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In this post, we will let you know about the basics of Credit and its related Questions and Answers. The following questions are directly asked many competitive examinations like JAIIB, CAIIB and other credit related exams. You can find simple and easily understandable answers for all the questions.

What are the basic principles of lending?

  • Safety
  • Liquidity and
  • Profitability

What is liquidity?

  • It is the convertibility of an asset into cash with the minimum loss of time and value.

What are the basic points to be noted while considering a credit proposal?

  • Purpose
  • Security
  • Source of Payment
  • Sanction Terms

What are the C’s to be noted by the banker while lending?

  • Character
  • Capacity
  • Capital
  • Credit Worthiness
  • Collateral
  • Conditions

What is meant by ‘MASTD’ principle in case of securities taken for an advance?

  • Marketability
  • Ascertainability
  • Stability
  • Transportability and
  • Durability

What is a Cash Credit account?

  • It is a drawing account against credit granted by the bank. It is operated like a current account in which certain drawing limit is sanctioned. Borrower can operate the account within the sanctioned limit and remit the amount as and when possible. It is allowed generally against hypothecation of stock. It can be renewed every year

What are the various stages in credit management?

  • Appraisal
  • Assessment
  • Sanction
  • Documentation
  • Disbursement
  • Follow up and
  • Recovery

Questions & Answers – Capital and Its Types

What is meant by Capital?

  • It is the money invested by the owners, promoters or the public in a firm or a company.

What is the meaning of ‘authorized’ capital?

  • Legally permitted capital that can be issued by the company.

What is called as ‘issued’ capital?

  • That part of the authorized capital for which subscription is invited by the company from the prospective shareholders.

Describe the term ‘subscribed’ capital

  • It is that portion of the capital subscribed by the shareholders including promoters.

What is the meaning of ‘paid up’ capital?

  • After subscription, shareholders are called up to pay the share price. The actual amount paid by the shareholders towards the called up capital is known as ‘paid up’ capital.

What are net owned funds?

  • Net owned funds = Paid up share capital + Free reserves + Capital reserves –(Accumulated loss + Intangible assets). It can also be called as Tangible Networth)

What is called capital reserve?

  • Reserves which are not available for distribution among shareholders are called capital reserves.

What are called general reserves?

  • Reserves that are available for the distribution among the shareholders are general reserves. They are carved out of net profit.

What is meant by Networth?
It is the sum total of paid up share capital and reserves & surplus. It is also known as owner’s equity.

What does the term contingent liability refer to?
It is the likely liability which may or may not arise on the happening of a specified event. It is shown as a
footnote in the balance sheet

Marginal Cost of Funds Based Lending Rate (MCLR) – Questions & Answers

What is MCLR?
It is a benchmark lending rate applicable from 01.04.2016 reflecting marginal cost of funds. It is different from the base rate which was based on average cost of funds.

What are the components of MCLR?

  • Marginal cost of funds
  • Negative carry on account of CRR
  • Operating costs
  • Tenor premium

What are the key elements of MCLR?

Banks should publish the MCLR at least for the following 5 maturities:

  1. (i) Overnight,
  2. (ii) One Month,
  3. (iii) Three Months,
  4. (iv) Six Months and
  5. (v) One Year.

Banks can also publish MCLR of any other longer maturity. It should be reviewed and published every month. Presently all banks rate are linked to external bench mark like Repo rate.

What are the operational challenges before MCLR?

  • Managing Asset Liability gap and Liquidity issues
  • Multiple Rate System unlike Base Rate
  • Mounting bad loans
  • Sluggish credit growth
  • Slow deposit growth

Asset – Questions & Answers

What are intangible assets?
Intangible assets are the long term resources of an entity, but have no physical existence. They derive
their value from intellectual or legal rights and from the value they add to the other assets. They have only notional value. Eg: Goodwill, Trade Mark and Patents

What are fictitious assets?
Fictitious assets are like intangible assets which do not exist in physical form. They are deferred revenue
expenditure whose benefit is derived over long period of time. Accumulated losses is an example of fictitious assets.

Define Current assets.
Current assets are those assets which can be converted into cash or sold or recycled or consumed during the operating cycle of the business – normally one year.

What are Quick assets?
Assets in high liquid form such as cash. The formula for Quick Assets = Current assets – (Inventory + Prepaid Expenses).

What is Gross working capital?
Gross working Capital is the capital invested in total current assets of the enterprise.

Explain Net working capital (NWC)
Net working capital tells about how the assets are funded. In a narrow sense, the term working capital refers to the net working capital or liquid surplus. NWC = Current assets – Current liabilities

What are non-current assets?
They are neither current assets nor fixed or fictitious assets. For example, Security Deposits, Investments, etc.

What are financial statements?
All those statements which have a financial implication could be broadly termed as financial statements. E.g: Trading & Profit & loss A/c, Balance Sheet, Fund flow statement and Cash flow statement are general financial statements.

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