Chapter 22: Credit Control and Monitoring (CAIIB – Paper 1)
1. What is the primary purpose of credit control in banking?
A. To increase the bank's profit only
B. To maintain the bank’s branch network
C. To regulate credit flow and ensure financial stability
D. To promote foreign investments
The primary purpose of credit control is to regulate the flow of credit in the economy to maintain financial stability and avoid over-lending or under-lending.
2. Why is credit monitoring important for a bank?
A. To identify potential NPAs early and manage risk
B. To expand the bank’s physical infrastructure
C. To increase customer deposits only
D. To reduce the interest rates on all loans
Credit monitoring helps banks track borrowers’ repayment behavior, detect early signs of stress, and reduce the risk of non-performing assets (NPAs).
3. Which of the following is a key objective of credit control?
A. Maximizing foreign currency reserves only
B. Promoting only rural banking
C. Reducing customer complaints
D. Ensuring optimal utilization of funds and preventing over-indebtedness
The objective of credit control is to ensure that funds are used efficiently and borrowers are not over-indebted, thus maintaining credit discipline in the economy.
4. How does effective credit control benefit the overall economy?
A. By reducing the number of bank branches
B. By stabilizing money supply and preventing inflation
C. By increasing corporate profits only
D. By restricting international trade
Effective credit control ensures a balance between demand and supply of credit, helping stabilize the economy and control inflation or deflation.
5. The importance of credit control includes which of the following?
A. Maintaining financial discipline among borrowers
B. Encouraging unlimited lending without risk assessment
C. Ignoring interest rate fluctuations
D. Focusing only on short-term profits
Credit control is important to maintain financial discipline, ensure timely repayments, and minimize defaults, thereby protecting both banks and the economy.
6. What is the primary purpose of the Loan Review Mechanism (LRM)?
A. To increase the interest rate on loans arbitrarily
B. To systematically monitor and assess the performance of loans
C. To approve new loan applications without evaluation
D. To reduce the bank's credit limits to all sectors
The Loan Review Mechanism is designed to monitor the performance of loans, detect early warning signs of stress, and ensure timely corrective action.
7. Which of the following is a quantitative tool used in credit monitoring?
A. Borrower interviews
B. Site visits to borrower’s premises
C. Financial ratio analysis
D. Risk assessment discussions
Quantitative tools, such as financial ratio analysis, help assess the financial health of borrowers numerically and identify potential credit risks.
8. Which of the following is a qualitative tool in credit monitoring?
A. Borrower’s management evaluation
B. Debt-equity ratio calculation
C. Interest coverage ratio
D. Cash flow statement analysis
Qualitative tools focus on non-numerical aspects such as the borrower’s management quality, business outlook, and governance practices.
9. The loan review process typically involves which of the following steps?
A. Issuing new loans without appraisal
B. Only monitoring overdue accounts
C. Conducting external audits only
D. Evaluating borrower performance, analyzing financials, and recommending corrective actions
The loan review process is comprehensive: it assesses borrower performance, analyzes financial and operational metrics, and recommends corrective measures if needed.
10. Why are early warning signals important in credit monitoring?
A. They increase the bank’s profits immediately
B. They help detect potential defaults before they occur
C. They are only for regulatory reporting
D. They reduce interest rates automatically
Early warning signals, such as delays in repayment or declining financial ratios, help banks take preventive action to reduce the risk of NPAs.
11. Which report is primarily used to classify loans under the Loan Review Mechanism?
A. Annual Profit & Loss Statement
B. Customer Account Statement
C. Loan Classification / Asset Quality Report
D. Cash Flow Statement
LRM uses the loan classification or asset quality report to categorize loans into standard, sub-standard, doubtful, or loss assets, helping banks manage credit risk.
12. Which of the following is a commonly used credit rating tool in banks?
A. CAMELS rating
B. RBI liquidity ratio
C. Interest rate benchmark
D. Forex parity index
The CAMELS rating evaluates Capital adequacy, Asset quality, Management quality, Earnings, Liquidity, and Sensitivity to market risk, helping banks assess borrower and portfolio risk.
13. What is the recommended frequency for reviewing standard loans under LRM?
A. Once every 5 years
B. At least once a year
C. Only when the borrower requests
D. Only at the end of loan tenure
Standard loans should be reviewed at least annually to ensure that the borrower continues to meet financial and operational parameters set by the bank.
14. Why is periodic loan review important in credit monitoring?
A. To increase interest income automatically
B. To avoid reporting to regulators
C. To approve unrelated loans
D. To detect early signs of stress and take corrective action
Regular loan review allows banks to identify potential weaknesses, restructure loans if needed, and prevent loans from turning into NPAs.
15. Which of the following factors is NOT typically assessed in a credit monitoring report?
A. Borrower’s repayment history
B. Employee personal preferences
C. Financial ratios like debt-equity and interest coverage
D. Collateral adequacy and market conditions
Credit monitoring focuses on objective borrower and loan parameters; personal preferences of employees are irrelevant to loan performance assessment.
16. What is the primary corrective action a bank may take for a stressed loan?
A. Ignore the issue until maturity
B. Immediately declare it a loss
C. Restructure the loan or revise repayment terms
D. Increase the loan amount without assessment
When a loan shows signs of stress, banks can take corrective measures such as restructuring the loan, revising repayment schedules, or providing temporary relief to avoid default.
17. Which level of management is usually involved in the escalation of non-performing loans?
A. Only branch-level staff
B. Senior management and credit committees
C. Only external auditors
D. Marketing department staff
Non-performing loans are escalated to senior management and specialized credit committees to review, approve corrective actions, or take recovery measures.
18. How is LRM integrated with the bank’s overall risk management system?
A. By monitoring only deposits
B. By approving loans without assessment
C. By focusing only on branch operations
D. By feeding loan performance data into risk reports and alerting management of potential issues
LRM data is used to inform risk management, providing early warning signals, tracking portfolio health, and supporting strategic decisions.
19. Which of the following is an indicator that a loan may require escalation in LRM?
A. Timely repayment and healthy financial ratios
B. Consistent delays in repayment or deterioration of financial metrics
C. Borrower’s prompt communication and collateral coverage
D. Loan fully repaid ahead of schedule
Loans showing repeated delays, declining financial ratios, or other stress signals are flagged for escalation to management for review and action.
20. What is the key benefit of integrating LRM with the bank’s reporting system?
A. Timely and accurate information for decision-making and regulatory compliance
B. Reducing customer satisfaction
C. Ignoring high-risk loans
D. Avoiding credit reviews
Integration ensures management receives timely reports on loan performance, facilitating early intervention, informed decisions, and adherence to regulatory norms.
