Chapter 23: Appraisal and Assessment of Credit Facilities (JAIIB – Paper 2)
1. What is the primary objective of credit appraisal by a bank?
A. To determine the interest rate to be charged
B. To monitor the borrower after sanction
C. To assess the creditworthiness of the borrower
D. To check the repayment schedule of the bank
Credit appraisal primarily aims to assess the borrower's ability and willingness to repay the loan, ensuring minimal credit risk for the bank.
2. Which of the following is a key component of the '5 Cs of Credit' used in appraisal?
A. Collateral only
B. Character, Capacity, Capital, Collateral, Conditions
C. Cost, Credit, Collateral, Capital, Conditions
D. Cash flow, Collateral, Capital, Capacity, Currency
The '5 Cs of Credit'—Character, Capacity, Capital, Collateral, and Conditions—are fundamental in assessing a borrower’s creditworthiness.
3. During credit appraisal, analyzing financial statements helps the bank to:
A. Understand the borrower’s repayment capacity
B. Set the branch targets
C. Decide the branch opening location
D. Evaluate RBI policies
Financial statement analysis allows banks to evaluate profitability, liquidity, and solvency, helping assess the borrower’s capacity to repay the loan.
4. Which type of appraisal focuses on the borrower's ability to generate cash flow to repay the loan?
A. Security appraisal
B. Project appraisal
C. Technical appraisal
D. Cash flow appraisal
Cash flow appraisal assesses whether the borrower’s projected cash inflows are sufficient to meet the debt servicing obligations.
5. Which document is usually required for personal loan appraisal by banks?
A. Company’s Memorandum of Association
B. Identity proof, income proof, and residence proof
C. Board resolution
D. Partnership deed
For personal loans, banks require the borrower’s identity proof, income proof, and residence proof to evaluate creditworthiness.
6. Which of the following is a qualitative technique of credit appraisal?
A. Ratio analysis
B. Cash flow analysis
C. Management evaluation
D. Projected financial statements
Qualitative techniques focus on non-financial factors like management quality, reputation, and experience to assess creditworthiness.
7. Ratio analysis in credit appraisal primarily helps in assessing:
A. Financial health and performance of the borrower
B. Market trends and competitor analysis
C. Legal compliance of the borrower
D. Branch expansion potential
Ratio analysis evaluates profitability, liquidity, solvency, and efficiency ratios to determine the borrower’s financial health.
8. The technique which involves examining projected cash inflows and outflows of a borrower is called:
A. Security appraisal
B. Technical appraisal
C. Management appraisal
D. Cash flow appraisal
Cash flow appraisal analyzes projected cash inflows and outflows to ensure the borrower can meet repayment obligations.
9. Technical appraisal in credit assessment focuses on:
A. Borrower's repayment history
B. Feasibility, quality, and technology of the project
C. Collateral valuation
D. Market and industry trends
Technical appraisal evaluates the project’s design, quality of machinery, technology, and operational feasibility to reduce project risks.
10. Security appraisal involves which of the following?
A. Evaluating assets pledged or mortgaged against the loan
B. Assessing market competition
C. Studying management efficiency
D. Estimating project profitability
Security appraisal ensures that collateral provided by the borrower is adequate and realizable in case of default.
11. Which of the following is a primary method for assessing a loan applicant’s creditworthiness?
A. Market survey
B. Income-based assessment
C. Technical evaluation only
D. Competitor analysis
Income-based assessment evaluates the borrower’s repayment capacity based on current income, cash flows, and financial statements.
12. Which method of loan assessment involves analyzing past banking transactions of the borrower?
A. Technical appraisal
B. Security appraisal
C. Market appraisal
D. Credit bureau or past transaction analysis
Analyzing past transactions and credit history helps banks predict the borrower’s repayment behavior and credit reliability.
13. Debt Service Coverage Ratio (DSCR) is used in loan assessment to:
A. Measure the collateral value
B. Evaluate market potential
C. Assess the borrower’s ability to repay debt from operating income
D. Determine management quality
DSCR = Net Operating Income / Total Debt Service; it measures if the borrower generates enough cash to meet debt obligations.
14. Which assessment method focuses on evaluating assets and collateral provided by the borrower?
A. Security appraisal
B. Cash flow appraisal
C. Technical appraisal
D. Income assessment
Security appraisal evaluates the adequacy and realizable value of collateral to reduce the risk of loan default.
15. Projected cash flow assessment in loan appraisal helps the bank to:
A. Determine branch expansion plans
B. Evaluate market demand only
C. Monitor competitor performance
D. Ensure future repayment capacity of the borrower
By analyzing projected cash inflows and outflows, the bank ensures the borrower will have sufficient funds to service the loan in the future.
16. Working capital assessment primarily helps banks to:
A. Evaluate long-term investment decisions
B. Determine interest rates for term loans
C. Ensure adequacy of funds for day-to-day operations
D. Monitor project feasibility
Working capital assessment ensures that the borrower has sufficient short-term funds to meet operational needs like inventory, salaries, and creditors.
17. Which method of working capital assessment uses past sales and expense data to determine future fund requirements?
A. Cash flow method
B. Percentage of sales method
C. Current ratio method
D. Debt-equity method
The Percentage of Sales Method estimates working capital needs based on historical sales and expense patterns, projecting short-term funding requirements.
18. Which ratio is commonly used to assess short-term liquidity in working capital assessment?
A. Debt-equity ratio
B. Return on equity
C. Operating profit ratio
D. Current ratio
Current ratio = Current Assets / Current Liabilities; it measures the ability to meet short-term obligations and is key in working capital assessment.
19. Cash flow method of working capital assessment primarily focuses on:
A. Timing of cash inflows and outflows
B. Ratio analysis only
C. Collateral valuation
D. Long-term investment decisions
Cash flow method evaluates the timing of cash receipts and payments to ensure the borrower can meet short-term obligations as they arise.
20. In working capital assessment, excess working capital may indicate:
A. Risk of default
B. Inefficient utilization of funds
C. Immediate liquidity crisis
D. Technical appraisal issues
Excess working capital indicates that resources are idle or underutilized, which may reduce profitability and operational efficiency.
21. The primary objective of term loan assessment is to:
A. Evaluate daily operational cash requirements
B. Determine working capital limits
C. Assess the borrower’s capacity to repay long-term debt
D. Monitor short-term liabilities only
Term loan assessment focuses on evaluating the borrower's ability to repay long-term financing used for capital expenditures or expansion.
22. Which of the following is commonly analyzed in term loan appraisal?
A. Daily cash receipts only
B. Competitor strategies
C. RBI notifications only
D. Project viability, financial statements, and repayment schedule
Banks analyze project feasibility, borrower’s financial performance, and repayment schedule to ensure timely servicing of term loans.
23. Debt Service Coverage Ratio (DSCR) in term loan assessment is calculated as:
A. Net Operating Income / Total Debt Service
B. Current Assets / Current Liabilities
C. Total Equity / Total Debt
D. Net Profit / Sales
DSCR measures whether the borrower’s net operating income is sufficient to cover principal and interest obligations of the term loan.
24. In assessing term loans, technical appraisal focuses on:
A. Borrower’s income tax returns
B. Project design, machinery, technology, and operational feasibility
C. Collateral security only
D. Current ratio and liquidity position
Technical appraisal ensures that the project is feasible, machinery and technology are adequate, and operations can support repayment of the loan.
25. Which method helps in determining the maximum term loan amount a borrower can be sanctioned?
A. Percentage of sales method
B. Security appraisal method only
C. Repayment capacity or cash flow method
D. Current ratio method
Repayment capacity method assesses the borrower’s cash flow and net income to determine the maximum sustainable term loan limit.
