Question 1

While assessing Working Capital requirements under the Turnover Method (Nayale Committee), banks typically assess the requirement at:

15% of the Projected Annual Turnover.10% of the Projected Annual Turnover.20% of the Projected Annual Turnover.25% of the Projected Annual Turnover.

View Explanation

Under the Turnover Method (recommended for limits up to ?5 Crore), the working capital requirement is assessed at 25% of the projected turnover. Out of this, the bank provides 20% as limits, and the borrower brings in 5% as margin.

Question 2

Which ratio is the primary indicator of a firm's long-term solvency and ability to meet long-term obligations?

Current RatioInventory Turnover RatioGross Profit RatioDebt-Equity Ratio

View Explanation

The Debt-Equity Ratio (Total Debt / Shareholder's Equity) measures the leverage of a company. A lower ratio indicates higher solvency and financial stability in the long run.

Question 3

In "Consortium Lending", the bank that takes the largest share and leads the arrangement is called the:

Merchant BankLead BankParticipating BankArranger Bank

View Explanation

The Lead Bank assesses the borrower's needs, appraises the project, and coordinates with other member banks for documentation and disbursement.

Question 4

In the "5 Cs of Credit", which "C" refers to the borrower's willingness to repay the loan and their reputation/integrity?

CollateralCharacterCapacityCapital

View Explanation

Character refers to the borrower's integrity and intent to repay. Capacity refers to ability (cash flow). Capital is their own contribution. Collateral is security. Conditions refer to economic factors.

Question 5

While assessing the limit for Letter of Credit (LC), which factor is the most critical determinant?

The borrower's export sales only.The bank's profit margin.The borrower's annual consumption of raw materials to be imported/purchased and the lead time.The exchange rate volatility.

View Explanation

The LC limit is non-fund based. It depends on the estimated annual purchase of material (consumption) and the time taken from placing the order to the receipt of goods/retirement of bills (Lead Time/Usance period).

Question 6

The "Stock Statement" submitted by a borrower is a key tool for monitoring which type of facility?

Term LoanCash Credit / Working CapitalBank GuaranteeHousing Loan

View Explanation

In Cash Credit, the Drawing Power (DP) is calculated based on the value of stocks and receivables declared in the monthly Stock Statement. It ensures the loan is backed by sufficient current assets.

Question 7

The "Debt Service Coverage Ratio" (DSCR) is used to assess the borrower's ability to:

Generate sales.Service interest and principal installments of Term Loans.Repay short-term overdrafts.Manage inventory.

View Explanation

DSCR measures the cash flow available to pay current debt obligations (Interest + Principal). DSCR < 1 means negative cash flow. Banks typically look for DSCR > 1.5 or 2 for Term Loans.

Question 8

Under the Tandon Committee recommendations (Method II of lending), the Maximum Permissible Bank Finance (MPBF) for working capital is calculated as:

75% of (Current Assets - Other Current Liabilities).Total Current Assets - Total Current Liabilities.75% of (Current Assets - Current Liabilities).(75% of Current Assets) - Current Liabilities.

View Explanation

Under Method II (which is more conservative and ensures a higher current ratio of 1.33:1), the borrower must finance 25% of the *Total Current Assets* from long-term sources. Hence, MPBF = (0.75 * CA) - CL.

Question 9

The "Break-Even Point" (BEP) analysis is most critical for the appraisal of:

Bill Discounting.Overdraft limits.Project Loans / Term Loans.Letter of Credit.

View Explanation

BEP analysis determines the level of sales volume at which the project makes neither profit nor loss (covers all costs). It assesses the viability and risk of a long-term project, making it crucial for Term Loan appraisal.

Question 10

Which document is essential for assessing the technical feasibility of a project for a Term Loan?

Project Report / TEV StudyBalance SheetGST ReturnsCIBIL Report

View Explanation

A Techno-Economic Viability (TEV) study or Project Report details the technical aspects (technology, location, machinery) and economic viability, crucial for long-term funding decisions.

Question 11

In a consortium arrangement, the "Pari-Passu" charge implies that:

The Lead Bank has the first right over the assets.The charge is valid for only 1 year.The borrower cannot sell the assets.Lenders share the security rights in proportion to their outstanding debt.

View Explanation

Pari-Passu means "on equal footing". It ensures that in case of liquidation or asset sale, all member banks share the proceeds proportionally to their dues, without any priority to one over the other.

Question 12

The "Working Capital Gap" (WCG) is defined as:

Total Current Assets - Current Liabilities excluding Bank Finance.Gross Working Capital - Net Working Capital.Total Current Assets - Total Current Liabilities.Long Term Sources - Long Term Uses.

View Explanation

WCG represents the portion of current assets that needs to be financed. It is calculated by subtracting "Other Current Liabilities" (excluding bank borrowings) from Total Current Assets. The bank finances a part of this gap.

Question 13

In Project Finance, "Debt Service Reserve Account" (DSRA) is created to:

Pay dividends to shareholders.Fund the project cost overrun.Provide a cushion for repayment of loan installments in case of cash flow mismatch.Buy raw materials.

View Explanation

DSRA typically holds an amount equal to 3-6 months of debt service obligations (Interest + Principal). It acts as a safety buffer to ensure timely repayment even if project cash flows are temporarily disrupted.

Question 14

In "Fund Flow Analysis", which of the following is a "Source" of funds?

Decrease in Current Assets.Decrease in Current Liabilities.Increase in Current Assets.Net Loss from operations.

View Explanation

A decrease in assets (like selling stock or collecting debtors) releases cash, so it is a Source of funds. An increase in assets consumes cash (Use).

Question 15

The "Internal Rate of Return" (IRR) of a project is the discount rate at which:

Total Profit is maximum.Cost of Capital is minimum.Benefit-Cost Ratio is greater than 1.Net Present Value (NPV) is zero.

View Explanation

IRR is the break-even discount rate that equates the present value of cash inflows with the present value of cash outflows (NPV = 0). If IRR > Cost of Capital, the project is viable.

JAIIB Quiz

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