.
28. Which of the following is an example of a credit derivative?
A. Fixed deposit receipt
B. Credit default swap (CDS)
C. Savings account
D. Loan repayment schedule
Credit derivatives like Credit Default Swaps (CDS) allow banks to transfer credit risk of a borrower to another party.
29. How does collateral help in credit risk mitigation?
A. Reduces branch expenses
B. Increases marketing efficiency
C. Ensures IT compliance
D. Provides security to recover losses in case of borrower default
Collateral provides the bank a claim on assets that can be liquidated to recover losses if the borrower fails to repay.
30. Which of the following best describes a Credit Default Swap (CDS)?
A. A type of savings account
B. A branch-level marketing tool
C. A derivative contract that transfers credit risk from one party to another
D. A collateral-free loan
A CDS is a financial derivative where one party transfers the credit risk of a borrower to another party, providing protection against default.
31. What is credit concentration risk?
A. Risk due to IT system failure
B. Risk arising from excessive exposure to a single borrower, sector, or geography
C. Risk of low interest income
D. Risk of regulatory fines
Credit concentration risk occurs when a bank has large exposures to a single borrower, sector, or geographic area, increasing the potential loss if that exposure fails.
32. Which of the following is an effective way to manage credit concentration risk?
A. Approving more loans to a single sector
B. Ignoring large exposures
C. Diversifying exposures across borrowers, sectors, and regions
D. Reducing branch network
Diversification reduces the risk of large losses by spreading exposures across multiple borrowers, sectors, and geographies.
33. What is the purpose of stress testing in credit risk management?
A. To assess the impact of extreme but plausible scenarios on the credit portfolio
B. To increase branch marketing efficiency
C. To monitor branch IT systems
D. To reduce staff training costs
Stress testing evaluates how the credit portfolio would perform under extreme economic, market, or borrower-specific scenarios, helping banks plan risk mitigation strategies.
34. Which of the following is a typical scenario considered in credit stress testing?
A. Office renovation cost
B. Marketing campaign success
C. IT system upgrade schedule
D. Economic slowdown, interest rate shocks, or sectoral downturns
Credit stress testing involves simulating adverse scenarios like economic recession, interest rate shocks, or sector-specific downturns to assess portfolio resilience.
35. According to Basel guidelines, what is the primary purpose of capital requirements related to credit risk?
A. To increase bank profits
B. To improve marketing efficiency
C. To ensure banks hold sufficient capital to cover potential credit losses
D. To reduce branch operating costs
Basel guidelines require banks to maintain capital buffers to absorb losses arising from credit risk and ensure financial stability.
36. Which Basel approach allows banks to calculate credit risk capital requirements based on internal risk assessments?
A. Standardized Marketing Approach
B. Internal Ratings-Based (IRB) Approach
C. Fixed Branch Network Approach
D. Operational Risk Approach
The IRB approach under Basel allows banks to use their internal credit risk ratings to calculate capital requirements more accurately.
37. Which of the following is a benefit of adhering to Basel guidelines on credit risk?
A. Reducing IT infrastructure costs
B. Increasing branch marketing
C. Increasing customer deposits automatically
D. Enhancing financial stability and prudent risk management
Basel guidelines help banks maintain adequate capital, manage credit risk prudently, and enhance overall financial system stability.
