Chapter 17: Overview of Credit Management (CAIIB – Paper 1)
1. What is the primary role of credit in an economy?
A. To restrict economic growth
B. To maintain only government reserves
C. To facilitate production, consumption, and trade
D. To prevent private sector participation
Credit enables economic agents to invest, consume, and trade, thereby driving overall economic growth.
2. Which of the following best describes the importance of credit for banks?
A. It is the primary source of income for banks through interest
B. It is used only for compliance with RBI guidelines
C. It ensures banks do not need deposits
D. It helps banks to avoid lending risks completely
Credit operations are the main income-generating activity for banks, as they earn interest on loans and advances.
3. Which of the following was a key feature of credit in India during the pre-independence period?
A. Dominance of cooperative banks over all sectors
B. Heavy reliance on informal moneylenders
C. Centralized lending by RBI
D. Widespread digital lending mechanisms
Historically, rural and small borrowers in India relied heavily on informal moneylenders before the growth of formal banking institutions.
4. What was a major development in formal credit system in India post-independence?
A. Closure of all cooperative banks
B. Complete reliance on informal lending
C. Reduction of credit to agricultural sector
D. Expansion of scheduled commercial banks and priority sector lending
Post-independence, India developed its formal banking system, emphasizing priority sector lending to agriculture and small industries.
5. Why is credit management important for banks?
A. To minimize defaults and ensure profitability
B. To avoid offering loans completely
C. To comply with international trade only
D. To maintain only cash reserves without lending
Effective credit management ensures banks lend responsibly, control risks, and remain profitable while supporting economic growth.
6. Which principle of credit emphasizes lending only to those who are capable of repaying?
A. Principle of security
B. Principle of profitability
C. Principle of capacity
D. Principle of diversification
The Principle of Capacity ensures that credit is given to borrowers who have the ability to repay, safeguarding the bank’s interest.
7. Which principle of credit focuses on protecting the bank’s funds against loss?
A. Principle of purpose
B. Principle of security
C. Principle of profitability
D. Principle of flexibility
The Principle of Security emphasizes lending against adequate collateral to protect the bank’s funds from default risk.
8. Which principle requires banks to consider the purpose for which the credit is required?
A. Principle of purpose
B. Principle of capacity
C. Principle of diversification
D. Principle of profitability
The Principle of Purpose ensures that credit is used for its intended purpose, reducing misuse and improving repayment likelihood.
9. Which principle of credit stresses that loans should generate adequate returns to the bank?
A. Principle of security
B. Principle of capacity
C. Principle of purpose
D. Principle of profitability
The Principle of Profitability ensures that the credit provided earns a reasonable return for the bank while minimizing risk.
10. Which principle suggests that banks should spread credit across sectors to reduce risk?
A. Principle of security
B. Principle of diversification
C. Principle of capacity
D. Principle of purpose
The Principle of Diversification reduces risk by avoiding concentration of credit in a single borrower, sector, or region.
11. Which of the following is considered a primary borrower in banking?
A. Bank itself
B. Individual or business directly seeking credit
C. Government regulatory body
D. Insurance company
Primary borrowers are individuals or entities that directly approach banks for credit facilities.
12. Which type of borrower typically relies on **co-operative societies or groups** to access loans?
A. Corporate borrowers
B. Government agencies
C. Small and marginal farmers
D. Multinational companies
Small and marginal farmers often borrow through co-operative societies to access formal credit.
13. Which of the following is classified as a **corporate borrower**?
A. Companies and large business firms seeking loans
B. Individual retail customers
C. Government institutions issuing bonds
D. Non-profit organizations only
Corporate borrowers are companies or large business entities that require credit for operations, expansion, or working capital.
14. Which type of borrower is most sensitive to seasonal business cycles?
A. Corporate borrowers
B. Government institutions
C. Multinational companies
D. Traders and small businesses
Small traders and businesses often require credit to manage working capital fluctuations during seasonal cycles.
15. Which type of borrower typically borrows for personal purposes like education, housing, or consumer goods?
A. Corporate borrowers
B. Individual retail borrowers
C. Government agencies
D. Cooperative societies
Individual retail borrowers take loans for personal needs such as education, housing, or consumer durables.
16. Which of the following is considered a **short-term credit**?
A. Term loan for machinery purchase
B. Project finance for 5 years
C. Cash credit or working capital loan
D. Housing loan
Short-term credit, like cash credit or working capital loans, is typically repayable within a year and used to meet operational needs.
17. Which type of credit is generally extended for **purchasing fixed assets or machinery**?
A. Term loan
B. Cash credit
C. Overdraft facility
D. Retail loan
Term loans are long-term credit facilities provided for purchasing machinery, equipment, or other fixed assets.
18. Which type of credit allows a borrower to withdraw **funds up to a sanctioned limit as needed**?
A. Term loan
B. Cash credit
C. Bill discounting
D. Housing loan
Cash credit allows borrowers to withdraw funds from their account up to the sanctioned limit to meet short-term working capital needs.
19. Which type of credit involves the **purchase of bills of exchange or promissory notes before maturity**?
A. Term loan
B. Overdraft
C. Bill discounting
D. Retail loan
Bill discounting is a short-term credit facility where banks purchase bills or promissory notes before maturity at a discount.
20. Which type of credit is typically offered to **individuals for personal consumption purposes**?
A. Term loan
B. Retail loan
C. Cash credit
D. Bill discounting
Retail loans are credit facilities provided to individuals for personal purposes like education, housing, vehicles, or consumer durables.
21. Which of the following is a **key component of credit management** in banks?
A. Credit appraisal
B. Marketing of insurance products
C. Retail banking deposits
D. Customer relationship only
Credit appraisal is a primary component of credit management, ensuring that loans are granted responsibly and risk is assessed properly.
22. Which component of credit management involves monitoring borrowers’ repayment behavior?
A. Credit sanctioning
B. Loan marketing
C. Credit monitoring
D. Deposit collection
Credit monitoring ensures timely follow-up on repayments and identifies potential defaults early.
23. Which component ensures loans are approved after evaluating risk, purpose, and repayment capacity?
A. Credit recovery
B. Credit sanctioning
C. Credit reporting
D. Loan portfolio management
Credit sanctioning involves approving loans after thorough assessment of the borrower’s risk, purpose, and repayment capacity.
24. Which component of credit management deals with **recovering dues from non-performing assets (NPAs)**?
A. Credit monitoring
B. Credit appraisal
C. Credit sanctioning
D. Credit recovery
Credit recovery focuses on collecting overdue amounts from NPAs to minimize losses and improve the bank’s asset quality.
25. Which component helps banks to **analyze and report credit performance trends**?
A. Credit appraisal
B. Credit recovery
C. Credit reporting and portfolio management
D. Credit marketing
Credit reporting and portfolio management involve analyzing trends, tracking performance, and optimizing the loan portfolio to control risk.
26. Which of the following is the primary role of RBI guidelines in bank credit management?
A. To increase banks’ profitability only
B. To ensure prudent lending and financial stability
C. To reduce government control over banks
D. To promote only retail loans
RBI guidelines provide regulatory framework for banks to lend responsibly, control risks, and maintain financial stability.
27. What is the purpose of **priority sector lending (PSL) guidelines** issued by RBI?
A. To increase interest rates on corporate loans
B. To reduce credit to agriculture
C. To ensure banks lend to agriculture, micro, small enterprises, and weaker sections
D. To promote only export finance
PSL guidelines mandate banks to allocate a certain percentage of their lending to sectors like agriculture, MSMEs, and weaker sections for inclusive growth.
28. Which RBI guideline is aimed at **maintaining asset quality and preventing NPAs**?
A. Asset Classification and Provisioning norms
B. Cash Reserve Ratio norms
C. Statutory Liquidity Ratio norms
D. Priority Sector Lending norms
Asset classification and provisioning norms ensure banks identify NPAs early and make adequate provisions, maintaining financial stability.
29. Which RBI regulation governs **loan exposure limits to a single borrower or group**?
A. Basel III Capital Adequacy norms
B. Priority Sector Lending norms
C. Cash Reserve Ratio norms
D. Large Exposure Framework (LEF)
The Large Exposure Framework sets limits on credit exposure to a single borrower or a group to mitigate concentration risk in banks’ loan portfolios.
30. How do RBI’s **prudential norms** influence bank credit management?
A. By reducing interest rates on all loans
B. By guiding banks to assess risk, maintain provisions, and ensure prudent lending
C. By eliminating the need for credit appraisal
D. By promoting unsecured lending only
Prudential norms guide banks to maintain asset quality, adequate provisioning, and risk management practices in credit operations.
31. What is the primary objective of credit appraisal?
A. To provide loans without risk assessment
B. To meet RBI targets only
C. To evaluate the borrower’s repayment capacity and project viability
D. To increase bank deposits
Credit appraisal assesses the borrower’s ability to repay, the purpose of the loan, and the feasibility of the proposed project to minimize risk.
32. Which of the following is a key component of credit risk assessment?
A. Bank marketing strategy
B. Assessment of borrower’s creditworthiness and collateral
C. Branch staffing pattern
D. Customer service satisfaction
Credit risk assessment evaluates the borrower’s ability to repay and the adequacy of security to mitigate potential losses.
33. Which appraisal method analyzes **past financial statements** of a borrower?
A. Financial appraisal
B. Technical appraisal
C. Market appraisal
D. Legal appraisal
Financial appraisal studies past and projected financial statements to assess profitability, liquidity, and repayment capacity.
34. Which type of appraisal evaluates the **technical feasibility of a project or business activity**?
A. Financial appraisal
B. Technical appraisal
C. Market appraisal
D. Legal appraisal
Technical appraisal examines whether the project has the required technology, resources, and expertise to succeed.
35. Which appraisal focuses on **legal compliance and validity of documents** for credit sanction?
A. Financial appraisal
B. Technical appraisal
C. Market appraisal
D. Legal appraisal
Legal appraisal ensures that all agreements, securities, and collateral documents are legally valid and enforceable.
