Chapter 24: Operational Aspects of Loan Accounts (JAIIB – Paper 2)
1. Which of the following is the main purpose of a bank fixing a benchmark interest rate for loans?
A. To determine the penalty for default
B. To set service charges for accounts
C. To guide pricing of different loan products
D. To calculate employees’ bonuses
Banks fix benchmark rates like MCLR or Base Rate to guide the pricing of their loan products, ensuring uniformity and transparency.
2. A borrower has taken a floating rate loan linked to the bank's MCLR. If the MCLR increases by 0.25%, what happens to the interest payable?
A. It remains the same
B. It increases proportionally
C. It decreases automatically
D. It becomes zero
In a floating rate loan linked to MCLR, any increase in the benchmark rate directly increases the interest payable by the borrower.
3. In credit management, the term ‘credit appraisal’ refers to:
A. Assessing the borrower's repayment capacity
B. Monitoring interest rate fluctuations
C. Determining branch profitability
D. Approving bank staff leave requests
Credit appraisal is the process of evaluating a borrower's creditworthiness and repayment capacity before sanctioning a loan.
4. Which of the following is a key objective of credit risk management in banks?
A. Maximizing staff incentives
B. Increasing customer deposits only
C. Expanding branch network
D. Minimizing default and NPA risk
The main objective of credit risk management is to ensure the bank minimizes the risk of defaults and maintains asset quality.
5. What does the term ‘loan-to-value ratio (LTV)’ indicate in credit management?
A. The interest rate charged on loans
B. The proportion of loan sanctioned to the value of collateral
C. The tenure of the loan in months
D. The processing fees charged by the bank
LTV ratio represents the ratio of the loan amount sanctioned to the appraised value of the collateral/security provided.
6. A bank charges different interest rates for different borrowers based on risk. This practice is called:
A. Flat rate lending
B. Fixed rate lending
C. Risk-based pricing
D. Repo rate lending
Risk-based pricing allows banks to charge interest rates according to the borrower's creditworthiness and perceived risk.
7. Which of the following is considered a preventive measure in credit management?
A. Proper credit appraisal before sanction
B. Initiating recovery after default
C. Writing off bad loans
D. Reporting to credit bureaus after default
Proper credit appraisal is a preventive step that helps avoid future loan defaults.
8. Which of the following is the primary objective of credit monitoring?
A. To increase the bank’s profit on loans
B. To collect service charges from borrowers
C. To extend more loans to existing borrowers
D. To ensure timely repayment and detect early signs of default
Credit monitoring helps the bank track loan performance, ensure timely repayments, and identify potential defaults early.
9. Which report is commonly used by banks to monitor borrower credit performance?
A. Profit & Loss Account of the branch
B. Loan Review / Credit Monitoring Report
C. Employee appraisal report
D. RBI monetary policy statement
Loan review or credit monitoring reports are prepared periodically to evaluate borrowers’ repayment behavior and asset quality.
10. In loan operations, the term ‘sanction’ refers to:
A. Recovering overdue amounts
B. Depositing funds in borrower account
C. Official approval to grant a loan
D. Monitoring borrower’s credit
Sanctioning a loan means the bank officially approves the loan after due appraisal and documentation.
11. What does the term ‘disbursement’ in loan operations mean?
A. Actual release of loan amount to the borrower
B. Charging interest on loan
C. Recovery of overdue loan
D. Appraisal of borrower creditworthiness
Disbursement is the process where the sanctioned loan amount is actually paid out to the borrower.
12. Which of the following is a key indicator for credit monitoring?
A. Number of branch employees
B. Overdue amount / Non-performing Assets (NPAs)
C. Number of new accounts opened
D. Daily cash deposit in the branch
NPAs and overdue amounts are critical indicators used to monitor borrower performance and manage credit risk.
13. In loan operations, the term ‘repayment schedule’ refers to:
A. Interest rate applicable to the loan
B. Total amount sanctioned to the borrower
C. Type of collateral provided
D. Pre-determined plan of installments for loan repayment
The repayment schedule defines when and how much the borrower should pay in installments to repay the loan.
14. What is the meaning of ‘prepayment’ in loan accounts?
A. Repaying part or full loan before scheduled dates
B. Charging penalty on overdue loans
C. Delaying installment payments
D. Appraising borrower creditworthiness
Prepayment is when a borrower repays the loan partially or fully before the scheduled dates, which may attract prepayment charges.
15. In credit operations, ‘delinquency’ refers to:
A. Total amount sanctioned to the borrower
B. Regular repayment by the borrower
C. Delay or failure to make scheduled payments
D. Approval of new loans
Delinquency is the term used when a borrower delays or fails to make loan repayments as per schedule.
16. Which of the following is the first step in the operational process of handling a loan?
A. Disbursement of loan amount
B. Receiving and verifying loan application
C. Preparing the repayment schedule
D. Monitoring loan performance
The first step in loan operations is receiving the loan application and verifying the documents before credit appraisal.
17. In loan accounting, which of the following represents interest accrued but not yet received?
A. Loan principal
B. Non-performing asset
C. Accrued interest
D. Loan provisioning
Accrued interest refers to the interest earned on a loan that has not yet been received by the bank.
18. Which accounting entry is passed when a loan is disbursed to the borrower?
A. Debit Loan Account, Credit Cash/Bank
B. Debit Cash, Credit Loan Account
C. Debit Interest Suspense, Credit Loan Account
D. Debit Cash, Credit Interest Income
When a loan is disbursed, the bank debits the borrower’s loan account (asset) and credits cash/bank (asset reduction).
19. Which of the following is recorded in the Interest Suspense Account?
A. Principal amount of performing loans
B. Accrued interest on non-performing assets (NPA)
C. Loan processing fees
D. Recovery from overdue loans
Interest suspense account holds accrued interest on NPAs, which is not recognized as income until recovery.
20. What does ‘loan provisioning’ in bank accounts signify?
A. The total interest earned on loans
B. Cash reserved for disbursement
C. Amount set aside to cover potential loan losses
D. Loan processing charges collected
Loan provisioning is a regulatory requirement to set aside funds to cover potential losses from NPAs or defaulted loans.
21. When a borrower repays part of the loan principal, which accounting entry is passed?
A. Debit Interest Income, Credit Cash
B. Debit Loan Account, Credit Interest Suspense
C. Debit Cash, Credit Interest Income
D. Debit Cash/Bank, Credit Loan Account
When a borrower repays principal, cash/bank is debited (asset increase) and loan account is credited (asset reduction).
22. Which of the following is a common operational term in loan handling?
A. Sanction, disbursement, monitoring
B. Marketing, sales, investment
C. HR, payroll, appraisal
D. Audit, inspection, compliance
The main operational terms in loan handling are sanction, disbursement, monitoring, and recovery.
23. In accounting of loan products, which account is credited for processing fees collected from the borrower?
A. Loan Account
B. Interest Suspense Account
C. Processing Fee Income / Other Income
D. Provision for Loan Losses
Processing fees charged to borrowers are credited to the bank’s income account under processing fee or other income.
24. What is the effect of loan rescheduling on the borrower’s account?
A. Immediate closure of loan account
B. Extension or change of repayment terms
C. Increase in interest rate by RBI mandate
D. Transfer to another branch automatically
Loan rescheduling modifies the repayment terms to help borrowers manage repayment while protecting the bank from default.
25. Which of the following is considered a best practice in accounting for loans?
A. Ignoring overdue interest until loan closure
B. Debiting interest income directly to cash without accrual
C. Mixing principal and interest in one account
D. Maintaining separate accounts for principal, interest, and NPAs
Best practice is to maintain separate accounts for principal, interest, and NPAs for clear tracking and regulatory compliance.
26. What is the primary purpose of the operating manual for loans and advances in a bank?
A. To increase the bank’s profit
B. To provide a marketing strategy for loans
C. To guide staff on standard procedures and compliance
D. To monitor branch cash transactions
The operating manual provides detailed instructions and procedures for staff to handle loans consistently and comply with regulatory requirements.
27. Which of the following is typically included in sample operating instructions for loan products?
A. Employee salary structure
B. Step-by-step process for loan sanction, disbursement, and recovery
C. Stock investment guidelines
D. Branch opening procedures
Sample operating instructions provide a clear, stepwise approach for loan processing including sanction, documentation, disbursement, and monitoring.
28. Which of the following is an advantage of following standardized operating instructions for loans?
A. Reduces customer base
B. Eliminates the need for loan documentation
C. Increases branch manual work
D. Ensures consistency, reduces errors, and improves compliance
Standard operating instructions help maintain uniform practices, reduce errors, and ensure regulatory compliance in loan operations.
29. Who is primarily responsible for adhering to the operating instructions while handling loans?
A. RBI officials
B. Bank staff and loan processing officers
C. Borrowers
D. External auditors only
Bank staff and loan officers must strictly follow the operating manual to ensure correct processing, documentation, and compliance.
30. Which of the following would be considered a sample operating instruction for loan disbursement?
A. Collect monthly deposit slips from customers
B. Prepare staff duty roster
C. Verify loan documentation, ensure account setup, and release funds
D. Conduct branch audit
Sample operating instructions guide the staff on verifying documentation, setting up accounts, and disbursing loan funds properly.
31. Why is it important to have written operating instructions for different loan products?
A. To increase loan interest rates arbitrarily
B. To ensure standardization, compliance, and clarity for staff
C. To reduce the number of borrowers
D. To delegate all responsibility to branch managers
Written instructions ensure all staff follow standardized procedures, reducing errors and maintaining regulatory compliance.
32. Which of the following is an example of a basic operating instruction for handling loan accounts?
A. Approving branch staff leave
B. Filing annual branch reports
C. Conducting marketing campaigns
D. Recording repayment receipts accurately and updating loan account
Basic operating instructions include maintaining accurate records of repayments and updating borrower loan accounts timely.
33. What is the role of sample operating instructions provided by the bank headquarters?
A. To monitor RBI inspections
B. To calculate branch profitability
C. To serve as a template for branch-level loan processing procedures
D. To approve staff promotions
Sample operating instructions from headquarters act as a guideline/template to ensure uniform loan processing across branches.
34. In case of a discrepancy during loan processing, operating instructions typically advise staff to:
A. Ignore and continue
B. Report to higher authority for verification and rectification
C. Close the borrower’s account immediately
D. Collect additional interest charges
Staff are advised to report discrepancies to higher authorities to ensure proper verification and corrective action, maintaining compliance.
35. Which of the following ensures that operational instructions are followed correctly for loan products?
A. Customer feedback only
B. Marketing team supervision
C. Internal audit and branch supervision
D. RBI inspections only
Adherence to operating instructions is ensured through internal audits and supervision at the branch level, maintaining operational standards.
36. Which of the following is a common operational aspect of housing loans?
A. No documentation required
B. Verification of property title, sanction, and disbursement in stages
C. Only cash payment accepted
D. No repayment schedule
Housing loans require property verification, proper sanctioning, and staged disbursement according to construction or purchase milestones.
37. Personal loans typically require which of the following operational steps?
A. Mortgage of immovable property
B. Only cheque repayment
C. KYC verification, loan sanction, and repayment schedule setup
D. No documentation required
Personal loans require KYC compliance, proper sanctioning, and creation of a repayment schedule for the borrower.
38. Which of the following is true about guidelines for recovery agents engaged by banks?
A. They can recover loans using any method they choose
B. Banks have no responsibility for their actions
C. They can operate without any contract
D. Banks must ensure recovery agents act ethically and follow prescribed guidelines
Banks are responsible for ensuring that recovery agents operate ethically and follow RBI and internal guidelines while recovering dues.
39. What is the purpose of the Fair Practices Code (FPC) for lenders?
A. To increase interest rates arbitrarily
B. To protect borrowers and ensure transparency and ethical lending
C. To reduce operational workload
D. To delegate recovery completely to agents
The Fair Practices Code ensures ethical treatment of borrowers, transparency in loan terms, and responsible recovery practices.
40. Which of the following is included under the operational aspects of vehicle loans?
A. No repayment schedule
B. Cash-only disbursement
C. Verification of vehicle documents, sanction, and staged disbursement if applicable
D. No documentation required
Vehicle loans require verification of vehicle ownership and documents, proper sanctioning, and sometimes staged disbursement for financing dealers.
41. Which of the following is a key instruction banks provide to recovery agents?
A. Ignore the borrower complaints
B. Charge extra fees beyond the approved limits
C. Use force or threats to recover loans
D. Follow RBI guidelines and act courteously and ethically
Banks instruct recovery agents to follow regulatory guidelines and behave ethically, ensuring fair treatment of borrowers.
42. According to the Fair Practices Code, a lender must disclose to the borrower:
A. Internal branch audit reports
B. Terms and conditions, interest rates, and fees applicable on the loan
C. Recovery agent details only after default
D. Employee salaries and incentives
FPC requires lenders to disclose all relevant information, including interest rates, charges, and repayment terms, before sanctioning loans.
43. Which of the following is a common operational aspect of education loans?
A. Only cash repayment
B. No documentation required
C. Verification of admission documents, co-obligor or collateral, and flexible repayment post-study
D. Immediate foreclosure required
Education loans involve verifying admission proof, ensuring co-obligor or collateral is in place, and structuring repayment after completion of the course.
44. Under the Fair Practices Code, what should a bank do if a borrower defaults?
A. Publish borrower details in the media immediately
B. Apply penalties without notice
C. Force recovery through unauthorized agents
D. Notify the borrower, explore alternative repayment options, and follow ethical recovery practices
FPC ensures banks treat defaulting borrowers fairly by notifying them, discussing options, and recovering dues ethically.
45. Which of the following is true regarding engagement of recovery agents by banks?
A. Banks can delegate loan sanctioning to them
B. Banks have no responsibility for their conduct
C. Banks must ensure agents act within RBI and internal guidelines
D. Agents can recover loans using any method without bank oversight
Banks are responsible for the conduct of recovery agents and must ensure adherence to ethical, regulatory, and internal guidelines.
