Question (1) which financial trigger can be set up internally as an early signal of a borrower’s probability of default?

a) Change in profit projections.

b) Change in ownership structure.
c) Unexpected change in dividend policy.
d) Emergence of new competitive entrants in the market.

Question (2) What is the difference between operating cash flow and earnings before interest, taxes, depreciation
and amortisation (EBITDA)?

a) EBITDA considers interest expense.

b) EBITDA considers capital expenditures.
c) EBITDA considers changes in cash flow.
d) EBITDA adds back depreciation and amortisation.

Question (3) What external factors outside of a business’s control can affect its liquidity levels?

a) Credit and lending policy.

b) Facility and loan structure.
c) Industry and business risk.
d) Management and key persons’ risk.

Question (4) Which industry factor increases the need for a company to compete for a high volume of sales to
remain profitable?

a) High fixed costs.

b) Few competitors.
c) High switching costs.
d) Rapid demand growth.

Question (5) Which action might a company take when it is in the cash concern stage of financial distress?

a) Selling vital assets.

b) Cancelling bonuses.
c) Laying off key employees.
d) Eliminating management positions.

Question (6) What does a current ratio of 1.33 indicate about a company’s current assets?

a) Current assets are less than net working capital.

b) Current assets are able to cover double the current liabilities.
c) Very few current assets have been funded from current liabilities.
d) A portion of current assets has been funded from long-term sources.

Question (7) In which condition can a local business perform well while the local economy is in recession?

a) Local competition is weak.

b) The business has a high profit margin.
c) The business sells high quality and durable products.
d) The local economy of business’s customers is thriving.

Question (8) Which is likely to be false of a company with a low gearing ratio?.

a) It has a high debt load.

b) It has high interest costs.
c) It has high repayment ability.
d) It has a high repayment obligation.
Question (9) What information in a credit agency report can help a bank assess a company’s management integrity?

a) Opinion about the company management.

b) Information about the financial performance.
c) How freely the management shares information.
d) Details on covenant compliance for the bank loans.

Question (10) What is the starting point in the process of projecting a business’s financial performance?

a) Evaluate economic factors.

b) Complete sensitivity analysis.
c) Project future values for the risk drivers.
d) Review historic levels of the risk drivers.

Question (11) What does the credit risk premium attributed to in the credit pricing process?

a) The bank’s risk appetite.

b) Expected return on equity.
c) The bank’s growth strategy.
d) Losses incurred due to default.

Question (12) Based on these information: current secured INR 35,000 and current unsecured INR 20,000; non-
current secured INR 75,000 and non-current unsecured INR 60,000, what is this company’s total amount of
subordinated debt outstanding?

a) INR 55,000
b) INR 80,000
c) INR 110,000
d) INR 135,000

Question (13) What would describe a non-fund-based facility?

a) A facility that is lower risk than a fund-based facility.

b) A credit facility that incurs a monetary obligation when draw down occurs.
c) A facility that is similar to a fund-based facility in terms of how it is recorded in a bank’s books.
d) A facility that may result in a funded obligation if the customer fails to settle any payments due.

Question (14) How are surrounding businesses affected when an environment is dominated by two large employers?

a) Neutral on sales and profitability.

b) Loss of one of the employers creates high overall risk.
c) Increased employment reduces the risk for the industry.
d) The impact is significant only if a catastrophic market downturn occurs.

Question (15) What type of capital investment is intangible and financial in nature?

a) Applying for patents.

b) Developing new products.
c) Listing securities on a stock exchange.
d) Replacing existing plant and equipment.

Question (16) For how many days can an account remain continuously in excess of the sanctioned limit before it is
considered out of order?

a) 30
 b) 60
c) 90
d) 120

Question (17) Which party enforces a bank guarantee in the event of default?

a) Applicant.
b) Beneficiary.
c) Government.
d) Guarantor.

Question (18) Which factor will most likely reduce loss given default?

a) Amount of the loan.

b) Duration of the loan.
c) Industry of the borrower.
d) Seniority of the loan.

Question (19) During which implementation phase of deal structure is counsel instructed on documentation and
covenant definition issues?

a) Design.
b) Drawdown.
c) Monitoring.
d) Negotiation.

Question (20) Which is an example of an insurance covenant in a credit agreement?

a) Prohibition on providing other creditors security over any assets.

b) Restriction on incurring new debt above a pre-determined amount.
c) Requirement to pay premiums on schedule to avoid a lapse of coverage.
d) Obligation to submit security valuations performed by an independent appraiser.

Question (21) At the beginning of the year, ZXV Inc. acquires computer equipment at a cost of INR 500,000. Using a
40% declining balance depreciation rate each year, what is the depreciation charge for this equipment in the second
year?

a) INR 120,000
b) INR 180,000
c) INR 200,000
d) INR 300,000

Question (22) Which result of an increase in management risk will most negatively affect a company’s financial
performance?

a) Managers’ increased focus on their own compensation packages.

b) Managers fail to take timely or correct decisions that affect sales or costs.
c) Managers fail to take full advantage of favourable developments in the external environment.
d) Managers are less transparent in their dealings with external stakeholders, such as banks.

Question (23) What is the number of inventory days for a company with sales of INR 500,000, inventory of INR
60,000, cost of goods sold of INR 300,000 and trade receivables of INR 125,000?

a) 73
b) 152
 c) 175
d) 219

Question (24) What is the primary reason for assessing a business’s financial performance before extending credit?

a) To determine what a company’s key ratios are.

b) To determine how a business generates cash flow.
c) To determine how a company spends its free cash flow.
d) To determine why a business has achieved certain results.

Question (25) For which type of banking products does the Reserve Bank of India regulate interest rates?

a) Savings accounts.
b) Chequing accounts held by residents.
c) Personal loans of more than INR 200,000.
d) Commercial loans of more than INR 200,000.

Question (26) What is the most effective measure of a business’s operating efficiency?

a) Increase in sales.
b) Increase in profits.
c) Absolute level of operating expenses.
d) Trends in operating expenses as a percentage of sales.

Question (27) A company that records the market value of its equipment on its balance sheet has not followed which
accounting principle?

a) Cost.
b) Matching.
c) Conservatism.
d) Going concern.

Question (28) What test is used to determine whether a borrower will generate enough cash flow from day-to-day
operations to cover its debt obligations?

a) Bias to fail test.

b) Liquidity test.
c) Secondary source test.
d) Solvency test.

Question (29) Special Mention Accounts were introduced as a new asset category between which two categories?

a) Doubtful and Loss.

b) Standard and Doubtful.
c) Sub-standard and Doubtful.
d) Standard and Sub-standard.

Question (30) Which type of structural mitigation is used to ensure that all intercompany transactions occur at arm’s
length?

a) Collateral.
b) Guarantee.
c) Monitoring.
d) Restrictive covenant.
Question (31) What type of credit rating will most likely cause a borrower’s credit score to be adjusted downward
because of an expected downturn in the borrower’s industry?

a) Fail grade rating.

b) Single risk rating.
c) Facility risk rating.
d) External international rating.

Question (32) Which describes the absolute priority rule with respect to payments made to creditors at default?

a) Subordinated debt is paid before insolvency-related costs.

b) Available funds are paid first to the lowest ranked class until the borrower’s obligations are fully satisfied.
c) Available funds are paid first to the highest ranked class until the borrower’s obligations are fully satisfied.
d) Distributions to each ranked class are paid out proportionately based on its percentage in the company's
capital structure.

Question (33) What is the profit before tax and financial costs for a company with sales of INR 5,000,000, cost of
goods sold of INR 2,600,000, operating expenses of INR 1,400,000, interest expense of INR 60,000 and tax expenses
of INR 125,000?

a) INR 815,000
b) INR 940,000
c) INR 1,000,000
d) INR 1,185,000

Question (34) What is meant by the term “excess borrowings” under the Tandon Committee approach to lending?

a) The amount borrowed exceeds current liabilities.

b) The liquidity level exceeds the minimum required.
c) The maximum permissible bank borrowings exceed current assets.
d) The minimum required net working capital exceeds the actual amount.

Question (35) What type of credit rating is most appropriate to evaluate the credit risk of a group of borrowers that
has never borrowed money before?

a) Corporate family rating.

b) Issue rating.
c) Issuer rating.
d) Short-term rating.

Question (36) Which item is evaluated more substantively when determining the amount of financing available to a
company under the assessed bank finance method as compared to the maximum permissible bank finance method?

a) Assets.
b) Current ratio.
c) Liquidity.
d) Trade payables.

Question (37) How should a customer’s account activity be monitored to ensure end-use of funds?

a) Review a percentage of all the transactions.

b) Scrutinise all the transactions regardless of value.
c) Review the transactions above a threshold amount.
d) Browse through the account and investigate any unusual transaction.
Question (38) Companies operating in which industry are most likely to have a high investment in fixed infrastructure
assets, with little inventory?

a) Electric utility.
b) Food retailing.
c) Home construction.
d) Financial services consulting.

Question (39) Which factor will decrease a buyer’s market risk in the long term in conditions where the supplier has
high bargaining power?

a) Buyer’s ability to pay.

b) Increase in supplier’s market share.
c) Availability of substitute products in the market.
d) High demand skilled workers are employed by the supplier.

Question (40) What information should be reviewed in the periodic progress reports on implementation of a project
to assess likelihood of meeting the loan repayment obligations?

a) The project implementation is on schedule.

b) Funding is available to cover any cost overruns.
c) There are orders for the project outputs once completed.
d) Project reports have been approved by the lender’s engineer

Question (41) Why is management integrity the most critical factor when assessing the impact of management risk
on a company’s credit risk?

a) Management lacking integrity may prioritise payments to other external stakeholders.

b) A lack of integrity can result in a company using cash flows for purposes other than interest or loan
payments.
c) A lack of integrity can result in a company’s underperformance and subsequent inability to meet its payment
obligations.
d) A positive assessment of management integrity is necessary for a lender to be confident in the reliability of
the information provided by the company.

Question (42) What governing body for the Insolvency and Bankruptcy Code would set up accreditation for
insolvency professionals and information utilities?

a) Adjudicating Authority.
b) Debt Recovery Tribunal.
c) Insolvency Professional Agency.
d) Insolvency and Bankruptcy Board of India.

Question (43) Which proposition is least likely to be considered for a term loan for its financing requirements?

a) Expansion of a fleet of vehicles.

b) Capital expenditure for a power plant.
c) An instalment financing construction project.
d) Daily working capital requirements for a small business.

Question (44) What is the primary reason for reviewing external information when assessing a company’s credit
quality?
 a) To evaluate any adverse press coverage of the company.
b) To assess the company’s vulnerability to natural disasters.
c) To review any gradual economic changes that may affect the company’s industry.
d) To evaluate what developments may create opportunities for the company or adversely affect its
performance.

Question (45) Which factor will most likely affect the length of time it takes to convert inventory to sales?

a) New products.
b) Increased financing.
c) Management decisions.
d) Accounts payable growth.

Question (46) What is the difference between a partnership firm and a Limited Liability Partnership (LLP)?

a) If a partner dies a partnership firm continues to exist and an LLP dissolves.

b) An LLP is a separate legal entity from its members and a partnership is not a separate legal entity.
c) An LLP is governed by the Indian Partnership Act and a partnership firm is governed by the Companies Act.
d) The income from a partnership firm stays within the firm and LLP income is personal income for the
partners.

Question (47) How many days is the short-term financing gap for a company with 47 trade receivables days, 68
inventory days and 63 trade payables days?

a) 42
b) 52
c) 84
d) 178

Question (48) What is the first step for a management team in order to achieve results through the efforts of others?

a) Set the strategic direction.

b) Source the necessary resources.
c) Incentivise the organisation in an effective manner.
d) Manage the critical business operations on a daily and long-term basis.

Question (49) What type of non-fund-based lending facility would a buyer of goods and services use to guarantee a
one-time payment?

a) Export credit.
b) Letter of credit.
c) Overdraft.
d) Term loan.

Question (50) Which costs related to environmental hazards can have a significant negative impact on a company’s
credit risk?

a) Cost of insurance premiums.

b) Cost of hazardous waste clean-up.
c) Cost of compliance with environmental laws.
d) Cost of professional assessment of facilities for safety.

Question (51) What general inference can be made about a company that has positive cash flow from operations,
and that is borrowing and investing?
 a) It is starting up.
b) It is closing down.
c) It is restructuring.
d) It is acquiring other companies.

Question (52) If net sales for a company over three Fiscal Year Ends (FYE) was

FYE 1: INR 1,25,00,885,

FYE 2: INR 1,37,45,473 and

FYE 3: INR 1,40,25,992,

what is this company’s sales growth for FYE 3 compared to FYE 2?

a) 2.0%
b) 2.04%
c) 8.87%
d) 10.0%

Question (53) Which action by a borrower’s management could have an adverse effect on its cash flow and ability to
meet its obligations?

a) Adopting a conservative financing strategy.

b) Executing plans to ensure short-term goals are met.
c) Increasing the rate of depreciation resulting in reduced net income.
d) Disclosing information to other stakeholders on need to know basis.

Question (54) What is the impact of low market entry barriers on competition within an industry and the financial
performance of businesses’ operating within the industry?

a) Increased competition, increased cash flow.

b) Increased competition, decreased cash flow.
c) Decreased competition, decreased cash flow.
d) Decreased competition, increased cash flow.

Question (55) In an initial review of a company’s financial statements, which ratios can be reviewed to uncover
opportunities and identify potential risk flags?

1. Net income.
2. Gross margin.
3. Inventory days.
4. Return on equity.
a) 1 and 2.
b) 1 and 4.
c) 2 and 3. d) 3 and 4.

Question (56) Which organisational structure can inhibit management’s ability to take decisions thus adversely
affecting the company’s performance and credit risk?

a) A pyramidal structure.
b) A centralised decision-making process.
c) A structure that has distinct divisions between different functions.
d) A structure in which roles and responsibilities are clearly documented.

Question (57) XYZ trucking company (XYZ) has recently entered into an arrangement with an online sales business to
deliver their general consumer goods and expect that this partnership will improve their sales. XYZ has sought
enhanced financing to support this new business. The transportation industry is in a decline due to a recession, and
XYZ’s most recent annual financial statement shows relatively weak sales performance. What is the next step in
assessing XYZ’s credit application?

a) The assessment should end, and credit should be declined.

b) The assessment should be postponed until the industry enters the recovery stage.
c) The assessment should continue and focus on total profit as a measure of success.
d) The assessment should continue with more focus on the sales projections scenarios and cash flow impact.

Question (58) Why does a special purpose vehicle expose a lender to more risk than conventional financing?

a) The loan has no security guaranteed.

b) The sponsor has no established track record.
c) The sponsor is the only party liable for the loan.
d) The loan is repaid only from the project’s cash flows.

Question (59) A company has INR 11,304,950 in Cost of Goods Sold (COGS) and INR 1,091,070 in trade payables as of
its most recent fiscal year-end. The company claimed no depreciation in COGS. How many days on average did it take
this company to pay its trade creditors during the fiscal year?

a) 9
b) 10
c) 35
d) 38

Question (60) Which activity can reduce a company’s cash flow position?

a) Sale of assets.
b) Collection of receivables.
c) Purchase of investments.
d) Increase in owner’s equity.

Question (61) What type of early warning signals may be indicated as a result of technology changes?

a) Business.
b) Fundamental.
c) Market.
d) Operational.

Question (62) which element in the development of a business plan would indicate a high degree of management
risk?

a) Set business objectives are easy to meet.

b) Reports on progress implementation are often late.
c) No consultation with stakeholders in setting up the plan.
d) Finalisation of the business plan only a few days before the start date.

Question (63) Titan Ltd. is a lumber exporter with annual sales of INR 750,000, 45 inventory days, 35 trade
receivables days, and 40 trade payables days. What approximate amount of external financing will Titan Ltd. need to
support its operating cycle?

a) INR 61,644
b) INR 82,192
c) INR 102,740
d) INR 246,575

Question (64) What is the basic function of credit monitoring?

 a) To ensure the borrower continues to be a good credit risk.
b) To ensure the borrower is operating within the credit limits.
c) To determine if the credit facilities are being used for the intended purpose
d) To determine what actions should be taken where there is a cause for concern.

Question (65) Why must a company’s management plan for unexpected events even if they are unlikely to occur?

a) Robust planning can reduce costs as an alternative to obtaining insurance coverage.

b) Contingency planning is a prerequisite to obtain insurance coverage and business loans.
c) Many improbable unexpected events can have a significant effect on the business operations.
d) Adequate planning can help minimise the impact of disturbances relating to economic cycles and
technological changes.

Question (66) Under what circumstances might weak succession planning affect a borrower’s credit risk when a key
management member leaves unexpectedly?

a) The nominated successor lacks management integrity.

b) The nominated successor has not completed all required training.
c) The nominated successor cannot take up the position for a few weeks.
d) Details of the nominated successor were not provided to the borrower’s bank.

Question (67) Which is the best description of the gearing ratio?

a) An indication of current assets to current liabilities.

b) An indication of net worth compared to total assets.
c) An indication of how much cash is available to cover payments.
d) An indication of how a business’s assets are funded between owners and creditors.

Question (68) At what point during an asset purchase do a company’s capital expenditures most affect its operational
cash flow?

a) Before the purchase while saving for the down payment.

b) At the time of purchase and beyond due to financing costs.
c) When the asset purchased generates expenses such as taxes and insurance.
d) Capital expenditures do not affect cash flow as they are outside normal operational activities.

Question (69) Which risk driver is most sensitive to economic factors such as a recession?

a) Capital expenditures.
b) Sales growth figures.
c) Trade receivable days.
d) Operating profit margin.

Question (70) In what type of security charge are goods and raw materials commonly pledged as assets?

a) Assignment.
b) Hypothecation.
c) Lien.
d) Mortgage.

Question (71) What is considered as one of the three levels of oversight in the corporate governance process?
 a) The media.
b) The regulators.
c) The board of directors.
d) Banks and other lenders.

Question (72) Which type of charge is appropriate when the security is a factory?

a) Hypothecation.
b) Lien.
c) Mortgage.
d) Pledge.

Question (73) How does industry risk affect the credit risk of a particular business enterprise that operates within
that industry?

a) The effect is limited to industry-specific regulations.

b) The effect is substantial only if the industry is in a decline phase.
c) The effect is insignificant as long as the particular business performs well and generates enough cash.
d) The effect is significant as industry risk includes factors that determine capital requirements and cash flow.

Question (74) Which party issues a letter of credit in a goods and services transaction?

a) Applicant.
a) Bank.
b) Beneficiary.
c) Seller.

Question (75) which factor can be excluded from the cost analysis during the pricing decision process?

a) External financial market conditions.

b) The borrower’s total business with the bank.
c) The borrower’s past and current financial performance.
d) The bank’s minimum returns requirements for the transaction.

Question (76) what is the primary purpose of calculating drawing power in a funds-based working capital facility?

a) To determine the amount the customer can draw on.

b) To ensure that bank funds are not tied up in obsolete stocks.
c) To ensure that drawings are being used to fund current assets.
d) To check that the value of eligible assets is at least equal to the approved credit limit.

Question (77) What causes market overcapacity?

a) Industry growth.
b) Weak competition.
c) Drop in a sales price.
d) Low product demand.

Question (78) What projected information is best to use to assess working capital limits?

a) Sales.
b) Balance sheet.
c) Labour expenses.
 d) Profit and loss statement.

Question (79) What is the first step in the process of restructuring a loan?

a) Take control.
b) Develop an action plan.
c) Resolve future financing.
d) Implement the action plan.

Question (80) In which scenario would customer concentration cause significant cash flow risk for a business?

a) The business sells clothing to individual consumers.

b) The business distributes flour to most bakeries in the region.
c) The business supplies specialised parts to the largest auto maker.
d) The business provides cleaning services to schools, offices and residential buildings.