Chapter 22: Principles of Lending, Different Types of Borrowers, and Types of Credit Facilities (JAIIB – Paper 2)
1. Which of the following is the most important principle of lending?
A. Profitability of the bank only
B. Borrower’s political influence
C. Safety of the loan
D. Bank’s market share growth
The safety of the loan is the foremost principle; a loan must be recoverable to protect the bank’s assets.
2. Which principle of lending states that the loan should be given only after assessing the borrower’s ability to repay?
A. Liquidity principle
B. Principle of repayment capacity
C. Principle of security
D. Principle of profitability
Assessing the borrower’s repayment capacity ensures that the loan can be recovered in due time.
3. A borrower applies for a loan with multiple purposes. Which lending principle should guide the bank?
A. Purpose principle
B. Principle of diversification
C. Principle of liquidity
D. Principle of profitability
The purpose principle states that credit should be granted for a specific purpose, which should be evaluated before lending.
4. The principle which ensures that loans are granted to trustworthy borrowers and reduces the risk of default is called:
A. Principle of profitability
B. Principle of diversification
C. Principle of liquidity
D. Principle of character
The principle of character emphasizes lending to borrowers with integrity, reputation, and reliability to ensure repayment.
5. Which principle requires the bank to provide credit considering the borrower’s business prospects, past track record, and repayment history?
A. Principle of security
B. Principle of prudence
C. Principle of purpose
D. Principle of liquidity
The principle of prudence ensures that lending decisions are cautious, considering borrower’s ability, track record, and risk factors.
6. Which of the following is typically classified as an individual borrower?
A. A person taking a personal loan for education
B. A private limited company
C. A partnership firm
D. A cooperative society
Individual borrowers are persons who take loans for personal or professional purposes such as education, housing, or personal business.
7. A borrower that is a registered company or firm taking a loan for business expansion is classified as:
A. Retail borrower
B. Individual borrower
C. Corporate borrower
D. Small scale borrower
Corporate borrowers include companies, partnership firms, or registered entities borrowing funds for business purposes.
8. Which type of borrower usually has a small loan requirement and limited credit history?
A. Large corporate borrower
B. Institutional borrower
C. Government borrower
D. Small borrower
Small borrowers usually have limited loan requirements and less established credit histories, typical for micro or retail lending.
9. Which borrower type usually takes loans for public purposes, infrastructure projects, or social welfare activities?
A. Retail borrower
B. Government or institutional borrower
C. Individual borrower
D. Corporate borrower
Government or institutional borrowers take loans for public projects, infrastructure development, or welfare schemes.
10. Microfinance loans are typically extended to which type of borrower?
A. Small and low-income borrowers
B. Corporate borrowers
C. Government agencies
D. Institutional investors
Microfinance is targeted at small, low-income borrowers, often to support livelihood, small businesses, or self-employment.
11. Which type of credit facility allows the borrower to withdraw money up to a sanctioned limit as per need?
A. Term Loan
B. Bill Discounting
C. Cash Credit / Overdraft
D. Loan Against Securities
Cash Credit and Overdraft facilities allow the borrower to withdraw funds up to a sanctioned limit based on requirements, providing flexibility.
12. Which credit facility is granted for a fixed period and repaid in installments?
A. Term Loan
B. Cash Credit
C. Overdraft
D. Bill Discounting
Term loans are provided for a fixed tenure and repaid in installments, typically for project finance, equipment purchase, or business expansion.
13. Bill discounting is a credit facility primarily used by:
A. Individual borrowers
B. Traders and businesses dealing with bills of exchange
C. Government agencies
D. Cooperative societies
Bill discounting allows businesses to receive immediate funds against their bills of exchange before maturity.
14. Which type of credit is secured against the borrower’s stocks, receivables, or goods?
A. Term Loan
B. Personal Loan
C. Overdraft
D. Working Capital Loan / Loan against Stock
Working Capital Loans or Loans against Stock are secured against inventory or receivables to support day-to-day business operations.
15. Which credit facility is generally used to finance imports or exports and is sanctioned for a short period?
A. Bill Finance / Export-Import Credit
B. Term Loan
C. Overdraft
D. Loan Against Securities
Export-Import credit or bill finance provides short-term funds to finance trade transactions, ensuring liquidity for importers and exporters.
16. Which of the following is a common fund-based working capital facility?
A. Bank guarantee
B. Letter of credit
C. Cash Credit
D. Bill Discounting
Cash Credit is a typical fund-based working capital facility where funds are made available to a borrower up to a sanctioned limit.
17. In Cash Credit accounts, interest is charged on:
A. The entire sanctioned limit
B. The amount actually utilized
C. Principal plus collateral value
D. Full credit limit minus repayments
Interest in Cash Credit accounts is charged only on the amount actually utilized, not on the entire sanctioned limit.
18. Which type of fund-based facility is generally short-term and allows withdrawal up to a pre-sanctioned limit against pledged stock or receivables?
A. Term Loan
B. Loan Against Property
C. Export Credit
D. Cash Credit / Working Capital Loan
Cash Credit or Working Capital Loans are sanctioned against inventory or receivables and allow withdrawal as per business needs.
19. Which of the following is a distinguishing feature of a fund-based working capital facility?
A. Borrower gets funds directly to meet working capital needs
B. Bank provides only guarantee to third parties
C. No interest is charged on utilized funds
D. Funds are provided for long-term asset creation only
Fund-based facilities provide direct cash to the borrower to meet day-to-day working capital requirements.
20. In which fund-based working capital facility does the borrower pledge stock or receivables as security?
A. Term Loan
B. Personal Loan
C. Cash Credit / Loan Against Stock
D. Bill Finance
Cash Credit or Loan Against Stock requires pledging inventory or receivables as security for the working capital loan.
21. Term loans are generally provided for:
A. Day-to-day working capital needs
B. Payment of bills and salaries only
C. Financing fixed assets or long-term projects
D. Short-term trade finance
Term loans are provided for acquiring fixed assets, setting up projects, or business expansion over a longer tenure.
22. Which feature distinguishes a demand loan from other term loans?
A. Fixed repayment schedule
B. Repayable on the bank’s demand at any time
C. Secured by stocks and receivables only
D. Provided only to individual borrowers
Demand loans are repayable immediately or on demand by the bank, unlike other term loans with fixed repayment schedules.
23. Which type of borrower typically avails a term loan?
A. Businesses seeking long-term investment in assets
B. Borrowers needing day-to-day cash for working capital
C. Government departments for short-term expenses
D. Individuals for microfinance purposes
Term loans are mainly taken by businesses to invest in long-term projects, machinery, or infrastructure.
24. Which of the following is true about the interest rate on term loans?
A. Always fixed for the entire tenure
B. Always floating as per bank discretion
C. Not charged if collateral is provided
D. Can be fixed or floating depending on the agreement
Term loan interest rates may be fixed or floating depending on the loan agreement between bank and borrower.
25. Which feature differentiates a term loan from working capital facilities?
A. Interest is not charged
B. Purpose is for long-term investment rather than short-term operations
C. Provided without any collateral
D. Repayment is made on demand only
Term loans finance long-term investments in assets or projects, unlike working capital facilities which are for short-term operational needs.
26. Which of the following is a typical non-fund based credit facility?
A. Cash Credit
B. Bank Guarantee
C. Term Loan
D. Working Capital Loan
Bank Guarantees are non-fund based facilities where the bank assures payment to a third party if the borrower defaults, without providing direct funds.
27. Which non-fund based facility is commonly used in import and export transactions?
A. Cash Credit
B. Term Loan
C. Letter of Credit (LC)
D. Loan Against Securities
Letters of Credit are widely used in trade finance to ensure payment to exporters once conditions of the LC are met.
28. Performance guarantees are issued by banks to:
A. Provide working capital directly
B. Finance imports only
C. Offer loans for fixed assets
D. Ensure the borrower performs contractual obligations
Performance guarantees assure that the borrower or contractor fulfills contractual obligations; the bank pays the beneficiary if obligations are not met.
29. A bid bond or tender guarantee is used for:
A. Ensuring the bidder honors the terms of the tender
B. Funding day-to-day operations
C. Financing long-term projects
D. Repaying working capital loans
Bid bonds guarantee that the bidder will accept the contract if awarded, otherwise the bank pays a penalty to the tendering authority.
30. Which of the following is a key difference between fund-based and non-fund based facilities?
A. Fund-based facilities do not require repayment
B. Non-fund based facilities do not involve direct disbursement of funds
C. Fund-based facilities are for guarantees only
D. Non-fund based facilities are long-term loans only
Non-fund based facilities involve bank guarantees or letters of credit where the bank provides assurance rather than disbursing funds directly.
31. A personal loan provided to an individual for meeting personal expenses is classified as:
A. Fund-based other credit facility
B. Non-fund based facility
C. Working capital loan
D. Trade finance facility
Personal loans are fund-based facilities provided to individuals for meeting personal or household expenses.
32. Which facility is granted against mortgaged property as security?
A. Cash Credit
B. Term Loan
C. Loan Against Property
D. Bill Discounting
Loans Against Property are secured loans where the borrower pledges immovable property as collateral for obtaining funds.
33. Which type of loan is typically used by individuals to purchase consumer durables or electronics?
A. Term Loan
B. Cash Credit
C. Bill Finance
D. Consumer Credit / Personal Loan
Consumer credit or personal loans are designed for individuals to purchase durables, electronics, or other personal items.
34. Which facility provides credit based on the borrower’s salary or income without requiring collateral?
A. Loan Against Property
B. Salary-backed personal loan
C. Cash Credit
D. Term Loan
Salary-backed personal loans are unsecured loans granted to salaried individuals based on their income and repayment capacity.
35. Which of the following loans is commonly categorized as a special credit facility for women or priority sectors?
A. Microfinance or SHG-linked loan
B. Cash Credit
C. Term Loan for large corporations
D. Bill Discounting
Microfinance loans or loans linked to Self Help Groups (SHGs) are considered special credit facilities aimed at women or priority sector borrowers.
