Chapter 21: Credit Delivery and Straight Through Processing (CAIIB – Paper 1)
1. What is the primary purpose of loan documentation in credit delivery?
A. To comply with RBI's SLR requirements
B. To ensure higher profitability for the bank
C. To establish enforceable rights and obligations of borrower and lender
D. To avoid audit observations
Loan documentation ensures that the terms of sanction, security creation, and borrower's obligations are legally enforceable in case of default. It forms the legal foundation for recovery.
2. Which of the following is NOT a valid feature of third-party guarantees in bank lending?
A. Guarantee must be in writing
B. Oral guarantee is enforceable if witnessed
C. Guarantor’s liability is co-extensive with that of borrower
D. Bank can proceed against guarantor without exhausting remedies against borrower
As per Indian Contract Act, a guarantee must be in writing. Oral guarantees are not legally valid. The guarantor’s liability is co-extensive with that of the borrower unless otherwise agreed.
3. A borrower defaults on a loan. The bank has a personal guarantee from a third party. What is the bank’s right?
A. Bank can directly sue the guarantor without first proceeding against borrower
B. Bank must first exhaust borrower’s assets before approaching guarantor
C. Guarantor is liable only after insolvency proceedings of borrower
D. Guarantor can refuse liability if borrower defaults intentionally
Under Section 128 of Indian Contract Act, guarantor’s liability is co-extensive and immediate. The bank can proceed directly against guarantor without first exhausting remedies against borrower.
4. In credit delivery, what does the term “Straight Through Processing (STP)” primarily refer to?
A. Manual verification of loan documents by branch staff
B. Outsourcing of documentation to third-party agencies
C. Physical movement of credit files between departments
D. End-to-end electronic processing of loan transactions without manual intervention
Straight Through Processing (STP) means digital, end-to-end processing of transactions (like loan approvals, payments) without manual intervention, ensuring speed, accuracy, and compliance.
5. Which document is considered as primary evidence of creation of charge in bank loans?
A. Sanction letter
B. Stock statement submitted by borrower
C. Duly executed loan agreement and security documents
D. Auditor’s certificate
The duly executed loan agreement and security documents (like mortgage deed, hypothecation deed, guarantee deed) are the primary evidence of bank’s charge and rights over the loan.
6. What does “charge over securities” primarily signify in banking?
A. Ownership of borrower’s property by the bank
B. Bank’s right to claim proceeds of specified assets in case of default
C. Guarantee from a third-party
D. Collateral insurance cover
A charge gives the bank a legal claim over specified assets of the borrower in case of default. It does not transfer ownership but creates a lien on the asset for recovery.
7. Which of the following statements is TRUE regarding creation of charge?
A. Charge is automatically created by granting a loan
B. Charge requires oral consent of borrower
C. Charge must be documented and registered if required under law
D. Charge can be created without specifying the security asset
For a charge to be legally enforceable, it must be properly documented. Certain types of charges (like mortgage of immovable property) also require registration under the law.
8. In case of possessory security, what is the primary role of the bank?
A. To insure the asset on behalf of borrower
B. To create a lien without taking physical possession
C. To only verify existence of asset periodically
D. To take physical possession of the asset to ensure enforceability of security
Possessory security requires the bank or its agent to physically hold the asset (like warehouse receipts or pledged goods) to ensure the bank can enforce its claim in case of default.
9. Which type of security allows the borrower to retain possession while the bank has a legal charge?
A. Non-possessory charge
B. Possessory pledge
C. Hypothecation of cash
D. Third-party guarantee
In non-possessory charge, the borrower retains physical possession of the asset, but the bank has a legal right to the proceeds or enforcement in case of default.
10. When can a bank take possession of the secured asset?
A. Only after issuing a legal notice under SARFAESI
B. Only after borrower’s written consent each time
C. When the borrower defaults or as per the terms of the security agreement
D. Only after the guarantee period expires
The bank can take possession of secured assets as per the security agreement or when the borrower defaults. For certain assets, SARFAESI provisions may apply for enforcement.
11. What is the primary purpose of disbursal procedures in bank lending?
A. To record the borrower's credit history only
B. To negotiate higher interest rates with borrowers
C. To ensure funds are released in compliance with sanction terms and security requirements
D. To increase the bank's cash in hand temporarily
Disbursal procedures ensure that the sanctioned loan amount is released only after all documentation, security creation, and conditions precedent are met, minimizing risk to the bank.
12. Which of the following is considered a key condition before disbursing a loan?
A. Completion of all documentation and execution of security documents
B. Borrower’s verbal confirmation over phone
C. Bank manager’s personal guarantee
D. Submission of only financial statements without security creation
A loan can be disbursed only after all necessary documents, legal agreements, and securities are properly executed and verified, ensuring enforceability.
13. In case of partial disbursal of a loan, which of the following practices is correct?
A. Bank can release funds without updating the loan account
B. Security documents are not required for partial disbursal
C. Interest is charged on total sanctioned amount immediately
D. Bank should ensure documentation covers the disbursed portion and update the loan account
For partial disbursal, the bank must ensure that the documentation covers the amount released and that the loan account reflects only the disbursed portion, so that interest is charged correctly and security is enforceable.
14. Which of the following is a common mode of loan disbursal in banks today?
A. Cash disbursal at branch counter only
B. Direct credit to borrower’s account through electronic transfer
C. Payment through third-party vendors without borrower consent
D. Only via cheque issued by bank manager personally
Modern disbursal methods include direct credit to the borrower’s bank account through NEFT, RTGS, or other electronic modes, ensuring speed, traceability, and compliance.
15. Which of the following is not advisable during loan disbursal?
A. Verifying that all conditions precedent are satisfied
B. Ensuring proper execution of security and documentation
C. Releasing funds before obtaining security documents
D. Recording the disbursal details in the loan account system
Disbursing funds before completing documentation or security execution exposes the bank to legal and credit risks. All conditions precedent must be satisfied before release.
16. What is the main purpose of a consortium lending arrangement?
A. To ensure that only one bank bears all the credit risk
B. To pool resources of multiple banks for large credit exposure and share risk
C. To avoid regulatory reporting requirements
D. To allow borrowers to negotiate lower interest rates individually with each bank
Consortium lending allows multiple banks to jointly finance a large borrower, spreading credit risk and ensuring coordinated monitoring of the account.
17. In a consortium loan, who typically acts as the lead bank?
A. The bank with the lowest credit exposure
B. Any new entrant bank in the consortium
C. The borrower’s preferred bank
D. The bank coordinating administration, disbursement, and monitoring of the loan
The lead bank administers the consortium loan, handles documentation, disbursal, monitoring, and coordinates communication among participant banks.
18. What is the primary difference between consortium lending and loan syndication?
A. Syndication involves only two banks, consortium more than two
B. Consortium loans are unregulated
C. In syndication, the lead bank arranges the loan and distributes portions to other banks, often without retaining full exposure
D. Syndication does not involve legal documentation
Loan syndication allows the lead bank to arrange a large loan and sell portions to other banks or investors, reducing its own exposure. Consortium lending involves shared exposure and joint monitoring.
19. Which of the following is an advantage of consortium/multiple banking arrangements for the borrower?
A. Access to larger funds than a single bank could provide
B. Borrower can avoid interest payments to some banks
C. Borrower can bypass credit appraisal processes
D. Borrower is not liable to any bank individually
Multiple banking arrangements allow borrowers to obtain a large loan amount by pooling resources of several banks, while still undergoing proper credit appraisal and remaining liable to all banks.
20. In a syndicated loan, what is the role of the lead arranger?
A. To act as guarantor for the entire loan
B. To monitor the borrower’s repayment alone
C. To approve the borrower’s business plan independently
D. To structure the loan, negotiate terms, and distribute portions to other lenders
The lead arranger structures the syndicated loan, negotiates terms with the borrower, and distributes loan portions to participant banks, often retaining a smaller portion.
21. What is the primary objective of a Straight-Through Processing (STP) system in credit delivery?
A. To manually verify every document before loan approval
B. To outsource credit appraisal to third-party agencies
C. To allow partial approval by branch managers only
D. To automate loan processing from application to disbursal without manual intervention
STP systems automate end-to-end loan processing, ensuring faster approvals, reduced errors, and consistent application of credit policies.
22. Which of the following is a major benefit of credit underwriting engines?
A. Increased requirement for manual verification
B. Higher dependence on branch-level discretion
C. Consistent application of credit policies and faster decision-making
D. Elimination of regulatory compliance checks
Credit underwriting engines ensure that credit evaluation is consistent, automated, and aligned with the bank’s risk parameters, reducing delays and human bias.
23. Which of the following tasks can be automated using a Straight-Through Loan Processing system?
A. Application intake, document verification, credit scoring, and disbursal approval
B. Only manual document verification
C. Post-disbursal loan monitoring only
D. Legal actions against defaulters only
STP systems handle multiple stages of credit processing, including application intake, KYC/document verification, automated credit scoring, approvals, and even disbursal.
24. What is a key risk if Straight-Through Processing is implemented without proper controls?
A. Increased manual errors
B. Approval of loans that do not meet credit policy or risk thresholds
C. Slower loan disbursal
D. Decreased customer satisfaction
Without proper controls and validation rules, STP systems can approve loans automatically that violate credit policy or exceed risk limits, exposing the bank to potential losses.
25. How does STP impact turnaround time in loan processing?
A. Increases delays due to additional manual verification
B. Has no significant impact on speed
C. Reduces turnaround time significantly by automating multiple stages
D. Only affects post-disbursal monitoring speed
By automating credit evaluation, document verification, and approvals, STP systems significantly reduce the time required to process and disburse loans.
