FINALS

Question 1

What is the most important guiding principle of a banker?

Answer 1

Safety

Safety refers to ensuring that borrowers can repay the loan along with interest.

Question 2

What does security mean in the context of banking?

Answer 2

Any valuable given to support a loan or advance

This can include items like gold, silver, or immovable property.

Question 3

Define liquidity in banking.

Answer 3

A bank’s ability to meet the claims of its customers

It ensures that money lent is not locked up for long periods.

Question 4

What should a banker consider when lending regarding suitability?

Answer 4

The economic health of the nation

Lending should focus on purposes that are desirable for the economy.

Question 5

What is the principle of risk diversification?

Answer 5

Spreading risk by giving advances for different purposes and segments

This includes not keeping all the eggs in one basket.

Question 6

What is the primary goal of profitability in commercial banks?

Answer 6

To earn sufficient income to cover various expenses and pay dividends

This includes paying interest to depositors and meeting establishment charges.

Question 7

Why should a banker inquire about the purpose of a loan?

Answer 7

Safety and liquidity of the loan depend on its purpose

Productive loans increase the chances of recovery.

Question 8

How does the nature of business impact loan repayment capacity?

Answer 8

The repaying capacity of a borrower depends on the nature of the business

Different businesses have different risks and returns.

Question 9

What is margin in the context of loan security?

Answer 9

The market value of the security must be higher than the amount of advances proposed

It provides a cushion against fluctuations in prices and interest rates.

Question 10

What are national policies in relation to commercial banks?

Answer 10

Government policies and national interests impose social responsibilities on banks

These responsibilities guide lending practices and risk management.

Question 11

What does the ‘character’ refer to in the 5 Cs of credit?

Answer 11

The reputation of the prospective borrower

It includes qualities like integrity, trustworthiness, and responsibility.

Question 12

Define ‘capacity’ in the context of credit evaluation.

Answer 12

The management ability factor indicating the borrower’s ability to repay the debt

It also reflects the ability to utilize the loan effectively.

Question 13

What does ‘capital’ mean in the 5 Cs of credit?

Answer 13

The general financial position of the potential borrower’s firm

It indicates the ability to generate funds continuously over time.

Question 14

What is collateral in banking?

Answer 14

Assets offered as a pledge against the loan

It provides assurance of repayment in case of default.

Question 15

What do ‘conditions’ refer to in the 5 Cs of credit?

Answer 15

The economic and business conditions affecting the borrower’s ability to earn and repay the debt

This includes factors beyond the borrower’s control.

Question 16

What are the three steps involved in the credit evaluation process?

Answer 16

• Gathering credit information
• Credit analysis
• Credit decision

Each step is crucial for assessing the creditworthiness of applicants.

Question 17

What information is secured through an interview with the borrower?

Answer 17

Detailed information about the borrower’s business

This aids in the credit decision process.

Question 18

What do financial statements include?

Answer 18

• Balance sheet
• Profit and loss account

They provide insights into the borrower’s financial position and capacity.

Question 19

What is the role of credit rating agencies?

Answer 19

To gather information on the creditworthiness of applicants

They maintain credit histories on individuals and businesses.

Question 20

How can a bank utilize its own records in credit evaluation?

Answer 20

By studying previous dealings with existing customers

This provides insight into the applicant’s past performance.

Question 21

What is the purpose of obtaining reports from other banks?

Answer 21

To gather information on the applicant’s dealings with other banks

This helps in assessing the borrower’s creditworthiness.

Question 22

What are some non-formal methods of gathering credit information?

Answer 22

Understanding the personality, motive, and capabilities of borrowers

These methods can provide additional insights beyond formal documentation.