Chapter 23

1. What is the primary objective of documentation in a loan agreement?

a) To protect the borrower's rights

b) To prevent court proceedings
c) To safeguard the bank's interests
d) To determine the interest rate
e) To transfer ownership of assets
Correct Answer: c) To safeguard the bank's interests
Explanation: Documentation spells out the rights and responsibilities of both parties and helps
protect the bank's interests in case of disputes or legal proceedings.

2. According to Section 3 of the Indian Evidence Act 1872, what does a "document" mean?

a) Any written statement

b) Any matter expressed or described upon any substance
c) Only stamped agreements
d) Electronic records only
e) Verbal contracts
Correct Answer: b) Any matter expressed or described upon any substance
Explanation: Section 3 of the Indian Evidence Act defines a document as any matter expressed or
described on a substance by letters, figures, or both.

3. Which of the following is an "instrument" as defined under the Indian Stamp Act?

a) A verbal agreement
b) A written memo without signatures
c) Any document creating or recording rights or liabilities
d) A document signed only by witnesses
e) Any bank statement
Correct Answer: c) Any document creating or recording rights or liabilities
Explanation: The Indian Stamp Act defines "instrument" as any document by which any right or
liability is created, transferred, or recorded.

4. Why is a Demand Promissory Note (D.P. Note) important in loan documentation?

a) It identifies the type of security

b) It makes the borrower personally liable to repay the loan
c) It transfers the property to the bank
d) It exempts the borrower from legal disputes
e) It reduces the interest rate
Correct Answer: b) It makes the borrower personally liable to repay the loan
Explanation: A D.P. Note makes the borrower personally liable for any advance or loan taken from
the bank.

5. Which of the following is not a type of security under loan documentation?

a) Personal security
b) Primary security
c) Collateral security
d) Corporate security

1
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
e) Tangible security
Correct Answer: d) Corporate security
Explanation: The primary types of security in loan documentation are personal, primary, collateral,
and tangible security.

6. What is the key difference between an agreement and a bond under loan documentation?

a) Agreements require a witness, while bonds do not

b) Bonds attract fixed stamp duty, while agreements do not
c) Bonds require attestation by a witness, while agreements do not
d) Agreements are more legally binding than bonds
e) Bonds are verbal agreements
Correct Answer: c) Bonds require attestation by a witness, while agreements do not
Explanation: A bond must be attested by a witness, while an agreement does not require attestation.

7. What is the primary role of stamping in loan documentation?

a) To avoid tax on the loan

b) To provide proof of authenticity
c) To make the document admissible in court
d) To lower the interest rate on the loan
e) To prevent the borrower from defaulting
Correct Answer: c) To make the document admissible in court
Explanation: Stamping is crucial as unstamped documents may not be admissible in court
proceedings.

8. What is the purpose of a Demand Promissory Note (D.P. Note)?

a) To create a mortgage
b) To make the borrower personally liable for the loan
c) To serve as a pledge
d) To execute a lien
e) To create a charge on immovable property
Correct Answer: b) To make the borrower personally liable for the loan
Explanation: A Demand Promissory Note is a personal liability document that makes the borrower
personally liable for the loan.

9. Which type of document creates a charge on a property in favor of the bank?

a) Agreement of Guarantee
b) Demand Promissory Note
c) Agreement of Hypothecation
d) Acknowledgement of Debt
e) Proxy
Correct Answer: c) Agreement of Hypothecation
Explanation: Charge-creating documents like the Agreement of Hypothecation create a charge on
the property in favor of the bank.

10. What is one of the key features that distinguish a bond from an agreement?

a) A bond requires a witness to be signed

b) A bond does not need a fixed stamp duty

2
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
c) A bond cannot be used in court
d) A bond is not a legal document
e) A bond is for verbal agreements
Correct Answer: a) A bond requires a witness to be signed
Explanation: A bond must be attested by a witness, and this attestation is a distinguishing feature,
along with ad valorem stamp duty.

11. What does the term "hypothecation" refer to in banking documentation?

a) Transfer of ownership of immovable property

b) Pledge of goods
c) Creation of a charge on movable assets without transfer of possession
d) Security for immovable property
e) Guarantee given by a third party
Correct Answer: c) Creation of a charge on movable assets without transfer of possession
Explanation: Hypothecation refers to the creation of a charge on movable assets without the transfer
of possession.

12. Which one of the following is NOT a requirement for a document to be enforceable?

a) Proper recital
b) Adequately stamped
c) Description of security
d) Witnessed by two people
e) Duly registered
Correct Answer: d) Witnessed by two people
Explanation: A document must be properly recited, stamped, and registered when required, but not
all documents need to be witnessed by two people.

13. What type of security is created when the ownership of goods is transferred to the lender
while the possession remains with the borrower?

a) Mortgage
b) Pledge
c) Hypothecation
d) Lien
e) Set-off
Correct Answer: b) Pledge
Explanation: A pledge refers to the security where the ownership of goods is transferred to the
lender, while the possession remains with the borrower.

14. Which of the following documents does NOT require stamp duty to be witnessed by a third
party?

a) Agreement
b) Bond
c) Deed
d) Mortgage
e) Hypothecation
Correct Answer: a) Agreement

3
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Explanation: An agreement does not need to be attested or witnessed by a third party and attracts
fixed stamp duty.

15. Which of the following is a function of legal documentation in banking?

a) To only safeguard the borrower’s interest

b) To identify the security charged to the bank
c) To determine the interest rate
d) To adjust loan amounts
e) To settle disputes outside court
Correct Answer: b) To identify the security charged to the bank
Explanation: Legal documentation helps in identifying the security charged to the bank and protects
the bank’s interests during legal proceedings.

16. What is the meaning of a deed as per the documentation?

a) A verbal contract between parties

b) A signed instrument containing some form of transfer or contract
c) An unsigned promissory note
d) A temporary loan agreement
e) A verbal understanding between borrower and lender
Correct Answer: b) A signed instrument containing some form of transfer or contract
Explanation: A deed is a signed, usually sealed instrument that contains some form of transfer or
contract.

17. How is the period of limitation extended in the case of a loan document?

a) By decreasing the loan amount

b) By increasing the loan tenure
c) By obtaining a revival letter or acknowledgment of debt
d) By revising the interest rate
e) By notarizing the original loan document
Correct Answer: c) By obtaining a revival letter or acknowledgment of debt
Explanation: The period of limitation can be extended by obtaining a revival letter or
acknowledgment of debt.

18. What does "e-stamping" refer to?

a) A method of physical stamping of documents

b) A method of applying digital signatures to documents
c) An online method of paying non-judicial stamp duty
d) Stamping carried out only by banks
e) A method of validating physical documents through electronic means
Correct Answer: c) An online method of paying non-judicial stamp duty
Explanation: E-stamping refers to the online method of paying non-judicial stamp duty on
documents to the state

19. What is the consequence of a document not being duly stamped according to Section 33 of the
Indian Stamp Act?

a) The document is automatically validated

b) The document is accepted with a fine

4
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
c) The document is impounded
d) The document is dismissed by the court
e) The borrower is fined
Correct Answer: c) The document is impounded
Explanation: According to Section 33 of the Indian Stamp Act, if a document is not duly stamped, it is
impounded by the authority.
20. Which of the following is one of the fixed stamp duty documents all over India?

a) Acknowledgment of Debt
b) Promissory Note
c) Agreement of Hypothecation
d) Deed of Mortgage
e) Power of Attorney
Correct Answer: b) Promissory Note
Explanation: Promissory notes, along with usance bills, letters of credit, and other documents, attract
a fixed stamp duty across
21. What is the consequence of a document not being duly stamped according to Section 35 of the
Indian Stamp Act?

a) The document is invalid for any purpose

b) The document can be revalidated by paying a fine
c) The document can be used without any issues
d) The document will be considered a null agreement
e) The document can be filed for appeal in court
Correct Answer: a) The document is invalid for any purpose
Explanation: According to Section 35 of the Indian Stamp Act, if a document is not duly stamped, it
cannot be revalidated and will be inadmissible for any purpose.
22. What happens when a document is executed in more than one state?

a) Full duty must be paid in each state

b) The document is considered invalid
c) The document is only valid in the state of first execution
d) The difference in stamp duty between the states must be paid
e) No further action is needed
Correct Answer: d) The difference in stamp duty between the states must be paid
Explanation: When a document is executed in more than one state, the difference in stamp duty
must be paid in the second state if it exceeds the first.
23. What type of security involves transferring goods or assets to a lender while retaining
ownership?

a) Mortgage
b) Pledge
c) Lien
d) Hypothecation
e) Assignment
Correct Answer: d) Hypothecation
Explanation: Hypothecation refers to transferring assets to the lender while retaining ownership,
with a charge created on the asset.
24. What is the time limit for filing a suit for the recovery of money based on a Demand
Promissory Note?

5
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) 12 years from the date of default
b) 3 years from the date of default
c) 90 days from the date of execution
d) 30 days from the date of the agreement
e) 6 months from the due date
Correct Answer: b) 3 years from the date of default
Explanation: For a Demand Promissory Note, the period of limitation for filing a suit for the recovery
of money is 3 years from the date of default.
25. Which section of the Indian Registration Act mandates the compulsory registration of certain
documents?

a) Section 2
b) Section 5
c) Section 9
d) Section 17
e) Section 35
Correct Answer: d) Section 17
Explanation: Section 17 of the Indian Registration Act mandates the compulsory registration of
certain documents such as instruments of gift, leases, and non-testamentary instruments.
26. How does the law of limitation apply to a guarantor’s liability?

a) It applies from the date of the loan agreement

b) It applies from the date the borrower defaults
c) It applies from the date the guarantor signs the agreement
d) It is calculated from the date the bank requests payment
e) It is determined based on the guarantor's personal assets
Correct Answer: b) It applies from the date the borrower defaults
27. What is the legal effect of a document that has not been registered but is required to be
registered under the Indian Registration Act?

a) The document becomes void

b) The document cannot affect the property involved
c) The document is valid for only one year
d) The document must be signed by witnesses to be valid
e) The document can be used only for personal purposes
Correct Answer: b) The document cannot affect the property involved
Explanation: If a document required to be registered under the Indian Registration Act is not
registered, it cannot affect the property mentioned in it or be admitted as evidence.

28. What happens if a document is executed in one state and then sent to another state where the
stamp duty is higher?

a) The document must be re-executed

b) The document must be stamped with the full duty of the second state
c) The difference in stamp duty must be paid
d) The document is valid without any additional duty
e) The document is invalid if not executed in the same state
Correct Answer: c) The difference in stamp duty must be paid
Explanation: If a document is executed in one state and sent to another state where the stamp duty
is higher, only the difference in duty must be paid before execution in the second state.

6
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
29. Which of the following methods can extend the period of limitation in a loan agreement?

a) Reduction of loan tenure

b) Change of interest rate
c) Acknowledgement of debt
d) Transfer of ownership
e) Witnessing the document by two parties
Correct Answer: c) Acknowledgement of debt
Explanation: The period of limitation in a loan agreement can be extended by obtaining an
acknowledgement of debt, which resets the limitation period.

30. What is the primary purpose of registering a document under the Indian Registration Act?

a) To authenticate the document

b) To provide public notice of the document
c) To legalize a verbal agreement
d) To exempt the document from stamp duty
e) To transfer property rights without consent
Correct Answer: b) To provide public notice of the document
Explanation: The primary purpose of registering a document is to serve as public notice of the
transaction or right mentioned in the document.

31. What is the period of limitation for enforcing a payment secured by a mortgage?

a) 3 years
b) 5 years
c) 12 years
d) 30 years
e) 1 year
Correct Answer: c) 12 years
Explanation: The period of limitation for enforcing a payment secured by a mortgage is 12 years from
the date when the money becomes due.

32. Which of the following is a document that must be registered under the Indian Registration
Act?

a) Promissory Note
b) Instruments of gift of immovable property
c) Agreement of Hypothecation
d) Demand Promissory Note
e) Transfer of Shares
Correct Answer: b) Instruments of gift of immovable property
Explanation: Under Section 17 of the Indian Registration Act, instruments of gift of immovable
property must be registered.

33. How can a guarantor’s liability be extended beyond the original period of limitation?

a) By revising the loan agreement

b) By obtaining a fresh guarantee
c) By issuing a notice of default
d) By modifying the interest rate
e) By changing the guarantor

7
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Correct Answer: b) By obtaining a fresh guarantee
Explanation: A guarantor’s liability can be extended beyond the original limitation period by
obtaining a fresh guarantee or revival letter.

34. What happens if a document executed in more than one state is not stamped with the correct
stamp duty in the second state?

a) The document becomes void

b) The document can still be used as evidence
c) The document is impounded until the correct duty is paid
d) The document is only valid in the first state
e) The document must be notarized
Correct Answer: c) The document is impounded until the correct duty is paid
Explanation: If a document is executed in more than one state and the correct stamp duty is not paid
in the second state, the document is impounded until the deficit duty is paid.

35. In the event of a borrower's death, how can the limitation period be extended for recovery
from legal heirs?

a) By filing a fresh loan application

b) By obtaining an Acknowledgement of Debt from the legal heirs
c) By reducing the loan amount
d) By adjusting the loan interest
e) By transferring the loan to another bank
Correct Answer: b) By obtaining an Acknowledgement of Debt from the legal heirs
Explanation: The limitation period for recovery from legal heirs can be extended by obtaining an
Acknowledgement of Debt from them.

36. What is the legal effect of a document that has not been registered but is required to be
registered under the Indian Registration Act?

a) The document is valid for a limited period

b) The document cannot affect the property comprised therein
c) The document is valid in local courts but not in higher courts
d) The document is accepted if notarized
e) The document can still be enforced with a penalty
Correct Answer: b) The document cannot affect the property comprised therein
Explanation: If a document that is required to be registered is not registered, it cannot affect the
property involved and cannot be received as evidence in any transaction affecting such property.

37. Under what circumstances can the limitation period be extended beyond the normal period?

a) By adjusting the interest rate

b) By increasing the loan amount
c) By acknowledging the debt and security in writing
d) By revising the repayment schedule
e) By adding additional guarantors
Correct Answer: c) By acknowledging the debt and security in writing
Explanation: The limitation period can be extended by acknowledging the debt and security in
writing or by part payment before the expiry of the limitation period.

38. What happens when the borrower dies without clearing the loan?

8
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) The loan is written off
b) The loan is transferred to the guarantor
c) The legal heirs of the borrower are liable only up to the value of assets inherited
d) The guarantor becomes liable for the entire loan
e) The loan is split into equal parts among all borrowers
Correct Answer: c) The legal heirs of the borrower are liable only up to the value of assets inherited
Explanation: When a borrower dies, the legal heirs are liable for the debt only up to the value of the
assets they inherit. They are not personally liable unless they have signed specific documents to this
effect.

39. What is the consequence of changing the terms of a loan without the consent of the
guarantor?

a) The loan continues as usual

b) The guarantor is automatically discharged from liability
c) The borrower becomes the new guarantor
d) The bank must sign new documents
e) The interest rate is revised
Correct Answer: b) The guarantor is automatically discharged from liability
Explanation: A guarantor is discharged from liability if the terms of the loan are changed without
their consent.

40. Which of the following documents should be executed by the "Karta" in a Hindu Undivided
Family (HUF)?

a) Agreement of Guarantee
b) Demand Promissory Note
c) All documents related to borrowing for family business
d) Mortgage Deed
e) Letter of Hypothecation
Correct Answer: c) All documents related to borrowing for family business
Explanation: The Karta of an HUF has implied authority to borrow for the family business and bind
the HUF property, thus executing all relevant documents.

41. Which of the following is required to make a bond legally valid?

a) A seal from the bank

b) A third-party witness
c) It must be signed by all guarantors
d) It must be written on non-judicial stamp paper
e) It must be attested by a lawyer
Correct Answer: b) A third-party witness
Explanation: A bond must have an attestation by a third-party witness, and this is a key requirement
for its legal validity.

42. What is required for the execution of a document by an illiterate borrower?

a) Thumb impression in the presence of a bank official

b) Signature with a witness
c) Verbal confirmation in the presence of a lawyer
d) Written explanation in their local language

9
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
e) Biometric authentication
Correct Answer: a) Thumb impression in the presence of a bank official
Explanation: An illiterate borrower must place their left thumb impression in the presence of a bank
official, and a statement should be included indicating that the contents of the document were
explained to them.

43. Which of the following documents should be stamped with special adhesive stamps?

a) Demand Promissory Notes

b) Receipts
c) Acknowledgement of Debt
d) All agreements of hypothecation
e) Bills of Exchange
Correct Answer: d) All agreements of hypothecation
Explanation: Special adhesive stamps are required for documents like agreements of hypothecation,
while documents such as promissory notes and receipts use adhesive revenue stamps.

44. How can the limitation period be reset for corporate borrowers?

a) By signing new promissory notes

b) By acknowledging the debt in the balance sheet
c) By renewing the loan terms
d) By requesting a letter from the bank
e) By applying for a new loan
Correct Answer: b) By acknowledging the debt in the balance sheet
Explanation: The limitation period can be reset for corporate borrowers if the debt is acknowledged
in their balance sheet before the original period expires.

45. Which of the following is NOT a type of document execution?

a) Execution by individuals
b) Execution by partnerships
c) Execution by corporate guarantors
d) Execution by digital signature
e) Execution by verbal agreement
Correct Answer: e) Execution by verbal agreement
Explanation: Execution of documents must be written and signed by the relevant parties. Verbal
agreements are not valid for legal documentation.

46. What is the legal effect of a document that has not been registered but is required to be
registered under the Indian Registration Act?

a) It can still be used as evidence in court

b) It is considered void but can be later revalidated
c) It cannot affect the property mentioned in the document
d) It can be accepted if both parties agree
e) It is automatically registered after a certain period
Correct Answer: c) It cannot affect the property mentioned in the document
Explanation: According to the Indian Registration Act, if a document that is required to be registered
is not registered, it cannot affect the property mentioned in the document or be received as
evidence in court.

10
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
47. Which of the following documents is required to be compulsorily registered under Section 17
of the Indian Registration Act?

a) Promissory Note
b) Lease of immovable property for a term exceeding one year
c) Agreement of Guarantee
d) Deed of Hypothecation
e) Proxy
Correct Answer: b) Lease of immovable property for a term exceeding one year
Explanation: Section 17 of the Indian Registration Act specifies that a lease of immovable property
for a term exceeding one year is one of the documents that must be compulsorily registered.

48. What does "execution of a document" mean in the context of banking?

a) Signing a blank paper

b) Signing the document after reading and understanding its contents
c) Getting the document notarized
d) Filing the document in the court of law
e) Digitally scanning the document
Correct Answer: b) Signing the document after reading and understanding its contents
Explanation: Execution of a document means signing the document after reading, understanding,
and agreeing to its contents. Merely signing a blank paper is not considered execution.

49. In the case of a minor, who can execute loan documents on their behalf?

a) The minor themselves

b) A legal guardian
c) Any adult relative
d) The minor's school teacher
e) The minor's lawyer
Correct Answer: b) A legal guardian
Explanation: Since a minor's contract is void, their legal guardian can execute loan documents on
their behalf if the loan is for the benefit of the minor.

50. What phrase should be written on the Demand Promissory Note when there are joint
borrowers?

a) "We jointly promise to pay"

b) "We promise to share the responsibility"
c) "We promise to repay individually"
d) "We jointly and severally promise to pay"
e) "We agree to the terms collectively"
Correct Answer: d) "We jointly and severally promise to pay"
Explanation: In the case of joint borrowers, the phrase "We jointly and severally promise to pay"
should be used to create joint and several liability.

51. What should be done in case a borrower is illiterate?

a) A thumb impression should be obtained

b) The document should not be executed
c) The borrower should be excluded from the loan
d) The borrower should hire a lawyer

11
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
e) A witness signature should suffice
Correct Answer: a) A thumb impression should be obtained
Explanation: For an illiterate borrower, their left thumb impression should be obtained in the
presence of a bank official, with an appropriate declaration below the impression.

52. What is the period of limitation for enforcing payment of money secured by a mortgage?

a) 3 years
b) 5 years
c) 7 years
d) 12 years
e) 30 years
Correct Answer: d) 12 years
Explanation: The period of limitation for enforcing payment of money secured by a mortgage is 12
years from the date when the money becomes due.

53. How can the period of limitation for a loan document be extended?

a) By altering the interest rate

b) By notarizing the document
c) By obtaining an acknowledgment of debt
d) By reducing the loan amount
e) By issuing a new loan agreement
Correct Answer: c) By obtaining an acknowledgment of debt
Explanation: The limitation period can be extended through an acknowledgment of debt or by
obtaining a revival letter.

54. What is the effect of non-registration of a document that is required to be registered?

a) The document can still be used as proof in certain cases

b) The document becomes void and has no legal effect
c) The document can be revalidated with a fine
d) The borrower is fined but the document remains valid
e) The document can be executed with witness signatures
Correct Answer: b) The document becomes void and has no legal effect
Explanation: Non-registration of a document that is required to be registered renders it void and
ineffective in legal proceedings.

55. Which of the following actions discharges a guarantor from liability?

a) The lender increases the interest rate

b) The borrower defaults on the loan
c) The lender releases the borrower from their obligations
d) The guarantor continues to fulfill the obligations
e) The lender applies additional security
Correct Answer: c) The lender releases the borrower from their obligations
Explanation: A guarantor is discharged from liability when the lender releases the borrower from
their obligations, among other conditions like changes without the guarantor's consent.

56. What happens if a Bill of Exchange is not duly stamped?

12
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) It is automatically validated by the court
b) It is inadmissible as evidence
c) It is considered valid with witness signatures
d) It can be validated with a fine
e) It is accepted as long as both parties agree
Correct Answer: b) It is inadmissible as evidence
Explanation: If a Bill of Exchange is not duly stamped, it is inadmissible as evidence in

57. What is the legal effect of a document that has not been registered but is required to be under
the Indian Registration Act?

a) It can be used as evidence of the transaction in court

b) It can affect the property mentioned in the document
c) It cannot affect the property comprised therein
d) It can be validated through a fine
e) It is automatically considered valid if signed by both parties
Correct Answer: c) It cannot affect the property comprised therein
Explanation: Under Section 49 of the Indian Registration Act, a document that is required to be
registered but is not, cannot affect the property described in it and cannot be used as evidence in
court.

58. What does the process of "execution of a document" mean in the context of loan
documentation?

a) Simply signing a blank paper

b) Only signing the document without reading it
c) Signing a document after reading and understanding its contents
d) Completing the documentation in any order
e) Skipping the legal formalities for urgent loans
Correct Answer: c) Signing a document after reading and understanding its contents
Explanation: The execution of a document refers to the act of signing the document after it has been
read and understood by the executant.

59. When is a guarantor discharged from their liability under the guarantee?

a) When the borrower repays half the loan

b) When the terms of the loan are changed without the guarantor's consent
c) When the bank increases the loan amount
d) When the borrower requests the discharge of the guarantor
e) When the bank extends the tenure without the borrower's consent
Correct Answer: b) When the terms of the loan are changed without the guarantor's consent
Explanation: A guarantor is discharged from liability if the terms of the loan are altered without their
consent, which affects their obligation.

60. What is the required stamp duty for a bond as per the Indian Stamp Act?

a) No stamp duty
b) Fixed stamp duty
c) Ad valorem stamp duty
d) Duty based on the length of the contract
e) Duty applicable to agreements only

13
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Correct Answer: c) Ad valorem stamp duty
Explanation: Bonds attract ad valorem stamp duty, which is based on the value of the transaction.

61. What is the function of a "Revival Letter" in banking documentation?

a) To increase the loan amount

b) To reduce the loan tenure
c) To extend the limitation period for a document
d) To cancel the previous loan agreement
e) To terminate the borrower's liability
Correct Answer: c) To extend the limitation period for a document
Explanation: A Revival Letter can be used to extend the period of limitation for loan documents,
essentially giving a fresh start to the limitation period.

62. Which of the following can result in the termination of a guarantor's obligation?

a) The death of the borrower

b) Reduction of the interest rate
c) A change in terms of the loan without the guarantor’s consent
d) Borrower’s delay in repayment
e) Change in the bank’s management
Correct Answer: c) A change in terms of the loan without the guarantor’s consent
Explanation: If the terms of the loan are changed without the guarantor's consent, the guarantor's
obligation may be terminated.

63. What does the process of "e-stamping" ensure?

a) That the stamp duty is paid electronically to the state government

b) That the document is printed electronically
c) That the loan is processed automatically
d) That the bank validates the borrower’s credentials
e) That the borrower pays a higher stamp duty
Correct Answer: a) That the stamp duty is paid electronically to the state government
Explanation: E-stamping refers to the online method of paying non-judicial stamp duty, making the
stamping process more convenient and secure.

64. Which of the following is NOT considered a charge-creating document?

a) Agreement of Hypothecation
b) Deed of Mortgage
c) Agreement of Guarantee
d) Agreement of Pledge
e) Letter of Lien & Set-off
Correct Answer: c) Agreement of Guarantee
Explanation: An Agreement of Guarantee is a personal liability document, not a charge-creating
document.

65. What is the purpose of registering a document under the Indian Registration Act?

a) To reduce the loan amount

b) To increase the tenure of the loan
c) To provide public notice of the transaction

14
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
d) To ensure the bank's internal records are updated
e) To notify the borrower of the repayment schedule
Correct Answer: c) To provide public notice of the transaction
Explanation: The purpose of registering a document is to provide public notice of the transaction and
protect the rights of the parties involved.

66. How is the limitation period affected when a loan document is acknowledged in the borrower’s
balance sheet?

a) It is reduced to one year

b) It is extended for another year
c) It gives a fresh start to the limitation period
d) It is canceled immediately
e) It is shortened by the borrower
Correct Answer: c) It gives a fresh start to the limitation period
Explanation: Acknowledgment of the debt in the borrower's balance sheet gives rise to a fresh
limitation period, starting from the date of the balance sheet.

67. Which of the following is a consequence of not paying proper stamp duty on a Bill of Exchange?

a) It can be rectified later

b) The bank can still sue based on the document
c) It cannot be revalidated and is inadmissible in court
d) The borrower must pay an additional penalty
e) The document is valid without stamp duty
Correct Answer: c) It cannot be revalidated and is inadmissible in court
Explanation: If a Bill of Exchange or Promissory Note is not properly stamped, it cannot be
revalidated by any means and will be inadmissible in court.

68. What is the period of limitation for enforcing payment of money secured by a mortgage?

a) 1 year
b) 3 years
c) 5 years
d) 12 years
e) 30 years
Correct Answer: d) 12 years
Explanation: The period of limitation for enforcing the payment of money secured by a mortgage is
12 years from the date the money becomes due.

69. In the context of Section 18 of the Limitation Act, what is the effect of an acknowledgment in
writing made by the borrower before the expiration of the prescribed period?

a) The acknowledgment is void if not made under oath

b) It extends the limitation period by 5 years from the date of acknowledgment
c) It gives rise to a fresh limitation period from the time of the acknowledgment
d) It is only valid if signed by both the borrower and the guarantor
e) It can only extend the limitation period if accompanied by part payment
Correct Answer: c) It gives rise to a fresh limitation period from the time of the acknowledgment
Explanation: Under Section 18 of the Limitation Act, an acknowledgment in writing signed by the

15
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
party before the expiration of the limitation period results in a fresh limitation period being
computed from the date of the acknowledgment.

70. Under the Indian Stamp Act, what is the treatment of an instrument executed in multiple
states when the rate of stamp duty differs between them?

a) The stamp duty must be paid in full in each state

b) The highest stamp duty among the states must be paid initially
c) The difference in stamp duty between states must be affixed in the subsequent state of execution
d) Stamp duty from the state with the lowest rate must be used
e) No additional stamp duty is required after the first state's payment
Correct Answer: c) The difference in stamp duty between states must be affixed in the subsequent
state of execution
Explanation: If an instrument is executed in multiple states, the document must first be executed on
the applicable stamp duty of the first state, and any difference in stamp duty must be affixed when it
is executed in the subsequent state.

71. According to Section 33 of the Indian Stamp Act, what authority does a public officer have
when an unstamped document is produced before them?

a) The public officer may ignore the lack of stamping if it is a minor document
b) The public officer must impound the document
c) The public officer must levy a fine equal to the unpaid stamp duty
d) The public officer must destroy the document
e) The public officer may require the document to be signed by the borrower and the guarantor
Correct Answer: b) The public officer must impound the document
Explanation: Under Section 33 of the Indian Stamp Act, a public officer must impound any document
that is not properly stamped when it is produced before them.

72. In case of a continuing guarantee for a running account, from which point is the limitation
period computed?

a) From the date the guarantee was signed

b) From the date of the first loan disbursement
c) From the date of determination or refusal by the guarantor to carry out obligations
d) From the date of the loan default
e) From the date the loan account is classified as non-performing
Correct Answer: c) From the date of determination or refusal by the guarantor to carry out
obligations
Explanation: For a continuing guarantee, the limitation period is computed from the date the
guarantor refuses or determines not to carry out their obligations, not from the date the guarantee
was executed.

73. If a minor is admitted to the benefits of a partnership, which of the following is true regarding
their ability to execute loan documents on behalf of the firm?

a) The minor can fully execute all loan documents

b) The minor can execute documents only with the consent of the guardian
c) The minor can execute documents jointly with other partners
d) The minor cannot execute or participate in the execution of loan documents
e) The minor can execute the loan documents but is not liable for the loan

16
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Correct Answer: d) The minor cannot execute or participate in the execution of loan documents
Explanation: A minor can only be admitted to the benefits of a partnership but cannot execute or
participate in the execution of loan documents.

74. In the case of non-judicial stamp paper, what is the correct method of writing on the
document?

a) Writing should be done only on the back of the stamp paper

b) Writing must ensure the stamp duty appears on the face of the instrument
c) Writing can be done in any format without specific placement
d) Writing should avoid covering the stamp entirely
e) Writing is not allowed directly on the stamp paper
Correct Answer: b) Writing must ensure the stamp duty appears on the face of the instrument
Explanation: Non-judicial stamp paper should be written in such a manner that the stamp duty
appears on the face of the instrument.

75. What happens if a promissory note is not properly stamped?

a) The note can be validated by payment of the missing stamp duty

b) It is admissible in court with a fine
c) It is inadmissible in evidence and cannot be revalidated
d) It can still be used for legal proceedings after paying a penalty
e) It is valid only if signed by a notary
Correct Answer: c) It is inadmissible in evidence and cannot be revalidated
Explanation: A promissory note that is not duly stamped is inadmissible in evidence and cannot be
revalidated by any means.

76. Which of the following is a valid remedy if a document is executed without sufficient stamp
duty?

a) The document is automatically void

b) The deficiency can be paid within three months to validate the document
c) The court may impose a fine but still allow the document as evidence
d) The document can be revalidated upon payment of proper stamp duty and a penalty
e) No remedy is possible if the stamp duty is insufficient
Correct Answer: d) The document can be revalidated upon payment of proper stamp duty and a
penalty
Explanation: A document executed with insufficient stamp duty can be revalidated upon payment of
the appropriate stamp duty along with a penalty.

77. What is the maximum period within which a document executed outside India must be
stamped when it is first received in India?

a) 1 month
b) 2 months
c) 3 months
d) 6 months
e) 12 months
Correct Answer: c) 3 months
Explanation: A document executed outside India must be stamped within three months of its first
receipt in India.

17
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
78. Which of the following circumstances would NOT extend the limitation period for a document?

a) Acknowledgment of debt in writing

b) Part payment of the debt
c) Revival letter signed by the borrower
d) Acknowledgment of debt by the guarantor only
e) Including the debt in the borrower’s balance sheet
Correct Answer: d) Acknowledgment of debt by the guarantor only
Explanation: Acknowledgment by the borrower or part payment can extend the limitation period.
However, acknowledgment by the guarantor alone, without acknowledgment by the borrower, may
not extend the limitation period.

79. In the context of documentation, which of the following factors does NOT affect the selection
of the right type of document for a loan agreement?

a) Type of borrower (e.g., individual, partnership firm)

b) Nature of security (e.g., goods, immovable property)
c) Date of loan disbursement
d) Type of charge (e.g., mortgage, hypothecation)
e) Type of advance/facility (e.g., term loan, overdraft)
Correct Answer: c) Date of loan disbursement
Explanation: While the type of borrower, security, charge, and advance all affect document selection,
the date of loan disbursement does not influence which documents are used.

80. Under Section 35 of the Indian Stamp Act, what is the consequence if a bill of exchange or
promissory note is under-stamped?

a) It is admissible with a fine

b) It is inadmissible in evidence and cannot be validated
c) It is valid for certain claims only
d) It can be revalidated by paying the deficit stamp duty within 6 months
e) It is admissible if acknowledged by the borrower
Correct Answer: b) It is inadmissible in evidence and cannot be validated
Explanation: According to Section 35 of the Indian Stamp Act, an under-stamped promissory note or
bill of exchange cannot be revalidated and is inadmissible as evidence.

81. What is the limitation period for a mortgagee to enforce possession of immovable property
under the Indian Limitation Act?

a) 3 years from the date of execution

b) 5 years from the date of default
c) 10 years from the date the mortgagee becomes entitled to possession
d) 12 years from the date the mortgagee becomes entitled to possession
e) 30 years from the date of execution
Correct Answer: d) 12 years from the date the mortgagee becomes entitled to possession
Explanation: A mortgagee has a limitation period of 12 years from the date when they become
entitled to possession of immovable property under the Limitation Act.

82. Under what circumstances can a document that has not been duly stamped be produced as
evidence in a court of law?

18
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) If the borrower consents to its production
b) If the lender agrees to pay the stamp duty on behalf of the borrower
c) After the payment of proper stamp duty and a penalty
d) If the document is more than 5 years old
e) If the loan is under ₹10,000
Correct Answer: c) After the payment of proper stamp duty and a penalty
Explanation: A document not duly stamped can be admitted as evidence only after the proper stamp
duty and any applicable penalty have been paid.

83. Which of the following is true regarding the execution of documents by a Hindu Undivided
Family (HUF)?

a) Only the eldest male member of the family can sign

b) The Karta and all major coparceners must sign the documents
c) The Karta alone can execute the documents on behalf of the HUF
d) Only a registered document is valid for an HUF
e) All members of the family, including minors, must sign
Correct Answer: c) The Karta alone can execute the documents on behalf of the HUF
Explanation: The Karta of the Hindu Undivided Family can execute documents on behalf of the HUF,
though it is desirable that major coparceners also stand as guarantors.

84. In what situation can a balance sheet of a corporate borrower extend the limitation period for
a loan?

a) If the balance sheet is signed after the limitation period expires

b) If the borrower records the debt in the balance sheet before the limitation period expires
c) If the lender acknowledges the balance sheet
d) If the borrower’s balance sheet is audited
e) If the debt is listed as "contingent liability"
Correct Answer: b) If the borrower records the debt in the balance sheet before the limitation period
expires
Explanation: Recording a debt in the borrower’s balance sheet before the limitation period expires
gives rise to a fresh period of limitation starting from the date of the balance sheet.

85. According to the Indian Contract Act, what happens if a guarantee is not determined by the
guarantor’s death?

a) The liability ceases immediately

b) The legal heirs of the guarantor become liable for the entire debt
c) The guarantor’s liability continues until the bank recalls the loan
d) The guarantor’s liability ceases after 12 months
e) The guarantor’s liability continues for an additional 3 years from the date of death
Correct Answer: c) The guarantor’s liability continues until the bank recalls the loan
Explanation: Upon the death of a guarantor, the liability continues until the bank recalls the loan or
takes legal steps, subject to the limitation period.

86. What is the primary consequence if a borrower’s legal heirs fail to acknowledge the deceased
borrower’s debt after inheriting their assets?

a) The loan is automatically written off

b) The bank can only claim up to the inherited value of the assets

19
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
c) The bank can initiate legal proceedings for the entire loan amount
d) The legal heirs become personally liable for the full debt
e) The loan becomes non-performing
Correct Answer: b) The bank can only claim up to the inherited value of the assets
Explanation: The legal heirs of a deceased borrower are only liable up to the value of the inherited
assets and not for any personal liability beyond that.

87. If a borrower signs a Demand Promissory Note but does not place their signature on the
revenue stamp, what is the effect of this on the document's enforceability?

a) The note is still enforceable but with a fine

b) The note is valid if signed by a witness
c) The note becomes unenforceable
d) The note is valid but may face issues in court
e) The borrower must re-sign the document in the presence of the bank manager
Correct Answer: d) The note is valid but may face issues in court
Explanation: While the Demand Promissory Note may still be considered valid, if the borrower’s
signature does not appear on the revenue stamp, it could lead to enforceability issues during legal
proceedings.

88. When does the limitation period for a term loan agreement with a repayment schedule begin?

a) From the date of first disbursement

b) From the date the loan is fully repaid
c) From the date of execution of the agreement
d) From the date the borrower defaults on the repayment schedule
e) From the date the borrower acknowledges the debt
Correct Answer: d) From the date the borrower defaults on the repayment schedule
Explanation: The limitation period for a term loan agreement begins when the borrower defaults on
the repayment schedule.

89. What is the maximum period within which a borrower must present a document for
registration under the Indian Registration Act after its execution?

a) 2 months
b) 3 months
c) 4 months
d) 6 months
e) 12 months
Correct Answer: c) 4 months
Explanation: Under Section 23 of the Indian Registration Act, a document must be presented for
registration within four months of its execution.

90. Which of the following statements is correct regarding part payment made by a borrower
before the expiry of the limitation period?

a) Part payment extends the limitation period only if made in cash

b) Part payment automatically reduces the loan tenure
c) Part payment extends the limitation period if acknowledged in writing by the borrower
d) Part payment has no effect on the limitation period
e) Part payment cancels the existing loan agreement

20
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Correct Answer: c) Part payment extends the limitation period if acknowledged in writing by the
borrower
Explanation: Part payment before the expiry of the limitation period, if acknowledged in writing by
the borrower, extends the limitation period from the date of payment.

91. Which of the following applies to the digital execution of loan documents as per RBI
guidelines?

a) Digital documents are only valid if notarized electronically

b) Loan documents can be digitally signed without the borrower’s consent
c) Borrowers must receive digitally signed documents via email or SMS
d) Digital execution is not allowed for loans over ₹1 crore
e) Only NBFCs are allowed to issue digitally signed loan documents
Correct Answer: c) Borrowers must receive digitally signed documents via email or SMS
Explanation: According to RBI guidelines, digitally signed documents such as loan agreements and
sanction letters must automatically be sent to the borrower via email or SMS.

92. What is the period of limitation for filing a suit by a mortgagee for possession of immovable
property under a mortgage?

a) 3 years from the date of mortgage execution

b) 5 years from the date of default
c) 12 years from the date when the mortgagee becomes entitled to possession
d) 20 years from the date of mortgage execution
e) 30 years from the date of default
Correct Answer: c) 12 years from the date when the mortgagee becomes entitled to possession
Explanation: According to the Law of Limitation, the period for filing a suit by the mortgagee for
possession of immovable property is 12 years from the date when the mortgagee becomes entitled
to the property.

93. Under the Indian Stamp Act, if a document comprises several distinct matters, what is the
required stamp duty?

a) The duty payable on the highest-value matter

b) The duty payable on each distinct matter in aggregate
c) A flat fee for the entire document
d) Only the matter of financial interest is stamped
e) The stamp duty applicable to the state of first execution
Correct Answer: b) The duty payable on each distinct matter in aggregate
Explanation: If a document comprises several distinct matters, the stamp duty is calculated by
aggregating the duties applicable to each individual matter.

94. What is the consequence under Section 35 of the Indian Stamp Act if a promissory note is
found to be insufficiently stamped?

a) It is impounded and a penalty is imposed

b) It can still be admitted in court with a penalty
c) It is inadmissible as evidence and cannot be validated
d) The borrower must repay the loan in full
e) It can be validated by paying double the stamp duty
Correct Answer: c) It is inadmissible as evidence and cannot be validated

21
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Explanation: According to Section 35 of the Indian Stamp Act, a promissory note that is insufficiently
stamped cannot be revalidated and is inadmissible as evidence in court.

95. When does the limitation period for enforcing a Letter of Guarantee begin, as per Indian law?

a) From the date the guarantee is signed

b) From the date of loan disbursement
c) From the date of determination or breach by the guarantor
d) From the date of loan default by the borrower
e) From the date of execution of the loan documents
Correct Answer: c) From the date of determination or breach by the guarantor
Explanation: The limitation period for enforcing a Letter of Guarantee begins from the date of
determination or breach by the guarantor, not from the date of execution or loan disbursement.

96. In the event of the death of a guarantor, which of the following actions should the bank take to
safeguard its rights?

a) Freeze the borrower’s account immediately

b) Split the running account and take fresh guarantees if needed
c) Terminate the loan and release the borrower from liability
d) Transfer the liability to the guarantor's estate without notice
e) Ignore the guarantor’s death unless the borrower defaults
Correct Answer: b) Split the running account and take fresh guarantees if needed
Explanation: Upon the death of a guarantor, the bank should split the running account and take fresh
guarantees to continue securing its position.

97. Under what condition can a limited company stand as a guarantor for another entity’s loan?

a) If it has a net worth exceeding ₹10 crore

b) If it is empowered to do so by its Memorandum and Articles of Association
c) If the company’s directors consent to the guarantee
d) If the borrower requests it in writing
e) If the bank specifically demands it
Correct Answer: b) If it is empowered to do so by its Memorandum and Articles of Association
Explanation: A limited company can act as a guarantor only if it is empowered by its Memorandum
of Association and Articles of Association.

98. Which of the following documents is NOT required to be compulsorily registered under Section
17 of the Indian Registration Act?

a) Instruments of gift of immovable property

b) Lease of immovable property exceeding one year
c) Instruments creating any right or interest in immovable property of ₹100 or more
d) Non-testamentary instruments acknowledging the receipt of consideration
e) Acknowledgment of Debt
Correct Answer: e) Acknowledgment of Debt
Explanation: An Acknowledgment of Debt is not required to be compulsorily registered under
Section 17 of the Indian Registration Act, while other instruments mentioned above are.

99. In the context of hypothecation, what is the bank’s legal position on the asset?

22
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) The bank has ownership of the asset but no possession
b) The bank has possession but no ownership
c) The bank has a charge over the asset without possession or ownership
d) The bank is a co-owner of the asset with the borrower
e) The bank transfers possession of the asset to a third party
Correct Answer: c) The bank has a charge over the asset without possession or ownership
Explanation: In hypothecation, the bank holds a charge over the asset as security for the loan, but
the possession and ownership remain with the borrower.

100. What is the impact of a revival letter on a time-barred debt under Section 25(3) of the Indian
Contract Act?

a) It has no legal effect once the debt is time-barred

b) It can revive the debt if the borrower agrees to repay
c) It reduces the debt amount
d) It eliminates the borrower’s liability
e) It imposes a penalty on the borrower
Correct Answer: b) It can revive the debt if the borrower agrees to repay
Explanation: According to Section 25(3) of the Indian Contract Act, a time-barred debt can be revived
if there is a fresh promise to pay the outstanding debt, making the debt a valid consideration.

101. What legal remedy does a bank have if a document is found to be insufficiently stamped due
to accident or mistake?

a) The document can be revalidated by paying double the duty

b) The bank has no remedy and must draft a new document
c) The document can be presented for adjudication of stamp duty within one year
d) The document must be discarded as invalid
e) The borrower must provide a new document with the correct stamp duty
Correct Answer: c) The document can be presented for adjudication of stamp duty within one year
Explanation: If a document is insufficiently stamped by accident or mistake, it can be presented for
adjudication to the appropriate authority within one year to rectify the issue.

102. Which of the following is TRUE regarding the liability of legal heirs of a deceased borrower?

a) Legal heirs are personally liable for the entire debt

b) Legal heirs are liable only up to the value of the assets inherited
c) Legal heirs are automatically discharged from liability
d) Legal heirs must assume personal liability for the entire loan
e) Legal heirs can reduce the liability by paying a nominal fee
Correct Answer: b) Legal heirs are liable only up to the value of the assets inherited
Explanation: Legal heirs are liable only up to the value of the assets they inherit from the deceased
borrower, and not beyond that amount.

103. In the context of the Law of Limitation, what is the limitation period for filing a suit for
recovery of money paid by oversight in excess from a Savings/Current Account?

a) 1 year from the date of payment

b) 2 years from the date of payment
c) 3 years from the date of discovery of the mistake
d) 5 years from the date of payment

23
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
e) 6 months from the date of discovery of the mistake
Correct Answer: c) 3 years from date of discovery of the mistake

104. In the event of the death of a guarantor, what should the bank do with the running account
(such as Cash Credit or Overdraft)?

a) The account should be immediately closed, and the borrower notified

b) The account should be split, and fresh guarantees should be obtained if necessary
c) The loan should be written off since the guarantor is deceased
d) The borrower should be asked to provide additional collateral immediately
e) The bank should immediately take legal action against the guarantor’s legal heirs
Correct Answer: b) The account should be split, and fresh guarantees should be obtained if
necessary
Explanation: When a guarantor dies, the bank typically splits the running account and obtains a fresh
guarantee to continue securing the bank's position.

105. In what circumstances can a guarantor be discharged from liability even if the borrower has
not yet repaid the loan?

a) If the guarantor’s legal heirs refuse to take on the liability

b) If the terms of the loan are changed without the guarantor's consent
c) If the bank chooses to pursue legal action only against the borrower
d) If the loan amount exceeds the original sanctioned limit
e) If the guarantor’s business goes bankrupt
Correct Answer: b) If the terms of the loan are changed without the guarantor's consent
Explanation: A guarantor is discharged from liability if the terms of the loan or agreement are
changed without their consent, even if the borrower has not repaid the loan.

106. In the event of the death of a guarantor, what is the bank’s legal position regarding the
guarantor’s legal heirs?

a) The legal heirs are automatically responsible for the entire loan
b) The legal heirs are liable only up to the value of the assets inherited from the guarantor
c) The legal heirs have no liability and are discharged immediately
d) The bank can force the legal heirs to provide a new guarantee
e) The bank can claim the entire outstanding loan from the legal heirs
Correct Answer: b) The legal heirs are liable only up to the value of the assets inherited from the
guarantor
Explanation: Legal heirs are liable for the guarantor’s obligations only up to the value of the assets
they inherit from the guarantor, not beyond that.

107. What must a bank do if a borrower’s guarantor dies and the loan facility is to be continued?

a) Demand immediate repayment of the loan

b) Replace the deceased guarantor with a fresh guarantor
c) Transfer the guarantor’s liability to the borrower
d) Foreclose the borrower’s assets
e) Notify the guarantor’s legal heirs of their liability
Correct Answer: b) Replace the deceased guarantor with a fresh guarantor
Explanation: If the bank decides to continue the loan facility after the guarantor's death, it must
obtain a fresh guarantee from another party.

24
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
108. How does the death of a guarantor affect the enforceability of the guarantee provided by the
guarantor?

a) The guarantee becomes void immediately upon the guarantor's death

b) The guarantee remains valid, but the bank can proceed only against the deceased guarantor’s
estate
c) The guarantee can no longer be enforced for any amount due
d) The borrower must immediately settle the loan
e) The guarantee becomes invalid, and the borrower is released from liability
Correct Answer: b) The guarantee remains valid, but the bank can proceed only against the deceased
guarantor’s estate
Explanation: Even after the death of the guarantor, the guarantee remains enforceable, and the bank
can proceed against the guarantor’s estate for the recovery of dues.

109. What happens if a guarantor dies and the bank does not replace the guarantor or take fresh
guarantees within the limitation period?

a) The loan becomes time-barred, and the bank cannot enforce the guarantee
b) The borrower is automatically discharged from the loan
c) The bank can still proceed against the deceased guarantor’s estate within the limitation period
d) The bank must close the account and claim losses from insurance
e) The bank’s right to recover the loan is forfeited
Correct Answer: c) The bank can still proceed against the deceased guarantor’s estate within the
limitation period
Explanation: If a guarantor dies, the bank can proceed against the deceased guarantor’s estate for
the recovery of dues within the limitation period, even if fresh guarantees are not obtained.

Case Study 1:

Scenario: ABC Enterprises, a partnership firm, approaches XYZ Bank for a loan. The firm comprises two
partners. They wish to offer their business assets as collateral. The bank requires the partners to sign
a Demand Promissory Note (D.P. Note) and execute an agreement of hypothecation for the business
assets.

1. Who must execute the loan documents on behalf of the partnership firm?

a) One partner, as authorized by the other

b) All partners must sign the loan documents in their individual capacity
c) Only the managing partner must sign
d) The firm’s accountant can sign the documents
e) One partner’s spouse can sign on behalf of both partners
Correct Answer: b) All partners must sign the loan documents in their individual capacity
Explanation: All partners of a partnership firm must execute loan documents, both on behalf of the
firm and in their individual capacity. This ensures that the bank has recourse to both the firm’s assets
and the partners’ individual estates.

Case Study 2:

Scenario: A borrower, Mr. Singh, had executed a Demand Promissory Note in favor of a bank for a term
loan. The loan is now overdue, and Mr. Singh refuses to repay, claiming the document was not
adequately stamped when it was executed.

25
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
2. What is the legal standing of the Demand Promissory Note if it was insufficiently stamped?

a) It can still be enforced in court

b) It is inadmissible as evidence in court
c) It can be revalidated by paying a penalty
d) The borrower can be forced to repay without the document
e) The bank can initiate criminal action against the borrower
Correct Answer: b) It is inadmissible as evidence in court
Explanation: A Demand Promissory Note that is not duly stamped cannot be revalidated and is
inadmissible as evidence in court.

Case Study 3:

Scenario: A bank is planning to provide a term loan to a borrower who is offering immovable property
as collateral. The bank wants to ensure the mortgage is legally enforceable.

3. What is the period of limitation for enforcing the payment of money secured by a mortgage?

a) 1 year
b) 3 years
c) 5 years
d) 12 years
e) 30 years
Correct Answer: d) 12 years
Explanation: The period of limitation for enforcing payment of money secured by a mortgage is 12
years from the date when the money becomes due.

Case Study 4:

Scenario: DEF Industries, a limited company, wants to stand as a guarantor for a loan taken by its
subsidiary. However, the Articles of Association of DEF Industries are silent on the company's ability to
provide guarantees.

4. Can DEF Industries legally act as a guarantor for the loan?

a) Yes, as long as the board passes a resolution

b) No, unless the Memorandum and Articles of Association specifically authorize it
c) Yes, but only if a managing director signs the guarantee
d) No, unless the company has more than ₹10 crore in net assets
e) Yes, without any specific requirement from the Articles
Correct Answer: b) No, unless the Memorandum and Articles of Association specifically authorize it
Explanation: A limited company can stand as a guarantor only if it is expressly authorized to do so in
its Memorandum and Articles of Association.

Case Study 5:

Scenario: Mr. Raj, an individual borrower, has passed away without fully repaying his loan. The loan
was secured by a personal guarantee from his business partner. The bank wants to proceed with legal
action against the deceased’s legal heirs.

5. What is the legal liability of the legal heirs for the outstanding loan?

a) The legal heirs are personally liable for the entire loan
b) The legal heirs are liable only up to the value of assets inherited

26
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
c) The legal heirs are discharged from any liability
d) The bank cannot proceed against the legal heirs
e) The legal heirs must continue the guarantee obligation
Correct Answer: b) The legal heirs are liable only up to the value of assets inherited
Explanation: The legal heirs are liable only up to the value of the assets they inherit from the
deceased borrower and are not personally liable for the entire loan

Case Study 6:

Scenario: A loan agreement between a bank and a borrower was executed without adequate stamp
duty due to an oversight. The bank wants to enforce the agreement in court, but the borrower disputes
its validity.

6. What should the bank do to remedy the situation?

a) Destroy the document and create a new one

b) Pay the additional stamp duty and a penalty to revalidate the document
c) Proceed with the original document as it is
d) Appeal directly to the court to bypass the stamping issue
e) Initiate criminal charges against the borrower
Correct Answer: b) Pay the additional stamp duty and a penalty to revalidate the document
Explanation: If a document is insufficiently stamped, the bank can pay the additional stamp duty
along with a penalty to revalidate the document.

Case Study 7:

Scenario: XYZ Co. entered into a loan agreement with a bank, secured by a hypothecation of goods.
The company later defaulted on the loan, and the bank wants to recover the outstanding amount by
claiming the hypothecated goods.

7. What is the bank’s legal position regarding the hypothecated goods?

a) The bank has physical possession of the goods

b) The bank has a charge over the goods without possession
c) The bank automatically owns the goods upon default
d) The bank must transfer ownership to a third party
e) The bank can sell the goods without notifying the borrower
Correct Answer: b) The bank has a charge over the goods without possession
Explanation: In hypothecation, the bank holds a charge over the goods as security, but the
possession and ownership remain with the borrower.

Case Study 8:

Scenario: A borrower signed a revival letter extending the limitation period on a loan that was near
the end of its limitation period. The bank wants to ensure the loan remains enforceable.

8. How does the revival letter affect the limitation period?

a) It extends the limitation period by 6 months

b) It extends the limitation period by 3 years
c) It does not affect the limitation period
d) It cancels the borrower’s liability
e) It shortens the limitation period by 1 year

27
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Correct Answer: b) It extends the limitation period by 3 years
Explanation: A revival letter signed by the borrower extends the limitation period for the loan by 3
years from the date of the letter.

Case Study 9:

Scenario: A bank granted a loan to ABC Pvt. Ltd., a limited company, secured by a mortgage on
immovable property. The mortgage deed was executed, but the registration was delayed due to
internal procedural issues at the bank. The borrower defaults, and the bank wants to enforce the
mortgage.

9. What is the legal standing of the mortgage if the deed is not registered?

a) The mortgage is valid, and the bank can enforce it

b) The mortgage is void due to non-registration
c) The mortgage can be enforced with a penalty
d) The mortgage is valid only if it is notarized
e) The bank must write off the loan as a loss
Correct Answer: b) The mortgage is void due to non-registration
Explanation: Under Section 17 of the Indian Registration Act, a mortgage of immovable property
must be compulsorily registered. If not registered, it cannot be enforced, and the bank loses its legal
rights over the property.

Case Study 10:

Scenario: A partnership firm applies for a working capital loan from a bank, and the partners agree to
provide a personal guarantee. After a few months, one of the partners passes away. The firm defaults
on the loan, and the bank wants to enforce the personal guarantee.

10. What should the bank do in light of the partner’s death?

a) Enforce the personal guarantee against the deceased partner’s legal heirs
b) Enforce the personal guarantee against the surviving partners
c) Write off the loan as uncollectible
d) Require the firm to provide fresh guarantees from the remaining partners
e) File a lawsuit against the deceased partner’s estate
Correct Answer: b) Enforce the personal guarantee against the surviving partners
Explanation: In the case of a partnership, the personal guarantee signed by the partners typically
creates joint and several liability, meaning the surviving partners remain liable for the full amount of
the loan.

Case Study 11:

Scenario: XYZ Ltd., a borrower, executed a Demand Promissory Note (D.P. Note) in favor of the bank.
The borrower has since defaulted, and the bank seeks to enforce the D.P. Note. However, the
borrower claims that the note is invalid because it was executed 3.5 years ago.

11. Can the bank enforce the D.P. Note in this situation?

a) Yes, the bank can enforce the note regardless of time passed
b) No, the D.P. Note is time-barred after 3 years
c) Yes, but the bank must get the note revalidated
d) No, because the D.P. Note expires after 1 year

28
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
e) The bank must issue a fresh demand before enforcement
Correct Answer: b) No, the D.P. Note is time-barred after 3 years
Explanation: Under the Law of Limitation, a Demand Promissory Note must be enforced within 3
years from the date of execution. After 3 years, it becomes time-barred.

Case Study 12:

Scenario: A borrower pledges movable assets (inventory) to a bank as security for a loan through a
pledge agreement. However, the borrower continues to hold possession of the inventory. The
borrower defaults on the loan, and the bank wishes to enforce its rights over the pledged assets.

12. Can the bank legally claim the pledged assets?

a) Yes, because the pledge gives the bank ownership rights

b) No, because the borrower retains possession of the assets
c) Yes, because the bank holds the right to enforce the pledge even without possession
d) No, because a pledge requires transfer of possession to the lender
e) The bank must notify the borrower before claiming the assets
Correct Answer: d) No, because a pledge requires transfer of possession to the lender
Explanation: A valid pledge requires that the lender (bank) take possession of the pledged assets.
Without possession, the bank cannot enforce the pledge.

Case Study 13:

Scenario: ABC Industries, a limited company, defaults on a loan secured by a mortgage. The
mortgage deed was executed but has not yet been registered. The borrower is now requesting the
bank to extend the loan tenure and renegotiate the terms.

135. What impact does this have on the mortgage and its enforceability?

a) The mortgage can still be enforced after renegotiation

b) The mortgage becomes invalid if the terms are renegotiated without registration
c) The mortgage remains valid, and renegotiation is irrelevant
d) The bank must register the mortgage before renegotiating the terms
e) The mortgage can be enforced with a penalty
Correct Answer: b) The mortgage becomes invalid if the terms are renegotiated without registration
Explanation: If the mortgage deed is not registered, the mortgage becomes invalid. Renegotiating
the terms without proper registration further weakens the enforceability of the security.

Case Study 14:

Scenario: DEF Ltd. took out a term loan from a bank secured by a hypothecation of machinery. The
company defaulted, and the bank is now seeking to take possession of the machinery.

14. What is the bank’s legal position regarding the hypothecated machinery?

a) The bank can immediately take possession of the machinery

b) The bank has a charge over the machinery but does not have the right to immediate possession
c) The bank must sell the machinery through a third party
d) The borrower must transfer the title of the machinery to the bank
e) The bank automatically becomes the owner of the machinery upon default
Correct Answer: b) The bank has a charge over the machinery but does not have the right to
immediate possession

29
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Explanation: In a hypothecation, the borrower retains possession of the asset, while the lender (the
bank) holds a charge over the machinery. The bank does not have immediate possession rights but
can enforce the charge through legal means to recover the loan.

Case Study 15:

Scenario: A limited company, XYZ Ltd., has secured a large loan from a bank using its factory as
collateral through a mortgage. The company defaults on the loan, and the bank initiates legal
proceedings to recover the outstanding amount. During the proceedings, it is discovered that the
mortgage deed was not properly stamped when it was executed.

15. What is the impact of the unstamped mortgage deed on the bank’s legal case?

a) The mortgage is still valid, and the court can admit it with a fine
b) The mortgage is inadmissible in court and cannot be enforced
c) The mortgage can be enforced only after paying the stamp duty
d) The court will reduce the loan amount due to the error
e) The bank must issue a new mortgage deed to recover the loan
Correct Answer: b) The mortgage is inadmissible in court and cannot be enforced
Explanation: Under the Indian Stamp Act, an unstamped or insufficiently stamped document is
inadmissible as evidence in court. In this case, the mortgage deed cannot be enforced until the
proper stamp duty is paid, and a penalty may be required.

Case Study 16:

Scenario: Mr. Verma, a borrower, has provided a corporate guarantee for a loan taken by his company.
The loan becomes overdue, and the bank wants to invoke the corporate guarantee. However, the
company is now facing insolvency proceedings, and Mr. Verma claims the guarantee is no longer
enforceable due to the insolvency status.

16. Can the bank enforce the corporate guarantee in this case?

a) The corporate guarantee becomes void upon insolvency

b) The corporate guarantee can still be enforced against Mr. Verma’s personal assets
c) The bank must wait until the insolvency proceedings are completed
d) The bank cannot enforce the guarantee due to the insolvency
e) The guarantee is enforceable only after a court order
Correct Answer: b) The corporate guarantee can still be enforced against Mr. Verma’s personal assets
Explanation: A corporate guarantee remains enforceable even if the company is undergoing
insolvency proceedings. The bank can still claim from Mr. Verma’s personal assets unless specifically
restricted by the terms of the insolvency proceeding.

Case Study 17:

Scenario: A borrower, Mrs. Sharma, took a loan from a bank, secured by a mortgage on her residential
property. After her death, her legal heirs inherited the property. The loan remains unpaid, and the
bank wishes to recover the outstanding dues by selling the property.

17. What is the legal position of the legal heirs regarding the loan?

a) The legal heirs are personally liable for the entire loan
b) The legal heirs are liable only up to the value of the assets they inherited
c) The bank cannot recover the loan from the inherited property

30
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
d) The loan is automatically written off after Mrs. Sharma’s death
e) The legal heirs can contest the loan in court to avoid payment
Correct Answer: b) The legal heirs are liable only up to the value of the assets they inherited
Explanation: Legal heirs are only liable for the loan up to the value of the assets they inherit. In this
case, the bank can recover its dues from the inherited property but cannot pursue the legal heirs
personally for more than what they inherited.

Case Study 18:

Scenario: A bank granted a loan to a sole proprietorship, and the proprietor passed away without
leaving any legal heir or will. The loan was secured by a hypothecation of the business’s stock. The
bank is now seeking to recover the outstanding amount.

18. What should the bank do to recover its dues?

a) Sell the stock without further legal process

b) Claim the hypothecated stock and sell it after legal proceedings
c) The loan will be written off since there are no legal heirs
d) The bank must foreclose on the property immediately
e) The bank must wait for a court-appointed executor to distribute the assets
Correct Answer: b) Claim the hypothecated stock and sell it after legal proceedings
Explanation: The bank can claim the hypothecated stock, but it must follow the due process of law to
recover its dues. Hypothecation does not give the bank immediate possession, so legal proceedings
are necessary to enforce the security.

Case Study 19:

Scenario: ABC Ltd., a limited company, offers its plant and machinery as security for a term loan from
a bank. After defaulting on the loan, the company negotiates a restructuring of the loan, but the
bank discovers that the mortgage deed covering the plant and machinery was never registered.

19. What is the consequence of the unregistered mortgage deed?

a) The mortgage is enforceable but with a fine

b) The mortgage is not enforceable until it is registered
c) The bank can still proceed to recover the loan without the mortgage
d) The mortgage is valid if it is signed by all directors
e) The company must immediately register the mortgage deed
Correct Answer: b) The mortgage is not enforceable until it is registered
Explanation: A mortgage of immovable property (including plant and machinery) must be registered
to be enforceable under the Indian Registration Act. An unregistered mortgage cannot be enforced in
court.

Case Study 20:

Scenario: DEF Ltd., a borrower, is facing financial difficulties and has negotiated with the bank to
extend the term loan repayment period. However, one of the guarantors of the loan, Mr. Gupta, was
not informed about the extension of the loan terms. Mr. Gupta now claims he is discharged from his
guarantee obligations.

20. Is Mr. Gupta’s claim valid?

31
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) No, a guarantor cannot be discharged under any circumstances
b) Yes, a guarantor is discharged if the loan terms are changed without consent
c) No, unless Mr. Gupta has formally requested discharge
d) Yes, but only if the loan is fully repaid
e) No, the guarantor’s liability remains unless the bank discharges him
Correct Answer: b) Yes, a guarantor is discharged if the loan terms are changed without consent
Explanation: If the terms of the loan are changed without the guarantor's consent, the guarantor can
be discharged from their obligation under the law.

Case Study 21:

Scenario: A borrower, Mr. Ramesh, secured a term loan from a bank by hypothecating his inventory.
Mr. Ramesh defaults on the loan, and the bank now wants to take possession of the inventory, but
the borrower has already sold a significant portion of it.

21. What legal recourse does the bank have?

a) The bank can claim possession of the remaining inventory

b) The bank cannot claim the inventory because it was sold
c) The bank can sue the buyer of the inventory to recover the loan
d) The bank must write off the loan as it lost the security
e) The bank can claim damages for selling the inventory without consent
Correct Answer: a) The bank can claim possession of the remaining inventory
Explanation: In a hypothecation agreement, the bank retains a charge over the inventory, even
though the borrower maintains possession. While the bank cannot reclaim what has been sold, it can
still claim possession of any remaining inventory to recover the loan. The bank may also pursue legal
remedies for the unauthorized sale of the hypothecated goods.

Case Study 22:

Scenario: A borrower defaults on a secured loan after three years of no payments. The bank wants to
file a suit for recovery but realizes the borrower has not acknowledged the debt for several years.

22. How can the bank extend the limitation period to file the suit?

a) The bank cannot extend the limitation period once it has expired
b) The bank can extend the period by obtaining an acknowledgment of debt from the borrower
c) The bank can automatically extend the period by renewing the loan
d) The limitation period is extended if the bank provides new terms to the borrower
e) The bank can extend the period by transferring the loan to another bank
Correct Answer: b) The bank can extend the period by obtaining an acknowledgment of debt from
the borrower
Explanation: The limitation period for enforcing debt can be extended by obtaining an
acknowledgment of the debt from the borrower before the expiration of the original period. This
acknowledgment resets the limitation period, giving the bank additional time to file a recovery suit.

Case Study 23:

Scenario: A term loan provided to a corporate borrower was secured by a personal guarantee from
one of the directors. The company goes into liquidation, and the bank wants to recover the
outstanding dues from the director’s personal assets.

23. What is the bank’s legal standing to recover from the director?

32
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) The personal guarantee becomes void upon the company’s liquidation
b) The bank can proceed against the director's personal assets under the personal guarantee
c) The bank can only claim from the company’s liquidated assets
d) The bank must wait for court approval before claiming from the director
e) The personal guarantee is enforceable only after liquidating the company’s assets
Correct Answer: b) The bank can proceed against the director's personal assets under the personal
guarantee
Explanation: A personal guarantee remains enforceable even if the company is liquidated. The bank
can directly claim from the personal assets of the guarantor to recover the outstanding dues.

Case Study 24:

Scenario: A borrower signed a loan agreement with a bank, but the agreement was not stamped due
to an administrative oversight. The borrower later defaults on the loan, and the bank wishes to file a
suit for recovery.

24. What action must the bank take to ensure the loan agreement is enforceable in court?

a) The loan agreement can be enforced without any further action

b) The bank must pay the appropriate stamp duty and any applicable penalties
c) The loan must be written off as unenforceable
d) The bank must issue a new loan agreement and have it stamped properly
e) The court will automatically enforce the loan agreement
Correct Answer: b) The bank must pay the appropriate stamp duty and any applicable penalties
Explanation: If a document is not duly stamped, it is inadmissible in court. The bank must pay the
proper stamp duty and any associated penalties to make the loan agreement enforceable.

33
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Chapter 24
1. What is the primary purpose of creating a charge on a security in favor of a lender?

A) To transfer ownership of the asset

B) To provide a fallback mechanism in case of loan default
C) To grant exclusive possession of the asset to the lender
D) To improve the borrower’s financial reputation
E) To establish a long-term partnership between lender and borrower
Answer: B
Explanation: Creating a charge allows the lender to have a legal right to the asset in case of default,
providing a fallback mechanism.

2. Which of the following is a key characteristic of a charge?

A) Transfer of asset ownership

B) Existence of a debt is mandatory
C) Charge holder has perpetual transfer rights
D) Security in favor of the lender for payment of money
E) It automatically gives possession of the asset to the lender
Answer: D
Explanation: A charge serves as security for the lender for the payment of money, but it does not
automatically transfer ownership or possession of the asset.

3. What type of charge involves the delivery of goods as security for a debt without transferring
ownership?

A) Mortgage
B) Hypothecation
C) Lien
D) Pledge
E) Assignment
Answer: D
Explanation: A pledge involves delivering goods as security for a debt, with the ownership remaining
with the borrower and only possession transferred.

4. What is a key feature of a "Negative Lien"?

A) The borrower gives possession of the asset to the bank

B) The lender has the right to sell the asset
C) The borrower agrees not to create any charge over the assets
D) The lender can repossess the asset without notice
E) The asset must be a movable property
Answer: C
Explanation: A negative lien involves the borrower declaring that the assets are free from
encumbrance and agreeing not to create a charge over them.

5. Which of the following is NOT considered a method of creating a charge?

A) Set-off
B) Pledge
C) Appropriation

34
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 D) Forfeiture
E) Hypothecation
Answer: D
Explanation: Forfeiture is not a recognized method of creating a charge. The recognized methods
include pledge, set-off, appropriation, and hypothecation.

6. Which section of the Indian Contract Act defines "Particular Lien"?

A) Section 171
B) Section 174
C) Section 170
D) Section 172
E) Section 173
Answer: C
Explanation: Section 170 of the Indian Contract Act defines "Particular Lien," which gives the right to
retain goods for which the debt was incurred.

7. In which of the following cases does "General Lien" apply?

A) Only for goods directly related to the debt incurred

B) Only for goods held as collateral for specific debts
C) For retaining goods for any general balance due
D) For sale of assets in case of bankruptcy
E) For movable property only
Answer: C
Explanation: General lien allows the retention of goods for any general balance due, not just for the
specific debt incurred.

8. What kind of mortgage involves depositing title deeds without transferring legal title?

A) Simple Mortgage
B) English Mortgage
C) Equitable Mortgage
D) Usufructuary Mortgage
E) Anomalous Mortgage
Answer: C
Explanation: In an equitable mortgage, the borrower deposits title deeds with the lender without
transferring legal title.

9. What is one of the primary risks associated with hypothecation?

A) Loss of ownership
B) Double financing
C) Excessive registration fees
D) Legal ownership transfer
E) Immediate possession by lender
Answer: B
Explanation: One of the risks associated with hypothecation is the possibility of double financing,
where the borrower may use the same asset to secure multiple loans.

10. In a pledge, who has the right to sell the goods in case of default?

35
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 A) The borrower
B) The court
C) The lender (pledgee)
D) An independent arbitrator
E) None of the above
Answer: C
Explanation: In case of default, the pledgee (lender) has the right to sell the goods after giving due
notice to the pledgor (borrower).

11. Which of the following is NOT a form of mortgage recognized under Indian law?

A) Simple Mortgage
B) Equitable Mortgage
C) Mortgage by Conditional Sale
D) Legal Mortgage
E) Usufructuary Mortgage
Answer: D
Explanation: There is no form of mortgage specifically termed as "Legal Mortgage" in Indian law.

12. What is the main distinction between a fixed charge and a floating charge?

A) Ownership transfer
B) Type of asset
C) Ability to sell assets without permission
D) Applicability to future assets
E) Existence of debt
Answer: D
Explanation: A floating charge can cover future assets, while a fixed charge is only on specific,
present assets.

13. Under which act is the CERSAI registration mandated?

A) Transfer of Property Act, 1882

B) Indian Contract Act, 1872
C) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002
D) Banking Regulation Act, 1949
E) Companies Act, 2013
Answer: C
Explanation: The CERSAI registration is mandated under the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002.

14. What is the purpose of CERSAI registration?

A) To enhance the lender’s authority over the borrower

B) To prevent fraud in lending by avoiding multiple loans on the same asset
C) To enable the transfer of ownership of pledged assets
D) To register all movable assets with the government
E) To resolve disputes between lenders

36
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: B
Explanation: CERSAI registration prevents fraud by ensuring that multiple loans are not raised against
the same asset.

15. Which of the following charges on securities can be filed with CERSAI?

A) Mortgages by deposit of title deeds

B) Hypothecation of crops
C) Fixed deposits
D) Stock certificates
E) Vehicle loans
Answer: A
Explanation: Mortgages by deposit of title deeds are one of the types of charges required to be
registered with CERSAI.

16. In the case of hypothecation, what is usually retained by the borrower?

A) Ownership of the property

B) Possession of the property
C) Both ownership and possession
D) Only the right to sell the property
E) None of the above
Answer: C
Explanation: In hypothecation, both ownership and possession are retained by the borrower, with
only a charge created in favor of the lender.

17. What is the main difference between pledge and hypothecation?

A) Ownership is transferred in hypothecation but not in pledge

B) Possession of the goods is transferred in pledge but not in hypothecation
C) A pledge is enforceable by law, but hypothecation is not
D) Only movable assets can be pledged, while hypothecation applies to all assets
E) Hypothecation involves the sale of goods upon default
Answer: B
Explanation: In a pledge, possession of the goods is transferred to the lender, whereas in
hypothecation, possession remains with the borrower.

18. Which form of mortgage does not require registration in some states?

A) English Mortgage
B) Usufructuary Mortgage
C) Equitable Mortgage
D) Mortgage by Conditional Sale
E) Simple Mortgage
Answer: C
Explanation: An equitable mortgage does not require registration in some states, depending on local
laws.

19. Which of the following rights does a mortgagor have in a mortgage transaction?

A) Right to ownership of the mortgaged property

B) Right to dispose of the property without lender’s consent

37
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 C) Right to recover possession after loan repayment
D) Right to transfer the debt to another borrower
E) Right to charge a fee for mortgaging the property
Answer: C
Explanation: The mortgagor has the right to recover possession of the property once the loan is
repaid.

20. In the case of appropriation of payments, when a borrower has multiple debts, who decides
which debt is discharged if the borrower does not indicate a preference?

A) The borrower’s financial advisor

B) The bank’s board of directors
C) The creditor
D) The court
E) A third-party auditor
Answer: C
Explanation: If the borrower does not specify which debt is being discharged, the creditor may apply
the payment to any lawful debt.

21. Which of the following is an essential feature of hypothecation?

A) Transfer of ownership
B) Delivery of possession to the lender
C) Charge on movable property without possession transfer
D) Requirement for court approval
E) Permanent transfer of the asset
Answer: C
Explanation: In hypothecation, a charge is created on movable property without transferring
possession to the lender, allowing the borrower to retain control over the asset.

22. In which of the following forms of mortgage does the mortgagor remain in possession of the
property but gives the lender the right to collect rent or profit from it?

A) Simple Mortgage
B) Usufructuary Mortgage
C) Equitable Mortgage
D) Mortgage by Conditional Sale
E) Anomalous Mortgage
Answer: B
Explanation: In a Usufructuary Mortgage, the mortgagor remains in possession of the property, but
the lender has the right to collect rent or profit.

23. Which document governs the rules for a banker's right of set-off?

A) Indian Contract Act, 1872

B) Transfer of Property Act, 1882
C) Companies Act, 2013
D) Securitisation and Reconstruction of Financial Assets Act, 2002
E) Banking Regulation Act, 1949

38
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: A
Explanation: The Indian Contract Act, 1872 governs the rules for a banker's right of set-off, allowing a
creditor to adjust a debtor’s accounts to determine the net payable balance.

24. What must a bank do to enforce a mortgage under the SARFAESI Act without court
intervention?

A) Obtain written consent from the borrower

B) Give the borrower 60 days' notice
C) File a lawsuit in the local court
D) Issue a public notice of sale
E) Register the mortgage with CERSAI after the notice period
Answer: B
Explanation: Under the SARFAESI Act, the lender can take possession of the property without court
intervention by giving the borrower 60 days' notice after default.

25. What is the main risk addressed by the creation of a floating charge?

A) Property damage
B) Default by a co-borrower
C) Multiple claims on future assets
D) Depreciation of asset value
E) Involuntary transfer of ownership
Answer: C
Explanation: A floating charge secures future assets and addresses the risk of multiple claims on
these assets, which may fluctuate during the course of business.

26. Which of the following is NOT required for the creation of an equitable mortgage?

A) Deposit of original title deeds

B) Expressed intention to create a charge
C) Written agreement
D) Loan repayment obligation
E) Identifiable immovable property
Answer: C
Explanation: An equitable mortgage does not require a written agreement; the deposit of title deeds
with the intention to create a charge suffices.

27. What action must a bank take in case of default when holding a pledge as security?

A) Apply to the court for possession

B) File for bankruptcy of the borrower
C) Provide notice of intent to sell the pledged goods
D) Seize all assets of the borrower
E) Liquidate all other securities first
Answer: C
Explanation: In case of default, the lender (pledgee) must provide the borrower (pledgor) with a
notice of intent to sell the pledged goods before taking action.

28. What is a key difference between a lien and a pledge?

A) A pledge does not involve any security interest

39
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 B) A lien transfers ownership of the asset to the lender
C) A pledge involves the transfer of possession, while a lien does not
D) A lien can only be created on immovable property
E) Both give equal rights to the lender to sell the asset
Answer: C
Explanation: In a pledge, possession of the asset is transferred to the lender, whereas in a lien,
possession remains with the borrower.

29. In which type of lien does the right of retainer extend beyond the particular goods for which
the debt was incurred?

A) Specific Lien
B) Particular Lien
C) General Lien
D) Implied Lien
E) Statutory Lien
Answer: C
Explanation: A General Lien allows the lender to retain any goods of the borrower, not just those
related to the specific debt incurred.

30. What is the most common form of mortgage used by lending banks in India?

A) Mortgage by Conditional Sale

B) Simple Mortgage
C) Usufructuary Mortgage
D) English Mortgage
E) Equitable Mortgage
Answer: E
Explanation: Equitable Mortgage, where title deeds are deposited as security, is the most common
form of mortgage used by lending banks in India.

31. Which of the following is NOT an essential feature of appropriation of payments under the
Indian Contract Act?

A) Known amount of claims

B) Claims must be in the same right
C) The right to adjust payments must be immediate
D) The right of set-off must exist
E) Payments can only be applied to future debts
Answer: E
Explanation: Appropriation of payments applies to existing debts, not future debts, and allows
creditors to adjust payments against those debts.

32. When does the priority of charge registration apply under the CERSAI framework?

A) From the time of loan sanction

B) From the time of asset purchase
C) From the time of registration with CERSAI
D) From the time of debt repayment
E) From the time of borrower’s default

40
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: C
Explanation: Under the CERSAI framework, priority applies from the time the charge is registered
with CERSAI, not from the time of loan sanction or asset purchase.

33. Which type of charge is created over movable assets where possession is not transferred, but
the lender holds an equitable interest in the assets?

A) Pledge
B) Hypothecation
C) Lien
D) Assignment
E) Mortgage
Answer: B
Explanation: Hypothecation creates a charge over movable assets without transferring possession,
while the lender holds an equitable interest in the assets.

34. Under a Simple Mortgage, what happens if the borrower defaults on the loan?

A) The lender automatically takes possession of the property

B) The borrower loses ownership of the property
C) The lender can seek court intervention to sell the property
D) The lender files for bankruptcy of the borrower
E) The property is handed over to a third party
Answer: C
Explanation: In a Simple Mortgage, the lender must seek court intervention to sell the mortgaged
property if the borrower defaults on the loan.

35. What type of property can be subject to a mortgage under Indian law?

A) Only movable property

B) Only intangible property
C) Both movable and immovable property
D) Only immovable property
E) Both tangible and intangible property
Answer: D
Explanation: Under Indian law, only immovable property, such as land or buildings, can be
mortgaged.

36. In a Usufructuary Mortgage, what rights does the mortgagee have?

A) Right to ownership of the property

B) Right to sell the property at any time
C) Right to collect rents and profits from the property
D) Right to demolish the property
E) Right to transfer the mortgage to a third party
Answer: C
Explanation: In a Usufructuary Mortgage, the mortgagee has the right to collect rents and profits
from the property but does not obtain ownership or the right to sell it.

37. What is the primary reason for registering a charge with CERSAI?

A) To reduce interest rates on loans

41
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 B) To secure the lender's first right to the charged asset
C) To prevent the borrower from selling the asset
D) To transfer ownership of the asset to the lender
E) To create a contractual obligation between the borrower and lender
Answer: B
Explanation: Registering a charge with CERSAI secures the lender’s first right to the charged asset,
ensuring priority in case of borrower default.

38. What is the purpose of filing a "Set-off" in a banking context?

A) To file for loan foreclosure

B) To sell the borrower's assets
C) To adjust debit and credit balances of a customer’s accounts
D) To transfer the borrower’s debt to another institution
E) To nullify the borrower’s repayment obligations
Answer: C
Explanation: Set-off allows a bank to adjust debit and credit balances across a customer’s accounts,
determining the net amount owed.

39. In which of the following cases is a "General Lien" NOT applicable?

A) Money kept in safe custody

B) Securities held as collateral for a loan
C) Goods held for sale by the lender
D) Bank deposits for securing a general loan
E) Cheques deposited for collection
Answer: A
Explanation: General lien does not apply to money kept in safe custody as this is held in trust, not as
security for a debt.

40. What is a "Sub-mortgage"?

A) A mortgage created by the borrower on part of the property

B) A mortgage held by a third party on behalf of the lender
C) A mortgage created by the mortgagee on the mortgaged property
D) A mortgage with multiple lenders
E) A mortgage on movable property
Answer: C
Explanation: A sub-mortgage is created by the mortgagee, where the mortgaged property is further
mortgaged to another lender.

41. In which case does the concept of "Crystallization" apply in relation to a floating charge?

A) When the borrower defaults on a loan

B) When the bank decides to sell the security
C) When the floating charge converts into a fixed charge
D) When the borrower repays the entire loan
E) When the asset is destroyed
Answer: C
Explanation: Crystallization occurs when a floating charge becomes a fixed charge, typically upon the
borrower’s default or insolvency, or when the lender decides to enforce the charge.

42
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
42. Which of the following is a key feature of a Simple Mortgage?

A) The lender takes immediate possession of the property

B) The lender automatically becomes the owner of the property
C) The borrower retains possession, and the lender can sue for recovery of the loan
D) The borrower must transfer ownership upon loan disbursement
E) The lender can sell the property without court approval
Answer: C
Explanation: In a Simple Mortgage, the borrower retains possession of the property, and the lender
has the right to sue for recovery of the loan amount in case of default.

43. What distinguishes a "Legal Assignment" from an "Equitable Assignment"?

A) Legal assignment requires court approval

B) Legal assignment involves an absolute transfer of the debt, whereas equitable assignment
does not
C) Legal assignment can only be created for tangible assets
D) Equitable assignment transfers both possession and ownership
E) Legal assignment cannot be revoked by the assignor
Answer: B
Explanation: A legal assignment involves the absolute transfer of the debt to the lender, while an
equitable assignment does not meet all the formal requirements of a legal assignment.

44. Which of the following actions is required to create an Equitable Mortgage?

A) Filing a formal application with the court

B) Registering the property with the local land registry
C) Depositing original title deeds with the lender
D) Transferring possession of the property to the lender
E) Signing a legal contract
Answer: C
Explanation: In an Equitable Mortgage, the borrower deposits the original title deeds with the lender
to create a charge over the property without transferring possession.

45. What type of charge does not give the lender immediate rights over the assets but secures
future assets or fluctuating assets?

A) Fixed charge
B) Floating charge
C) Lien
D) Pledge
E) Hypothecation
Answer: B
Explanation: A floating charge covers future or fluctuating assets, and the lender’s rights only
crystallize (convert into a fixed charge) in specific circumstances, such as default.

46. Under the Indian Contract Act, which section governs the rules for a General Lien?

A) Section 59
B) Section 170
C) Section 171
D) Section 174

43
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 E) Section 176
Answer: C
Explanation: Section 171 of the Indian Contract Act governs the rules for General Lien, which allows
banks and certain other entities to retain goods for any general balance due.

47. What is the key difference between a charge created "By operation of Law" and a charge "By
act of Parties"?

A) A charge by operation of law does not require a contract between the lender and borrower
B) A charge by act of parties is enforceable without notice
C) A charge by operation of law is created only for immovable assets
D) A charge by act of parties does not need to be registered
E) A charge by operation of law requires the transfer of ownership
Answer: A
Explanation: A charge created by operation of law does not require a contractual agreement and
occurs automatically under legal provisions, whereas a charge by act of parties involves mutual
agreement.

48. In a Set-off, which of the following conditions must be met?

A) Claims must be for future debts

B) Debts must be between different parties
C) Claims must be in the same right and debts must be due immediately
D) Set-off can only apply to secured debts
E) Debts must arise from the same transaction
Answer: C
Explanation: Set-off requires that the claims are in the same right (between the same parties) and
that the debts are due immediately.

49. What is the primary feature of a Mortgage by Conditional Sale?

A) The lender becomes the owner of the property immediately

B) The borrower can buy back the property upon repayment of the loan
C) The lender can sell the property without the borrower’s consent
D) The borrower retains possession but loses ownership
E) The lender has no right to sell the property
Answer: B
Explanation: In a Mortgage by Conditional Sale, the borrower retains the option to buy back the
property after repaying the loan amount.

50. Which of the following assets can be hypothecated?

A) Immovable property like land

B) Machinery and inventory
C) Government bonds
D) Fixed deposits
E) Personal jewelry
Answer: B
Explanation: Hypothecation typically applies to movable assets like machinery, inventory, and
vehicles, which remain in the borrower’s possession while serving as collateral.

44
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
51. Which type of lien gives the lender the right to retain specific goods for a particular debt
incurred in connection with those goods?

A) General Lien
B) Specific Lien
C) Statutory Lien
D) Implied Lien
E) Negative Lien
Answer: B
Explanation: A Specific Lien gives the lender the right to retain particular goods in respect of the
debt incurred for those goods.

52. What does the Central Registry of Securitisation Asset Reconstruction and Security Interest of
India (CERSAI) primarily prevent?

A) Borrower’s default on loans

B) Lender’s misuse of assets
C) Multiple loans being raised on the same asset
D) Fraudulent property ownership claims
E) Delays in loan disbursement
Answer: C
Explanation: CERSAI primarily prevents multiple loans from being raised on the same asset by
registering all security interests created by lenders.

53. Which form of charge allows the borrower to continue using the asset while it is being used as
security for a loan?

A) Mortgage by Conditional Sale

B) Pledge
C) Hypothecation
D) Lien
E) Assignment
Answer: C
Explanation: Hypothecation allows the borrower to continue using the asset, such as machinery or
inventory, while it is used as security for a loan.

54. In a Usufructuary Mortgage, who retains possession of the mortgaged property?

A) The mortgagee
B) A third-party trustee
C) The mortgagor
D) The government
E) The court
Answer: C
Explanation: In a Usufructuary Mortgage, the mortgagor retains possession of the property while the
mortgagee receives the income (e.g., rent or profits) from the property.

55. Which of the following is NOT considered an actionable claim for the purposes of an
assignment in banking?

A) Book debts
B) Life insurance policies

45
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 C) Government securities
D) Money due from a government department
E) Debt secured by a mortgage of immovable property
Answer: E
Explanation: A debt secured by a mortgage of immovable property is not considered an actionable
claim for assignment; assignment usually applies to unsecured or movable claims.

56. Under a floating charge, which assets are typically included?

A) Land and buildings

B) Fixed machinery only
C) Movable goods and stock-in-trade
D) Registered securities
E) Intellectual property rights
Answer: C
Explanation: A floating charge typically covers movable goods, stock-in-trade, and other assets that
fluctuate during the borrower’s business operations.

57. What is the primary advantage of an Equitable Mortgage over a Simple Mortgage?

A) The lender gains ownership of the property

B) There are fewer formalities and lower costs in creation
C) The borrower retains full control over the property
D) The lender can take possession without court intervention
E) The property can be sold without any legal process
Answer: B
Explanation: An Equitable Mortgage has simpler procedures, fewer formalities, and lower costs
compared to a Simple Mortgage, making it more convenient for both the borrower and lender.

58. Which of the following actions is NOT required in the creation of a pledge?

A) Delivery of goods to the lender

B) Ownership transfer to the lender
C) Retaining the goods until the debt is paid
D) Right of the lender to sell the goods in case of default
E) Notice of sale to the borrower
Answer: B
Explanation: In a pledge, only possession of the goods is transferred to the lender, while ownership
remains with the borrower.

59. What kind of mortgage requires the actual transfer of possession of the mortgaged property to
the mortgagee?

A) Usufructuary Mortgage
B) Equitable Mortgage
C) Simple Mortgage
D) Mortgage by Conditional Sale
E) Anomalous Mortgage
Answer: A
Explanation: In a Usufructuary Mortgage, the mortgagee takes possession of the property and earns
profits from it, such as rent, while ownership remains with the mortgagor.

46
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
60. What is a key characteristic of a Lien in favor of a bank?

A) The bank gets immediate ownership of the asset

B) The bank can retain the asset only for a specific debt
C) The bank has the right to retain all assets of the customer for any balance due
D) The bank automatically becomes the owner of the asset upon loan default
E) The bank must always transfer the lien to a third party
Answer: C
Explanation: A Lien allows the bank to retain all the customer's assets for any general balance due,
not just for a specific debt.

61. In the case of a Negative Lien, what is the principal limitation faced by the lender in case of a
borrower’s default?

A) The lender cannot sell the asset even after court intervention
B) The lender has no right to take possession or retain the asset
C) The lender must seek permission from all other creditors
D) The asset is automatically transferred to another lender upon default
E) The borrower can freely dispose of the asset
Answer: B
Explanation: A Negative Lien only restricts the borrower from creating a further charge or disposing
of the asset without the lender's permission, but it does not give the lender any rights over the asset.

62. Crystallization of a floating charge may be triggered by which of the following events, and what
is the immediate legal consequence for the lender?

A) Regular inspection by the lender; the lender gains partial ownership of the assets
B) Voluntary repayment by the borrower; the floating charge is converted into a lien
C) The borrower’s insolvency; the charge converts into a fixed charge over present asset
D) Sale of the borrower’s business; the lender loses control over the assets
E) Asset appreciation beyond a specified value; the floating charge is removed automatically
Answer: C
Explanation: Crystallization occurs when a floating charge converts into a fixed charge, typically
triggered by the borrower’s insolvency or default. The lender gains a fixed charge over all present
assets at the time of crystallization.

63. In the context of appropriation of payments under the Indian Contract Act, if neither the
debtor nor the creditor makes any specific appropriation, how should the creditor legally apply the
payment when the borrower has multiple debts?

A) The payment must be applied to the most recent debt

B) The payment must be applied to the oldest debt, even if time-barred
C) The creditor can apply the payment to any debt of the highest value
D) The payment must be applied to future debts first
E) The creditor must seek judicial approval before appropriating the payment
Answer: B
Explanation: If neither the borrower nor the creditor makes any appropriation, the payment must be
applied to the oldest debt, regardless of whether it is time-barred under the limitation law.

64. Mortgage by Conditional Sale creates a peculiar legal situation. Which of the following is the
correct legal interpretation of the borrower's rights during the mortgage period?

47
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 A) The borrower retains full rights over the property and can sell it without the lender’s
permission
B) The borrower can lease the property for profit without informing the lender
C) The borrower cannot reclaim the property once the sale conditions are met by the lender
D) The borrower is entitled to reclaim the property upon repayment of the loan, within the
agreed terms
E) The borrower must permanently transfer ownership to the lender after three years
Answer: D
Explanation: In a Mortgage by Conditional Sale, the borrower retains the right to reclaim the
property upon full repayment of the loan, as long as it is done within the terms of the agreement.

65. Under SARFAESI Act 2002, in what scenario can a secured creditor enforce its security interest
without the intervention of a court or tribunal, and what is the specific condition that must be
fulfilled before such enforcement?

A) The creditor can enforce security as soon as the borrower fails to pay an installment
B) The creditor can take possession of the asset immediately upon loan sanction
C) The creditor can enforce security if the loan is classified as Non-Performing Asset (NPA) and a
60-day notice has been served
D) The creditor can enforce security if the borrower has another active loan with the same
lender
E) The creditor can enforce the security interest only after the asset has been registered with
CERSAI for more than 120 days
Answer: C
Explanation: Under the SARFAESI Act, a secured creditor can enforce its security interest without
court intervention if the borrower defaults, and the loan is classified as an NPA. A 60-day notice must
be served to the borrower before the enforcement action.

66. When a floating charge crystallizes due to a borrower’s insolvency, what is the immediate
impact on the priority of the lender's security interest?

A) The lender loses all rights over the assets in favor of government dues
B) The floating charge loses priority and is treated as unsecured debt
C) The floating charge converts into a fixed charge, and the lender’s security interest ranks ahead
of unsecured creditors
D) The lender must apply to the court for permission to convert the charge into a fixed charge
E) The lender must wait until all other creditors are repaid before enforcing their security interest
Answer: C
Explanation: When a floating charge crystallizes, it converts into a fixed charge, giving the lender
priority over unsecured creditors in terms of security interest on the specified assets.

67. Equitable Mortgage requires the deposit of title deeds to create a security interest. Which of
the following statements accurately describes the enforceability of an equitable mortgage under
Indian law?

A) It cannot be enforced unless registered with CERSAI

B) The mortgagee has limited rights and can only enforce the mortgage after 120 days
C) It is fully enforceable without court intervention under the SARFAESI Act, provided title deeds
are deposited
D) It requires physical possession of the property for the lender to enforce the charge

48
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 E) The mortgagee can only file for enforcement if the title deeds were notarized by a public
officer
Answer: C
Explanation: Under the SARFAESI Act, an Equitable Mortgage can be enforced without court
intervention as long as the title deeds are deposited and the charge is registered, making it fully
enforceable in case of borrower default.

68. In case of double financing, where a borrower has taken loans from two different banks on the
same hypothecated asset, what is the typical legal recourse available to the lenders, and how is
priority determined?

A) The lender with the higher loan amount takes possession of the asset
B) The lender that registered the charge first with CERSAI has priority
C) Both lenders must share the asset equally regardless of loan amounts
D) The first lender to issue a notice of default takes precedence
E) Both lenders must wait until the borrower repays one of the loans in full
Answer: B
Explanation: In cases of double financing, the lender that registered the charge first with CERSAI has
priority over the asset, regardless of the loan amount.

69. What is the primary difference between a Usufructuary Mortgage and a Simple Mortgage in
terms of the mortgagee's rights over the property?

A) The mortgagee in a Simple Mortgage takes possession of the property, whereas in a

Usufructuary Mortgage, the borrower retains possession
B) The mortgagee in a Usufructuary Mortgage has the right to collect rent or profits, while the
mortgagee in a Simple Mortgage does not
C) The mortgagee in a Simple Mortgage gains full ownership rights, while the mortgagee in a
Usufructuary Mortgage gains partial ownership
D) The mortgagee in a Usufructuary Mortgage can sell the property immediately upon default,
whereas in a Simple Mortgage, court intervention is required
E) The mortgagee in a Usufructuary Mortgage cannot enforce any rights unless the borrower
consents
Answer: B
Explanation: In a Usufructuary Mortgage, the mortgagee has the right to collect rent or profits from
the property, while in a Simple Mortgage, the mortgagee does not have such rights and may need
court intervention to sell the property upon default.

70. Under the Companies Act, 2013, a company must register a charge with the Registrar of
Companies (ROC) within how many days of its creation, and what is the legal consequence of
failing to do so?

A) 30 days; the charge becomes invalid and unenforceable against third parties
B) 60 days; the charge can be enforced, but the company faces a penalty
C) 90 days; the charge is deemed legally void unless rectified through court intervention
D) 120 days; the charge must be registered retroactively for legal validity
E) 15 days; the charge cannot be enforced against unsecured creditors if unregistered
Answer: A
Explanation: Under the Companies Act, 2013, a charge must be registered with the Registrar of

49
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Companies within 30 days of its creation, failing which it becomes invalid and unenforceable against
third parties.

71. In a Usufructuary Mortgage, the mortgagee collects rent and profits from the property but
does not have the right to sell the property. Under what condition can the mortgagee enforce the
sale of the property?

A) Only if the property is damaged beyond repair

B) Only with express court approval
C) Only if the mortgagor agrees to forfeit the property
D) Only if the borrower fails to meet the terms of repayment after the expiry of the mortgage
period
E) The mortgagee can never sell the property in a Usufructuary Mortgage
Answer: E
Explanation: In a Usufructuary Mortgage, the mortgagee only has the right to collect rent or profits
from the property and does not have the right to sell the property, even upon default.

72. Under the SARFAESI Act, what is the primary advantage of securitization for financial
institutions in terms of asset-liability management (ALM)?

A) It allows immediate recovery of non-performing assets (NPAs) through asset sales

B) It transfers credit risk from the originator to the third-party investors
C) It improves the liquidity ratio of the institution by liquidating high-value properties
D) It enables the lender to impose stricter repayment terms on borrowers
E) It allows the bank to retain ownership of assets while collecting principal payments
Answer: B
Explanation: Securitization under SARFAESI allows the financial institution to transfer credit risk to
third-party investors while receiving funds upfront, improving its asset-liability management by
freeing up capital and mitigating risk.

73. Hypothecation is one of the most popular modes of securing loans on movable assets.
However, it poses certain risks for the lender. Which of the following is the most significant risk
associated with hypothecation from a lender's perspective?

A) The lender cannot repossess the asset without prior notice

B) The borrower retains possession and may create multiple charges on the same asset
C) The hypothecation agreement must be renewed annually for enforcement
D) The lender must secure court approval before repossessing the asset
E) The asset automatically transfers to the borrower upon loan repayment
Answer: B
Explanation: In hypothecation, since the borrower retains possession of the asset, there is a
significant risk that the borrower might create multiple charges on the same asset, leading to issues
like double financing.

74. Equitable Mortgage is created by the deposit of title deeds without registering the mortgage in
certain states. Which of the following is a primary legal disadvantage of Equitable Mortgage
compared to Simple Mortgage?

A) The borrower can reclaim the title deeds at any time without notice
B) The mortgagee has no legal recourse in the event of default
C) The security interest may be invalid if the deeds are lost or destroyed

50
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 D) The lender must sell the property immediately upon default
E) The mortgage cannot be enforced without physical possession of the property
Answer: C
Explanation: One of the primary legal disadvantages of an Equitable Mortgage is that if the title
deeds are lost or destroyed, the security may be invalid, as these deeds serve as the core proof of
the mortgage agreement.

75. In the case of floating charges, what specific legal action is required by the lender to secure
their interest once the charge crystallizes?

A) The lender must seek court approval to convert the floating charge into a fixed charge
B) The lender must file for insolvency proceedings against the borrower
C) The lender must register the fixed charge with CERSAI within 30 days of crystallization
D) The lender must inform the borrower in writing before taking possession of any assets
E) No additional action is required; the floating charge automatically converts into a fixed charge
upon crystallization
Answer: E
Explanation: Once a floating charge crystallizes, it automatically converts into a fixed charge without
the need for additional action from the lender, securing their interest over the borrower’s assets at
the time of crystallization.

76. In the context of CERSAI registration, which of the following is the correct order of priority in
the enforcement of security interests under the SARFAESI Act?

A) First registered lender with CERSAI has priority over subsequent lenders, regardless of loan
date
B) Lender with the highest loan amount has first priority
C) Lender with the earliest loan sanction date has priority, irrespective of CERSAI registration
date
D) Priority is given to secured creditors registered with CERSAI within 60 days of the loan creation
E) Priority is given to government dues before registered creditors under CERSAI
Answer: A
Explanation: Under the SARFAESI Act, the lender who registers their charge first with CERSAI has
priority, regardless of the date of loan sanction or loan amount.

77. Assignment of a debt involves the transfer of rights from the assignor to the assignee. In
banking, which of the following is a condition for legal assignment to be enforceable without
dispute?

A) The assignor must be a public sector bank

B) The assignment must be registered with the court
C) The assignee must notify the borrower of the assignment in writing
D) The assignment must involve only future debts and claims
E) The assignor must transfer all rights, including possession of the asset, to the assignee
Answer: C
Explanation: For a legal assignment to be enforceable, the assignee must notify the borrower in
writing about the assignment, ensuring that the debtor knows to make payments to the assignee.

78. When a bank exercises its right of set-off, which of the following conditions must be fulfilled for
it to be legally valid under the Indian Contract Act?

51
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 A) The set-off must be mutually agreed upon in the loan agreement
B) The bank can apply set-off without prior notice to the customer
C) The debts being offset must arise from the same transaction or contract
D) The debts must be due in the same right and both must be payable immediately
E) The set-off can apply only to future debts not yet matured
Answer: D
Explanation: For the right of set-off to be legally valid, the debts must be due in the same right
(between the same parties) and must be immediately payable. Both conditions must be met for the
bank to exercise this right.

79. Under a Pledge, the lender holds possession of the goods as collateral. Which of the following
is an exclusive right of the pledgee (lender) upon default of the pledgor (borrower)?

A) The right to convert the pledge into a floating charge

B) The right to re-hypothecate the goods to another lender
C) The right to take ownership of the goods outright
D) The right to retain the goods until the debt is paid and to sell them after giving notice to the
pledgor
E) The right to hold the goods for an indefinite period without repayment
Answer: D
Explanation: Upon default, the pledgee has the right to retain the goods and sell them after giving
the pledgor due notice. However, they do not have the right to take ownership or convert the pledge
into other forms of charges.

80. In a Lien, particularly under Section 171 of the Indian Contract Act, what is the limitation on
the application of a General Lien by a bank?

A) It can only apply to debts arising from secured loans

B) It can apply to any and all goods or securities, even those not related to the debt
C) It cannot apply to money held in trust or goods left in safe custody
D) It is limited to the specific goods or securities for which the loan was granted
E) It applies automatically to any deposits made by the customer
Answer: C
Explanation: A General Lien cannot be applied to money or goods held in trust or left in safe custody
by the customer, as these items are not considered collateral for a loan or security.

81. When a borrower defaults on a loan secured by an equitable mortgage, what is the primary
advantage to the lender under the SARFAESI Act compared to traditional recovery methods?

A) The lender can immediately repossess the property without court intervention
B) The lender can sell the property directly, bypassing public notice requirements
C) The lender can seize other assets of the borrower in addition to the mortgaged property
D) The lender must file a court petition for recovery, which simplifies the process
E) The lender must negotiate with other creditors for a priority claim
Answer: A
Explanation: Under the SARFAESI Act, the lender can enforce an equitable mortgage and repossess
the property without court intervention, provided the borrower has defaulted and a notice has been
served.

82. In a Simple Mortgage, if the mortgagor defaults, what is the legal recourse available to the
lender to recover the loan amount?

52
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 A) The lender can take immediate possession of the mortgaged property
B) The lender must file a suit for foreclosure and seek court intervention for the sale of the
property
C) The lender can forcefully evict the mortgagor and sell the property directly
D) The lender can repossess the property without giving notice to the borrower
E) The lender can liquidate the property at any time without court approval
Answer: B
Explanation: In a Simple Mortgage, the lender must file a suit for foreclosure or seek court
intervention to sell the mortgaged property in case of the borrower’s default.

83. Subrogation is a legal concept that often applies in the context of guarantees and indemnities.
Under Indian law, what is the effect of subrogation on the rights of a guarantor once the
guaranteed debt has been discharged?

A) The guarantor steps into the shoes of the lender and gains the lender’s rights against the
borrower
B) The guarantor forfeits all rights against the borrower after the debt is repaid
C) The guarantor can demand repayment from the borrower immediately, even before
discharging the debt
D) The guarantor has the right to claim ownership of the borrower’s assets
E) The guarantor is required to waive all claims against the borrower upon debt discharge
Answer: A
Explanation: Subrogation allows the guarantor to step into the shoes of the lender after discharging
the debt, gaining the lender’s rights to recover the amount from the borrower.

84. Appropriation of payments made by the borrower can follow different rules depending on
circumstances. If a borrower has multiple debts with a bank but fails to specify which debt a
payment should be applied to, how can the bank legally apply the payment under the Indian
Contract Act?

A) The bank must apply the payment to the largest outstanding debt
B) The bank can apply the payment to any debt, even one barred by limitation
C) The bank must proportionally distribute the payment across all debts
D) The payment can only be applied to debts that are not yet overdue
E) The bank must apply the payment to future debts
Answer: B
Explanation: If the borrower does not specify, the bank has the discretion to apply the payment to
any lawful debt, even if it is barred by the limitation law, under Section 60 of the Indian Contract Act.

85. In the case of a Mortgage by Conditional Sale, if the borrower fails to repay the loan within the
stipulated time, what is the status of the property as per the terms of the mortgage?

A) The borrower retains ownership but loses possession

B) The lender automatically becomes the absolute owner of the property
C) The property is sold to a third party at the borrower’s expense
D) The borrower can renegotiate the terms of the mortgage with the lender
E) The lender is required to auction the property and repay the borrower
Answer: B
Explanation: In a Mortgage by Conditional Sale, if the borrower fails to repay the loan within the
agreed period, the lender becomes the absolute owner of the property.

53
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
86. In the event of a borrower’s default, which of the following best describes the bank’s right
under a pledge as defined by the Indian Contract Act?

A) The bank must return the pledged goods to the borrower immediately
B) The bank has the right to retain and sell the goods without court intervention
C) The bank must seek approval from the borrower before selling the goods
D) The bank is not permitted to sell the goods until full loan repayment
E) The bank can only take physical possession of the goods, not sell them
Answer: B
Explanation: Under Section 176 of the Indian Contract Act, in the case of default, the bank (pledgee)
has the right to sell the pledged goods after giving notice to the pledgor (borrower) without needing
court intervention.

87. When a bank creates a General Lien over a borrower’s assets, which of the following is not a
valid form of asset that can be retained by the bank under this lien?

A) Goods delivered for specific loan purposes

B) Securities deposited for general account settlement
C) Cheques deposited for collection
D) Money held in safe custody
E) Goods pledged for a particular loan
Answer: D
Explanation: A General Lien cannot apply to money held in safe custody, as these are considered
trust items and not collateral for a loan.

88. Which of the following best describes the legal condition for "Crystallization" of a floating
charge under Indian law?

A) The floating charge is automatically transferred to a fixed charge upon payment default by the
borrower
B) The floating charge converts into a fixed charge only after a court order
C) Crystallization occurs only when the borrower voluntarily surrenders the charged assets
D) The floating charge becomes fixed upon the lender's demand or when the borrower’s
business ceases to trade
E) The floating charge can never be converted into a fixed charge by the lender
Answer: D
Explanation: Crystallization occurs when a floating charge becomes a fixed charge, typically triggered
by the borrower’s default or cessation of business activities.

89. Under the SARFAESI Act, a secured creditor can enforce security interest without court
intervention. Which of the following is a key requirement before taking possession of the
property?

A) Serve a 60-day notice to the borrower after declaring the account as NPA
B) Obtain permission from the local authorities before repossession
C) File a petition with the Debt Recovery Tribunal (DRT) for approval
D) Wait for the borrower to voluntarily surrender the property
E) Register the asset sale with the Ministry of Finance within 30 days of repossession
Answer: A
Explanation: Under the SARFAESI Act, a secured creditor can enforce the security interest by taking

54
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
possession of the property, provided a 60-day notice is given to the borrower after the loan is
classified as NPA (Non-Performing Asset).

90. In a Simple Mortgage, if the borrower fails to repay the loan, what is the lender's right
regarding the mortgaged property?

A) The lender has the automatic right to take possession of the property
B) The lender can sell the property without any further legal proceedings
C) The lender must approach the court to obtain a decree for the sale of the property
D) The lender must negotiate with other creditors to establish priority
E) The lender has no rights unless the borrower voluntarily hands over the property
Answer: C
Explanation: In a Simple Mortgage, the lender must seek court intervention by filing a suit to obtain
a decree for the sale of the mortgaged property upon the borrower’s default.

91. Hypothecation of assets does not involve the transfer of possession. What is the primary risk
faced by lenders in hypothecation agreements?

A) The lender gains full ownership of the assets upon loan default
B) The borrower may dispose of the assets without the lender's knowledge
C) The lender is required to physically inspect the assets weekly
D) The borrower must seek court approval before using hypothecated goods
E) The hypothecated goods must be registered as collateral with the local government
Answer: B
Explanation: Since possession of the hypothecated assets remains with the borrower, there is a risk
that the borrower may dispose of or create additional charges on the assets without the lender’s
knowledge.

92. In the context of CERSAI (Central Registry of Securitisation Asset Reconstruction and Security
Interest of India), which of the following is the main purpose of registering a charge on securities?

A) To transfer ownership of the borrower’s assets to the bank

B) To prevent fraudulent creation of multiple charges on the same asset
C) To ensure the borrower can access the pledged assets at any time
D) To allow third-party creditors to sell the borrower’s assets directly
E) To make the security charge available to any public or private lender without notice
Answer: B
Explanation: CERSAI registration helps prevent fraudulent creation of multiple charges on the same
asset, ensuring that lenders have a clear and enforceable security interest.

93. A Mortgage by Conditional Sale involves which of the following legal rights for the lender upon
the borrower’s failure to repay the loan?

A) The lender automatically takes ownership of the property after the loan default
B) The lender can only sell the property with the court’s permission
C) The lender must continue collecting rent or profits from the property until repayment
D) The borrower must sell the property to repay the lender within a specified time
E) The lender can lease the property to another borrower as security for a new loan
Answer: A
Explanation: In a Mortgage by Conditional Sale, if the borrower defaults, the lender automatically
takes ownership of the property without further legal proceedings.

55
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
94. In Equitable Mortgage, the title deeds are deposited with the lender as security. Which of the
following is a major risk for the lender in such an arrangement?

A) The borrower may sell the property while the mortgage is active
B) The title deeds may be lost, rendering the mortgage unenforceable
C) The lender must obtain physical possession of the property upon default
D) The mortgage automatically converts into a floating charge upon loan default
E) The mortgage can only be enforced if registered with the Registrar of Companies (ROC)
Answer: B
Explanation: The major risk for the lender in an Equitable Mortgage is that if the title deeds are lost
or destroyed, the mortgage may become unenforceable, as the lender relies on these documents for
security.

95. In a Set-off situation, the bank combines the borrower’s debit and credit balances across
accounts. Which of the following is a valid condition for exercising the right of set-off?

A) The bank can apply set-off only for secured debts

B) The borrower must give explicit consent before the set-off is applied
C) The claims must be in the same right and immediately payable
D) The bank can apply the set-off for future debts not yet due
E) The set-off applies automatically, regardless of the borrower’s preferences
Answer: C
Explanation: For a valid set-off, the claims must be in the same right (between the same parties) and
must be immediately payable. This ensures the bank’s legal right to combine debit and credit
balances.

96. Under the Companies Act, 2013, failure to register a charge with the Registrar of Companies
(ROC) within the stipulated time results in which of the following consequences?

A) The charge is still enforceable but subject to penalties

B) The charge becomes invalid and unenforceable against third parties
C) The charge can be enforced, but only after court intervention
D) The company is allowed a grace period of 90 days to register retroactively
E) The company is required to pay a flat fee for late registration
Answer: B
Explanation: Failure to register a charge within the stipulated time renders the charge invalid and
unenforceable against third parties, as per Section 77 of the Companies Act, 2013.

97. Assignment of actionable claims is a common practice in banking. Which of the following best
defines equitable assignment?

A) The absolute transfer of debt that requires registration with the borrower
B) The transfer of an entire debt or claim through a legal deed
C) The transfer of part of a debt or claim without notifying the borrower
D) The assignment of a secured debt under court supervision
E) The transfer of debt rights to the government upon borrower default
Answer: C
Explanation: Equitable assignment refers to the transfer of part of a debt or claim, often without
formal notification to the borrower. This differs from legal assignment, which requires complete
transfer and notice to the borrower.

56
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
98. In the case of a Negative Lien, what is the primary risk faced by the lender?

A) The borrower can sell the asset without informing the lender
B) The lender cannot retain possession of the borrower’s assets
C) The borrower is allowed to create additional charges on the same asset
D) The lender must register the negative lien with CERSAI for enforcement
E) The lender automatically loses the right to enforce the security after one year
Answer: B
Explanation: In a Negative Lien, the lender does not have the right to retain possession of the
borrower’s assets, which means the asset remains in the borrower’s control, posing a risk to the
lender.

99. A floating charge is commonly used to secure the changing assets of a business. In which of the
following cases does a floating charge typically crystallize?

A) When the borrower voluntarily pays off the loan

B) When the business enters insolvency or ceases to trade
C) When the lender transfers the loan to another bank
D) When the borrower requests to convert it into a fixed charge
E) When the business profits exceed a predetermined threshold
Answer: B
Explanation: A floating charge typically crystallizes when the borrower’s business becomes insolvent
or ceases to trade. At this point, the charge converts into a fixed charge over the current assets.

100. Lien can be general or particular in nature. Which of the following is a distinguishing feature
of a Particular Lien under the Indian Contract Act, 1872?

A) It allows the lender to retain all of the borrower’s goods until all debts are repaid
B) It is automatically applied to all loans, regardless of the borrower’s consent
C) It allows the lender to retain only those goods directly related to the debt incurred
D) It requires the lender to provide advance notice before retaining the goods
E) It applies to both movable and immovable property of the borrower
Answer: C
Explanation: A Particular Lien gives the lender the right to retain only the specific goods in respect of
which the debt was incurred, unlike a General Lien, which applies to all goods.

101. CERSAI registration is mandatory for certain types of secured transactions. Which of the
following security interests must be registered with CERSAI under the SARFAESI Act?

A) Lien on personal jewelry

B) Mortgage by deposit of title deeds on immovable property
C) Hypothecation of intangible assets like intellectual property
D) Pledge of government bonds
E) Assignment of life insurance policies
Answer: B
Explanation: Mortgage by deposit of title deeds on immovable property must be registered with
CERSAI under the SARFAESI Act to secure the lender’s interest and prevent multiple loans on the
same asset.

102. In Set-off, the claims must be in the same right. Which of the following illustrates a valid
example of debts that are in the same right for a bank to apply a set-off?

57
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 A) Debts owed by a borrower and a co-borrower under separate loans
B) A company’s current account balance and its director’s personal loan
C) A borrower’s savings account balance and an outstanding credit card debt
D) A borrower’s fixed deposit and an overdue business loan in the same name
E) A borrower’s loan and a co-signed loan under a different guarantor
Answer: D
Explanation: A valid example of set-off would be combining a borrower’s fixed deposit and an
overdue business loan in the same name, as both debts are “in the same right” and owed by the
same entity.

103. In a Mortgage by Conditional Sale, what happens if the borrower repays the loan within the
agreed period?

A) The lender retains ownership of the property until all interest is paid
B) The property is automatically transferred to the lender for liquidation
C) The borrower regains ownership of the property
D) The borrower must renegotiate the loan terms with the lender
E) The lender continues to receive rent or profits from the property
Answer: C
Explanation: In a Mortgage by Conditional Sale, if the borrower repays the loan within the agreed
period, the borrower regains ownership of the property as per the terms of the mortgage.

104. In hypothecation, the borrower retains possession of the goods while creating a charge in
favor of the lender. Which of the following actions by the borrower would constitute a breach of
the hypothecation agreement?

A) Submitting quarterly stock reports to the bank

B) Using the hypothecated goods in the regular course of business
C) Selling the hypothecated goods without the bank’s consent
D) Maintaining insurance for the hypothecated assets
E) Pledging future goods not covered under the hypothecation agreement
Answer: C
Explanation: Selling hypothecated goods without the lender's consent constitutes a breach of the
hypothecation agreement since the goods serve as collateral and the borrower retains possession
under specific conditions.

105. In a negative lien, what is the primary obligation placed on the borrower?

A) The borrower must transfer ownership of the asset to the bank

B) The borrower must agree not to sell or encumber the asset without the lender’s consent
C) The borrower must provide periodic reports on the asset’s condition
D) The borrower must allow the lender to physically inspect the asset at any time
E) The borrower must create a registered charge on the asset in favor of the lender
Answer: B
Explanation: A negative lien obligates the borrower to refrain from selling or creating any charge on
the asset without prior consent from the lender, but the lender does not take possession or
ownership of the asset.

106. Appropriation of payments involves applying a borrower’s payment to specific debts when
multiple debts exist. Under which circumstance can the creditor exercise discretion in the
appropriation of payments?

58
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 A) When the borrower explicitly indicates which debt to settle
B) When the borrower makes a partial payment and specifies the debt
C) When the borrower makes a payment but does not indicate any specific debt
D) When the borrower applies a payment to a time-barred debt
E) When the borrower pays off a future debt before its due date
Answer: C
Explanation: When the borrower fails to indicate which debt is being paid, the creditor has the
discretion to apply the payment to any lawful debt, even if some debts are time-barred, under
Section 60 of the Indian Contract Act.

107. Crystallization of a floating charge is a critical moment in the lifecycle of the charge. Which
event typically triggers the crystallization of a floating charge in favor of the lender?

A) The borrower’s regular repayment of installments

B) The borrower’s loan account becoming a Non-Performing Asset (NPA)
C) The borrower’s request for additional credit from the bank
D) The borrower’s initiation of bankruptcy proceedings
E) The sale of part of the hypothecated goods by the borrower
Answer: D
Explanation: Crystallization of a floating charge occurs when the borrower becomes insolvent or
ceases to trade, at which point the charge converts to a fixed charge on the existing assets to protect
the lender’s interest.

108. Which of the following is not a characteristic of an equitable mortgage?

A) Title deeds are deposited with the lender

B) The mortgagee has the right to sell the property upon default without court intervention
C) The mortgage is created without a written agreement in certain locations
D) The borrower retains ownership of the property
E) The lender must register the mortgage with CERSAI for full enforceability
Answer: B
Explanation: In an equitable mortgage, although the lender holds the title deeds, they do not have
the right to sell the property without court intervention unless provisions like the SARFAESI Act apply.

109. Under a set-off, a bank combines a borrower’s debit and credit balances to determine the net
amount owed. Which of the following scenarios would invalidate the right of set-off for the bank?

A) The borrower’s accounts have a mix of loan debits and savings credits
B) The borrower has multiple loan accounts in different branches of the same bank
C) The borrower has two accounts, one of which is held jointly with another person
D) The borrower has both a current account and an overdraft account
E) The borrower’s account has both secured and unsecured debts
Answer: C
Explanation: The right of set-off can only apply to accounts held in the same right. In the case of a
joint account with another person, set-off cannot be applied unless both account holders are liable
for the debt.

110. Assignment of debt in banking involves transferring the lender's rights to a third party. Under
what conditions can an equitable assignment take place?

A) The debt must be transferred in full, and the borrower must be notified in writing

59
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 B) The lender transfers part of the debt, and the borrower may not be notified
C) The lender transfers both the debt and the security interest in writing
D) The borrower must consent to the transfer of debt
E) The debt must be assigned through a legal contract and registered with the court
Answer: B
Explanation: An equitable assignment occurs when part of a debt is transferred to another party, and
it may be done without formal notice to the borrower, unlike a legal assignment.

111. In a pledge, what is the key right of the lender (pledgee) in case of borrower (pledgor)
default?

A) The right to seize the borrower’s personal assets in addition to pledged goods
B) The right to sell the pledged goods after giving reasonable notice to the borrower
C) The right to convert the pledge into a hypothecation without the borrower’s consent
D) The right to lease the pledged goods to a third party for profit
E) The right to claim ownership of the pledged goods without a sale
Answer: B
Explanation: In the case of default, the lender (pledgee) has the right to sell the pledged goods after
giving reasonable notice to the borrower, according to Section 176 of the Indian Contract Act.

112. In the context of SARFAESI Act, which of the following is an incorrect assumption regarding
the enforcement of security interests by banks?

A) Banks can enforce security interest without court intervention if the loan is classified as an
NPA
B) The borrower must be given a 60-day notice before the bank can take possession of the asset
C) SARFAESI Act applies only to immovable property, not movable property
D) The bank can auction the property without judicial intervention after the notice period
E) The bank must register the charge with CERSAI before enforcing its rights under SARFAESI
Answer: C
Explanation: SARFAESI Act applies to both movable and immovable property, and this is an incorrect
assumption as it covers a wide range of secured assets including machinery, stocks, and receivables.

113. Which of the following describes the primary risk of using a floating charge to secure a loan?

A) The charge does not apply to future assets

B) The lender has no right to sell the assets upon borrower default
C) The charge may be ineffective if the borrower disposes of assets during normal business
operations
D) The floating charge automatically becomes a general lien upon loan default
E) The borrower loses ownership of the assets immediately after loan disbursement
Answer: C
Explanation: One primary risk of a floating charge is that it covers fluctuating assets like inventory or
receivables, which the borrower may dispose of during the regular course of business, potentially
reducing the value of the security.

114. In lien, a bank retains possession of goods until the borrower’s debt is settled. Under what
circumstance does the bank lose its right to General Lien over the borrower’s goods?

A) When the borrower submits new security to the bank

B) When the borrower creates a pledge for a different loan

60
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 C) When the goods are deposited with the bank for a specific purpose, such as safe custody
D) When the borrower defaults on a loan secured by other assets
E) When the borrower opens a new account with the same bank
Answer: C
Explanation: General Lien does not apply to goods deposited for a specific purpose, such as safe
custody. These goods are held in trust and cannot be retained for loan repayment.

115. Mortgage by deposit of title deeds (Equitable Mortgage) does not involve the physical transfer
of property. In which case would the equitable mortgage become unenforceable?

A) If the borrower dies before repaying the loan

B) If the title deeds are lost or destroyed and not recoverable
C) If the borrower moves to another state after the mortgage is created
D) If the borrower defaults after partial repayment
E) If the borrower’s property is jointly owned with another party
Answer: B
Explanation: An equitable mortgage relies on the deposit of title deeds as security, and if these
deeds are lost or destroyed, the

116. Lien is one of the rights of a lender. Which of the following is an essential feature of a banker’s
lien?

A) The bank must obtain the borrower’s permission to exercise the lien
B) The lien extends to all the assets in the borrower’s possession, including personal property
C) The bank has an implied right to sell the borrower’s assets held under lien
D) The lien allows the bank to retain securities for the borrower’s general balance due
E) The lien requires court approval before being enforced
Answer: D
Explanation: A banker’s lien allows the bank to retain securities or assets belonging to the borrower
for any general balance due, and it is considered an implied pledge.

117. Which of the following correctly explains the legal priority of charges created on a borrower's
assets?

A) Priority is always given to the lender with the earliest loan sanction date
B) Priority is determined by the total loan amount, with larger loans taking precedence
C) The lender who registers the charge first with CERSAI has priority over subsequent lenders
D) Priority is given to the lender with the most secured assets under lien
E) Government dues always take priority over secured lenders’ claims
Answer: C
Explanation: Under the CERSAI system, the lender who registers the charge first has priority over
subsequent lenders, regardless of the loan sanction date or amount.

118. Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest (SARFAESI) Act, what is the minimum period of default required for a bank to initiate
recovery proceedings?

A) 30 days
B) 60 days
C) 90 days
D) 120 days

61
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 E) 180 days
Answer: C
Explanation: Under the SARFAESI Act, the borrower’s account must be classified as a Non-Performing
Asset (NPA), which occurs after a minimum of 90 days of default, before the bank can initiate
recovery proceedings.

119. Hypothecation typically involves which of the following assets?

A) Immovable property such as land or buildings

B) Movable assets such as inventory or receivables
C) Fixed assets like manufacturing plants
D) Government bonds and securities
E) Personal property such as jewelry
Answer: B
Explanation: Hypothecation usually involves movable assets such as inventory, vehicles, or
receivables, where the borrower retains possession of the asset while creating a charge in favor of
the lender.

120. Which of the following is not a mode of charge available for securing a loan?

A) Pledge
B) Hypothecation
C) Set-off
D) Assignment
E) Foreclosure
Answer: E
Explanation: Foreclosure is a legal process for recovering a debt, not a mode of creating a charge.
The common modes of charge include pledge, hypothecation, set-off, and assignment.

121. When a borrower defaults on a loan secured by an equitable mortgage, the lender has the
right to enforce the mortgage under the SARFAESI Act. Which of the following actions is required
before the lender can take possession of the property?

A) The lender must file a petition in the Debt Recovery Tribunal (DRT)
B) The lender must issue a 60-day notice to the borrower
C) The lender must seek permission from a local court
D) The lender must conduct an auction of the borrower’s other assets
E) The lender must allow the borrower a final repayment window of 30 days
Answer: B
Explanation: Before taking possession of the property under the SARFAESI Act, the lender must issue
a 60-day notice to the borrower, giving them time to repay the debt or object to the enforcement.

122. Which of the following cannot be hypothecated to secure a loan under typical banking
practices?

A) Plant and machinery

B) Motor vehicles
C) Accounts receivable
D) Land and buildings
E) Inventory and stock

62
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: D
Explanation: Land and buildings are immovable property and cannot be hypothecated.
Hypothecation generally applies to movable assets like machinery, vehicles, and inventory.

123. Under the Transfer of Property Act, 1882, which of the following is a key distinction between
a Simple Mortgage and an Equitable Mortgage?

A) A Simple Mortgage does not require court intervention to sell the property, while an Equitable
Mortgage does
B) A Simple Mortgage transfers possession of the property to the lender, while an Equitable
Mortgage does not
C) A Simple Mortgage is created by a registered document, while an Equitable Mortgage is
created by deposit of title deeds
D) A Simple Mortgage involves future property, while an Equitable Mortgage involves current
property only
E) A Simple Mortgage allows the lender to lease the property, while an Equitable Mortgage does
not
Answer: C
Explanation: A Simple Mortgage is created by a registered document, while an Equitable Mortgage is
created by depositing the title deeds with the lender without registration.

1. Case Study : Pledge and Default

ABC Manufacturing has availed a loan of ₹5 crore from XYZ Bank, secured by a pledge of raw materials
worth ₹2 crore. ABC Manufacturing defaults on the loan repayment. The bank decides to enforce the
pledge and sell the raw materials. Before selling the pledged goods, the bank sent a notice to ABC
Manufacturing but did not receive any response. ABC Manufacturing argues that the bank cannot sell
the goods as it still intends to repay the loan in the future.

What is the correct course of action for XYZ Bank under Indian law?

• A) XYZ Bank must wait for court approval before selling the pledged goods

• B) XYZ Bank must renegotiate the repayment terms with ABC Manufacturing

• C) XYZ Bank has the right to sell the pledged goods after providing reasonable notice

• D) XYZ Bank cannot sell the goods unless it receives explicit approval from ABC
Manufacturing

• E) XYZ Bank must wait for the loan term to end before initiating recovery proceedings

Answer: C
Explanation: Under Section 176 of the Indian Contract Act, the lender (pledgee) has the right to sell
the pledged goods after giving reasonable notice to the borrower (pledgor) in case of default. The
bank does not require further approval from the borrower or the court.

2. Case Study : Equitable Mortgage and SARFAESI Act

63
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
DEF Corporation takes a loan of ₹10 crore from PQR Bank, secured by an equitable mortgage on
their office building. The title deeds of the building are deposited with the bank. DEF Corporation
defaults on the loan, and the loan account is classified as a Non-Performing Asset (NPA). PQR Bank
decides to take possession of the property under the SARFAESI Act. DEF Corporation claims that the
bank must approach the court before taking possession.

What action should PQR Bank take to enforce its rights under the SARFAESI Act?

• A) The bank can take immediate possession without any notice to DEF Corporation

• B) The bank must wait for 90 days after default before taking possession

• C) The bank must file a petition with the Debt Recovery Tribunal (DRT) before taking
possession

• D) The bank must issue a 60-day notice to DEF Corporation before taking possession of the
property

• E) The bank can sell the property immediately without any further legal process

Answer: D
Explanation: Under the SARFAESI Act, PQR Bank can take possession of the property without court
intervention. However, it must first serve a 60-day notice to the borrower, giving them an
opportunity to repay the loan before enforcement actions like taking possession or selling the
property can occur.

3. Case Study : Hypothecation and Double Financing

GHI Traders has taken a cash credit facility of ₹1 crore from LMN Bank secured by hypothecation of
stock. Six months later, GHI Traders also obtains a working capital loan from another bank, using the
same stock as collateral, without informing LMN Bank. LMN Bank discovers this during a stock
inspection and claims that GHI Traders has violated the loan agreement. GHI Traders argues that it is
allowed to use the stock for securing multiple loans.

What is the key legal issue in this scenario, and what is LMN Bank’s right under the hypothecation
agreement?

• A) GHI Traders is allowed to use the same stock as collateral for multiple loans without
informing LMN Bank

• B) GHI Traders has violated the loan agreement, and LMN Bank can seize the stock
immediately

• C) LMN Bank must wait for GHI Traders to default before taking action

• D) LMN Bank should issue a court order to prevent GHI Traders from using the stock as
collateral

• E) LMN Bank can only enforce its security after the working capital loan is repaid

Answer: B
Explanation: In hypothecation agreements, the borrower retains possession of the asset but must
not create multiple charges on the same asset without the lender’s consent. GHI Traders has violated

64
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
the agreement by using the same stock to secure another loan without informing LMN Bank, giving
LMN Bank the right to enforce its security immediately.

4. Case Study : Mortgage by Conditional Sale

JKL Builders takes a loan from ABC Bank, secured by a mortgage by conditional sale of a plot of land.
The loan agreement states that if JKL Builders fails to repay the loan by the due date, the land will be
transferred to the bank’s ownership. JKL Builders defaults on the loan, and ABC Bank claims
ownership of the land. However, JKL Builders argues that it should still have time to repay the loan
and reclaim the property.

What legal outcome is expected under this type of mortgage?

• A) JKL Builders can reclaim the land if they repay the loan within the next 6 months

• B) JKL Builders has lost ownership of the land, and ABC Bank has full ownership

• C) ABC Bank must auction the land and return any surplus to JKL Builders

• D) ABC Bank cannot claim ownership without court approval

• E) ABC Bank must negotiate new repayment terms with JKL Builders

Answer: B
Explanation: In a Mortgage by Conditional Sale, if the borrower defaults, the property is
automatically transferred to the lender's ownership, as per the terms of the agreement. JKL Builders
has no further claim on the land unless otherwise specified in the agreement.

5. Case Study : General Lien and Retention of Securities

MNO Bank has extended a term loan of ₹50 lakh to XYZ Ltd., which is secured by machinery as
collateral. XYZ Ltd. also has a separate overdraft facility with MNO Bank. XYZ Ltd. defaults on the
overdraft but continues to make regular payments on the term loan. XYZ Ltd. deposits some
marketable securities with MNO Bank for safekeeping. MNO Bank decides to retain the securities
under General Lien to recover the overdraft.

Is MNO Bank entitled to retain the securities under General Lien?

• A) Yes, MNO Bank can retain the securities for any unpaid debt, including the overdraft

• B) No, MNO Bank cannot retain the securities because they were deposited for safekeeping

• C) Yes, MNO Bank can use the securities to recover both the overdraft and the term loan

• D) No, MNO Bank can only use the machinery pledged for the term loan to recover the
overdraft

• E) Yes, but MNO Bank must first obtain XYZ Ltd.'s consent before retaining the securities

Answer: B
Explanation: General Lien does not apply to securities deposited for safekeeping or specific purposes
such as trust items. MNO Bank cannot retain securities deposited for safekeeping to recover an
unrelated debt like the overdraft.

65
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
6. Case Study : Set-Off Rights

PQR Ltd. has taken two loans from DEF Bank: a term loan and a cash credit facility. Both loans are
secured by separate assets. PQR Ltd. is struggling financially and defaults on the term loan but
continues to service the cash credit facility. PQR Ltd. maintains a significant balance in its current
account with DEF Bank. DEF Bank decides to exercise its right of set-off by using the balance in the
current account to adjust against the unpaid term loan.

Can DEF Bank legally exercise the right of set-off in this case?

• A) Yes, DEF Bank can adjust the balance in the current account against the unpaid term loan

• B) No, DEF Bank must wait for PQR Ltd. to default on both loans before applying set-off

• C) Yes, but only with the court’s approval

• D) No, because the current account is linked to the cash credit facility, not the term loan

• E) No, because the right of set-off applies only to unsecured loans

Answer: A
Explanation: DEF Bank can exercise the right of set-off by adjusting the balance in PQR Ltd.'s current
account to recover the unpaid term loan. The right of set-off allows a bank to combine debit and
credit balances across different accounts of the same borrower, as long as the claims are in the same
right.

7. Case Study : Floating Charge and Crystallization

LMN Industries has a floating charge on its inventory to secure a loan from GHI Bank. Due to
financial difficulties, LMN Industries stops its operations and declares insolvency. GHI Bank is
concerned about the status of the floating charge and wants to secure its interest in the inventory.

What is the status of GHI Bank’s floating charge after LMN Industries declares insolvency?

• A) The floating charge automatically crystallizes into a fixed charge on the current inventory

• B) The floating charge is nullified, and GHI Bank loses its claim on the inventory

• C) GHI Bank must file a lawsuit to convert the floating charge into a lien

• D) The floating charge continues to fluctuate with future inventory levels

• E) GHI Bank must negotiate with the liquidator to claim any assets

Answer: A
Explanation: Upon insolvency, a floating charge automatically crystallizes into a fixed charge,
meaning GHI Bank now has a fixed claim on the inventory that exists at the time of insolvency.

8. Case Study : Assignment and Notification

STU Bank provides financing to a large corporate client, JKL Ltd., through an assignment of its
receivables from government contracts. The bank wishes to assign these receivables to another

66
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
financial institution, XYZ Bank, without informing JKL Ltd. about the assignment. XYZ Bank insists that
the assignment will not be valid unless JKL Ltd. is notified.

What must STU Bank do to ensure the validity of the assignment?

• A) STU Bank can assign the receivables without notifying JKL Ltd. under any circumstances

• B) STU Bank must notify JKL Ltd. in writing to ensure that the assignment is legally
enforceable

• C) STU Bank must file a petition with the court to validate the assignment

• D) STU Bank must seek consent from JKL Ltd. before assigning the receivables

• E) STU Bank can assign only part of the receivables without notifying JKL Ltd.

Answer: B
Explanation: For an assignment to be legally enforceable, the borrower (in this case, JKL Ltd.) must
be notified in writing about the assignment, so they know to make payments to the new assignee,
XYZ Bank.

9. Case Study : Usufructuary Mortgage and Rent Collection

OPQ Builders has taken a loan from ABC Bank, secured by a usufructuary mortgage on a commercial
property. Under the terms of the mortgage, OPQ Builders retains possession of the property, but ABC
Bank has the right to collect rent from the tenants of the property. OPQ Builders defaults on the
loan, and ABC Bank starts collecting rent from the tenants. OPQ Builders claims that the bank cannot
collect rent without first filing a suit for recovery.

What is the correct legal position of ABC Bank under the usufructuary mortgage?

• A) ABC Bank can collect rent from the tenants without filing a recovery suit

• B) ABC Bank must first give OPQ Builders a final chance to repay the loan before collecting
rent

• C) ABC Bank must seek court approval to collect rent from the tenants

• D) ABC Bank cannot collect rent from the tenants unless it takes possession of the property

• E) ABC Bank must terminate the tenancy agreements before collecting rent

Answer: A
Explanation: Under a usufructuary mortgage, the lender (ABC Bank) has the right to collect rent or
profits from the property without taking possession or filing a recovery suit, as long as the borrower
defaults on the loan.

10. Case Study : Lien on Deposited Securities

XYZ Pvt. Ltd. has taken a working capital loan from DEF Bank, secured by a general lien on XYZ's
marketable securities. XYZ Pvt. Ltd. decides to sell some of the marketable securities deposited with
DEF Bank. However, DEF Bank exercises its general lien and refuses to release the securities for sale,
claiming that it has the right to retain them for as long as the loan remains unpaid.

67
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Is DEF Bank correct in retaining the securities under its general lien?

• A) Yes, DEF Bank can retain the securities under the general lien until the loan is fully repaid

• B) No, DEF Bank must allow XYZ Pvt. Ltd. to sell the securities to repay the loan

• C) Yes, but DEF Bank must provide a written explanation to XYZ Pvt. Ltd. for retaining the
securities

• D) No, DEF Bank can only retain the securities if XYZ Pvt. Ltd. defaults on the loan

• E) Yes, but DEF Bank must first sell the securities to recover the loan and return any surplus
to XYZ Pvt. Ltd.

Answer: A
Explanation: Under a general lien, DEF Bank has the right to retain XYZ Pvt. Ltd.'s securities until the
loan is fully repaid, even if XYZ Pvt. Ltd. wishes to sell them, as the lien acts as security for the unpaid
debt.

11. Case Study : Crystallization and Floating Charge

RST Manufacturing has a working capital loan secured by a floating charge on its inventory and
receivables. Due to financial difficulties, RST Manufacturing stops trading and files for insolvency.
TUV Bank, which holds the floating charge, seeks to crystallize its security interest and claim the
inventory. However, another lender, XYZ Bank, holds a fixed charge on the same inventory.

What will be the status of TUV Bank's floating charge in light of the insolvency and XYZ Bank’s fixed
charge?

• A) TUV Bank’s floating charge will take priority over XYZ Bank’s fixed charge since it covers all
inventory

• B) TUV Bank’s floating charge automatically crystallizes into a fixed charge, but XYZ Bank’s
fixed charge will have priority

• C) TUV Bank’s floating charge cannot be crystallized due to XYZ Bank’s pre-existing fixed
charge

• D) TUV Bank must file a lawsuit to enforce its floating charge before crystallization

• E) TUV Bank’s floating charge will become a lien on future inventory only

Answer: B
Explanation: When RST Manufacturing enters insolvency, TUV Bank’s floating charge will
automatically crystallize into a fixed charge over the existing inventory. However, XYZ Bank’s fixed
charge will take priority over the crystallized floating charge, as fixed charges generally rank ahead of
floating charges on the same assets.

12. Case Study : Equitable Mortgage and Title Deeds

OPQ Ltd. avails a loan from MNO Bank and creates an equitable mortgage by depositing the title
deeds of its factory premises. The factory is located in a jurisdiction where registration of equitable
mortgages is not mandatory. Later, OPQ Ltd. defaults on the loan, and MNO Bank seeks to enforce its

68
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
security under the SARFAESI Act. However, during the enforcement process, OPQ Ltd. claims that the
title deeds have been lost, and thus, the mortgage is invalid.

What action should MNO Bank take, and how does the loss of title deeds affect its rights?

• A) MNO Bank must first recover the title deeds before enforcing the mortgage

• B) MNO Bank’s equitable mortgage is unenforceable without the title deeds, and it must
seek judicial resolution

• C) MNO Bank can enforce the mortgage under the SARFAESI Act without needing the
physical title deeds, as the mortgage is valid by law

• D) OPQ Ltd. can contest the mortgage due to the lost title deeds, and MNO Bank must
renegotiate the loan terms

• E) MNO Bank must file for bankruptcy proceedings before it can take possession of the
property

Answer: C
Explanation: Under the SARFAESI Act, MNO Bank can still enforce the equitable mortgage even if
the title deeds are lost, as the mortgage was validly created by the deposit of title deeds. The
absence of physical deeds does not negate the validity of the mortgage.

13. Case Study : Negative Lien and Asset Disposal

XYZ Pvt. Ltd. took a loan from ABC Bank, backed by a negative lien on its office building, where the
company promised not to sell or encumber the property without the bank's consent. XYZ Pvt. Ltd.
later sold the building to raise funds for business expansion, without informing ABC Bank. When ABC
Bank discovered the sale, it initiated recovery actions and claimed that XYZ Pvt. Ltd. breached the
loan agreement.

What is the correct legal position of ABC Bank, and what are its rights in this scenario?

• A) ABC Bank can enforce its negative lien and reclaim ownership of the building

• B) ABC Bank can file a lawsuit against XYZ Pvt. Ltd. for breach of contract and demand
repayment of the loan

• C) ABC Bank has no rights over the building because a negative lien does not create an
enforceable charge

• D) ABC Bank can stop the sale of the building and enforce a floating charge on other
company assets

• E) ABC Bank can convert the negative lien into an equitable mortgage automatically

Answer: B
Explanation: A negative lien does not give ABC Bank rights over the property itself but prevents XYZ
Pvt. Ltd. from selling or encumbering the property without the bank’s consent. By selling the building
without consent, XYZ Pvt. Ltd. has breached the contract, and ABC Bank can file a lawsuit for breach
and demand repayment.

69
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
14. Case Study : Pledge and Right to Sell

DEF Ltd. borrowed ₹50 crore from GHI Bank and pledged warehouse inventory valued at ₹30 crore as
collateral. Due to market fluctuations, the inventory’s value dropped to ₹20 crore, and DEF Ltd. failed
to meet additional collateral requirements. GHI Bank decided to sell the pledged goods to recover
part of the loan. However, DEF Ltd. claimed that GHI Bank could not sell the goods without prior
court approval.

What rights does GHI Bank have regarding the pledged goods in this scenario?

• A) GHI Bank can sell the pledged goods without court approval but must give reasonable
notice to DEF Ltd.

• B) GHI Bank must file a suit in the Debt Recovery Tribunal (DRT) to obtain approval before
selling the goods

• C) GHI Bank can only sell the goods after DEF Ltd. defaults on the entire loan amount

• D) GHI Bank must seek permission from DEF Ltd. before selling the pledged goods

• E) GHI Bank must wait for the loan tenure to end before enforcing the pledge

Answer: A
Explanation: Under Section 176 of the Indian Contract Act, GHI Bank has the right to sell the pledged
goods after giving reasonable notice to DEF Ltd., without needing court approval, if the borrower
defaults on the loan.

15. Case Study : Hypothecation and Repossession

MNO Automobiles took a loan from PQR Bank secured by hypothecation of machinery in its factory.
MNO Automobiles defaulted on the loan, and PQR Bank sent several reminders, but MNO
Automobiles did not respond. PQR Bank then initiated repossession of the machinery under the loan
agreement. MNO Automobiles contested the repossession, claiming that hypothecation does not
allow the bank to repossess the asset without court intervention.

What is the correct legal position of PQR Bank under the hypothecation agreement?

• A) PQR Bank can repossess the machinery without court intervention as per the loan
agreement

• B) PQR Bank must file a suit in the local court to obtain permission for repossession

• C) PQR Bank can only claim ownership of the machinery if MNO Automobiles agrees to the
repossession

• D) PQR Bank must convert the hypothecation into a pledge before repossession

• E) PQR Bank cannot repossess the machinery as it was never in the bank’s possession

Answer: A
Explanation: Under the terms of hypothecation, if a borrower defaults, the lender (PQR Bank) has
the right to repossession of the hypothecated assets without needing court intervention, provided
the loan agreement allows for this remedy.

70
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
16. Case Study : Usufructuary Mortgage and Rent Collection

DEF Properties took a loan from XYZ Bank secured by a usufructuary mortgage on a commercial
property. DEF Properties defaulted on the loan, and XYZ Bank decided to start collecting rent from
the tenants of the property. DEF Properties argued that XYZ Bank had no right to collect rent without
first taking possession of the property.

Does XYZ Bank have the right to collect rent under the terms of a usufructuary mortgage?

• A) Yes, XYZ Bank has the right to collect rent from the tenants as soon as DEF Properties
defaults on the loan

• B) No, XYZ Bank must first obtain possession of the property before collecting rent

• C) Yes, but XYZ Bank must file a legal notice to DEF Properties before collecting rent

• D) No, XYZ Bank must wait for court approval before collecting rent

• E) Yes, but XYZ Bank must terminate the tenancy agreements before collecting rent

Answer: A
Explanation: In a usufructuary mortgage, the lender (XYZ Bank) is entitled to collect rent or profits
from the property without taking physical possession of it when the borrower (DEF Properties)
defaults on the loan.

17. Case Study : Assignment of Debt and Borrower Notification

OPQ Bank has extended a term loan to STU Ltd., secured by an assignment of receivables from STU’s
customers. OPQ Bank decides to assign the debt to a third-party financial institution, UVW Finance,
without informing STU Ltd. UVW Finance insists that the assignment will only be enforceable once
STU Ltd. is notified. OPQ Bank claims that notification is not necessary for the assignment.

What is the legal requirement for the assignment of debt in this case?

• A) OPQ Bank can assign the debt without notifying STU Ltd., as long as UVW Finance agrees

• B) OPQ Bank must notify STU Ltd. in writing for the assignment to be enforceable

• C) UVW Finance can enforce the assignment without STU Ltd. being notified, as it’s a third
party

• D) OPQ Bank must get approval from STU Ltd. before assigning the debt to UVW Finance

• E) OPQ Bank can assign only part of the receivables without notifying STU Ltd.

Answer: B
Explanation: To make an assignment of debt legally enforceable, the borrower (STU Ltd.) must be
notified in writing about the assignment. This ensures that the borrower knows to make payments to
the new assignee, UVW Finance.

18. Case Study : General Lien and Security Retention

71
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
XYZ Ltd. has taken a term loan from ABC Bank, secured by a general lien on its stock of raw materials.
XYZ Ltd. also deposits some marketable securities with ABC Bank for safekeeping. XYZ Ltd. defaults
on the loan, and ABC Bank exercises its general lien by retaining both the raw materials and the
deposited securities. XYZ Ltd. argues that the bank cannot retain the securities, as they were
deposited for safekeeping.

Can ABC Bank retain the marketable securities under the general lien to recover the loan?

• A) Yes, ABC Bank can retain the securities under the general lien, as they are held in relation
to an unpaid debt

• B) No, ABC Bank cannot retain the securities, as they were deposited for safekeeping

• C) Yes, but ABC Bank must give a 30-day notice to XYZ Ltd. before retaining the securities

• D) No, ABC Bank can only retain the raw materials under the general lien

• E) Yes, but only if XYZ Ltd. consents to the retention of the securities

Answer: B
Explanation: A general lien does not apply to items like marketable securities that are deposited
with the bank for safekeeping. These are trust items, and the bank cannot retain them to recover an
unpaid loan unless they were specifically pledged as security.

19. Case Study : Set-Off and Secured Debt

RST Ltd. has a term loan and an overdraft facility with MNO Bank. Both loans are secured by
different assets. RST Ltd. defaults on the term loan but continues to service the overdraft facility
regularly. At the same time, RST Ltd. maintains a positive balance in its current account with MNO
Bank. MNO Bank decides to apply a right of set-off to recover the term loan using the current
account balance.

Is MNO Bank entitled to exercise the right of set-off in this case?

• A) Yes, MNO Bank can apply the right of set-off to recover the term loan using the current
account balance

• B) No, MNO Bank must first secure court approval before applying the right of set-off

• C) Yes, but only with RST Ltd.'s written consent

• D) No, MNO Bank cannot apply set-off because the current account is linked to the overdraft
facility

• E) Yes, but MNO Bank must apply the set-off only after default on both loans

Answer: A
Explanation: MNO Bank can exercise its right of set-off by adjusting the positive balance in RST Ltd.’s
current account against the unpaid term loan. The right of set-off allows the bank to combine debit
and credit balances across the borrower’s accounts to determine the net payable balance.

20. Case Study : Mortgage by Conditional Sale and Ownership Transfer

72
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
JKL Developers took a loan from ABC Bank, secured by a mortgage by conditional sale of a
commercial property. The mortgage agreement states that if JKL Developers defaults, the property
will automatically be transferred to ABC Bank's ownership. JKL Developers defaults on the loan, and
ABC Bank claims full ownership of the property. However, JKL Developers argues that it should still
have the right to reclaim the property upon repayment.

What is the correct legal outcome in this case?

• A) JKL Developers can reclaim the property if they repay the loan within a grace period

• B) ABC Bank automatically becomes the owner of the property upon default

• C) ABC Bank must file a suit to claim ownership of the property

• D) JKL Developers retains partial ownership of the property until the loan is fully repaid

• E) ABC Bank must auction the property to recover the loan amount

Answer: B
Explanation: In a Mortgage by Conditional Sale, if the borrower defaults, the lender (ABC Bank)
automatically becomes the owner of the property. The borrower (JKL Developers) no longer has the
right to reclaim the property unless otherwise stated in the agreement.

73
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Chapter 25
1. What is the primary objective of credit monitoring?

A) To increase sales
B) To minimize NPAs
C) To expand business
D) To enhance customer satisfaction
E) To reduce competition
Answer: B) To minimize NPAs
Explanation: The primary objective of credit monitoring is to minimize or eliminate NPAs by ensuring
the quality of loan assets and adherence to terms and covenants
2. Credit monitoring is best described as:

A) A one-time check
B) An annual audit
C) A continuous supervision process
D) A loan disbursement process
E) A loan repayment process
Answer: C) A continuous supervision process
Explanation: Credit monitoring involves continuous supervision of loan accounts to ensure
adherence to terms and quality of assets throughout the loan tenure
3. Which of the following is NOT a tool used for credit monitoring?

A) Stock Audit
B) MIS (Management Information System)
C) Loan Review Mechanism
D) Fund flow monitoring
E) Increasing the loan amount
Answer: E) Increasing the loan amount
Explanation: Credit monitoring tools include stock audit, MIS, and loan review mechanisms.
Increasing loan amounts is not a monitoring tool
4. At which stage does Credit Administration start?

A) During loan proposal

B) After the loan is sanctioned
C) After the loan is repaid
D) Before disbursement
E) During stock audit
Answer: B) After the loan is sanctioned
Explanation: Credit Administration begins once the loan is sanctioned, involving the execution of
terms and perfection of security
5. What should banks check for in stock statements during credit monitoring?

A) Stock levels match estimates

B) Financial statements are updated
C) Sales reports are positive
D) Customer complaints
E) Competitor analysis
Answer: A) Stock levels match estimates

74
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Explanation: During credit monitoring, banks scrutinize stock statements to ensure that stock levels
match estimates provided at the time of sanction
6. What is the primary aim of post-disbursement credit monitoring?

A) To increase credit limits

B) To identify early warning signals
C) To approve more loans
D) To reduce business operations
E) To ensure loan utilization in another branch
Answer: B) To identify early warning signals
Explanation: Post-disbursement monitoring aims to identify early warning signals to ensure asset
quality and take necessary corrective actions
7. What is the function of the Loan Review Mechanism (LRM)?

A) To assess future loans

B) To evaluate existing loans and credit quality
C) To review stock reports only
D) To disburse additional loans
E) To monitor customer complaints
Answer: B) To evaluate existing loans and credit quality
Explanation: LRM evaluates the effectiveness of loan administration, credit rating processes, and
assesses loan portfolio quality
8. What kind of audit reviews compliance with credit sanction processes and risk assessment?

A) Tax Audit
B) Credit Audit
C) Stock Audit
D) Sales Audit
E) Personal Audit
Answer: B) Credit Audit
Explanation: A Credit Audit reviews compliance with the credit sanction processes and assesses
credit risk, picking up early warning signals
9. Banks are advised to obtain legal audits for credit exposures above:

A) Rs. 1 crore
B) Rs. 2 crore
C) Rs. 3 crore
D) Rs. 4 crore
E) Rs. 5 crore
Answer: E) Rs. 5 crore
Explanation: Banks are advised to subject credit exposures of Rs. 5 crore and above to periodic legal
audits as part of their credit monitoring process
10. What is the purpose of End Use Verification during disbursement?

A) To ensure borrower credit score

B) To confirm funds are used for the intended purpose
C) To allow the borrower to invest in stocks
D) To ensure customer satisfaction
E) To increase the loan amount
Answer: B) To confirm funds are used for the intended purpose

75
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Explanation: End Use Verification ensures that the borrower uses the loan funds for the specific
purpose for which they were sanctioned
11. Which of the following is a sign of liquidity problems in the borrower's account?

A) Regular submission of financial statements

B) Frequent returns of cheques
C) Increase in production
D) Regular interest payments
E) Increased market share
Answer: B) Frequent returns of cheques
Explanation: Frequent cheque returns often indicate liquidity issues within the borrower's business
12. What tool helps banks monitor performance against projections?

A) Credit Audit
B) Quarterly Information System (QIS)
C) Sales Audit
D) Personal Audit
E) Marketing Analysis
Answer: B) Quarterly Information System (QIS)
Explanation: The QIS helps banks monitor the borrower's performance against projections and track
operational data
13. What should banks obtain to ensure end-use of term loan funds?

A) Stock audit reports

B) Original invoices
C) Stock purchase reports
D) Monthly cash flow statements
E) Customer satisfaction reports
Answer: B) Original invoices
Explanation: Banks should obtain original invoices to ensure that term loan funds are used for the
intended purpose, such as purchasing machinery or equipment
14. What is the importance of obtaining MSOD (Monthly Select Operational Data)?

A) To increase loan amounts

B) To monitor operational performance
C) To reduce interest rates
D) To check customer satisfaction
E) To assess competitor strength
Answer: B) To monitor operational performance
Explanation: MSOD is used to track the borrower's operational data, such as production, sales, and
receivables, which helps banks monitor the actual performance against projections
15. Which statement is true regarding credit monitoring tools?

A) Stock inspections are no longer necessary

B) Monitoring is done once a year
C) Stock statements should be scrutinized regularly
D) Stock audits are conducted every five years
E) Monitoring is only done in case of default
Answer: C) Stock statements should be scrutinized regularly

76
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Explanation: Regular scrutiny of stock statements is essential to ensure that the stock levels align
with projections and actual business performance
16. What is the role of the Credit Administration unit in banks?

A) To market new loans B) To execute and monitor credit facilities C) To handle customer complaints
D) To review customer service quality E) To disburse loans without conditions
Answer: B) To execute and monitor credit facilities
Explanation: The Credit Administration unit is responsible for conveying loan terms, ensuring proper
documentation, and monitoring the borrower's compliance with conditions

17. What is the goal of post-disbursement monitoring?

A) To sanction new loans B) To verify stock purchase C) To identify early warning signals and take
remedial measures D) To reduce the borrower's working capital E) To increase customer base
Answer: C) To identify early warning signals and take remedial measures
Explanation: Post-disbursement monitoring helps banks detect early warning signals in the
borrower's financial health and take corrective actions

18. How often should banks review credit exposures of Rs. 5 crore and above for legal compliance?

A) Monthly B) Quarterly C) Annually D) Every 5 years E) As per RBI guidelines

Answer: C) Annually
Explanation: Banks are required to subject credit exposures of Rs. 5 crore and above to periodic legal
audits, generally on an annual basis

19. Which of the following is considered a "Warning Signal" from the operation of a borrower's
account?

A) Increase in profits B) Consistent payments C) Unrelated/unusual debits D) Expansion of business

E) Rise in market share
Answer: C) Unrelated/unusual debits
Explanation: Unrelated or unusual debits in the borrower’s account may indicate diversion of funds
and serve as an early warning signal

20. What should banks check for during a factory inspection of the borrower?

A) The availability of updated financial statements B) The presence of government officials C) The
consistency of stock with submitted reports D) The borrower's market share E) The borrower's
competitor strategies
Answer: C) The consistency of stock with submitted reports
Explanation: During a factory inspection, banks should verify that the stock present matches the
details in the stock statements submitted to the bank

21. What is a key feature of Stock Audit?

A) It is performed by bank employees B) It is mandatory for all loans below Rs. 5 crore C) It ensures
the physical verification of stocks D) It is done every month E) It is only necessary for NPA accounts
Answer: C) It ensures the physical verification of stocks
Explanation: Stock audits are generally assigned to qualified professionals like Chartered
Accountants to verify the stock physically and match it with the stock statements provided to the
bank

77
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
22. For accounts with working capital limits above Rs. 5 crore, how often is a stock audit typically
conducted?

A) Monthly B) Quarterly C) Annually D) Every five years E) Only during defaults

Answer: C) Annually
Explanation: A stock audit is generally conducted annually for accounts with fund-based working
capital limits of Rs. 5 crore and above

23. What is the main purpose of the Loan Review Mechanism (LRM)?

A) To increase the loan sanction limits B) To independently assess loan performance and compliance
C) To assess marketing and sales strategies D) To promote customer services in rural areas E) To
identify customer preferences
Answer: B) To independently assess loan performance and compliance
Explanation: The Loan Review Mechanism (LRM) evaluates loan administration, ensures compliance
with terms, and helps in maintaining the quality of the credit portfolio

24. Which of the following best describes a "Negative Lien"?

A) A physical lien on the borrower's property B) A restriction against creating a mortgage without
consent C) A condition that mandates annual stock audits D) A legal charge on the borrower's future
income E) A limitation on loan disbursement
Answer: B) A restriction against creating a mortgage without consent
Explanation: A negative lien is a covenant where the borrower commits not to create a mortgage on
their property without the bank's express consent

25. What is the primary objective of a factory inspection in the credit monitoring process?

A) To check the quality of customer service B) To ensure the physical presence of stock and assets C)
To assess the borrower's marketing strategies D) To verify government compliance E) To expand the
credit limit
Answer: B) To ensure the physical presence of stock and assets
Explanation: Factory inspections aim to verify that the stock and assets reported by the borrower are
physically present and consistent with the bank's records

26. What happens if a borrower's financial covenants are not met during credit monitoring?

A) The loan is automatically written off B) The borrower is asked to submit new loan applications C)
Remedial actions such as interest rate increases may be triggered D) The borrower's competitors are
notified E) The loan is converted into a term deposit
Answer: C) Remedial actions such as interest rate increases may be triggered
Explanation: If financial covenants are not met, the bank may take steps such as increasing the loan's
interest rate or recalling the loan, depending on the severity of the covenant violation

27. Which of the following is an example of a monitoring tool used by banks?

A) Market analysis reports B) Sales projections C) Stock inspections and visit reports D) Competitor
SWOT analysis E) Marketing audits
Answer: C) Stock inspections and visit reports
Explanation: Stock inspections and visit reports are important monitoring tools used by banks to
assess the borrower's compliance and the status of assets

78
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
28. Which of the following actions might be taken if a borrower requests permission to raise new
debt under credit monitoring?

A) Automatic loan recall B) Termination of the loan agreement C) Review of the borrower's financial
performance and rating D) Reduction of credit limits E) Immediate stock audit
Answer: C) Review of the borrower's financial performance and rating
Explanation: If a borrower requests permission to raise new debt, the bank may conduct a review of
the borrower's financial performance and re-assess their credit rating

29. How does a bank typically confirm the end use of funds for a term loan?

A) By conducting market research B) By obtaining invoices from suppliers C) By reviewing competitor

data D) By analyzing quarterly projections E) By increasing the credit limit
Answer: B) By obtaining invoices from suppliers
Explanation: Banks confirm the end use of term loan funds by obtaining original invoices from
suppliers for purchases such as machinery, equipment, or vehicles

30. In the context of credit monitoring, what is an "Event of Default"?

A) When the borrower pays more than the agreed installment B) A violation of loan covenants or
terms C) An unexpected rise in the borrower's profits D) When the borrower's credit limit is
increased E) A new loan application

Answer: B) A violation of loan covenants or terms

Explanation:
An "Event of Default" refers to a situation where the borrower breaches the loan agreement or fails
to meet specific obligations outlined in the loan covenants. This can include failure to make
scheduled payments, violation of financial covenants (such as maintaining certain financial ratios), or
other terms agreed upon in the loan contract. Such defaults can lead to legal action, penalties, or the
acceleration of the loan repayment. It is a critical event in credit monitoring, prompting lenders to
take protective measures to mitigate credit risk. The other options do not constitute an event of
default.

31. What is a key feature of Stock Audit?

A) It is performed by bank employees

B) It is mandatory for all loans below Rs. 5 crore
C) It ensures the physical verification of stocks
D) It is done every month
E) It is only necessary for retail loans
Answer: C) It ensures the physical verification of stocks
Explanation: Stock audits are typically conducted by chartered accountants or cost accountants to
physically verify the stock levels and ensure they match the figures provided by the borrower

32. Which accounts are generally eligible for stock audits?

A) All accounts above Rs. 1 crore

B) Accounts with fund-based working capital limits of Rs. 5 crore and above
C) Personal loan accounts
D) Home loan accounts
E) Savings accounts
Answer: B) Accounts with fund-based working capital limits of Rs. 5 crore and above

79
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Explanation: Stock audits are generally conducted for accounts with working capital limits of Rs. 5
crore and above

33. What is the main purpose of factory inspections in credit monitoring?

A) To reduce interest rates

B) To monitor the borrower’s stock and operational conditions
C) To increase loan sanctions
D) To inspect competitor activities
E) To promote the bank's products
Answer: B) To monitor the borrower’s stock and operational conditions
Explanation: Factory inspections help banks verify stock, operational conditions, and the borrower's
adherence to loan terms

34. Which of the following is a sign of liquidity problems in a borrower’s account?

A) Regular repayment of loan installments

B) Increase in credit summations
C) Overdrawing the limits and frequent cheque returns
D) Rise in production levels
E) Higher demand for the borrower’s product
Answer: C) Overdrawing the limits and frequent cheque returns
Explanation: Frequent overdrawing and cheque returns are common indicators of liquidity problems

35. Why should banks compare the borrower’s actual performance with projections?

A) To increase the loan amount

B) To check market competitiveness
C) To assess deviations and take corrective actions
D) To evaluate customer satisfaction
E) To reduce borrower’s tax liability
Answer: C) To assess deviations and take corrective actions
Explanation: By comparing actual performance with projections, banks can identify discrepancies
and address issues to ensure the loan’s health

36. What should banks insist on obtaining for large loans (above Rs. 5 crore)?

A) Monthly marketing reports

B) Quarterly stock audit reports
C) Weekly financial updates
D) Financial statements of the borrower’s competitors
E) Daily sales report
Answer: B) Quarterly stock audit reports
Explanation: For large loans, periodic stock audits are essential to ensure the reliability of the stock
and book debts statements submitted by the borrower

37. What is the role of exception reports in credit monitoring?

A) To promote customer service

B) To highlight transactions that breach controls
C) To reduce loan interest rates
D) To assess the borrower's future projections

80
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
E) To enhance stock quality
Answer: B) To highlight transactions that breach controls
Explanation: Exception reports highlight transactions that breach internal controls, helping banks
identify potential issues

38. What should banks do if discrepancies are found in the borrower’s financial statements?

A) Ignore the discrepancies

B) Increase the loan amount
C) Call for explanations and take corrective actions
D) Ask for customer reviews
E) Stop all operations
Answer: C) Call for explanations and take corrective actions
Explanation: If discrepancies are found, the bank must seek explanations from the borrower and
take appropriate corrective measures

39. What is a key feature of Stock Audit?

A) It is performed by bank employees

B) It is mandatory for all loans below Rs. 5 crore
C) It ensures the physical verification of stocks
D) It is done every month
E) It is only necessary in case of defaults
Answer: C) It ensures the physical verification of stocks
Explanation: A stock audit involves physical verification of the stocks and book debts to ensure the
accuracy of the data submitted by the borrower

40. What is a potential red flag in a stock statement indicating poor marketing arrangements?

A) High finished goods stock over time

B) Increase in raw material stock
C) Low level of operations
D) Delayed submission of financial reports
E) Increase in bank deposits
Answer: A) High finished goods stock over time
Explanation: High levels of finished goods stock suggest either poor marketing arrangements or a
slowdown in market demand, which can be a red flag for credit monitoring

41. What can banks use to monitor the borrower's actual performance vis-a-vis projections?

A) End-of-day exception reports

B) Loan Review Mechanism (LRM)
C) Quarterly Information System (QIS)
D) Customer complaints
E) Competitor analysis reports
Answer: C) Quarterly Information System (QIS)
Explanation: Banks use QIS to monitor the borrower's actual performance compared to projections,
helping to detect variances and early warning signals

42. Which statement best describes the purpose of end-use verification?

81
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
A) To ensure proper loan repayment
B) To verify the loan amount is correctly invested in securities
C) To ensure funds are used for the purpose they were sanctioned
D) To provide the borrower with a credit score
E) To reduce the borrower's insurance premiums
Answer: C) To ensure funds are used for the purpose they were sanctioned
Explanation: End-use verification ensures that loan funds are utilized for the specific purpose they
were sanctioned, such as for equipment or project financing

43. What is an early warning signal of liquidity problems in the borrower’s account?

A) Timely repayment of loan

B) Consistent credit sales
C) Overdrawing of limits
D) Increase in production
E) Higher profit margins
Answer: C) Overdrawing of limits
Explanation: Overdrawing limits or exceeding sanctioned limits is a strong early warning signal of
liquidity problems

44. What is the consequence of non-compliance with covenants by a borrower?

A) Immediate loan approval

B) Increased lending limit
C) Decreased interest rate
D) Event of default
E) Borrower's credit score improvement
Answer: D) Event of default
Explanation: Non-compliance with covenants can trigger an "event of default," which may lead to
increased interest rates, more frequent reporting, or even recalling of the loan

45. Why is it important for banks to review exception reports daily?

A) To adjust loan repayment schedules

B) To detect breaches of control and operational irregularities
C) To forecast future sales
D) To calculate borrower credit scores
E) To increase loan amounts
Answer: B) To detect breaches of control and operational irregularities
Explanation: Exception reports help banks detect any breaches in control or operational
irregularities, allowing for timely intervention

46. What is the primary purpose of the Loan Review Mechanism (LRM)?

A) To verify stock levels

B) To monitor employee performance
C) To assess loan performance and prevent NPAs
D) To sanction new loans
E) To collect overdue payments
Answer: C) To assess loan performance and prevent NPAs

82
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Explanation: The Loan Review Mechanism (LRM) is designed to evaluate the performance of loan
accounts and ensure they do not turn into NPAs

47. What should banks monitor during post-disbursement credit monitoring?

A) Stock levels only

B) Borrower’s financial statements, operations, and covenant compliance
C) Borrower’s marketing strategy
D) Borrower’s interest payments only
E) Competitor financial performance
Answer: B) Borrower’s financial statements, operations, and covenant compliance
Explanation: Post-disbursement monitoring involves checking the borrower’s financial health,
operational performance, and adherence to covenants to ensure asset quality

48. What document is crucial in ensuring the end use of funds for a term loan?

A) Monthly sales report

B) Bank’s audit report
C) Original invoices of purchases
D) Stock statement
E) Customer feedback
Answer: C) Original invoices of purchases
Explanation: Banks ensure the end use of funds in term loans by obtaining original invoices for items
such as machinery, ensuring the funds were used appropriately

49. What action should be taken if a borrower repeatedly submits stock statements late?

A) Increase their credit limit

B) Report the borrower to the authorities
C) Investigate the reasons and ensure compliance
D) Reduce the interest rate
E) Discontinue the loan
Answer: C) Investigate the reasons and ensure compliance
Explanation: Late submission of stock statements may indicate underlying problems, and banks
should investigate to ensure accurate reporting and compliance

50. What is an Early Warning Signal (EWS) in credit monitoring?

A) A sudden increase in borrower’s profits

B) A borrower missing interest payments
C) A borrower expanding into a new market
D) An increase in working capital
E) A decrease in loan interest rate
Answer: B) A borrower missing interest payments
Explanation: Missing interest payments is a common early warning signal indicating potential
financial trouble for the borrower

51. What is the primary benefit of scrutinizing stock statements?

A) To increase the loan limit

B) To determine market conditions
C) To ensure that stock levels align with loan projections

83
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
D) To assess competitor strength
E) To evaluate customer satisfaction
Answer: C) To ensure that stock levels align with loan projections
Explanation: Scrutinizing stock statements helps ensure that the borrower maintains the projected
stock levels, preventing stock-related financial issues

52. Which statement best describes the purpose of a legal audit?

A) To evaluate borrower’s sales performance

B) To verify the legitimacy of loan documentation and property titles
C) To check stock levels
D) To monitor competitor activities
E) To track monthly loan repayments
Answer: B) To verify the legitimacy of loan documentation and property titles
Explanation: Legal audits are conducted to verify the legitimacy of loan-related documents and the
perfection of security

53. Which of the following is NOT an indicator of potential financial stress in a borrower’s account?

A) Frequent overdrawing of limits

B) Consistent timely repayments
C) Lower credit summations
D) Unrelated debits in the account
E) Frequent returns of cheques
Answer: B) Consistent timely repayments
Explanation: Consistent timely repayments indicate financial stability, while other factors such as
overdrawing limits or unrelated debits signal potential financial stress

54. What should banks do if stock audit reports indicate discrepancies?

A) Increase the loan limit

B) Ignore the discrepancies
C) Investigate the reasons and take corrective actions
D) Reduce the loan interest rate
E) Report the borrower to authorities immediately
Answer: C) Investigate the reasons and take corrective actions
Explanation: If stock audit reports show discrepancies, banks should investigate the causes and take
necessary corrective actions to ensure the borrower complies with loan terms

55. Why are financial statements important in credit monitoring?

A) To increase customer satisfaction

B) To monitor the borrower's performance against projections
C) To predict competitor behavior
D) To reduce the interest rate
E) To identify marketing trends
Answer: B) To monitor the borrower's performance against projections
Explanation: Financial statements help banks compare actual performance with the projections
made at the time of loan sanction and identify any significant deviations

56. What is a key aspect of the Quarterly Information System (QIS)?

84
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
A) It monitors the borrower's competitors
B) It checks the bank’s internal financial health
C) It tracks the borrower's sales and operational performance against projections
D) It focuses on customer complaints
E) It ensures timely loan repayment
Answer: C) It tracks the borrower's sales and operational performance against projections
Explanation: The Quarterly Information System (QIS) helps banks track the borrower's sales and
performance, comparing actual figures with projected estimates

57. What could frequent returns of sales bills indicate in a borrower’s account?

A) Strong sales performance

B) Good credit management
C) Poor quality of products or market difficulties
D) Increased customer satisfaction
E) Reduced loan requirements
Answer: C) Poor quality of products or market difficulties
Explanation: Frequent returns of sales bills may indicate problems such as poor product quality, low
demand, or other market difficulties

58. What action should banks take if Early Warning Signals (EWS) are identified in a borrower’s
account?

A) Ignore the signals and continue as usual

B) Increase the loan amount
C) Investigate the reasons and take appropriate action
D) Decrease the loan interest rate
E) Report the borrower to authorities immediately
Answer: C) Investigate the reasons and take appropriate action
Explanation: If Early Warning Signals are identified, banks should investigate the underlying issues
and take necessary actions to prevent further deterioration

59. What is the purpose of end-use verification of funds?

A) To increase the loan repayment period

B) To ensure funds are used for the intended purpose
C) To reduce customer complaints
D) To monitor market trends
E) To assess competitor financial health
Answer: B) To ensure funds are used for the intended purpose
Explanation: End-use verification ensures that the borrower uses the loan for the purpose it was
sanctioned, preventing diversion of funds

60. Which of the following is an important credit monitoring tool?

A) Stock inspection
B) Customer feedback
C) Competitor analysis
D) Marketing strategies
E) Loan waiver campaigns
Answer: A) Stock inspection

85
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Explanation: Stock inspection is a key credit monitoring tool that helps banks verify the borrower’s
stock levels and ensure they are consistent with loan requirements.

61. What does the stock audit process include?

A) Review of borrower’s personal records

B) Physical verification of stocks and book debts
C) Analysis of market trends
D) Loan repayment monitoring
E) Competitor strength evaluation
Answer: B) Physical verification of stocks and book debts
Explanation: Stock audits involve the physical verification of stocks and book debts to ensure they
align with the information provided by the borrower.

62. What is the primary objective of periodic credit monitoring?

A) To increase sales
B) To minimize risks and prevent slippage in asset quality
C) To reduce the loan amount
D) To monitor customer feedback
E) To assess competitor strategies
Answer: B) To minimize risks and prevent slippage in asset quality
Explanation

63. What should banks do if stock audit reports indicate discrepancies?

A) Increase the credit limit

B) Ignore the discrepancies if the borrower is profitable
C) Investigate the discrepancies and take corrective action
D) Disburse additional loans
E) Reduce loan interest rates
Answer: C) Investigate the discrepancies and take corrective action
Explanation: If a stock audit reveals discrepancies, banks must investigate the causes and take
corrective measures to safeguard their interests and prevent potential financial issues.

64. What is the significance of maintaining a strong current ratio in credit monitoring?

A) It helps increase market share

B) It ensures that a borrower has sufficient liquidity
C) It increases the bank's profit margin
D) It helps predict stock prices
E) It ensures low production costs
Answer: B) It ensures that a borrower has sufficient liquidity
Explanation: A strong current ratio ensures that the borrower has sufficient liquidity to meet their
short-term liabilities, which is vital for the loan's overall health.

65. What should a bank do if a borrower’s current ratio falls below the agreed-upon level?

A) Offer a new loan

B) Ignore the situation if the borrower is making profits
C) Conduct a review and discuss corrective measures with the borrower
D) Reduce the loan amount

86
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
E) Waive loan conditions
Answer: C) Conduct a review and discuss corrective measures with the borrower
Explanation: If the current ratio falls below the required level, the bank should review the situation
with the borrower and consider corrective actions to maintain the loan's performance.

66. What is the importance of MSOD (Monthly Select Operational Data) in credit monitoring?

A) It helps banks identify new customers

B) It tracks the borrower's sales and receivables
C) It monitors competitor performance
D) It increases the bank's loan portfolio
E) It tracks foreign exchange rates
Answer: B) It tracks the borrower's sales and receivables
Explanation: MSOD provides critical data on the borrower’s sales, production, and receivables,
helping banks track performance and detect early warning signs.

67. When should a borrower’s loan account be reviewed for potential corrective actions?

A) Once every five years

B) Only if the borrower requests it
C) During annual reviews or when there are early warning signals
D) When the borrower’s competitor is reviewed
E) Only after the loan is fully disbursed
Answer: C) During annual reviews or when there are early warning signals
Explanation: Loan accounts should be reviewed during annual reviews or when early warning signals
are detected, ensuring that the loan remains in good health.

68. What is the purpose of the Annual Review of Advances?

A) To increase the loan amount automatically

B) To assess the ongoing health of the borrower and the security of funds
C) To provide additional funds to the borrower
D) To compare the borrower’s performance with its competitors
E) To ensure customer satisfaction
Answer: B) To assess the ongoing health of the borrower and the security of funds
Explanation: The annual review of advances is conducted to assess the borrower’s financial
performance, business health, and the safety of the funds lent by the bank.

69. What type of borrowers typically undergo Stock Audits?

A) Only those in the service sector

B) Borrowers with large advances or NPAs
C) Borrowers with perfect repayment records
D) Borrowers in rural areas only
E) Borrowers with short-term loans
Answer: B) Borrowers with large advances or NPAs
Explanation: Stock audits are usually conducted for borrowers with large advances or those whose
accounts have turned into NPAs, to ensure that the value and condition of the stock are as reported.

70. What is one of the most critical warning signals in a borrower’s account?

87
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
A) High employee turnover
B) Frequent holidays taken by the borrower
C) Delay in payment of interest or installments
D) A high customer satisfaction score
E) Reduction in the number of employees
Answer: C) Delay in payment of interest or installments
Explanation: Delays in paying interest or installments are strong indicators of liquidity problems and
are key warning signals in credit monitoring.

71. Which of the following is a common reason for frequent returns of cheques?

A) Increased sales
B) Poor cash management or liquidity problems
C) A high credit score
D) New marketing initiatives
E) Competitor activities
Answer: B) Poor cash management or liquidity problems
Explanation: Frequent cheque returns are usually a result of poor cash management or liquidity
problems, indicating the borrower’s financial difficulties.

72. What is the role of stock inspections in credit monitoring?

A) To ensure stocks are priced correctly

B) To verify that the stock reported in financial statements physically exists
C) To assess customer satisfaction
D) To evaluate marketing strategies
E) To review bank employees’ performance
Answer: B) To verify that the stock reported in financial statements physically exists
Explanation: Stock inspections ensure that the physical stock matches the figures reported in the
borrower’s financial and stock statements, helping to prevent false reporting.

73. What should a bank do if a borrower’s stock levels significantly differ from projections?

A) Automatically increase the loan limit

B) Cancel the loan immediately
C) Investigate the reasons and take corrective action
D) Ignore the difference if the borrower is profitable
E) Increase the interest rate
Answer: C) Investigate the reasons and take corrective action
Explanation: Significant differences between projected and actual stock levels should be
investigated, and appropriate corrective actions should be taken to protect the bank’s interests.

74. Why is the analysis of financial statements crucial in credit monitoring?

A) It ensures that the borrower is paying taxes

B) It helps determine the market value of the borrower’s products
C) It provides insights into the borrower’s performance and compliance with covenants
D) It is required for legal audits
E) It helps banks evaluate customer complaints
Answer: C) It provides insights into the borrower’s performance and compliance with covenants

88
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Explanation: Analyzing financial statements helps the bank track the borrower’s actual performance,
compare it with projections, and ensure compliance with loan covenants.

75. Which of the following is NOT a typical component of a loan review?

A) Assessing the borrower’s financial health

B) Checking compliance with loan covenants
C) Reviewing competitor performance
D) Identifying early warning signals
E) Ensuring proper documentation
Answer: C) Reviewing competitor performance
Explanation: Loan reviews focus on the borrower’s financial health, compliance, and risk factors, not
on evaluating the performance of competitors.

76. Why is ensuring the end-use of funds important in credit monitoring?

A) It helps increase the borrower’s credit score

B) It ensures that funds are used for the purpose intended and not diverted
C) It reduces the bank’s interest income
D) It helps monitor market conditions
E) It increases customer satisfaction
Answer: B) It ensures that funds are used for the purpose intended and not diverted
Explanation: Ensuring the end-use of funds is crucial to prevent the diversion of loan proceeds to
unauthorized uses, which could jeopardize the loan's safety.

77. Which tool is primarily used to track the borrower’s performance over time?

A) Personal interviews
B) Competitor analysis
C) Monthly Select Operational Data (MSOD)
D) Stock inspections
E) Legal audits
Answer: C) Monthly Select Operational Data (MSOD)
Explanation: MSOD tracks the borrower’s performance in terms of sales, production, and
receivables, allowing the bank to monitor ongoing performance.

78. What is the primary objective of conducting factory inspections?

A) To verify the value of the company’s shares

B) To ensure the factory’s products are in demand
C) To confirm the stock and machinery exist as reported
D) To assess the borrower’s marketing efforts
E) To check the borrower’s customer satisfaction
Answer: C) To confirm the stock and machinery exist as reported
Explanation: Factory inspections are conducted to verify the actual presence of stock and machinery
reported in the borrower’s financial and operational statements.

79. What is a key indicator of liquidity problems in a borrower’s account?

A) Frequent stock audits

B) A high level of marketing expenses
C) Frequent overdrawing of limits

89
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
D) Consistent sales growth
E) Timely repayment of installments
Answer: C) Frequent overdrawing of limits
Explanation: Frequent overdrawing of credit limits often indicates liquidity constraints, which is a key
warning signal of potential financial stress.

80. What should banks do if stock statements show a high level of finished goods over time?

A) Increase the loan limit

B) Disregard the stock level if the borrower is profitable
C) Investigate potential issues with sales or inventory management
D) Automatically reduce the interest rate
E) Assume production is ramping up for future demand
Answer: C) Investigate potential issues with sales or inventory management
Explanation: A high level of finished goods over time may indicate slow sales or poor inventory
management, which should be investigated to prevent financial issues.

81. Which of the following is a key benefit of using Artificial Intelligence (AI) in credit monitoring?

A) It increases the loan disbursement speed

B) It helps predict credit defaults with higher accuracy
C) It reduces the need for stock audits
D) It eliminates the need for legal audits
E) It ensures customer satisfaction
Answer: B) It helps predict credit defaults with higher accuracy
Explanation: AI and Machine Learning tools help predict credit defaults more accurately by analyzing
large datasets, allowing banks to mitigate risks early.

82. What is the biggest challenge in adopting AI and Machine Learning for credit risk management?

A) Lack of sufficient financial data

B) Shortage of skilled professionals
C) Inability to collect loan repayments
D) Poor customer feedback
E) Increased competition
Answer: B) Shortage of skilled professionals
Explanation: The adoption of AI and Machine Learning in credit risk management is hindered by the
scarcity of skilled professionals who can manage and implement these advanced tools.

83. What does the term "predictive monitoring" in AI/ML-based credit risk management refer to?

A) Monitoring that occurs after a default

B) Annual reviews of loan accounts
C) Monitoring that predicts potential risks before they occur
D) Reviewing only the financial statements of borrowers
E) Auditing borrower accounts once every five years
Answer: C) Monitoring that predicts potential risks before they occur
Explanation: Predictive monitoring refers to the ability of AI/ML tools to forecast risks, such as
potential defaults, before they actually happen, helping banks take preventive actions.

84. How does AI/ML-driven monitoring differ from conventional credit monitoring?

90
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
A) It focuses on increasing profits
B) It operates on a scheduled, periodic basis
C) It provides continuous and real-time risk identification
D) It only monitors borrower’s stock levels
E) It eliminates the need for loan reviews
Answer: C) It provides continuous and real-time risk identification
Explanation: AI/ML-driven monitoring continuously tracks risks in real time, unlike conventional
methods, which are typically periodic and scheduled.

85. What is a key advantage of AI-based predictive analytics in banking?

A) It reduces the need for skilled professionals

B) It predicts stock market trends
C) It identifies frauds before they occur
D) It eliminates loan documentation
E) It reduces customer complaints
Answer: C) It identifies frauds before they occur
Explanation: AI-based predictive analytics can detect patterns and identify potential frauds before
they fully materialize, helping banks mitigate risks proactively.

86. What is the primary factor that AI/ML tools rely on for effective credit monitoring?

A) Small amounts of selective data

B) Comprehensive and high-quality data
C) Customer satisfaction surveys
D) Frequent manual audits
E) Monthly marketing reports
Answer: B) Comprehensive and high-quality data
Explanation: AI/ML tools depend heavily on large, high-quality datasets for accurate predictions and
risk assessments in credit monitoring.

87. What is the role of an “Agency for Specialized Monitoring” (ASM)?

A) To monitor customer satisfaction

B) To oversee small-scale borrowers
C) To monitor large advances above Rs. 250 crores
D) To audit tax payments
E) To increase loan limits
Answer: C) To monitor large advances above Rs. 250 crores
Explanation: The Agency for Specialized Monitoring (ASM) is responsible for monitoring large credit
exposures above Rs. 250 crores, ensuring proper management of large loans.

88. Which of the following is NOT a feature of AI/ML-driven credit risk management?

A) Predictive monitoring of risks

B) Real-time alerts for early warning signals
C) Regular stock audits
D) Continuous data analysis
E) Monitoring global economic conditions
Answer: C) Regular stock audits

91
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Explanation: AI/ML-driven credit risk management focuses on predictive monitoring, real-time
alerts, and continuous analysis, while stock audits are a part of traditional monitoring tools.

89. How does AI/ML improve loan reviews compared to traditional methods?

A) By increasing the loan amount

B) By speeding up loan disbursement
C) By continuously tracking and assessing loan health
D) By eliminating the need for stock statements
E) By reducing interest rates
Answer: C) By continuously tracking and assessing loan health
Explanation: AI/ML enhances loan reviews by continuously tracking borrower performance and
assessing the health of the loan in real time, as opposed to the periodic reviews in traditional
methods.

90. What is one major drawback of conventional credit monitoring compared to AI-driven
monitoring?

A) It leads to excessive customer engagement

B) It is limited to pre-disbursement monitoring
C) It relies on periodic reviews, which may miss early warning signs
D) It focuses only on international loans
E) It requires complex software
Answer: C) It relies on periodic reviews, which may miss early warning signs
Explanation: Conventional credit monitoring relies on scheduled periodic reviews, which may
overlook early warning signals that AI-driven systems can detect in real time.

91. What does AI/ML-based monitoring rely on to detect financial frauds?

A) Random customer surveys

B) Publicly available data and internal borrower data
C) Monthly loan interest payments
D) Competitor financial statements
E) Annual audit reports
Answer: B) Publicly available data and internal borrower data
Explanation: AI/ML systems rely on both publicly available data and internal borrower data to detect
patterns that indicate potential financial frauds.

92. Which of the following can be a sign of financial stress in a borrower’s account?

A) Regular submission of stock statements

B) Increase in credit summations
C) Non-payment of statutory liabilities
D) Reduced demand for loans
E) Rising market share
Answer: C) Non-payment of statutory liabilities
Explanation: Non-payment of statutory liabilities, such as taxes or provident fund dues, is a common
sign of financial stress in a borrower’s account.

93. What is a major pre-condition for successful AI/ML-driven credit risk management?

92
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
A) Reduction of credit limits
B) Availability of large amounts of comprehensive data
C) Elimination of traditional monitoring tools
D) Frequent face-to-face meetings with borrowers
E) Manual auditing of financial statements
Answer: B) Availability of large amounts of comprehensive data
Explanation: AI/ML-driven credit risk management requires access to comprehensive and large
datasets for accurate risk prediction and analysis.

94. In terms of credit monitoring, which action would be most appropriate if a borrower's actual
sales consistently fall short of their projections by more than 20% over two consecutive quarters?

A) Immediate termination of the credit facility

B) Increase the loan limit to support business recovery
C) Analyze the borrower’s business environment and consider restructuring the loan
D) Reduce the interest rate to ease the borrower's burden
E) Report the borrower to regulatory authorities for mismanagement
Answer: C) Analyze the borrower’s business environment and consider restructuring the loan
Explanation: In such a case, analyzing the borrower’s environment and considering loan
restructuring would be the prudent course to prevent further deterioration in the borrower's
financial health.

95. Which of the following covenants would most effectively mitigate the risk of asset diversion in
a credit facility with minimal collateral security?

A) Mandating quarterly financial reporting

B) Requiring submission of audited annual financial statements
C) Imposing a negative lien on fixed assets
D) Enforcing daily cash flow reporting
E) Implementing a high penalty for delayed interest payments
Answer: C) Imposing a negative lien on fixed assets
Explanation: A negative lien on fixed assets would ensure that the borrower does not create
additional encumbrances on assets without the bank's consent, thereby mitigating the risk of asset
diversion.

96. In the context of credit risk assessment, how would the introduction of Machine Learning (ML)
tools impact the traditional IRAC norms, specifically in the area of asset classification?

A) ML tools would replace the IRAC norms entirely

B) ML tools would enhance predictive monitoring, identifying potential slippages earlier than
traditional IRAC reviews
C) ML tools would require a complete overhaul of the IRAC system
D) ML tools would eliminate the need for human intervention in asset classification
E) ML tools would only affect provisioning, not classification
Answer: B) ML tools would enhance predictive monitoring, identifying potential slippages earlier
than traditional IRAC reviews
Explanation: Machine Learning tools can predict early signs of asset deterioration, which enhances
the accuracy of monitoring and asset classification under IRAC guidelines.

97 If a borrower consistently breaches the debt-equity ratio covenant stipulated at the time of loan
sanction, what corrective action should the bank take to minimize exposure risk?

93
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
A) Call for additional security or increase the interest rate
B) Grant the borrower a grace period to adjust their finances
C) Ignore the breach if other covenants are being met
D) Restructure the debt without penalty
E) Issue a legal notice for immediate repayment of the loan
Answer: A) Call for additional security or increase the interest rate
Explanation: A breach of the debt-equity ratio is a sign of financial imbalance. To protect its
exposure, the bank should request additional security or increase the interest rate to reflect the
increased risk.

98. Which of the following is the most critical factor in determining whether to initiate a forensic
audit for a large credit exposure?

A) Regular submission of stock statements

B) Consistent delays in repayment and unexplained fund transfers
C) Borrower's request for additional working capital
D) Decrease in borrower’s credit rating by a minor degree
E) Approval from the borrower's internal audit team
Answer: B) Consistent delays in repayment and unexplained fund transfers
Explanation: Delays in repayment combined with unexplained fund transfers are red flags that
suggest possible financial mismanagement or fraud, warranting a forensic audit.

99. When monitoring the financial health of a borrower, which of the following financial metrics
would most effectively signal the need for loan restructuring due to operational stress?

A) Increase in sales growth rate

B) Decrease in operating profit margin despite stable revenue
C) Reduction in liabilities
D) Increase in asset base
E) Stable current ratio but declining market share
Answer: B) Decrease in operating profit margin despite stable revenue
Explanation: A decrease in operating profit margin, despite stable revenue, signals that the borrower
is experiencing operational stress, which may require loan restructuring to prevent defaults.

100. In the context of credit monitoring, which of the following is the most effective early indicator
of a borrower’s potential insolvency?

A) An increase in stock levels

B) A gradual decrease in working capital turnover ratio

C) Consistent on-time repayments

D) Submission of detailed financial statements

E) Request for new lines of credit

Answer: B) A gradual decrease in working capital turnover ratio
Explanation: A declining working capital turnover ratio may indicate inefficient use of assets and
could be a signal of liquidity problems, which is a strong early indicator of potential insolvency.

101. Which of the following statements most accurately reflects the role of financial covenants in
credit monitoring?

94
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
A) They ensure that the borrower can increase the credit limit without the bank’s approval.

B) They act as an early warning system for breaches in financial health.

C) They are used only in term loans to prevent loan defaults.

D) They guarantee that the borrower will maintain a positive cash flow throughout the loan period.
E) They primarily focus on stock level verifications.
Answer: B) They act as an early warning system for breaches in financial health.
Explanation: Financial covenants are designed to monitor the borrower’s financial health and trigger
warnings when financial ratios, such as debt-to-equity or current ratios, breach predetermined
thresholds.

102. What should a bank verify during a stock audit?

A) Only the borrower's market share

B) The borrower's profit margins
C) The quantity and quality of the stock pledged as collateral
D) The borrower's credit score
E) The borrower's loan repayment history

Answer: C) The quantity and quality of the stock pledged as collateral

Explanation:
During a stock audit, the bank's primary goal is to verify the quantity and quality of the stock pledged
by the borrower as collateral for loans. The audit helps ensure that the borrower maintains adequate
stock levels that align with the terms of the loan agreement and that the quality of the stock has not
deteriorated. This is crucial for determining the value of the collateral and managing the bank's risk
exposure. Factors such as market share, profit margins, credit score, and repayment history, while
important, are not the primary focus of a stock audit, which is specifically concerned with the
collateral itself.

103. In a scenario where a borrower’s financial performance has started deviating from the
original projections, which of the following would be the most prudent action for a credit
monitoring officer to take?

A) Increase the interest rate immediately

B) Initiate a forensic audit of the borrower’s finances
C) Call for an immediate meeting with the borrower to understand the causes and discuss corrective
actions
D) Terminate the credit facility and start recovery proceedings
E) Wait for the borrower’s next financial statements before taking any action
Answer: C) Call for an immediate meeting with the borrower to understand the causes and discuss
corrective actions
Explanation: Engaging with the borrower at the earliest sign of deviation can help identify potential
issues and allow both the bank and borrower to take corrective measures before the situation
worsens.

104. Which of the following is the most challenging aspect of applying AI and ML in credit risk
management, particularly in the Indian banking context?

A) The inability to handle small data sets

B) Over-reliance on traditional credit scoring methods

95
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
C) Absence of uniform credit risk regulations
D) Lack of regulatory approval from RBI for AI-based models
E) Difficulties in collecting large, diverse datasets for AI models to process effectively
Answer: E) Difficulties in collecting large, diverse datasets for AI models to process effectively
Explanation: AI and ML models rely on vast amounts of high-quality data to produce accurate
results. In the Indian banking context, collecting such data, especially for smaller or rural borrowers,
can be a significant challenge.

105. What should a bank's primary course of action be when a significant discrepancy is found in
the borrower’s MSOD (Monthly Select Operational Data) report that doesn’t align with previously
provided projections?

A) Automatically downgrade the credit rating of the borrower

B) File a case with the Debt Recovery Tribunal (DRT)
C) Conduct an immediate on-site stock inspection and review financial data
D) Stop all further disbursements and call for immediate repayment
E) Offer the borrower a grace period to correct the discrepancy
Answer: C) Conduct an immediate on-site stock inspection and review financial data
Explanation: When significant discrepancies in operational data arise, the best action is to verify the
borrower’s claims through stock inspections and a thorough review of the financials to ensure the
accuracy of the information.

106. In post-disbursement credit monitoring, which of the following tools is most likely to detect
potential liquidity issues in the borrower’s business early on?

A) Periodic stock inspections

B) Monthly cash flow analysis and comparison against projections
C) Half-yearly submission of balance sheets
D) Year-end profit and loss analysis
E) Insurance verification of stock and collateral
Answer: B) Monthly cash flow analysis and comparison against projections
Explanation: Regular cash flow analysis, when compared to the original projections, can reveal
liquidity issues earlier than stock inspections or yearly financial statements, making it a more
dynamic monitoring tool.

107. Which of the following is a characteristic of an Event of Default in the context of financial
covenants?

A) When the borrower requests an increase in the credit limit

B) When the borrower fails to maintain the required Debt Service Coverage Ratio (DSCR)
C) When the borrower’s stock levels rise above expected projections
D) When the borrower exceeds its sales targets
E) When the borrower requests a term extension
Answer: B) When the borrower fails to maintain the required Debt Service Coverage Ratio (DSCR)
Explanation: Failing to maintain financial covenants like the DSCR is typically classified as an Event of
Default, which may lead the bank to increase interest rates or take corrective actions.

108. How does a credit monitoring officer use the Early Warning System (EWS) to protect the
bank’s interests?

96
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
A) By increasing the borrower’s credit limit based on EWS signals
B) By identifying signs of stress in the borrower’s operations before they escalate into defaults
C) By conducting surprise stock audits only during financial downturns
D) By focusing on the borrower’s market share growth
E) By eliminating financial covenants for borrowers with positive EWS signals
Answer: B) By identifying signs of stress in the borrower’s operations before they escalate into
defaults
Explanation: The EWS is designed to detect early signs of financial stress, allowing the bank to
intervene before the borrower defaults, thereby protecting the bank’s interests.

109. Which of the following is the most reliable indicator that a borrower may have diverted
funds?

A) A decrease in raw material costs

B) An increase in the borrower’s sales revenue
C) Frequent large debits to unrelated accounts
D) Regular payments of interest and principal
E) A decrease in stock levels
Answer: C) Frequent large debits to unrelated accounts
Explanation: Large debits to unrelated accounts, especially if not in line with the borrower's business
operations, could indicate fund diversion, which is a red flag for credit monitoring officers.

110. What is the primary advantage of using AI/ML-driven credit monitoring compared to
traditional methods?

A) It completely replaces the need for human intervention in loan monitoring

B) It offers real-time monitoring and predictive capabilities for potential defaults
C) It reduces the cost of loans for borrowers
D) It allows for more frequent legal audits
E) It increases customer satisfaction through more personalized loan products
Answer: B) It offers real-time monitoring and predictive capabilities for potential defaults
Explanation: AI/ML-driven credit monitoring systems can continuously analyze borrower data and
predict defaults before they occur, providing a significant advantage over traditional, periodic
monitoring methods.

111. A borrower’s financial statements show a significant reduction in current liabilities, while
their receivables and inventory levels remain consistent. What is the most likely risk that this
scenario indicates?

A) The borrower is aggressively paying down debt

B) The borrower may have underreported liabilities or shifted them off-balance sheet
C) The borrower is improving its liquidity position
D) The borrower is about to default on its loans
E) The borrower’s stock management is declining
Answer: B) The borrower may have underreported liabilities or shifted them off-balance sheet
Explanation: A significant reduction in liabilities without corresponding reductions in receivables and
inventory may suggest that the borrower is not fully reporting liabilities or has shifted them off-
balance sheet, which is a red flag in credit monitoring.

112. In credit monitoring, which of the following scenarios represents a potential breach of a
negative lien covenant?

97
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
A) The borrower fails to submit stock reports on time
B) The borrower creates a mortgage on its property without prior approval from the bank
C) The borrower maintains a higher than expected debt-to-equity ratio
D) The borrower delays interest payments by 15 days
E) The borrower increases its inventory holding period
Answer: B) The borrower creates a mortgage on its property without prior approval from the bank
Explanation: A negative lien covenant prohibits the borrower from creating a mortgage or lien on its
property without the lender’s consent. Breaching this covenant can trigger penalties or even recall of
the loan.

113. Which of the following best describes the primary function of an AI/ML-based “holistic data
assembly” in credit monitoring?

A) It focuses solely on the borrower’s sales data

B) It collects and analyzes data across multiple sources, including public and internal data
C) It monitors only the borrower’s real-time account balances
D) It is used to calculate loan interest rates based on past performance
E) It focuses on the borrower’s geographical expansion
Answer: B) It collects and analyzes data across multiple sources, including public and internal data
Explanation: Holistic data assembly in AI/ML-based credit monitoring integrates data from a variety
of sources, both public and internal, to provide a comprehensive view of the borrower’s financial
health and risks.

114. A borrower has missed submitting their quarterly financial statements as required by the loan
agreement. What should be the bank’s immediate course of action?

A) Ignore the issue since the borrower is making timely repayments

B) Conduct a forensic audit of the borrower’s finances
C) Review the borrower’s performance and issue a notice for non-compliance
D) Extend the time limit for submission without penalties
E) Increase the interest rate on the loan
Answer: C) Review the borrower’s performance and issue a notice for non-compliance
Explanation: Failure to submit required financial statements is a breach of the loan agreement, and
the bank should immediately review the borrower’s performance and issue a formal notice for non-
compliance, possibly followed by corrective actions.

115. Which of the following would be considered an Event of Default under a typical loan
agreement with financial covenants?

A) Borrower’s stock levels increase

B) Borrower’s interest coverage ratio drops below the agreed threshold
C) Borrower’s competitors gain market share
D) Borrower’s revenue increases by 10%
E) Borrower delays the submission of annual tax returns
Answer: B) Borrower’s interest coverage ratio drops below the agreed threshold
Explanation: A decline in the interest coverage ratio below the agreed level is considered an Event of
Default as it indicates the borrower may struggle to meet interest payments, putting the loan at risk.

116. A borrower with a marginal debt-to-equity ratio is approaching the bank for additional debt.
Which financial covenant would most likely be included to safeguard the bank’s interests?

98
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
A) A covenant requiring an increase in the borrower’s credit limit
B) A covenant prohibiting the borrower from raising any additional debt without the bank’s consent
C) A covenant allowing the borrower to increase leverage if profits rise
D) A covenant requiring the borrower to maintain a higher cash flow
E) A covenant restricting the borrower from selling any assets
Answer: B) A covenant prohibiting the borrower from raising any additional debt without the bank’s
consent
Explanation: A covenant restricting the borrower from raising additional debt would help the bank
protect its interests by preventing the borrower from further weakening its financial position through
excessive leverage.

117. When analyzing a borrower’s Quarterly Information System (QIS) report, you notice that the
receivables turnover ratio has slowed significantly. What is the most likely implication of this
change for the bank?

A) The borrower’s sales have increased

B) The borrower is likely experiencing cash flow problems due to delayed collections
C) The borrower’s profitability is improving
D) The borrower is reducing operational costs
E) The borrower’s stock levels are decreasing
Answer: B) The borrower is likely experiencing cash flow problems due to delayed collections
Explanation: A slowdown in the receivables turnover ratio suggests that the borrower is taking
longer to collect payments from customers, which may lead to cash flow problems that could affect
loan repayment capacity.

118. Which of the following is most critical when conducting a post-disbursement inspection of a
borrower’s stock levels?

A) Ensuring the borrower has submitted a marketing plan

B) Verifying that the stock levels align with the borrower’s MSOD
C) Checking the borrower’s profit margins
D) Assessing the borrower’s market position
E) Reviewing the borrower’s loan agreement terms
Answer: B) Verifying that the stock levels align with the borrower’s MSOD
Explanation: During post-disbursement inspections, verifying that the actual stock levels match
those reported in the Monthly Select Operational Data (MSOD) is crucial to ensure the borrower’s
data is accurate and the loan is being used as intended.

119. A borrower’s debt service coverage ratio (DSCR) has fallen below 1.0, indicating that:

A) The borrower is earning sufficient income to cover interest payments

B) The borrower may not have enough income to cover interest and principal repayments
C) The borrower has increased its equity base
D) The borrower’s stock turnover ratio has improved
E) The borrower has paid off its long-term liabilities
Answer: B) The borrower may not have enough income to cover interest and principal repayments
Explanation: A DSCR below 1.0 indicates that the borrower’s net operating income is insufficient to
cover its debt obligations, including both interest and principal repayments, posing a risk to the bank.

120. In the context of loan review mechanisms, which of the following best describes the purpose
of conducting a “sensitivity analysis” on a borrower’s financial projections?

99
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
A) To test the borrower’s ability to repay under various adverse conditions
B) To increase the borrower’s loan limit based on future profits
C) To determine the borrower’s stock management efficiency
D) To assess the borrower’s interest rate fluctuations
E) To predict the borrower’s long-term profitability
Answer: A) To test the borrower’s ability to repay under various adverse conditions
Explanation: Sensitivity analysis helps assess how changes in key variables (e.g., interest rates,
revenue) impact the borrower’s ability to meet its debt obligations, thereby identifying potential
risks under adverse conditions.

121. A borrower in the manufacturing sector reports a sharp rise in the ratio of finished goods
inventory to sales. What should this signal to the bank’s credit monitoring team?

A) The borrower is efficiently managing inventory levels

B) The borrower is facing reduced market demand or overproduction
C) The borrower’s sales have exceeded projections
D) The borrower is improving its working capital cycle
E) The borrower is preparing for a major expansion
Answer: B) The borrower is facing reduced market demand or overproduction
Explanation: A rise in the ratio of finished goods inventory to sales can indicate overproduction or
reduced demand, which could lead to liquidity issues and potential repayment problems.

122. What would be the most appropriate response if an AI-driven credit risk model identifies an
increase in the probability of default for an existing borrower?

A) Automatically terminate the borrower’s credit facility

B) Conduct a detailed review of the borrower’s financials and operational data
C) Offer the borrower a grace period for repayments
D) Disregard the alert unless the borrower misses a payment
E) Waive any loan covenants in the short term
Answer: B) Conduct a detailed review of the borrower’s financials and operational data
Explanation: If an AI-driven model identifies an increased default probability, the bank should
immediately conduct a thorough review of the borrower’s financial and operational data to
determine the cause and take necessary corrective measures.

123. A borrower frequently requests ad hoc limits over the approved credit line. What is the
primary risk this behavior signals?

A) The borrower is expanding into new markets

B) The borrower may be facing liquidity issues and mismanaging working capital
C) The borrower has strong cash flow management
D) The borrower is trying to improve its interest coverage ratio
E) The borrower is building additional inventory
Answer: B) The borrower may be facing liquidity issues and mismanaging working capital
Explanation: Frequent requests for ad hoc limits may indicate that the borrower is experiencing
liquidity problems and struggling with working capital management, which can be a red flag for the
bank.

124. A borrower’s actual sales figures are consistently 15% lower than the projections in their QIS
(Quarterly Information System) report. What is the most appropriate action for the bank to take in
response?

100
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
A) Increase the credit limit to accommodate the borrower’s shortfall
B) Conduct a performance review and determine the reasons for the deviation
C) Automatically downgrade the borrower’s credit rating
D) Waive the financial covenants to help the borrower meet their targets
E) Immediately classify the loan as a non-performing asset (NPA)
Answer: B) Conduct a performance review and determine the reasons for the deviation
Explanation: When actual sales are significantly lower than projections, the bank should conduct a
thorough performance review to understand the reasons for the shortfall and take corrective actions
to protect its interests.

125. Which of the following financial ratios is most indicative of a borrower’s ability to service its
debt obligations in the near term?

A) Debt-to-equity ratio
B) Quick ratio
C) Current ratio
D) Return on equity (ROE)
E) Interest coverage ratio
Answer: E) Interest coverage ratio
Explanation: The interest coverage ratio specifically measures a borrower’s ability to meet its interest
obligations, making it a critical ratio for assessing the borrower’s short-term debt-servicing capacity.

126. A borrower requests additional working capital citing higher than expected inventory levels.
However, a detailed analysis shows that the stock is primarily slow-moving. What should the
bank’s response be?

A) Approve the request for additional working capital

B) Deny the request and immediately initiate recovery proceedings
C) Review the borrower’s overall inventory management and require a detailed action plan before
considering additional financing
D) Increase the loan tenure to allow for more stock turnover
E) Recommend the borrower to sell off the excess stock at a discount
Answer: C) Review the borrower’s overall inventory management and require a detailed action plan
before considering additional financing
Explanation: Slow-moving inventory indicates inefficiency in stock management, and the bank
should first understand the reasons behind this before approving any further financing. The borrower
should present a concrete action plan to address the issue.

127. A borrower’s cash flow statement indicates that a significant portion of its revenue is being
used to fund unrelated business activities, contrary to the loan agreement. What is the immediate
course of action for the bank?

A) Request the borrower to submit new financial projections

B) Issue a notice to the borrower citing breach of the loan agreement and review the loan’s terms
C) Increase the borrower’s credit limit to cover the additional activities
D) Recommend that the borrower diversify into other businesses
E) Ignore the issue as long as the loan payments are on time
Answer: B) Issue a notice to the borrower citing breach of the loan agreement and review the loan’s
terms
Explanation: Using funds for unrelated business activities breaches the loan agreement. The bank

101
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
must take immediate action to protect its interests by issuing a notice and potentially reviewing or
restructuring the loan terms.

128. When monitoring a borrower’s credit health, which of the following would be the most
critical red flag related to liquidity?

A) A high profit margin

B) A sudden increase in raw material purchases
C) A decrease in the cash conversion cycle
D) A significant increase in accounts receivable days
E) Increased marketing expenses
Answer: D) A significant increase in accounts receivable days
Explanation: A longer accounts receivable period suggests that the borrower is taking longer to
collect payments, which can lead to liquidity issues and may impact the borrower’s ability to repay
loans on time.

129. What should be the bank’s immediate action if an AI-based credit risk model consistently
shows high default probability for a borrower that has not yet missed any payments?

A) Do nothing until a payment is missed

B) Review the borrower’s financial statements and business operations in detail
C) Immediately reduce the credit limit
D) Issue a formal letter reducing the loan interest rate
E) Stop disbursements and initiate recovery proceedings
Answer: B) Review the borrower’s financial statements and business operations in detail
Explanation: An AI-based risk model indicating a high probability of default should prompt the bank
to conduct a detailed review of the borrower’s financial health and operations to understand the
underlying risks and take appropriate corrective action.

130. If a borrower has violated a key financial covenant, such as maintaining a debt-to-equity ratio
within a certain range, but continues to make timely payments, what would be the most prudent
action for the bank to take?

A) Ignore the violation as long as payments are made

B) Immediately recall the loan
C) Engage the borrower to discuss corrective measures and possibly renegotiate the terms of the
loan
D) Increase the interest rate on the loan
E) Classify the loan as non-performing
Answer: C) Engage the borrower to discuss corrective measures and possibly renegotiate the terms
of the loan
Explanation: Violating a financial covenant is a serious matter, and the bank should engage the
borrower to understand the reasons behind the violation and negotiate terms to protect its interests
before taking any drastic actions.

131. A bank has provided a large term loan to a borrower with a covenant requiring quarterly
submission of financial data. The borrower has delayed submission for two consecutive quarters.
What is the bank’s next step?

A) Issue a formal notice for non-compliance and request immediate submission of financial data
B) Wait for the borrower to submit the data in the next quarter

102
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
C) Reduce the borrower’s credit limit as a precaution
D) Terminate the loan agreement immediately
E) Request an external audit of the borrower’s financials
Answer: A) Issue a formal notice for non-compliance and request immediate submission of financial
data
Explanation: Delays in submitting required financial data breach the loan covenant, and the bank
should formally request the borrower to comply, ensuring that proper monitoring can be conducted.

132. If a borrower’s sales remain stagnant while its expenses are rising and the bank has detected
no early warning signals, what is the most appropriate action for the bank’s credit monitoring
team?

A) Approve a loan extension to cover the rising expenses

B) Review the borrower’s expense management and operating efficiency
C) Increase the interest rate to offset the bank’s risk
D) Ignore the issue as long as loan payments are being made
E) Recommend that the borrower diversify into new markets
Answer: B) Review the borrower’s expense management and operating efficiency
Explanation: Rising expenses without corresponding growth in sales can lead to profitability and
liquidity issues. The bank should investigate the borrower’s expense management and operating
efficiency to address potential problems early.

133. What action should be taken if a borrower’s cash flow forecast shows a consistent shortfall in
funds for debt repayment over the next few quarters?

A) Continue monitoring and take no immediate action

B) Request the borrower to submit an updated business plan
C) Discuss restructuring the loan terms to ease repayment pressures
D) Increase the loan interest rate to mitigate risk
E) Recommend the borrower to raise equity
Answer: C) Discuss restructuring the loan terms to ease repayment pressures
Explanation: If a cash flow forecast shows an upcoming shortfall, the bank should engage the
borrower in a discussion to restructure the loan terms if necessary, to avoid future defaults and
manage risk effectively.

134. Which of the following best reflects a proactive step the bank could take if it observes the
borrower’s inventory turnover ratio declining over successive quarters?

A) Immediately increase the credit limit to help the borrower manage inventory
B) Reduce the borrower’s working capital limit
C) Schedule a stock audit and review the borrower’s inventory management practices
D) Wait for the borrower to improve performance before taking any action
E) Request an external audit of the borrower’s receivables
Answer: C) Schedule a stock audit and review the borrower’s inventory management practices
Explanation: A declining inventory turnover ratio indicates potential issues with overstocking or
inefficiencies in sales. Conducting a stock audit and reviewing inventory practices would provide
insights into corrective actions the borrower can take.

135. In a borrower’s cash flow statement, an unusual increase in financing activities, without a
corresponding increase in operational cash flow, could indicate:

103
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
A) The borrower is improving profitability
B) The borrower is relying heavily on external financing to cover operational shortfalls
C) The borrower’s sales are growing rapidly
D) The borrower is reducing its debt exposure
E) The borrower’s equity base is increasing
Answer: B) The borrower is relying heavily on external financing to cover operational shortfalls
Explanation: An increase in financing activities without a similar increase in operational cash flow
indicates that the borrower may be using external funding to compensate for operational shortfalls,
which can lead to unsustainable debt levels.

136. Which of the following would most likely trigger a financial covenant violation related to
working capital management?

A) A borrower significantly reduces its accounts payable

B) A borrower increases its accounts receivable days
C) A borrower reduces its debt service coverage ratio
D) A borrower increases its cash reserves
E) A borrower invests in new equipment
Answer: B) A borrower increases its accounts receivable days
Explanation: An increase in accounts receivable days can strain the borrower’s working capital,
potentially leading to a violation of working capital-related financial covenants.

137. During a stock audit, a borrower reports significantly higher levels of raw materials compared
to finished goods. What is the most likely implication of this finding?

A) The borrower has improved operational efficiency

B) The borrower is over-investing in inventory without matching sales growth
C) The borrower is preparing for an increase in production
D) The borrower is reducing operational expenses
E) The borrower’s market share is increasing
Answer: B) The borrower is over-investing in inventory without matching sales growth
Explanation: A higher level of raw materials compared to finished goods suggests overstocking or
poor inventory management, which could be a sign of inefficiencies or a mismatch between
production and sales.

138. What should a bank do if it detects that a borrower has failed to maintain the agreed-upon
current ratio for two consecutive quarters?

A) Automatically recall the loan

B) Issue a warning and request a corrective action plan from the borrower
C) Increase the borrower’s credit limit to cover operational costs
D) Ignore the issue if the borrower is still making timely payments
E) Reduce the loan’s interest rate to ease the borrower’s burden
Answer: B) Issue a warning and request a corrective action plan from the borrower
Explanation: A deviation from the agreed current ratio is a breach of financial covenants. The bank
should engage with the borrower and ask for a corrective action plan before considering more severe
actions.

139. In the context of credit monitoring, what would be a key red flag when analyzing the
borrower’s sales performance in their MSOD (Monthly Select Operational Data) report?

104
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
A) Sales are 10% higher than last quarter
B) Sales figures are significantly lower than projected with no clear explanation
C) The borrower submits the MSOD on time
D) Sales figures match exactly with projections
E) The borrower has requested an increase in their credit limit
Answer: B) Sales figures are significantly lower than projected with no clear explanation
Explanation: A significant deviation in sales from projections, without a valid explanation, is a critical
red flag that requires further investigation to determine the reasons behind the shortfall.

140. If a borrower’s loan agreement includes a covenant requiring debt-to-equity ratio to be below
a certain level, and the borrower’s debt increases without a proportional increase in equity, what
risk does this pose to the bank?

A) It reduces the borrower’s profitability

B) It decreases the borrower’s operational expenses
C) It increases the borrower’s financial leverage, heightening the risk of default
D) It signals that the borrower is managing liquidity efficiently
E) It improves the borrower’s interest coverage ratio
Answer: C) It increases the borrower’s financial leverage, heightening the risk of default
Explanation: A rise in debt without a corresponding increase in equity increases financial leverage,
which can make the borrower more vulnerable to financial stress and potential default.

141. Which of the following is a key indicator that funds may have been diverted by a borrower,
based on their financial statements?

A) An increase in accounts receivable

B) A significant and unexplained increase in unrelated debits in the borrower’s account
C) A decrease in operating expenses
D) A reduction in inventory levels
E) An increase in the borrower’s net profit
Answer: B) A significant and unexplained increase in unrelated debits in the borrower’s account
Explanation: Unexplained debits unrelated to business operations can indicate fund diversion, which
is a serious issue requiring immediate attention from the bank’s credit monitoring team.

142. Which of the following would be considered an early warning signal (EWS) indicating a
borrower’s financial stress?

A) Regular submission of financial statements

B) A sudden increase in the borrower’s stock levels, despite stagnant or declining sales
C) The borrower meets all payment deadlines
D) The borrower’s profitability remains stable
E) The borrower requests a term extension
Answer: B) A sudden increase in the borrower’s stock levels, despite stagnant or declining sales
Explanation: A buildup of stock without a corresponding increase in sales is a sign of potential
financial stress, as it may indicate slowing demand and poor inventory management.

143. What should be the bank’s immediate response if a borrower violates the negative lien
covenant by pledging a key asset as collateral for another loan?

A) Increase the borrower’s credit limit

B) Demand immediate repayment of the loan

105
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
C) Issue a formal notice of the violation and review the borrower’s financial situation
D) Reduce the borrower’s interest rate to mitigate risk
E) Ignore the violation if the borrower continues to make timely repayments
Answer: C) Issue a formal notice of the violation and review the borrower’s financial situation
Explanation: Violating a negative lien covenant by pledging assets requires the bank to formally
address the issue by issuing a notice and reviewing the borrower’s overall financial condition to
determine further actions.

144. How can AI and Machine Learning (AI/ML) tools enhance the bank’s ability to detect early
warning signals in credit monitoring?

A) By focusing solely on quarterly financial statements

B) By analyzing vast amounts of real-time data from multiple sources, including external market
trends
C) By reducing the need for manual stock audits
D) By automating loan disbursement processes
E) By decreasing the borrower’s interest rates
Answer: B) By analyzing vast amounts of real-time data from multiple sources, including external
market trends
Explanation: AI/ML tools enhance credit monitoring by continuously analyzing large datasets from
internal and external sources, detecting patterns and trends that could indicate financial stress
before traditional methods can.

145. A borrower’s financial projections show an optimistic increase in sales over the next two
quarters. However, their cash flow analysis shows negative cash flow. What should the bank
prioritize in its response?

A) Immediately classify the loan as non-performing

B) Engage the borrower in a discussion to verify the accuracy of the projections and cash flow, and
consider restructuring the loan if necessary
C) Increase the loan amount to cover cash flow shortages
D) Ignore the issue and wait for the next quarter’s financial reports
E) Request an audit of the borrower’s inventory
Answer: B) Engage the borrower in a discussion to verify the accuracy of the projections and cash
flow, and consider restructuring the loan if necessary
Explanation: Negative cash flow alongside optimistic projections suggests potential financial issues.
The bank should discuss these discrepancies with the borrower and may need to restructure the loan
if necessary.

146. A borrower in the retail sector submits financial statements showing a large increase in
accounts receivable but stagnant sales. What risk does this pose to the bank?

A) The borrower is likely expanding its operations

B) The borrower’s customers may be delaying payments, indicating potential liquidity issues
C) The borrower is reducing its operational efficiency
D) The borrower’s profitability is increasing
E) The borrower is preparing for a seasonal sales spike
Answer: B) The borrower’s customers may be delaying payments, indicating potential liquidity issues
Explanation: A significant increase in accounts receivable without a corresponding increase in sales

106
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
indicates that the borrower’s customers are likely delaying payments, which could lead to liquidity
issues and affect loan repayments.

147. If a borrower’s debt service coverage ratio (DSCR) falls below 1.0, what action should the bank
take?

A) Increase the loan amount to cover the shortfall

B) Immediately classify the loan as an NPA
C) Request the borrower to submit a corrective action plan to improve cash flow
D) Waive the covenant requirement for the next quarter
E) Ignore the issue as long as payments are made
Answer: C) Request the borrower to submit a corrective action plan to improve cash flow
Explanation: A DSCR below 1.0 indicates the borrower is unable to cover its debt obligations from its
current cash flow. The bank should request a corrective plan to address this shortfall before taking
further action.

148. What is the most critical challenge in successfully implementing AI/ML-driven credit
monitoring in the Indian banking context?

A) High cost of data storage

B) Lack of high-quality and comprehensive datasets for analysis
C) Overreliance on manual processes
D) The limited availability of AI software
E) Poor customer feedback on AI-based tools
Answer: B) Lack of high-quality and comprehensive datasets for analysis
Explanation: AI/ML tools require vast amounts of accurate and comprehensive data for effective
credit monitoring. In the Indian banking context, the challenge lies in collecting and maintaining such
datasets, especially for smaller or rural borrowers.

149. A borrower is facing increased competition and a declining market share, but they request
additional credit to support their marketing efforts. What should the bank consider before
approving the request?

A) The borrower’s stock levels and working capital management

B) The borrower’s profitability in the last two quarters
C) The borrower’s ability to generate positive cash flow from its current operations
D) The borrower’s previous requests for ad hoc limits
E) The borrower’s compliance with financial covenants
Answer: C) The borrower’s ability to generate positive cash flow from its current operations
Explanation: Before approving additional credit, the bank should assess whether the borrower can
generate enough cash flow to support repayment of both the existing and additional credit,
especially in a declining market.

150. Which of the following best describes the role of post-disbursement monitoring in credit risk
management?

A) To finalize the borrower’s loan documentation

B) To assess the borrower’s compliance with loan covenants and detect early signs of financial stress
C) To increase the borrower’s credit limit based on growth projections
D) To evaluate the borrower’s competition and market position
E) To prepare for future loan disbursements

107
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: B) To assess the borrower’s compliance with loan covenants and detect early signs of
financial stress
Explanation: Post-disbursement monitoring focuses on ensuring that the borrower complies with
loan covenants, and it plays a crucial role in detecting early warning signs of financial stress, allowing
the bank to take timely corrective actions.

Case Study 1:

A manufacturing company approaches a bank for a working capital loan. The company's financial
statements reveal the following:

• Gross sales have increased by 10% year-on-year, but the company’s net profit margin has
declined.

• The receivables turnover ratio has decreased significantly over the past three quarters.

• Inventory levels have increased by 20%, particularly in raw materials, while finished goods
inventory remains flat.

• The company’s current ratio is below the industry average but still above the loan’s covenant
requirement.

Question:

Based on the financial analysis, what should be the bank’s primary concern in assessing the working
capital loan request?

A) The company’s increased sales volume

B) The decline in the net profit margin
C) The significant increase in raw material inventory
D) The decrease in the receivables turnover ratio
E) The current ratio meeting covenant requirements

Answer: D) The decrease in the receivables turnover ratio

Explanation: A decline in the receivables turnover ratio indicates that the company is taking longer
to collect payments from its customers. This could lead to cash flow issues, impacting the company’s
ability to repay the loan. The increase in sales and raw materials are important, but the receivables
turnover ratio is the most direct indicator of potential liquidity problems in this scenario.

Case Study 2:

A retail chain with multiple outlets has been a long-standing client of the bank. They request an
increase in their credit limit, citing the expansion of two new outlets. Their financial data shows:

• Steady revenue growth over the last three years, but the operating margin has remained flat.

• Inventory turnover has slowed in the last two quarters, particularly in high-end electronics,
which now make up 40% of their stock.

• The company’s debt-to-equity ratio has increased from 1.2 to 2.0 over the last year.

• Accounts payable turnover has also slowed.

Question:

108
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Which factor should the bank focus on most when considering the credit limit increase request?

A) Revenue growth over the last three years

B) The flat operating margin
C) The increase in the debt-to-equity ratio
D) The slow inventory turnover in high-end electronics
E) Accounts payable turnover
Answer: C) The increase in the debt-to-equity ratio
Explanation: The debt-to-equity ratio has increased significantly, indicating that the company is
relying more on debt to finance its operations. This higher leverage poses a risk to the bank, as it may
strain the company’s ability to meet its debt obligations. The slow inventory turnover is important
but secondary to the increased financial leverage.

Case Study 3:

A borrower in the textile industry has an ongoing term loan for machinery financing with the bank.
Recently, the borrower has requested an additional term loan for expanding their production
capacity. The following details emerge during the review:

• The borrower’s sales have decreased by 5% over the last two quarters due to a global
downturn in demand for textiles.

• The debt service coverage ratio (DSCR) has fallen to 0.9, below the loan covenant
requirement of 1.25.

• The borrower’s cash flow forecast shows shortfalls for the next three months.

• The borrower has negotiated longer credit terms with their suppliers, extending from 60 to
90 days.

Question:

What is the most appropriate response from the bank regarding the additional term loan request?

A) Approve the request due to the borrower’s long-standing relationship

B) Deny the request immediately based on the global downturn in textiles
C) Engage the borrower in a discussion to restructure the existing loan before considering the new
loan
D) Request additional collateral to cover the increased loan amount
E) Ignore the decline in DSCR since it is likely temporary due to the market downturn

Answer: C) Engage the borrower in a discussion to restructure the existing loan before considering
the new loan
Explanation: The borrower’s DSCR is below the covenant requirement, indicating that they may
struggle to service their existing debt, let alone take on additional debt. The bank should first
consider restructuring the current loan, addressing the borrower’s cash flow issues before
considering any new loan requests.

Case Study 4:

A logistics company has requested a short-term loan to cover an expected cash flow gap over the
next six months due to a large pending contract. The bank conducts its due diligence and notes:

109
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 • The company’s accounts receivable turnover has slowed significantly due to delayed
payments from a major customer.

• The company’s net profit margin has improved due to cost-cutting measures implemented
last year.

• The company has a solid contract pipeline with new customers but the largest customer
represents 50% of its total revenue.

• The current ratio has dropped to 1.2, which is below the industry average of 1.5.

Question:

What should the bank’s primary concern be when considering the short-term loan request?

A) The company’s improved net profit margin

B) The drop in the current ratio
C) The concentration risk from the major customer
D) The new contract pipeline
E) The cost-cutting measures implemented last year

Answer: C) The concentration risk from the major customer

Explanation: The company’s heavy reliance on a single customer for 50% of its revenue poses a
concentration risk. If the major customer continues delaying payments or defaults, it could seriously
impact the company’s cash flow and ability to repay the short-term loan.

Case Study 5:

An automotive parts supplier has been operating under a cash credit facility with the bank for
several years. Recently, the borrower has requested an enhancement to the cash credit limit, citing
an increase in orders from a major automaker. Upon review, the bank finds:

• The borrower’s stock turnover has slowed, particularly for certain parts that are outdated
due to changes in the automaker’s designs.

• The borrower has outstanding payments to several smaller suppliers, with accounts payable
days increasing to 90.

• The borrower’s revenue has been growing steadily, but their profit margins have shrunk due
to rising material costs.

• The company’s debt-to-equity ratio is 3.0, significantly higher than the industry average of
1.5.

Question:

What should the bank prioritize when evaluating the borrower’s request for an increased cash credit
limit?

A) The increase in orders from the major automaker

B) The steady revenue growth over the past few years
C) The borrower’s high debt-to-equity ratio

110
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
D) The slow stock turnover of outdated parts
E) The increased accounts payable days

Answer: C) The borrower’s high debt-to-equity ratio

Explanation: A debt-to-equity ratio of 3.0 is significantly higher than the industry average and
suggests that the borrower is highly leveraged, which could strain their ability to manage additional
debt. The bank should prioritize this concern and carefully evaluate whether the borrower can
handle an increase in the cash credit limit without increasing the risk of default.

Case Study 6:

A food processing company has requested a term loan to upgrade its production facility. The
company’s financials show:

• A strong cash flow from operations over the last year, but the operating profit margin has
declined.

• The company has made significant capital expenditures in the last two years without
corresponding revenue growth.

• The current ratio has remained stable, but the quick ratio has declined.

• Inventory levels, particularly in finished goods, have been rising steadily.

Question:

What aspect of the borrower’s financials should the bank focus on most when evaluating the term
loan request?

A) The stable current ratio

B) The rising inventory levels
C) The decline in the quick ratio
D) The strong cash flow from operations
E) The capital expenditures made in the last two years

Answer: B) The rising inventory levels

Explanation: The rising inventory levels, especially in finished goods, could indicate that the company
is producing more than it can sell, which could lead to liquidity issues in the future. This is a key risk
that the bank needs to consider when evaluating the loan request.

Case Study 7:

A construction company has taken a working capital loan from the bank. During a routine review,
the following points are noted:

• The company’s revenue has been stable, but there has been a significant increase in their
accounts receivable due to delayed payments from clients.

• The company has several ongoing projects, but there have been delays in project completion
due to supply chain issues.

111
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 • The company’s operating profit margin remains healthy, but the cash conversion cycle has
increased by 30 days.

• The company has maintained good relations with its suppliers and has negotiated favorable
payment terms.

Question:

What should the bank’s primary concern be in this scenario?

A) The stable revenue

B) The increase in the accounts receivable due to delayed client payments
C) The favorable payment terms with suppliers
D) The company’s operating profit margin
E) The supply chain issues causing project delays

Answer: B) The increase in the accounts receivable due to delayed client payments
Explanation: The increase in accounts receivable indicates that the company is facing delays in
collecting payments, which could create liquidity issues and impact their ability to service the
working capital loan. This should be the bank’s primary concern in this scenario.

Case Study 8:

A pharmaceutical company, “MedLife,” has been a long-time client of the bank and is seeking an
enhancement of its existing working capital limits. Their financials reveal:

• The company's sales have grown by 15% in the last year, driven by a new drug launched in
the market.

• The inventory turnover ratio has declined, primarily due to excess stock of the new drug that
has not yet seen the expected sales uptake.

• The company’s receivables turnover has remained stable, but the accounts payable turnover
has slowed.

• MedLife has recently borrowed a significant amount from another bank, increasing its overall
debt-to-equity ratio from 1.5 to 2.5.

• The operating margin has improved due to cost-cutting measures, but cash flows remain
tight due to the slower stock movement.

Question:

What should the bank prioritize when deciding whether to approve the working capital
enhancement?

A) The increase in sales driven by the new drug

B) The improved operating margin
C) The company's increased debt-to-equity ratio
D) The stable receivables turnover
E) The slower stock movement and inventory build-up

112
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: C) The company's increased debt-to-equity ratio
Explanation: The significant increase in the debt-to-equity ratio to 2.5 indicates heightened leverage,
which could lead to financial strain. Coupled with the slow inventory turnover, this poses a risk to the
company’s liquidity, making it a key concern before approving further enhancements to working
capital limits.

Case Study 9:

An export-focused textile company, “GlobalTex,” has approached the bank for a term loan to
upgrade its machinery. Key findings from the company’s financials and market data include:

• The company’s exports have been declining for the past two years due to increased
competition from lower-cost producers in Southeast Asia.

• GlobalTex’s inventory of finished goods has been increasing, particularly for products that are
not in high demand internationally.

• The company has been struggling with liquidity due to delayed payments from key
international clients.

• The company’s debt service coverage ratio (DSCR) has dropped to 1.0, the minimum
acceptable level according to loan covenants.

• GlobalTex has received new orders from a large client in Europe but at a lower profit margin
than their previous orders.

Question:

What is the most significant risk factor that the bank should consider before approving the term loan
for machinery?

A) The new orders from the European client

B) The increase in finished goods inventory
C) The decline in exports due to increased competition
D) The DSCR being at the minimum acceptable level
E) The liquidity issues caused by delayed payments from international clients

Answer: D) The DSCR being at the minimum acceptable level

Explanation: The DSCR of 1.0 indicates that the company is barely able to cover its debt obligations.
Any further reduction in cash flow, whether from delayed payments or increased competition, could
lead to a default. This makes the DSCR the most critical factor to assess before approving additional
debt.

Case Study 10:

A real estate developer has taken a construction loan to build a residential complex. The bank is
conducting a review and finds the following:

• The project is 70% complete, but the sales of units are slower than expected.

113
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 • The developer has been relying on short-term borrowings to manage cash flow, increasing
the company’s overall leverage.

• There are several unsold high-end units that are unlikely to be sold in the near term due to
weak demand in the luxury segment.

• The developer has requested an extension of the loan repayment schedule, citing the delay
in sales.

• The company has a good track record of completing projects, but this project is facing cost
overruns due to rising material costs.

Question:

What should the bank focus on when deciding whether to approve the extension of the loan
repayment schedule?

A) The company's good track record of project completion

B) The delay in sales of high-end units
C) The rising material costs causing cost overruns
D) The increased leverage due to short-term borrowings
E) The project being 70% complete

Answer: D) The increased leverage due to short-term borrowings

Explanation: The company’s reliance on short-term borrowings to manage cash flow increases its
financial risk, especially in the context of slower sales. The bank should closely evaluate the
developer’s ability to service this additional debt before granting an extension to the repayment
schedule.

Case Study 11:

A steel manufacturing company, “SteelX,” has approached the bank for additional working capital.
During a review, the following data is gathered:

• The company’s sales have increased by 20% over the last year due to higher demand in the
construction sector.

• The accounts receivable period has increased from 60 days to 120 days due to delayed
payments from construction companies.

• Inventory levels, particularly of raw materials, have risen sharply as the company is stocking
up to meet future demand.

• SteelX’s debt-to-equity ratio has remained stable at 1.8, but the company’s free cash flow is
negative due to the increase in receivables.

• The company has negotiated favorable credit terms with its suppliers, extending the
accounts payable period.

Question:

What is the most significant concern for the bank when considering the additional working capital
request?

114
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
A) The 20% increase in sales
B) The stable debt-to-equity ratio
C) The increase in raw material inventory
D) The negative free cash flow due to the increase in receivables
E) The extended accounts payable period

Answer: D) The negative free cash flow due to the increase in receivables
Explanation: The company’s negative free cash flow, caused by the extended receivables period, is a
significant concern. While sales are increasing, delayed payments could lead to liquidity issues,
impacting the company’s ability to repay additional working capital.

Case Study 12:

An automobile spare parts manufacturer has requested a loan for expanding its production
capacity. Upon reviewing the company’s financials, the following points emerge:

• The company has experienced a decline in revenue from its largest customer, a major car
manufacturer, due to reduced demand for new cars.

• Inventory turnover has slowed, with a significant build-up of parts for older car models that
are being phased out.

• The company’s operating margin has narrowed due to rising raw material costs.

• The company’s debt service coverage ratio has fallen to 0.85, below the required minimum
of 1.25.

• The company has implemented cost-cutting measures, including layoffs and reducing non-
essential expenditures.

Question:

What should the bank prioritize when assessing the loan request for expanding production capacity?

A) The company’s cost-cutting measures

B) The decline in revenue from the largest customer
C) The significant build-up of inventory for older car models
D) The debt service coverage ratio below the required minimum
E) The rising raw material costs

Answer: D) The debt service coverage ratio below the required minimum
Explanation: A DSCR of 0.85 indicates that the company is not generating enough cash flow to cover
its debt obligations. This is a major concern for the bank, and it should be addressed before
considering any additional loans for expansion.

Case Study 13:

A large logistics company has requested an increase in its cash credit limit to fund an expansion
into new markets. The company’s financials reveal:

115
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 • The company’s sales have been growing steadily, but the profit margins have been declining
due to increased fuel costs.

• Accounts receivable have increased as the company has offered longer credit terms to new
customers in the competitive markets it is entering.

• The company’s debt-to-equity ratio has remained stable, but its working capital is strained
due to the rise in receivables.

• Inventory levels have remained consistent, with no significant changes.

• The company has strong relationships with its suppliers, allowing it to negotiate favorable
payment terms.

Question:

What should be the bank’s primary concern when deciding whether to increase the cash credit limit?

A) The steady sales growth

B) The declining profit margins due to increased fuel costs
C) The stable debt-to-equity ratio
D) The increase in accounts receivable from offering longer credit terms
E) The strong relationships with suppliers

Answer: D) The increase in accounts receivable from offering longer credit terms
Explanation: The increase in accounts receivable, caused by offering longer credit terms to new
customers, could strain the company’s cash flow. This is a key risk for the bank to assess when
considering whether to increase the cash credit limit.

Case Study 14:

A mid-sized manufacturer of electronic components, "ElectroTech," has been granted a working

capital loan by the bank. Recently, the bank's credit monitoring team conducted a review and
found:

• ElectroTech's sales have been flat over the past three quarters, while accounts receivable
days have increased by 45%.

• The inventory of raw materials has increased significantly, while finished goods inventory
remains stable.

• ElectroTech’s cash flows have become increasingly negative, with reliance on short-term
borrowings to cover expenses.

• A competitor has entered the market, intensifying price competition.

• The debt service coverage ratio (DSCR) has fallen to 0.95, below the required covenant of
1.25.

Question:

What should the bank's primary concern be in addressing the issues found in ElectroTech’s review?

A) The increase in raw materials inventory

B) The entry of a new competitor in the market
C) The increase in accounts receivable days

116
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
D) The drop in DSCR below the covenant requirement
E) The flat sales over the last three quarters

Answer: D) The drop in DSCR below the covenant requirement

Explanation: A DSCR of 0.95 indicates that ElectroTech is not generating sufficient cash to cover its
debt obligations. This, combined with negative cash flows and increased reliance on short-term
borrowing, presents a significant financial risk to the bank. The breach of covenant should trigger
immediate discussions with the borrower for corrective actions.

Case Study 15:

A construction company, "BuildCo," has been a long-term client of the bank. Recently, the bank
approved a term loan for the expansion of one of their major projects. During the post-
disbursement review, the following details were noted:

• BuildCo's operating profit margin has been declining due to increased raw material costs.

• The company has delayed payments to several subcontractors and suppliers, increasing the
accounts payable period from 60 days to 120 days.

• BuildCo’s cash credit limit has been fully drawn for several months, with no major
repayments.

• The project is only 50% complete, with further delays expected due to supply chain issues.

• BuildCo’s debt-to-equity ratio has increased to 3.0 from 2.0, putting further pressure on its
financials.

Question:

What is the most significant risk the bank should consider when monitoring BuildCo’s loan?

A) The delays in the completion of the project

B) The fully drawn cash credit limit
C) The increased debt-to-equity ratio
D) The increase in accounts payable period
E) The rising raw material costs

Answer: C) The increased debt-to-equity ratio

Explanation: An increase in the debt-to-equity ratio to 3.0 indicates that BuildCo is becoming highly
leveraged, which significantly increases the financial risk to the bank. While other factors like project
delays and increased payables are concerning, the leverage ratio should be prioritized in determining
the company's financial stability.

Case Study 16:

A retailer specializing in high-end electronics, "TechMax," has requested an increase in their

working capital limits due to expanding operations. Upon review, the bank finds the following:

• TechMax's inventory turnover has slowed, especially for high-end items that are not selling
as expected.

117
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 • The accounts receivable turnover has remained stable, but there is an increase in overdue
payments from key corporate clients.

• TechMax has opened two new stores but has faced higher-than-expected operational costs.

• The debt service coverage ratio is currently 1.1, just above the bank’s covenant requirement
of 1.0.

• Sales have been flat despite the company's expansion, which has put pressure on its cash
flows.

Question:

Which factor should the bank focus on most when deciding whether to approve TechMax’s request
for increased working capital?

A) The stable accounts receivable turnover

B) The flat sales despite expansion
C) The increase in overdue payments from key clients
D) The DSCR being just above the covenant threshold
E) The higher-than-expected operational costs

Answer: D) The DSCR being just above the covenant threshold

Explanation: A DSCR of 1.1 is close to the minimum required level of 1.0, indicating that TechMax has
limited capacity to service its debt. If any of its key clients default or if cash flow issues persist, the
company could easily slip into covenant breach, increasing the risk of default.

Case Study 17:

A steel manufacturer, "SteelWorks," has a term loan with the bank for a major plant upgrade. The
bank's periodic review highlights the following:

• SteelWorks' production levels have fallen short of projections for the last two quarters due to
technical issues in the upgraded machinery.

• Inventory of finished goods has increased as demand for steel has slowed in key markets.

• The company's accounts payable turnover has slowed significantly, with many suppliers
awaiting payments.

• SteelWorks has been in discussions with its largest customer for a price renegotiation, which
could further impact sales.

• The company’s DSCR has fallen to 0.85, well below the required covenant level of 1.25.

Question:

What action should the bank prioritize based on SteelWorks' current financial situation?

A) Renegotiating the loan covenants to reflect current market conditions

B) Conducting a detailed stock audit to verify inventory levels
C) Requesting additional collateral to cover the increased risk
D) Engaging in discussions to restructure the loan based on the reduced DSCR
E) Monitoring the price renegotiation discussions with SteelWorks’ key customer

118
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: D) Engaging in discussions to restructure the loan based on the reduced DSCR
Explanation: A DSCR of 0.85 indicates that SteelWorks is not generating enough cash flow to service
its debt. The bank must prioritize restructuring the loan to avoid further financial deterioration, as a
drop in DSCR below the covenant level represents a critical breach of financial conditions.

Case Study 18:

An agriculture-based company, "AgriHarvest," has been operating under a cash credit facility
provided by the bank. During a routine inspection, the bank finds:

• AgriHarvest has been experiencing delays in collecting payments from key buyers, which has
increased the accounts receivable period to 180 days.

• The company's sales have decreased by 10% due to unfavorable weather conditions
impacting crop yield.

• AgriHarvest’s stock turnover has slowed, with a high level of unsold inventory.

• The company’s cash credit limit is nearly fully drawn, with no major repayments in the past
two months.

• The DSCR has dropped to 0.90, below the bank’s covenant threshold.

Question:

What should the bank’s main priority be in managing the risk associated with AgriHarvest’s cash
credit facility?

A) Addressing the delays in payment collections from key buyers

B) Monitoring the company’s inventory turnover
C) Reviewing the cash credit limit and requesting partial repayments
D) Assessing the impact of the weather conditions on future sales
E) Investigating the breach of the DSCR covenant

Answer: E) Investigating the breach of the DSCR covenant

Explanation: The drop in DSCR to 0.90 indicates a significant risk that AgriHarvest may not be able to
service its debt. This should be the bank’s main focus, as a continued breach of covenant could lead
to further financial strain and potential default.

Case Study 19:

A medium-scale textile manufacturer, "TexCo," has recently been granted a term loan for
expanding its production facilities. A review of the financials shows:

• Sales have been stable, but the company has not met its revenue projections for the last two
quarters.

• The accounts receivable days have increased from 60 days to 120 days due to delayed
payments from key customers.

• TexCo has increased its stock of raw materials, anticipating higher production volumes.

• The company's cash flows have become strained, and it has requested additional working
capital to cover immediate operational expenses.

119
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 • The debt service coverage ratio (DSCR) has fallen to 1.0, meeting the minimum required by
the loan covenants.

Question:

What should be the bank’s primary concern in handling TexCo’s request for additional working
capital?

A) The stable sales figures

B) The increase in raw material inventory
C) The extended accounts receivable days
D) The DSCR meeting the minimum requirement
E) The cash flow strain and request for working capital

Answer: C) The extended accounts receivable days

Explanation: The increase in accounts receivable days indicates delayed payments from customers,
which directly affects cash flow. This delay, combined with strained cash flows, suggests liquidity
issues that need immediate attention. While the DSCR meeting the minimum requirement is a
concern, the root cause of liquidity problems (delayed payments) should be the primary focus.

Case Study 20:

A large real estate developer, "BuildMax," has been a long-term client of the bank. They have
requested an enhancement of their construction loan to complete an ongoing project. The bank’s
credit monitoring team finds:

• BuildMax’s project is 60% complete, but the completion timeline has been delayed by six
months.

• The accounts payable turnover has slowed, with many contractors and suppliers awaiting
payment.

• BuildMax’s sales of residential units have not met expectations due to a slowdown in the real
estate market.

• BuildMax’s DSCR has dropped to 0.85, below the required 1.25 covenant threshold.

• The company has requested an extension of the loan repayment period due to the project
delays.

Question:

What should the bank prioritize in making a decision about BuildMax’s loan enhancement request?

A) The project completion being delayed

B) The sales slowdown in the real estate market
C) The slow accounts payable turnover
D) The drop in DSCR below the covenant requirement
E) The request for an extension of the loan repayment period

Answer: D) The drop in DSCR below the covenant requirement

Explanation: A DSCR of 0.85 indicates that BuildMax is struggling to generate sufficient cash flow to

120
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
cover its debt obligations. This breach of the covenant is a major red flag, and the bank should
address this issue before considering an enhancement or restructuring of the loan.

Case Study 21:

An automotive parts supplier, "AutoTech," has taken a working capital loan from the bank. A
recent stock audit and financial review reveal:

• AutoTech’s inventory turnover has slowed significantly, particularly for parts related to older
car models.

• The company has been facing increased competition, leading to price cuts and reduced profit
margins.

• AutoTech’s accounts receivable days have increased slightly, but the overall cash flow is still
positive.

• The DSCR is currently 1.1, just above the required threshold.

• The company is planning to expand into electric vehicle parts, anticipating future demand,
but has not yet secured major contracts in this segment.

Question:

What is the primary risk the bank should focus on when monitoring AutoTech’s financial health?

A) The expansion into electric vehicle parts

B) The increase in accounts receivable days
C) The slow inventory turnover for older car parts
D) The DSCR being slightly above the minimum threshold
E) The company’s positive cash flow

Answer: C) The slow inventory turnover for older car parts

Explanation: The slow inventory turnover for older car parts indicates that AutoTech may be
overstocked with products that are becoming obsolete, which could lead to liquidity problems if not
addressed. While the DSCR and cash flow are still positive, the inventory issue poses a longer-term
risk that needs immediate attention.

Case Study 22:

A logistics company, "TransLog," has applied for a term loan to expand its fleet. The bank’s credit
review finds:

• TransLog’s revenue has been increasing steadily, but profit margins have been narrowing due
to rising fuel costs.

• The company has been offering extended credit terms to new customers, leading to a 50%
increase in accounts receivable.

• TransLog’s debt-to-equity ratio is 2.5, higher than the industry average.

• The DSCR has fallen to 0.9, below the bank’s required covenant level.

121
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 • TransLog has not yet secured long-term contracts with its new customers, and cash flow
projections are based on anticipated revenue from these customers.

Question:

What should the bank’s main concern be when considering TransLog’s term loan request?

A) The rising fuel costs impacting profit margins

B) The extended credit terms to new customers
C) The high debt-to-equity ratio
D) The DSCR falling below the required level
E) The lack of long-term contracts with new customers

Answer: D) The DSCR falling below the required level

Explanation: A DSCR of 0.9 indicates that TransLog does not have sufficient cash flow to meet its
debt obligations. This poses a significant risk, particularly if the company does not secure long-term
contracts with its new customers. The bank should address this issue before proceeding with any
loan approval.

Case Study 23:

A large manufacturing company, "SteelX," has been experiencing fluctuating demand for its
products. The bank’s credit monitoring team conducted a review and found:

• SteelX’s sales have been volatile, with significant quarterly fluctuations due to changes in the
global steel market.

• The company has accumulated a large inventory of raw materials, anticipating higher
demand, but this has not materialized.

• The accounts receivable days have remained stable, but the company has been offering
larger discounts to customers to boost sales.

• The DSCR has dropped to 0.75, well below the required 1.25 threshold.

• SteelX has requested a restructuring of its term loan, citing the volatility in the steel market
as the reason for its cash flow issues.

Question:

What action should the bank prioritize in response to SteelX’s request for loan restructuring?

A) Analyze the impact of global steel market volatility on future sales

B) Investigate the large inventory of raw materials
C) Assess the stability of accounts receivable management
D) Address the DSCR falling significantly below the covenant level
E) Review the impact of customer discounts on profit margins

Answer: D) Address the DSCR falling significantly below the covenant level
Explanation: A DSCR of 0.75 is a major red flag, as SteelX is generating insufficient cash flow to cover
its debt obligations. The bank must prioritize addressing this issue before considering any
restructuring, as it poses a critical risk to the loan’s performance.

122
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Chapter 26
1. What is the primary reason for a bank to monitor its loans and advances closely?

a) To identify potential loan beneficiaries

b) To enhance profitability
c) To ensure liquidity and avoid bankruptcy
d) To increase marketing
e) To streamline loan documentation

Answer: c) To ensure liquidity and avoid bankruptcy

Explanation: Banks must monitor loans to ensure timely collection of interest and principal,
preventing liquidity issues and potential bankruptcy.

2. What classification was used for loan assets before the introduction of IRAC norms?

a) Secured and unsecured loans

b) Fully secured, secured by guarantees, doubtful, and bad
c) Current and fixed assets
d) Liquid and non-liquid assets
e) Performing and non-performing assets

Answer: b) Fully secured, secured by guarantees, doubtful, and bad

Explanation: Before IRAC norms, banks classified assets based on security into four categories: fully
secured, secured by guarantees, doubtful, and bad.

3. What is the objective of IRAC norms?

a) To increase loan disbursement

b) To classify assets based on subjective opinions
c) To standardize income recognition and asset classification
d) To reduce interest rates
e) To create more NPAs

Answer: c) To standardize income recognition and asset classification

Explanation: IRAC norms aim to create a standardized method for income recognition and asset
classification based on objective criteria.

4. What does SMA stand for in the context of stressed assets?

a) Standard Managed Asset

b) Special Managed Account
c) Special Mention Account
d) Stressed Managed Account
e) Sub-Marginal Asset

Answer: c) Special Mention Account

Explanation: SMA stands for Special Mention Account, which refers to accounts that are at risk of
becoming non-performing.

5. What does it mean if a borrower’s account is classified as “Out of Order”?

a) The account exceeds the sanctioned limit for more than 60 days
b) The account is overdue by 30 days

123
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
c) There is no credit in the account for 90 days
d) The borrower has requested an account review
e) The borrower has submitted incorrect documents

Answer: c) There is no credit in the account for 90 days

Explanation: An "Out of Order" status refers to situations where no credits are sufficient to cover the
interest due for more than 90 days.

6. What is a key factor that leads to a loan becoming a Non-Performing Asset (NPA)?

a) Borrower’s relocation
b) Incorrect loan documentation
c) Overdue payment of interest or principal
d) Early loan repayment
e) Expansion of business operations

Answer: c) Overdue payment of interest or principal

Explanation: A loan becomes an NPA when the payment of interest or principal remains overdue
beyond a specified period, usually 90 days.

7. What is a common consequence of misusing borrowed funds by a borrower?

a) Loan becomes automatically renewed

b) Borrower receives more funds
c) Loan may become a Non-Performing Asset
d) Borrower is entitled to lower interest rates
e) Borrower is given longer repayment terms

Answer: c) Loan may become a Non-Performing Asset

Explanation: Misuse of funds often results in the loan being mismanaged, which can lead to its
classification as an NPA.

8. What is the significance of a borrower’s “right of recompense”?

a) To adjust loan tenure

b) To renegotiate loan terms without consent
c) To recoup sacrifices made by lenders once the borrower turns profitable
d) To apply for additional financing
e) To forgive a portion of the debt

Answer: c) To recoup sacrifices made by lenders once the borrower turns profitable
Explanation: Right of recompense allows banks to recoup sacrifices (like interest concessions) after
the borrower's business recovers.

9. What happens when a loan account is restructured under the bank’s Stressed Asset Resolution
policy?

a) It becomes automatically classified as “doubtful”

b) It remains classified as a standard asset if specific conditions are met
c) The borrower is penalized with additional interest
d) The loan is written off as a loss
e) No changes occur to its classification

124
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: b) It remains classified as a standard asset if specific conditions are met
Explanation: A restructured loan can retain its standard classification if the borrower adheres to the
restructured terms.

10. Under what condition can a Non-Performing Asset (NPA) be upgraded to a standard asset?

a) Upon partial repayment of overdue interest

b) Upon submission of updated financials
c) Upon full repayment of interest and principal arrears
d) Upon restructuring of the loan
e) Upon securing additional collateral

Answer: c) Upon full repayment of interest and principal arrears

Explanation: An NPA can be upgraded to a standard asset once all arrears of interest and principal
are fully paid.

11. Which of the following is NOT a category of assets classified under the IRAC norms?

a) Sub-standard assets
b) Doubtful assets
c) Loss assets
d) Secured assets
e) Standard assets

Answer: d) Secured assets

Explanation: IRAC norms classify assets into sub-standard, doubtful, loss, and standard assets, but
not secured assets.

12. What does the provisioning for NPAs depend on under the IRAC norms?

a) The type of collateral

b) The period for which the asset remains non-performing
c) The size of the loan
d) The borrower’s credit history
e) The borrower's industry

Answer: b) The period for which the asset remains non-performing

Explanation: Provisioning for NPAs is determined based on how long the asset has been non-
performing and the availability and realizability of security.

13. What does SMA-2 indicate in terms of overdue period?

a) 1-30 days overdue

b) 31-60 days overdue
c) 61-90 days overdue
d) 91-120 days overdue
e) 120+ days overdue

Answer: c) 61-90 days overdue

Explanation: SMA-2 refers to accounts where the principal or interest is overdue by 61-90 days.

14. Which of the following factors can make an account stressed?

125
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) Cash flow projected conservatively
b) Sudden rise in input costs
c) Timely payment of dues
d) Over-capitalization of the business
e) Short-term borrowing only

Answer: b) Sudden rise in input costs

Explanation: A sudden rise in input costs due to global or local economic changes can stress a
borrowing entity's cash flow, affecting loan repayment.

15. What is the correct definition of a Non-Performing Asset (NPA) for a term loan?

a) Principal or interest overdue for more than 30 days

b) Principal or interest overdue for more than 60 days
c) Principal or interest overdue for more than 90 days
d) Loan payments overdue for 1 year
e) Loan payments overdue for 2 years

Answer: c) Principal or interest overdue for more than 90 days

Explanation: For a term loan, an NPA is defined as a loan where the principal or interest is overdue
for more than 90 days.

16. What happens when a secured exposure is classified as a sub-standard asset under IRAC
norms?

a) No provisioning is required
b) 15% provisioning is required
c) 50% provisioning is required
d) 25% provisioning is required
e) 10% provisioning is required

Answer: b) 15% provisioning is required

Explanation: A secured exposure classified as sub-standard requires a 15% provisioning according to
IRAC norms.

17. What is meant by the term “diversion of funds”?

a) Use of borrowed funds for a purpose other than that originally intended
b) The borrower switching to a different bank for additional funding
c) Borrowing from multiple lenders simultaneously
d) Timely repayment of the loan
e) Early closure of the loan

Answer: a) Use of borrowed funds for a purpose other than that originally intended
Explanation: Diversion of funds occurs when the borrower uses the funds for purposes other than
what was originally sanctioned by the bank.

18. What is the provisioning requirement for unsecured exposure in the doubtful asset category for
more than three years?

a) 50% of outstanding
b) 75% of outstanding
c) 25% of outstanding

126
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
d) 100% of outstanding
e) 60% of outstanding

Answer: d) 100% of outstanding

Explanation: For unsecured exposure classified as doubtful for more than three years, a 100%
provisioning is required.

19. What is the maximum number of days a cash credit or overdraft account can remain
continuously out of order before it becomes an NPA?

a) 30 days
b) 60 days
c) 90 days
d) 120 days
e) 180 days

Answer: c) 90 days
Explanation: A cash credit or overdraft account is classified as an NPA if it remains continuously out
of order for more than 90 days.

20. What is the correct definition of a “loss asset”?

a) An asset with 50% collateral value

b) An asset where loss has been identified but not written off
c) An asset that is overdue for 180 days
d) An asset where full repayment is expected
e) An asset that is fully backed by government guarantees

Answer: b) An asset where loss has been identified but not written off
Explanation: A loss asset is one where the loss has been identified by the bank or auditors but has
not been completely written off.

21. What does CRILC stand for in the context of stressed assets?

a) Central Registry for Investments and Loans in Credit

b) Central Repository of Information on Large Credits
c) Credit Risk Information Linked Corporation
d) Corporate Rating of Indian Loan Classification
e) Central Record of Identified Loans for Classification

Answer: b) Central Repository of Information on Large Credits

Explanation: CRILC is the Central Repository of Information on Large Credits, established to collect,
store, and disseminate credit data to lenders.

22. In the event of restructuring a loan, what happens to the asset classification?

a) It is automatically upgraded to a standard asset

b) It remains in the same category
c) It is immediately downgraded to sub-standard
d) It is classified as a loss asset
e) It is written off as non-recoverable

127
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: c) It is immediately downgraded to sub-standard
Explanation: When a loan is restructured, it is immediately downgraded to a sub-standard asset as
per the RBI norms.

23. What type of provisioning is required for a loan classified under the “Loss Asset” category?

a) 0%
b) 15%
c) 40%
d) 75%
e) 100%

Answer: e) 100%
Explanation: A loss asset requires 100% provisioning since it is considered uncollectible.

24. Under what circumstance can an NPA be upgraded to a standard asset?

a) Upon restructuring
b) Upon partial repayment of dues
c) After recovery of interest for one year
d) Upon full recovery of interest and principal
e) Upon submission of a recovery plan

Answer: d) Upon full recovery of interest and principal

Explanation: An NPA can be upgraded to a standard asset once the borrower fully repays all overdue
interest and principal.

25. What are the primary categories of provisioning for stressed assets?

a) Income, Expense, Capital

b) Substandard, Doubtful, Loss
c) Short-term, Long-term, Overdue
d) Performing, Non-performing, Collateralized
e) Secured, Unsecured, Guaranteed

Answer: b) Substandard, Doubtful, Loss

Explanation: The primary categories for provisioning stressed assets are substandard, doubtful, and
loss.

26. What is the timeline for implementing the Corrective Action Plan (CAP) for an MSME once the
Committee has approved a restructuring plan?

a) 30 days
b) 45 days
c) 60 days
d) 90 days
e) 120 days

Answer: d) 90 days
Explanation: The Committee must implement the approved Corrective Action Plan (CAP) within 90
days to ensure timely resolution of stressed assets.

27. What is the primary objective of a Stressed Asset Resolution Policy?

128
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) To reduce loan interest rates
b) To prevent assets from becoming NPAs
c) To provide unsecured loans
d) To issue new credit cards
e) To enhance customer service

Answer: b) To prevent assets from becoming NPAs

Explanation: The primary objective of a Stressed Asset Resolution Policy is to monitor and manage
assets to prevent them from slipping into the Non-Performing Asset (NPA) category.

28. What is the classification of a Special Mention Account (SMA) where the overdue is between
31-60 days?

a) SMA-0
b) SMA-1
c) SMA-2
d) NPA
e) Out of Order

Answer: b) SMA-1
Explanation: An account where the overdue is between 31-60 days is classified as SMA-1.

29. What percentage of provisioning is required for unsecured exposure classified as sub-standard?

a) 5%
b) 15%
c) 25%
d) 50%
e) 100%

Answer: c) 25%
Explanation: For unsecured exposure classified as sub-standard, a 25% provisioning is required.

30. Under the Prudential Framework, what is the review period for a borrower’s account after
default?

a) 15 days
b) 30 days
c) 60 days
d) 90 days
e) 120 days

Answer: b) 30 days
Explanation: Upon default, lenders are required to review the borrower’s account within 30 days,
known as the "Review Period."

31. What is the provisioning requirement for secured doubtful assets under the "Doubtful Asset 1
(DA1)" classification?

a) 15%
b) 25%
c) 50%

129
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
d) 75%
e) 100%

Answer: b) 25%
Explanation: Under the DA1 classification, 25% provisioning is required for secured doubtful assets.

32. When is an agricultural loan classified as an NPA in the case of short-duration crops?

a) When the principal is overdue for 90 days

b) When the interest is overdue for 180 days
c) When the principal or interest is overdue for two crop seasons
d) When there is no repayment for one year
e) When the loan is restructured

Answer: c) When the principal or interest is overdue for two crop seasons
Explanation: For short-duration crops, an agricultural loan is classified as an NPA if the principal or
interest remains overdue for two crop seasons.

33. In which scenario can a “restructured” asset retain its standard classification?

a) If restructured after becoming an NPA

b) If the asset is restructured due to market volatility
c) If restructured under an approved resolution plan and payments continue
d) If restructured without the borrower’s consent
e) If restructured after complete repayment

Answer: c) If restructured under an approved resolution plan and payments continue

Explanation: A restructured asset can retain its standard classification if it is part of an approved
resolution plan and payments are made as per the restructured terms.

34. What are the three broad categories for resolving stressed assets?

a) Renewal, Restructuring, Write-off

b) Rectification, Restructuring, Recovery
c) Write-off, Diversification, Loan Enhancement
d) Diversion, Restructuring, Litigation
e) Loan Enhancement, Write-off, Sale of Assets

Answer: b) Rectification, Restructuring, Recovery

Explanation: The three main options available for resolving stressed assets are rectification,
restructuring, and recovery.

35. What is the maximum allowable delay in a project loan for infrastructure before it is classified
as an NPA?

a) 1 year
b) 2 years
c) 3 years
d) 4 years
e) 5 years

Answer: d) 4 years
Explanation: An infrastructure project loan can be delayed up to 4 years from the original Date of

130
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Commencement of Commercial Operations (DCCO) under certain conditions before it is classified as
an NPA.

36. Which of the following loans would NOT be classified as an NPA under IRAC norms?

a) Term loans overdue for 90 days

b) Bills discounted overdue for 90 days
c) Agricultural loans overdue for one crop season (long-duration crops)
d) Overdraft accounts “out of order” for 90 days
e) Short-term loans overdue for 30 days

Answer: e) Short-term loans overdue for 30 days

Explanation: Loans become NPAs when they are overdue for 90 days, not 30 days, as per IRAC
norms.

37. Under what condition can an asset be immediately classified as a “doubtful” asset?

a) If the borrower has declared bankruptcy

b) If the borrower is under investigation
c) If there is a 50% or more erosion in the security value
d) If the borrower misses one payment
e) If the borrower requests a loan restructuring

Answer: c) If there is a 50% or more erosion in the security value

Explanation: An asset can be immediately classified as “doubtful” if the security value has eroded by
50% or more.

38. How often should banks conduct a stock audit for NPAs with balances of Rs. 5 crore and above?

a) Every 3 months
b) Every 6 months
c) Every year
d) Every 2 years
e) Every 5 years

Answer: c) Every year

Explanation: A stock audit must be conducted annually for NPAs with balances of Rs. 5 crore and
above to ensure reliable stock valuation.

39. What happens if a Resolution Plan is not implemented within the stipulated 180 days from the
end of the Review Period?

a) The borrower is granted more time

b) The account is downgraded to a loss asset
c) An additional provisioning of 20% is required
d) The account is automatically written off
e) The loan is sold to another lender

Answer: c) An additional provisioning of 20% is required

Explanation: If a Resolution Plan is not implemented within 180 days, banks are required to make an
additional provisioning of 20%.

40. What is the minimum provisioning requirement for a project loan that fails to commence
commercial operations within one year for non-infrastructure projects?

131
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) 0.25%
b) 1%
c) 5%
d) 15%
e) 100%

Answer: d) 15%
Explanation: For non-infrastructure projects, if the loan fails to commence commercial operations
within one year, a provisioning requirement of 15% is imposed.

41. What type of assets does the Central Repository of Information on Large Credits (CRILC)
monitor?

a) Loans below Rs. 1 crore

b) Agricultural loans
c) Loans with an exposure of Rs. 5 crore and above
d) Overdraft accounts
e) Loans to public sector enterprises

Answer: c) Loans with an exposure of Rs. 5 crore and above

Explanation: CRILC monitors all loans with an exposure of Rs. 5 crore and above to ensure proper
data reporting.

42. Which of the following statements about "Holding on Operations" (HOO) is true?

a) HOO is initiated before a loan is disbursed

b) HOO is a method of freezing the bank’s exposure to the sanctioned limit
c) HOO involves immediate loan recovery
d) HOO applies only to unsecured loans
e) HOO is applicable only to retail loans

Answer: b) HOO is a method of freezing the bank’s exposure to the sanctioned limit
Explanation: Holding on Operations freezes the bank's exposure at the sanctioned limit, allowing the
borrower to operate within the frozen limit.

43. What is a key characteristic of a "Loss Asset"?

a) The asset is fully recoverable with minor delays

b) The security value is more than 75%
c) The asset is uncollectible and should be written off
d) The asset is still generating interest income
e) The asset has been refinanced multiple times

Answer: c) The asset is uncollectible and should be written off

Explanation: A loss asset is one that is considered uncollectible and of little value, requiring it to be
written off.

44. What is required for a project loan to maintain its standard classification if there is a delay due
to reasons beyond the borrower’s control?

a) Payment of all dues immediately

b) Rescheduling of the Date of Commencement of Commercial Operations (DCCO)
c) Borrower’s personal guarantee

132
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
d) Immediate restructuring of the loan
e) Bank takes possession of the borrower’s assets

Answer: b) Rescheduling of the Date of Commencement of Commercial Operations (DCCO)

Explanation: A project loan can retain its standard classification if the Date of Commencement of
Commercial Operations (DCCO) is rescheduled and the borrower adheres to the new terms.

45. What happens if a borrower in a revolving credit facility fails to repay for 60 days?

a) The account is immediately classified as NPA

b) The account is classified as SMA-2
c) The account is classified as SMA-1
d) The account is immediately frozen
e) The loan is rescheduled

Answer: c) The account is classified as SMA-1

Explanation: If a borrower in a revolving credit facility fails to repay for 60 days, the account is
classified as SMA-1.

46. What is the primary focus of a Resolution Plan (RP)?

a) Reducing the borrower’s credit limit

b) Increasing the loan tenure
c) Implementing strategies to resolve stress in the account
d) Waiving all overdue payments
e) Penalizing the borrower for delayed payments

Answer: c) Implementing strategies to resolve stress in the account

Explanation: The Resolution Plan focuses on identifying and implementing strategies to resolve
stress in the borrower's account.

47. What is the purpose of an Inter-Creditor Agreement (ICA) under the Prudential Framework?

a) To provide a forum for borrowers to appeal decisions

b) To create a uniform loan recovery timeline
c) To establish ground rules for resolving stressed assets among multiple lenders
d) To set new interest rates for defaulters
e) To allow borrowers to negotiate directly with creditors

Answer: c) To establish ground rules for resolving stressed assets among multiple lenders
Explanation: The Inter-Creditor Agreement (ICA) is designed to set rules for how lenders will work
together to resolve stressed assets.

48. What is required before any restructured asset can be upgraded to a standard asset?

a) A reduction in loan interest rate

b) Restructuring of other loans
c) Satisfactory performance for a certain period
d) A minimum of 10% repayment of outstanding debt
e) Government approval

Answer: c) Satisfactory performance for a certain period

Explanation: A restructured asset can only be upgraded to a standard asset after demonstrating
satisfactory performance for a defined period.

133
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
49. Under what condition would a Resolution Plan (RP) involving continuing credit exposure be
considered implemented?

a) When the borrower requests it

b) When new documentation is signed and security is created
c) When the borrower makes partial payments
d) When the loan is converted into a term loan
e) When the bank writes off the loan

Answer: b) When new documentation is signed and security is created

Explanation: A Resolution Plan involving continuing credit exposure is considered implemented once
all necessary documentation is completed, and security is created.

50. What is the provisioning requirement for "standard" assets in the Commercial Real Estate (CRE)
sector?

a) 0.25%
b) 0.40%
c) 1.00%
d) 1.50%
e) 2.00%

Answer: c) 1.00%
Explanation: The provisioning requirement for "standard" assets in the Commercial Real Estate (CRE)
sector is 1.00%.

51. A corporate borrower with an exposure of ₹150 crore has requested a restructuring plan due to
industry-wide challenges. As per the Prudential Framework for Resolution of Stressed Assets, what
would be the consequence if the Resolution Plan (RP) is delayed beyond 365 days from the
commencement of the Review Period?

a) The account is automatically downgraded to a loss asset

b) An additional provisioning of 35% is required
c) The borrower is allowed an extension of another 180 days
d) The RP must be reviewed by an independent audit committee
e) The account will be immediately classified as “standard” once overdue amounts are settled

Answer: b) An additional provisioning of 35% is required

Explanation: If the Resolution Plan is delayed beyond 365 days, the bank must make an additional
provisioning of 35% (20% for delays beyond 180 days, plus another 15% for delays beyond 365 days).
This stringent requirement ensures timely resolution of stressed accounts.

52. Under the RBI’s framework for restructuring loans, what is the impact on the asset
classification of a borrower’s loan when it is restructured due to COVID-19-related stress, assuming
the loan was classified as “standard” prior to restructuring?

a) It is immediately classified as "sub-standard"

b) It retains its standard classification if specific conditions are met
c) It is automatically upgraded to "performing asset"
d) It is classified as a "loss asset" until all dues are cleared
e) It requires 50% provisioning until the borrower fully repays

134
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: b) It retains its standard classification if specific conditions are met
Explanation: Under the COVID-19 restructuring framework, loans classified as standard can retain
their standard status if the restructuring is within the guidelines, including timely repayment and
adherence to the restructured terms.

53. A bank’s credit portfolio includes a large infrastructure project loan with significant delays. The
original DCCO (Date of Commencement of Commercial Operations) was extended twice due to
court cases. According to RBI norms, what is the maximum period for such an extension before the
loan becomes classified as NPA?

a) 2 years
b) 3 years
c) 4 years
d) 5 years
e) 6 years

Answer: c) 4 years
Explanation: For infrastructure projects involving court cases, the extension of the DCCO can be
granted for up to four years beyond the original DCCO. If the project fails to commence operations
within this period, the loan must be classified as NPA.

54. In the event of restructuring a loan with multiple banking arrangements, which of the following
conditions would require independent credit evaluations (ICE) by Credit Rating Agencies (CRAs) to
implement the Resolution Plan?

a) Aggregate exposure of ₹50 crore

b) Aggregate exposure of ₹100 crore or more
c) All loans, irrespective of exposure size
d) Only loans with unsecured exposure
e) Aggregate exposure of ₹500 crore or more requires two ICEs

Answer: e) Aggregate exposure of ₹500 crore or more requires two ICEs

Explanation: For restructuring loans with an aggregate exposure of ₹100 crore or more, one
Independent Credit Evaluation (ICE) is required. For exposures of ₹500 crore or more, two ICEs are
required, and the restructuring must achieve a credit rating of RP-4 or better.

55. Which of the following statements is true regarding the classification of consortium accounts
under RBI’s asset classification norms?

a) Classification of the account depends on the lead bank’s decision only

b) Each bank in the consortium can independently classify the account based on its own recovery
record
c) All consortium banks must follow the classification given by the bank with the highest exposure
d) Asset classification of the consortium account must always align with the CRILC report
e) Classification must be based on the borrower’s total exposure across all banks, including
consortium members

Answer: b) Each bank in the consortium can independently classify the account based on its own
recovery record
Explanation: In a consortium lending arrangement, each bank is required to classify the account
based on its own record of recovery, independent of the other banks in the consortium.

135
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
56. If a bank encounters a borrower with an overdue derivative contract showing a positive mark-
to-market value, after how many days of non-payment would the bank classify the exposure as an
NPA?

a) 60 days
b) 30 days
c) 90 days
d) 120 days
e) Upon contract maturity

Answer: c) 90 days
Explanation: Derivative transactions that show a positive mark-to-market value but remain unpaid
for more than 90 days must be classified as NPAs.

57. A bank’s exposure to an SME borrower has slipped into SMA-2 due to payment defaults. As per
RBI guidelines, within what timeframe must the bank report this to the Central Repository of
Information on Large Credits (CRILC) if the borrower’s total exposure exceeds ₹5 crore?

a) Monthly
b) Weekly
c) Daily
d) Quarterly
e) Annually

Answer: b) Weekly
Explanation: For borrowers with aggregate exposure of ₹5 crore and above, banks must report
instances of default to CRILC on a weekly basis. This ensures prompt identification of stress in large
exposures.

58. When restructuring a loan under the Insolvency and Bankruptcy Code (IBC), what happens to
the provisioning held by banks in the case of successful resolution through the assignment of
debt?

a) It must be fully written off

b) It can be reduced by 50%
c) It remains unchanged until the loan is fully repaid
d) It can be reversed upon completion of the assignment
e) It increases by 15% for the first year after restructuring

Answer: d) It can be reversed upon completion of the assignment

Explanation: When a loan is successfully resolved through the assignment of debt, the provisioning
held by banks can be reversed, as the loan has been resolved.

59. In cases where an additional 15% provision is required due to non-performance after
restructuring, how is the “specified period” defined for monitoring the restructured asset?

a) Until the loan matures

b) Until 10% of the outstanding principal is repaid
c) Until 20% of the outstanding principal is repaid
d) Until 50% of the outstanding principal is repaid
e) Until the borrower’s financials show a profit

136
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: c) Until 20% of the outstanding principal is repaid
Explanation: The specified period for a restructured asset refers to the time until 20% of the
outstanding principal is repaid, during which the borrower must demonstrate satisfactory
performance to avoid further downgrades.

60. Under what conditions can a loan backed by a Central Government guarantee remain classified
as a standard asset, even if the loan is overdue?

a) The guarantee is invoked but not yet honored

b) The borrower has missed one payment
c) The government guarantee has been revoked
d) The loan remains overdue for 60 days
e) The loan can remain standard until the government repudiates its guarantee when invoked

Answer: e) The loan can remain standard until the government repudiates its guarantee when
invoked
Explanation: Loans backed by a Central Government guarantee can remain classified as standard
assets until the government repudiates its guarantee after it has been invoked.

61. If a loan account under consortium lending becomes stressed, and one of the banks decides to
invoke recovery measures while the other consortium members do not agree, what would be the
correct course of action for the dissenting bank?

a) The dissenting bank must seek approval from the lead bank to proceed
b) The dissenting bank can independently initiate recovery measures without the consortium's
consent
c) The dissenting bank can proceed only after a majority of consortium members agree
d) The dissenting bank is bound by the decision of the majority and cannot initiate independent
recovery
e) The dissenting bank can approach the RBI to override the decision of the consortium

Answer: b) The dissenting bank can independently initiate recovery measures without the
consortium's consent
Explanation: In consortium lending, each member bank can initiate recovery measures
independently, even if the other consortium members disagree, provided it aligns with their recovery
strategy.

62. A project loan to a non-infrastructure sector has experienced delays in starting commercial
operations due to factors beyond the borrower’s control. The original DCCO (Date of
Commencement of Commercial Operations) was extended by one year. What is the maximum
additional extension period allowed before the account must be classified as NPA?

a) 6 months
b) 12 months
c) 18 months
d) 24 months
e) 36 months

Answer: b) 12 months
Explanation: For non-infrastructure sector projects, the Date of Commencement of Commercial
Operations (DCCO) can be extended by up to 12 months beyond the originally scheduled extension,
after which the account must be classified as an NPA if operations do not commence.

137
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
63. In a situation where a bank has granted a loan for a long-duration crop, how long can the
principal or interest remain overdue before the loan is classified as an NPA under the IRAC norms?

a) Two crop seasons

b) Three crop seasons
c) One crop season
d) 180 days
e) 90 days

Answer: c) One crop season

Explanation: For long-duration crops, a loan is classified as an NPA if the principal or interest remains
overdue for one crop season, as per the IRAC norms.

64. When restructuring a loan for a corporate borrower under the Prudential Framework, what
happens to the asset classification if the borrower defaults on payment again during the
Monitoring Period?

a) The loan is downgraded to a "loss asset"

b) The loan remains in the same classification
c) The asset is immediately classified as an NPA
d) The loan is downgraded by two notches in classification
e) The loan requires additional provisioning of 15%

Answer: e) The loan requires additional provisioning of 15%

Explanation: If a borrower defaults again during the Monitoring Period after restructuring, an
additional provisioning of 15% is required at the end of the Review Period.

65. Under what circumstances can a loan restructured for a borrower with an aggregate exposure
of more than ₹500 crore be classified as a "standard asset" under RBI guidelines?

a) After one year of satisfactory performance post-restructuring

b) Upon repayment of 25% of the outstanding principal
c) Upon obtaining a credit rating of RP-4 or better from two independent CRAs
d) When the borrower clears all dues within 90 days of restructuring
e) Upon a positive net worth declaration by the borrower

Answer: c) Upon obtaining a credit rating of RP-4 or better from two independent CRAs
Explanation: For loans with an aggregate exposure of ₹500 crore or more, a restructured asset can
be classified as a "standard asset" only after receiving a credit rating of RP-4 or better from two
independent CRAs.

66. A borrower’s account has become stressed, and the bank is considering rectification as the
initial step in resolving the stressed asset. What is a key condition that must be fulfilled during
rectification to avoid further slippage of the account?

a) Restructuring of the loan within 30 days

b) Commitment from the borrower to regularize the account without loss or sacrifice by the lender
c) Complete write-off of overdue interest
d) The borrower must provide additional collateral within 60 days
e) The bank must issue a notice of default to the borrower

Answer: b) Commitment from the borrower to regularize the account without loss or sacrifice by the
lender

138
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Explanation: Rectification involves obtaining a specific commitment from the borrower to regularize
the account without causing any loss or sacrifice to the lender.

67. In the context of consortium lending, how is asset classification handled if one of the member
banks experiences significant recovery delays while others maintain satisfactory recovery records?

a) The entire consortium must classify the account as an NPA

b) Only the lead bank's classification applies to the entire consortium
c) Each bank in the consortium classifies the account independently based on its own recovery
experience
d) The classification is determined by the largest lender in the consortium
e) The asset is immediately written off by all member banks

Answer: c) Each bank in the consortium classifies the account independently based on its own
recovery experience
Explanation: In consortium lending, each member bank independently classifies the account based
on its own recovery experience, even if other banks have different classifications.

68. If a bank’s borrower has taken a loan for a term deposit-backed project, and the loan has
become overdue by 90 days, what is the correct treatment of interest income on this loan as per
RBI’s Income Recognition guidelines?

a) Interest income should continue to be accrued as the loan is backed by term deposits
b) Interest income must be reversed and recognized only on actual realization
c) Interest income should be recognized on accrual basis as long as term deposits cover the full loan
d) Interest income should be recognized based on the market value of the term deposit
e) The loan should be classified as a standard asset due to adequate collateral

Answer: b) Interest income must be reversed and recognized only on actual realization
Explanation: Even for loans backed by term deposits, interest income must be reversed and
recognized on a cash basis if the loan becomes overdue by 90 days or more.

69. What is the maximum allowable period for which a project loan in the infrastructure sector can
be classified as a "standard asset" in the event of delays due to legal and regulatory hurdles?

a) 2 years from the original DCCO

b) 3 years from the original DCCO
c) 4 years from the original DCCO
d) 5 years from the original DCCO
e) 6 years from the original DCCO

Answer: c) 4 years from the original DCCO

Explanation: For infrastructure projects facing legal and regulatory delays, the project can be
classified as a "standard asset" for up to four years from the original Date of Commencement of
Commercial Operations (DCCO), provided certain conditions are met.

70. Which of the following is a condition under which a borrower’s account backed by a Central
Government guarantee is classified as an NPA?

a) When the borrower defaults for 60 days

b) When the borrower requests restructuring
c) When the government repudiates its guarantee when invoked

139
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
d) When the borrower’s financials show a significant loss
e) When the borrower defaults on two consecutive interest payments

Answer: c) When the government repudiates its guarantee when invoked

Explanation: Loans backed by a Central Government guarantee can remain classified as standard
until the government repudiates its guarantee after it is invoked. Once the government refuses to
honor the guarantee, the loan must be classified as an NPA.

71. A consortium borrower’s loan is overdue, and the borrower requests an extension of the
moratorium for interest payments. If granted, how does this affect the classification of the asset,
assuming all other terms remain unchanged?

a) The loan remains classified as standard for one more year

b) The loan must be downgraded to a sub-standard asset
c) The loan can be restructured without any change in classification
d) The loan requires an additional 10% provisioning
e) The loan will automatically become an NPA after 180 days

Answer: b) The loan must be downgraded to a sub-standard asset

Explanation: Granting a moratorium for interest payments without restructuring the terms will result
in the loan being downgraded to a sub-standard asset under the IRAC norms.

72. Under the RBI guidelines, what is the classification rule for an agricultural advance where the
loan is financed through Primary Agricultural Credit Societies (PACS) and part of the credit remains
in default?

a) The entire loan must be classified as NPA

b) Only the defaulting portion must be classified as NPA
c) The loan remains classified as a standard asset if the majority is performing
d) The loan is restructured and classified as a special mention account
e) The loan must be classified as "loss" if overdue by more than 30 days

Answer: b) Only the defaulting portion must be classified as NPA

Explanation: In the case of agricultural advances financed through PACS, only the portion of the
credit in default needs to be classified as an NPA, not the entire loan.

73. What is one of the key exemptions under RBI regulations for the conversion of debt into non-
SLR securities during restructuring?

a) Exemption from the requirement to classify the debt as NPA

b) Exemption from restrictions on investment in unlisted non-SLR securities
c) Exemption from provisioning norms for standard assets
d) Exemption from reporting the restructuring to the board of the bank
e) Exemption from audit requirements

Answer: b) Exemption from restrictions on investment in unlisted non-SLR securities

Explanation: RBI provides an exemption from restrictions on investment in unlisted non-SLR
securities during the conversion of debt as part of a restructuring process.

74. Under SEBI regulations, what is the rule for pricing equity shares when debt is converted into
equity?

140
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) Fixed at market value
b) Higher of book value or market price
c) Lower of market price or book value
d) Fixed at ₹1 per share for all conversions
e) Based on the future projection of company earnings

Answer: c) Lower of market price or book value

Explanation: The SEBI regulations state that the issue price during debt-to-equity conversion will be
the lower of either the market price or the book value of the shares.

75. What is the eligibility condition for restructuring under the Framework for Revival and
Rehabilitation of MSMEs?

a) MSMEs with loan limits above ₹25 crore

b) Only accounts classified as “loss assets”
c) MSMEs with loan limits up to ₹25 crore
d) MSMEs registered with SEBI
e) MSMEs classified as “doubtful” assets only

Answer: c) MSMEs with loan limits up to ₹25 crore

Explanation: The Framework for Revival and Rehabilitation of MSMEs applies to MSMEs with loan
limits up to ₹25 crore, and the accounts may be under consortium or multiple banking arrangements.

76. What is the role of the Committee for Corrective Action Plan for MSMEs under stress?

a) To negotiate with borrowers for loan write-offs

b) To manage the day-to-day operations of MSMEs
c) To create a Corrective Action Plan (CAP) for resolving stress in MSME accounts
d) To issue government-backed guarantees for MSMEs
e) To classify MSME loans under the NPA category

Answer: c) To create a Corrective Action Plan (CAP) for resolving stress in MSME accounts
Explanation: The Committee for Corrective Action Plan is responsible for developing and finalizing a
CAP to address the financial stress of MSMEs.

77. Who chairs the Committee for Corrective Action Plan for stressed MSMEs?

a) The branch manager of the MSME's bank

b) The CEO of the MSME
c) The regional or zonal head of the convening bank
d) A representative from the Ministry of MSMEs
e) The borrower’s financial advisor

Answer: c) The regional or zonal head of the convening bank

Explanation: The chairperson of the Committee is the regional or zonal head of the convening bank
that handles the MSME’s account.

78. What should be done when an MSME account is classified as SMA-2?

a) The loan should be restructured immediately

b) It must be referred to the Committee for Corrective Action Plan
c) The loan should be written off as a loss

141
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
d) The loan should be classified as NPA
e) The loan should be frozen

Answer: b) It must be referred to the Committee for Corrective Action Plan

Explanation: When an MSME account is classified as SMA-2, it must be forwarded to the Committee
for CAP within five working days.

79. What is the prescribed format for MSMEs to submit applications for CAP when loan limits
exceed ₹10 lakh?

a) SEBI format
b) RBI format
c) IBA format
d) Ministry of MSME format
e) SIDBI format

Answer: c) IBA format

Explanation: MSMEs with aggregate loan limits above ₹10 lakh should submit their application in the
IBA (Indian Banks' Association) format for consideration under CAP.

80. What action should be taken if the Committee decides that restructuring is necessary for an
MSME account?

a) The account should be downgraded to NPA

b) A Techno-Economic Viability (TEV) study should be conducted
c) The MSME should be given a moratorium on interest payments
d) The loan should be written off
e) The MSME’s assets should be sold immediately

Answer: b) A Techno-Economic Viability (TEV) study should be conducted

Explanation: Before restructuring an MSME account, a detailed Techno-Economic Viability (TEV)
study must be carried out to assess the viability of the business.

81. What is the maximum time allowed for restructuring an MSME loan under the CAP
framework?

a) 30 days
b) 60 days
c) 90 days
d) 180 days
e) 365 days

Answer: c) 90 days
Explanation: The restructuring process must be completed within 90 days under the CAP framework.

82. What is the priority for the repayment of additional finance provided under a restructuring
plan for MSMEs?

a) Equal to existing debt

b) Lower than existing debt
c) Higher than existing debt
d) Only after full repayment of existing debt
e) According to the discretion of the Committee

142
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: c) Higher than existing debt
Explanation: Additional finance provided during restructuring has a higher priority for repayment
compared to the existing debt.

83. What is the purpose of the “Right of Recompense” clause in a restructuring plan?

a) To allow the MSME to repay the loan over an extended period

b) To ensure the bank is compensated if the restructuring fails
c) To permit the bank to increase the interest rate post-restructuring
d) To allow the bank to withdraw from the restructuring agreement
e) To provide additional funds to the MSME during restructuring

Answer: b) To ensure the bank is compensated if the restructuring fails

Explanation: The "Right of Recompense" clause ensures that the bank can recover any losses if the
restructuring plan does not achieve its objectives.

84. When a loan for an MSME is identified as SMA-2, what is the required course of action for the
bank?

a) Downgrade the loan to NPA immediately

b) Refer the loan to the Committee for Corrective Action Plan (CAP)
c) Provide additional funding to the MSME without any further analysis
d) Extend the repayment period by one year
e) Immediately initiate recovery proceedings

Answer: b) Refer the loan to the Committee for Corrective Action Plan (CAP)
Explanation: When an MSME loan is classified as SMA-2, banks must refer it to a Committee for
Corrective Action Plan (CAP) to determine the best course of action, such as restructuring,
rectification, or recovery.

85. What is a critical condition for MSME accounts with aggregate loan limits up to ₹10 lakh when
classified as SMA-2?

a) The loan must be downgraded to a loss asset

b) No further action is required by the bank
c) The branch itself must handle the CAP without referring to the Committee
d) The loan must be referred to a national-level committee
e) The loan is automatically reclassified as standard if overdue is paid

Answer: c) The branch itself must handle the CAP without referring to the Committee
Explanation: For MSME loans with aggregate loan limits up to ₹10 lakh, the branch itself must
handle the Corrective Action Plan under the authority of the branch manager or a designated official.

86. In cases where promoters of a wilful defaulter are replaced by new promoters, what is the
bank’s stance on restructuring the loan?

a) The loan cannot be restructured under any circumstances

b) The loan may be restructured if the new promoters are viable
c) The loan must be liquidated
d) The loan must be downgraded to NPA
e) The bank is required to report the defaulters to SEBI

143
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: b) The loan may be restructured if the new promoters are viable
Explanation: If new promoters replace wilful defaulters, the loan may be restructured based on the
viability of the new promoters, without prejudice to any criminal actions against the previous
management.

87. What is the timeframe for completing the restructuring process for MSME accounts with
aggregate exposure between ₹10 crore and ₹25 crore?

a) 10 days
b) 20 days
c) 30 days
d) 60 days
e) 90 days

Answer: c) 30 days
Explanation: For MSME accounts with aggregate exposure between ₹10 crore and ₹25 crore, the
restructuring process must be completed within 30 working days.

88. Which of the following is NOT considered a sign of financial stress for MSMEs under the RBI
framework?

a) Failure to pay statutory liabilities

b) Excessive leverage
c) Promoters pledging their shares
d) Submission of incorrect stock statements
e) An increase in market share

Answer: e) An increase in market share

Explanation: An increase in market share is not a sign of financial stress, whereas the other options
(failure to pay statutory liabilities, excessive leverage, etc.) are clear indicators of stress in MSME
accounts.

89. How many days does the Committee have to take a decision on the corrective action plan for a
stressed MSME account after convening the first meeting?

a) 10 days
b) 20 days
c) 30 days
d) 45 days
e) 60 days

Answer: c) 30 days
Explanation: The Committee has 30 days from its first meeting to take a decision on the Corrective
Action Plan (CAP) for stressed MSME accounts.

90. What is a key requirement for additional finance under the Corrective Action Plan (CAP) for
MSMEs?

a) It must be unsecured
b) It must be repaid within 6 months
c) It can be extended for a period of 5 years
d) It should be without interest for 12 months
e) It should involve no further lending under the CAP

144
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: b) It must be repaid within 6 months
Explanation: Additional finance provided under the CAP should be repaid or regularized within a
maximum period of six months, and it should typically be an ad-hoc facility.

91. Which of the following is a requirement for restructuring a loan under the Corrective Action
Plan for MSMEs?

a) The borrower must be declared a wilful defaulter

b) A Techno-Economic Viability (TEV) study must be conducted
c) No further credit should be extended
d) The restructuring should be completed within 180 days
e) The borrower must pay 50% of the outstanding dues upfront

Answer: b) A Techno-Economic Viability (TEV) study must be conducted

Explanation: For accounts with aggregate exposure of ₹10 crore and above, a detailed Techno-
Economic Viability (TEV) study must be conducted before finalizing the restructuring as part of the
Corrective Action Plan.

92. What is the minimum voting requirement among creditors for a decision on restructuring
under the Inter-Creditor Agreement (ICA)?

a) 100% by value and 100% by number

b) 50% by value and 25% by number
c) 60% by value and 40% by number
d) 75% by value and 50% by number
e) 80% by value and 30% by number

Answer: d) 75% by value and 50% by number

Explanation: The decisions agreed upon by a majority of creditors, with 75% by value and 50% by
number, will be binding under the terms of the Inter-Creditor Agreement (ICA).

93. What happens if the Committee fails to reach a decision on the CAP within the prescribed time
limit?

a) The account is automatically classified as NPA

b) The decision is deferred to the next financial year
c) The Committee may take additional time up to 30 days
d) The loan is referred to the Debt Recovery Tribunal
e) The loan is automatically written off

Answer: c) The Committee may take additional time up to 30 days

Explanation: If the Committee is unable to

94. What is the role of the Committee for Corrective Action Plan (CAP) in the context of stressed
MSME accounts?

a) To restructure all accounts regardless of viability

b) To finalize the closure of all stressed accounts
c) To assess and finalize the Corrective Action Plan for MSME accounts
d) To approve all loans for MSMEs regardless of stress level
e) To liquidate all assets of the MSME for recovery

145
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: c) To assess and finalize the Corrective Action Plan for MSME accounts
Explanation: The Committee for Corrective Action Plan is responsible for assessing stressed MSME
accounts and devising a Corrective Action Plan (CAP) which may include rectification, restructuring,
or recovery options.

95. What should the Committee prioritize when considering the rectification option under a
Corrective Action Plan for an MSME account?

a) Providing long-term financing options

b) Implementing a forensic audit of the MSME
c) Ensuring that the rectification is borrower-driven without involving any loss to the lender
d) Initiating immediate recovery of all dues
e) Forcing the borrower to liquidate all assets

Answer: c) Ensuring that the rectification is borrower-driven without involving any loss to the lender
Explanation: Rectification under a Corrective Action Plan should be borrower-driven and supported
by identifiable cash flows, without any loss or sacrifice on the part of the lender.

96. What is the timeline for the Committee to finalize and notify the decision on the Corrective
Action Plan (CAP) for a stressed MSME?

a) 5 days from receiving the request

b) 10 days from first meeting
c) 15 days from receiving the request
d) 30 days from the first meeting
e) 60 days from the first meeting

Answer: d) 30 days from the first meeting

Explanation: The Committee is required to finalize and notify its decision on the Corrective Action
Plan within 30 days of its first meeting.

97. What is the minimum threshold for MSME accounts to be referred to the Committee for
Corrective Action Plan (CAP)?

a) ₹5 lakh
b) ₹10 lakh
c) ₹25 lakh
d) ₹50 lakh
e) ₹1 crore

Answer: b) ₹10 lakh

Explanation: MSME accounts with an aggregate loan limit above ₹10 lakh must be referred to the
Committee for Corrective Action Plan (CAP) within five working days of being identified as stressed.

98. In the case of consortium lending, who is responsible for referring a stressed MSME account to
the Committee for CAP?

a) The bank with the smallest exposure

b) The bank with the largest exposure
c) The RBI
d) The borrower
e) Any lender in the consortium

146
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: b) The bank with the largest exposure
Explanation: In the case of consortium lending or multiple banking arrangements (MBA), the bank
with the largest exposure is responsible for referring the stressed MSME account to the Committee.

99. Which of the following MSME accounts is eligible for restructuring under the Corrective Action
Plan (CAP)?

a) Accounts where fraud is detected

b) Accounts classified as SMA-1 or SMA-2
c) Accounts in NPA for more than two years
d) Accounts where the promoters have refused to provide personal guarantees
e) Accounts of wilful defaulters

Answer: b) Accounts classified as SMA-1 or SMA-2

Explanation: MSME accounts classified as SMA-1 or SMA-2 are eligible for restructuring under the
Corrective Action Plan, provided there are no instances of wilful default or fraud.

100. How is additional financing provided under a restructuring plan prioritized for repayment?

a) It is given lower priority than existing debt

b) It is repaid at the same time as existing debt
c) It is prioritized over the repayment of existing debt
d) It is repaid only after the company becomes profitable
e) It is not given any special repayment preference

Answer: c) It is prioritized over the repayment of existing debt

Explanation: Additional financing provided under restructuring is given priority for repayment over
existing debt to ensure that the fresh infusion of funds is repaid first.

101. What happens if an MSME account fails to perform as per the terms agreed upon under the
rectification or restructuring plan?

a) The borrower is given additional time to comply

b) The loan is automatically converted to a standard asset
c) The Committee initiates recovery measures
d) The account is written off
e) The Committee re-evaluates the restructuring plan

Answer: c) The Committee initiates recovery measures

Explanation: If an MSME account fails to perform as per the agreed terms under rectification or
restructuring, the Committee will initiate recovery measures.

102. What role do Techno-Economic Viability (TEV) studies play in the restructuring of MSME
accounts?

a) They assess the legal viability of the restructuring

b) They determine the viability of the MSME business before finalizing the restructuring plan
c) They monitor the post-restructuring performance of the MSME
d) They audit the financials of the MSME
e) They determine the market value of the MSME’s assets

Answer: b) They determine the viability of the MSME business before finalizing the restructuring
plan

147
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Explanation: A detailed Techno-Economic Viability (TEV) study is conducted to assess the viability of
the MSME business before the restructuring plan is finalized.

103. What happens if the Committee is unable to obtain information about the statutory dues of
an MSME within the prescribed timeline for deciding the Corrective Action Plan (CAP)?

a) The Committee is allowed an additional 30 days

b) The account is automatically classified as NPA
c) The Committee cancels the restructuring plan
d) The Committee must proceed without the information
e) The Committee refers the case to a higher authority

Answer: a) The Committee is allowed an additional 30 days

Explanation: If the Committee is unable to obtain information on statutory dues, it may take an
additional 30 days to decide the Corrective Action Plan (CAP), but it cannot exceed this period.

104. In case of recovery as a Corrective Action Plan, what proportion of creditors must agree on
the recovery plan for it to be binding on all lenders?

a) 100% of creditors by value and number

b) 75% of creditors by value and 60% by number
c) 75% of creditors by value and 50% by number
d) 50% of creditors by value and 50% by number
e) 60% of creditors by value and 40% by number

Answer: c) 75% of creditors by value and 50% by number

Explanation: For the recovery plan under the Corrective Action Plan (CAP) to be binding on all
lenders, 75% of the creditors by value and 50% by number must agree to the plan.

105. In a restructuring package for a listed company, how are lenders typically compensated for
their sacrifices?

a) By reducing the interest rate on the loan

b) By receiving cash payments from the government
c) By receiving equity shares in the company
d) By getting collateral from the borrower’s assets
e) By reducing the principal amount of the loan

Answer: c) By receiving equity shares in the company

Explanation: In a restructuring package for a listed company, lenders are often compensated for their
sacrifices by receiving equity shares in the company as part of the restructuring process.

106. What should the Committee do if the Corrective Action Plan (CAP) involves additional
financing, but the promoters are unable to bring in more funds?

a) Cancel the restructuring plan

b) Extend the repayment period of the loan
c) Allow the enterprise to raise secured or unsecured loans
d) Reduce the interest rate on the loan
e) Approve the restructuring without additional financing

148
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: c) Allow the enterprise to raise secured or unsecured loans
Explanation: If the promoters are unable to bring in additional funds, the Committee may allow the
enterprise to raise secured or unsecured loans as part of the Corrective Action Plan (CAP).

107. Which of the following is not a method of recovery under the Corrective Action Plan for
MSMEs?

a) Exit from the account

b) Legal recovery through Debt Recovery Tribunals (DRT)
c) Sale of impaired assets to Asset Reconstruction Companies (ARCs)
d) Writing off the loan as a loss asset immediately
e) Compromise settlement with the borrower

Answer: d) Writing off the loan as a loss asset immediately

Explanation: Writing off the loan as a loss asset is not part of the Corrective Action Plan’s recovery
process. The CAP focuses on exit, compromise, legal recovery, or sale of assets.

108. What is the purpose of the Standstill Clause in the restructuring process?

a) To prevent the borrower from selling assets without permission

b) To freeze the loan interest rate for six months
c) To prevent the lender from collecting dues during restructuring negotiations
d) To allow the borrower to continue business without making any payments
e) To exempt the borrower from submitting financial statements

Answer: a) To prevent the borrower from selling assets without permission

Explanation: The Standstill Clause prevents the borrower from undertaking any transactions that
would alienate assets or affect the security of the loan without the permission of the Committee
during the restructuring process.

109. What is one of the eligibility criteria for restructuring MSME accounts under the CAP?

a) Accounts where fraud has been detected are automatically eligible

b) Wilful defaulters are eligible if the Committee decides they are viable
c) The account must be classified as “Loss Asset”
d) The borrower’s net worth must be below ₹10 crore
e) Accounts with any exposure above ₹1 crore are eligible

Answer: b) Wilful defaulters are eligible if the Committee decides they are viable
Explanation: Wilful defaulters are generally not eligible for restructuring, but the Committee can
review the reasons for the default and decide whether to proceed with restructuring if the borrower
is deemed viable.

110. When must the Techno-Economic Viability (TEV) study be completed for accounts with an
aggregate exposure above ₹10 crore but less than ₹25 crore?

a) Within 20 working days

b) Within 30 working days
c) Within 60 working days
d) Within 90 working days
e) Within 15 working days

149
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: b) Within 30 working days
Explanation: The Techno-Economic Viability (TEV) study for MSME accounts with an aggregate
exposure above ₹10 crore and up to ₹25 crore must be completed within 30 working days.

111. What is the maximum time period for implementing a restructuring plan for MSME accounts
under the Corrective Action Plan (CAP)?

a) 60 days
b) 90 days
c) 120 days
d) 180 days
e) 150 days

Answer: b) 90 days
Explanation: The maximum time allowed for implementing a restructuring plan under the Corrective
Action Plan (CAP) is 90 days.

112. Under the Corrective Action Plan, which of the following is an option available to the
Committee for resolving stressed MSME accounts?

a) Forgiving all dues and writing off the loan

b) Restructuring the account based on a Techno-Economic Viability (TEV) study
c) Handing over the account to the government for resolution
d) Cancelling all existing credit facilities without further negotiation
e) Compulsory liquidation of the borrower’s assets

Answer: b) Restructuring the account based on a Techno-Economic Viability (TEV) study

Explanation: The Committee can consider restructuring the MSME account based on the findings of
the Techno-Economic Viability (TEV) study, which helps assess the viability of the business before
finalizing a restructuring plan.

113. What is the maximum timeline provided for a decision on the Corrective Action Plan (CAP)
after the first meeting of the Committee for stressed MSMEs?

a) 10 days
b) 15 days
c) 30 days
d) 60 days
e) 90 days

Answer: c) 30 days
Explanation: The Committee must take a decision on the Corrective Action Plan (CAP) within 30 days
from the date of the first meeting.

114. Which of the following is a valid reason for initiating the recovery process under the
Corrective Action Plan for MSMEs?

a) The borrower’s promoters have pledged additional assets

b) The account has failed to perform under the restructuring plan
c) The borrower has requested more time for rectification
d) The borrower is willing to offer more equity to the lenders
e) The borrower’s financial ratios have improved slightly

150
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: b) The account has failed to perform under the restructuring plan
Explanation: If the MSME account fails to perform as per the agreed terms under the restructuring
plan, the Committee may initiate the recovery process.

115. How does the Committee determine whether an MSME is eligible for restructuring under the
Corrective Action Plan (CAP)?

a) Based solely on the borrower’s past credit history

b) By conducting a detailed financial audit of the MSME
c) By assessing the viability of the MSME through a TEV study
d) Based on the collateral provided by the borrower
e) Based on the borrower’s relationship with the lead bank

Answer: c) By assessing the viability of the MSME through a TEV study

Explanation: The Committee assesses the eligibility for restructuring based on the viability of the
MSME, which is determined through a Techno-Economic Viability (TEV) study.

116. In what scenario can a wilful defaulter’s account be considered for restructuring under the
Corrective Action Plan (CAP)?

a) If the borrower is willing to reduce the loan amount

b) If the borrower is no longer associated with the promoters responsible for the default
c) If the borrower promises to repay the loan in full within 30 days
d) If the lead bank agrees to waive the interest
e) If the borrower’s financials show improvement

Answer: b) If the borrower is no longer associated with the promoters responsible for the default
Explanation: A wilful defaulter’s account may be considered for restructuring if the borrower is
totally delinked from the promoters responsible for the default, and the Committee finds the
business viable.

117. What is the priority of additional financing provided as part of a restructuring or rectification
plan under the CAP?

a) Equal to the repayment of existing debt

b) Lower than the repayment of secured debt
c) Higher than the repayment of existing debt
d) Only repayable after the enterprise becomes profitable
e) No special priority is given to additional financing

Answer: c) Higher than the repayment of existing debt

Explanation: Additional financing provided under the restructuring or rectification plan is given
higher priority for repayment over existing debt.

118. Which of the following is not included in the responsibilities of the Committee for Corrective
Action Plan (CAP) when handling a stressed MSME account?

a) Conducting a Techno-Economic Viability (TEV) study

b) Determining the future viability of the MSME
c) Forcing the MSME to liquidate its assets without consulting lenders
d) Recommending recovery actions if rectification or restructuring fails
e) Monitoring the progress of the Corrective Action Plan

151
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: c) Forcing the MSME to liquidate its assets without consulting lenders
Explanation: The Committee does not have the authority to force the MSME to liquidate its assets
without consulting the lenders. Recovery actions can only be initiated after careful assessment and
agreement by the lenders.

119. What is the purpose of the “right of recompense” clause in a restructuring agreement?

a) To ensure that the government compensates the lenders for their sacrifices
b) To allow borrowers to request a reduction in their liabilities
c) To enable lenders to recover the sacrifices made during the restructuring if the borrower turns
around
d) To reduce the borrower’s financial obligations
e) To exempt lenders from statutory regulations during the restructuring process

Answer: c) To enable lenders to recover the sacrifices made during the restructuring if the borrower
turns around
Explanation: The “right of recompense” clause allows lenders to recover their sacrifices (e.g., in
terms of reduced interest or principal) if the borrower’s business turns around post-restructuring.

120. Which of the following options is not considered as a trigger for banks to exit an account
under the Corrective Action Plan?

a) Drastic fall in the performance of the company

b) Disputes among the promoters
c) Industry or sector showing declining trends
d) The borrower pledging additional assets to secure the loan
e) Critical observations in audit reports

Answer: d) The borrower pledging additional assets to secure the loan

Explanation: The borrower pledging additional assets does not trigger the bank to exit the account.
Triggers include poor performance, disputes, declining industry trends, and adverse audit findings.

121. What is the typical role of a forensic audit during the corrective action process?

a) To determine the net worth of the borrower’s assets

b) To ensure that no fraud or malfeasance has taken place
c) To finalize the terms of a new loan
d) To increase the collateral requirement
e) To calculate the interest rate for restructuring

Answer: b) To ensure that no fraud or malfeasance has taken place

Explanation: A forensic audit is typically conducted to verify that no fraud or malfeasance has
occurred, especially in cases where there are concerns about financial mismanagement during the
corrective action process.

122. Which of the following is not a sign of financial difficulty as per the non-exhaustive list in the
Resolution of Stressed Assets framework?

a) Excessive leverage
b) Failure to pay statutory liabilities
c) Delayed submission of stock statements
d) Increase in production figures
e) Decline in sales and profit margins

152
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: d) Increase in production figures
Explanation: An increase in production figures is a positive indicator, not a sign of financial difficulty.
Other signs include excessive leverage, failure to pay liabilities, delayed submissions, and a decline in
sales and profits.

123. Which of the following factors can lead to an account being categorized as SMA-0 under the
Special Mention Account (SMA) framework?

a) Overdue by more than 90 days

b) Delay in submission of stock statements by 90 days or more
c) A single event of loan restructuring
d) Multiple requests for loan extensions within 60 days
e) Repayment default by less than 30 days

Answer: b) Delay in submission of stock statements by 90 days or more

Explanation: SMA-0 categorization can occur due to operational delays, such as a delay in the
submission of stock statements for 90 days or more. SMA-0 signals potential early signs of stress but
does not involve overdue repayments.

124. What is the maximum time allowed for initiating recovery measures if a Corrective Action
Plan (CAP) fails?

a) 30 days
b) 60 days
c) 90 days
d) 120 days
e) No fixed timeline

Answer: e) No fixed timeline

Explanation: The framework for the Corrective Action Plan (CAP) does not specify a fixed timeline for
initiating recovery measures if the CAP fails. The Committee is expected to act promptly but there is
no strict time frame provided for this.

125. What is the role of the regional or zonal head of the convener bank in the Committee for
Corrective Action Plan (CAP)?

a) To approve the final restructuring package

b) To oversee the forensic audit process
c) To serve as the Chairperson of the Committee
d) To provide additional financing options
e) To initiate legal proceedings for recovery

Answer: c) To serve as the Chairperson of the Committee

Explanation: The regional or zonal head of the convener bank serves as the Chairperson of the
Committee for Corrective Action Plan (CAP) and leads the decision-making process related to
stressed MSME accounts.

126. What is the purpose of a detailed Techno-Economic Viability (TEV) study in the context of
MSME restructuring?

a) To determine the borrower’s repayment capacity

b) To assess the borrower’s creditworthiness
c) To evaluate the long-term sustainability and viability of the MSME business

153
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
d) To audit the financials of the MSME
e) To determine the interest rate for new financing

Answer: c) To evaluate the long-term sustainability and viability of the MSME business
Explanation: The Techno-Economic Viability (TEV) study assesses the long-term sustainability and
viability of the MSME business before any restructuring plan is finalized.

127. What happens if an MSME does not respond to the Committee’s notice regarding the
Corrective Action Plan?

a) The Committee delays the decision until the MSME responds

b) The MSME account is automatically declared an NPA
c) The Committee proceeds ex-parte and decides without the MSME’s input
d) The Committee cancels the restructuring plan
e) The MSME is given a second notice before further action

Answer: c) The Committee proceeds ex-parte and decides without the MSME’s input
Explanation: If the MSME does not respond to the Committee’s notice, the Committee may proceed
ex-parte and make decisions regarding the Corrective Action Plan without the input of the MSME.

128. Under the SARFAESI Act, which of the following is not required before initiating recovery
measures?

a) The loan must be classified as NPA

b) The borrower must be given a 60-day notice
c) The total amount of debt must be less than ₹1 lakh
d) The charge must be registered with CERSAI
e) The debt must not be time-barred under the Limitation Act

Answer: c) The total amount of debt must be less than ₹1 lakh

Explanation: Under the SARFAESI Act, recovery measures can only be initiated if the total amount of
debt is greater than ₹1 lakh, among other conditions.

129. What is one of the major differences between the Recovery of Debts & Bankruptcy Act (RD&B
Act) and the SARFAESI Act?

a) The SARFAESI Act allows recovery of unsecured loans

b) The RD&B Act applies only to debts of ₹50 lakh and above
c) The SARFAESI Act enables creditors to recover debts without court intervention
d) The RD&B Act mandates government involvement in all debt recoveries
e) The SARFAESI Act does not apply to corporate borrowers

Answer: c) The SARFAESI Act enables creditors to recover debts without court intervention
Explanation: One of the main differences is that the SARFAESI Act allows creditors to recover secured
debts without the need to approach the courts, while the RD&B Act involves a tribunal process for
debt recovery.

130. What is the consequence if a borrower fails to repay the amount after a notice is served under
the SARFAESI Act?

a) The borrower is given an additional 90 days to comply

b) The borrower’s assets are automatically liquidated
c) The secured creditor can take possession of the secured assets

154
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
d) The case is referred to the Debt Recovery Tribunal (DRT)
e) The loan is written off as a loss asset

Answer: c) The secured creditor can take possession of the secured assets
Explanation: If the borrower fails to repay after receiving a notice under the SARFAESI Act, the
secured creditor has the right to take possession of the secured assets for recovery purposes.

131. Under the Corrective Action Plan (CAP), what is the minimum percentage of creditor
agreement required for a decision to proceed with restructuring or recovery?

a) 100% by value
b) 75% by value
c) 50% by value
d) 60% by value
e) 80% by value

Answer: b) 75% by value

Explanation: To proceed with restructuring or recovery under the Corrective Action Plan (CAP), at
least 75% of the creditors by value must agree to the decision.

132. When dealing with stressed MSME accounts, what is one of the key options available under a
Corrective Action Plan?

a) Liquidating all assets immediately

b) Offering additional financing without any conditions
c) Conducting a Techno-Economic Viability (TEV) study to assess restructuring feasibility
d) Reducing the interest rate below the base rate
e) Forgiving all existing debts of the MSME

Answer: c) Conducting a Techno-Economic Viability (TEV) study to assess restructuring feasibility

Explanation: One of the key options available under the Corrective Action Plan (CAP) is conducting a
Techno-Economic Viability (TEV) study to determine whether restructuring the MSME is a viable
option.

133. In which situation can a compromise settlement be offered under the Corrective Action Plan
(CAP)?

a) When the borrower has been declared a wilful defaulter

b) When the borrower has already been liquidated
c) When there is no prospect of recovering the full loan amount through legal recovery
d) When the borrower refuses to engage with the bank
e) When the bank prefers to avoid any legal action

Answer: c) When there is no prospect of recovering the full loan amount through legal recovery
Explanation: A compromise settlement can be offered when the bank determines that recovering
the full loan amount through legal recovery is not feasible, and a negotiated settlement would
maximize recovery.

134. What should be the Committee's approach if multiple warning signs (Early Warning Signals)
are detected in an MSME account?

a) Immediately classify the account as NPA

b) Conduct a forensic audit before taking any action

155
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
c) Refer the account to the Corrective Action Plan (CAP) Committee for review
d) Cancel all outstanding loan facilities without notice
e) File a lawsuit against the borrower

Answer: c) Refer the account to the Corrective Action Plan (CAP) Committee for review
Explanation: When multiple Early Warning Signals are detected in an MSME account, the bank
should refer the account to the Corrective Action Plan (CAP) Committee for review and potential
action.

135. What should be prioritized when considering additional financing under a Corrective Action
Plan?

a) Ensuring that the additional financing is repaid last

b) Providing long-term relief to the borrower
c) Prioritizing the repayment of the additional financing over the existing debt
d) Giving priority to unsecured creditors
e) Offering no repayment prioritization at all

Answer: c) Prioritizing the repayment of the additional financing over the existing debt
Explanation: Additional financing provided under the Corrective Action Plan should be given priority
in repayment over the existing debt to secure the fresh infusion of funds.

136. What is the purpose of the Right of Recompense in the restructuring of MSME accounts?

a) To allow the borrower to repay a reduced amount

b) To enable the bank to recover its sacrifices if the borrower’s financial condition improves
c) To freeze the interest rate for a period of time
d) To give borrowers the right to exit the restructuring plan
e) To provide tax exemptions to the bank

Answer: b) To enable the bank to recover its sacrifices if the borrower’s financial condition improves
Explanation: The Right of Recompense allows the bank to recover any sacrifices made (such as
reduced interest rates or extended repayment terms) if the borrower’s financial condition improves
post-restructuring.

137. What is the role of the Debtor-Creditor Agreement in the restructuring process under CAP?

a) It allows the borrower to waive some of the outstanding debt

b) It serves as the legal basis for the restructuring process
c) It mandates the borrower to sell assets to repay the debt
d) It provides tax relief to the borrower
e) It enables the bank to exit the loan without restructuring

Answer: b) It serves as the legal basis for the restructuring process

Explanation: The Debtor-Creditor Agreement is the legal basis for the restructuring process and
formalizes the terms agreed upon by the borrower and lenders.

138. What should be included in the Techno-Economic Viability (TEV) study when considering
restructuring for MSMEs?

a) A market valuation of the MSME’s assets

b) An assessment of the MSME’s long-term viability
c) A list of the MSME’s legal liabilities

156
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
d) The personal financials of the MSME’s promoters
e) A government-approved financial audit

Answer: b) An assessment of the MSME’s long-term viability

Explanation: The Techno-Economic Viability (TEV) study includes an assessment of the MSME’s long-
term viability and is used to determine whether restructuring is feasible.

139. Under what conditions is a loan classified as a Special Mention Account (SMA-2)?

a) When payments are overdue for more than 30 days

b) When payments are overdue for 60-90 days
c) When payments are overdue for more than 90 days
d) When the borrower has committed fraud
e) When the borrower has filed for bankruptcy

Answer: b) When payments are overdue for 60-90 days

Explanation: A loan is classified as a Special Mention Account (SMA-2) when payments are overdue
for 60-90 days.

140. What is the primary role of the Committee for Corrective Action Plan (CAP) in addressing
stressed MSME accounts?

a) To close all non-performing accounts

b) To restructure only viable accounts while initiating recovery for others
c) To recommend legal action against defaulters
d) To force liquidation of MSME assets
e) To request government intervention for all stressed accounts

Answer: b) To restructure only viable accounts while initiating recovery for others
Explanation: The CAP assesses whether a stressed MSME account is viable for restructuring, and if
not, it initiates recovery measures. The focus is on preserving businesses that can be saved, while
addressing those that cannot through recovery.

141. Which of the following best describes the eligibility criteria for MSME accounts to qualify for
restructuring under the Corrective Action Plan (CAP)?

a) Accounts classified as "loss assets"

b) Accounts that are yet to show signs of stress
c) Accounts classified as SMA-1 or SMA-2
d) Accounts where fraud has been detected
e) Accounts in default for more than three years

Answer: c) Accounts classified as SMA-1 or SMA-2

Explanation: MSME accounts classified as SMA-1 or SMA-2 are eligible for restructuring under the
Corrective Action Plan (CAP), as these classifications indicate early signs of stress before they become
NPAs.

142. What is the significance of the Inter-Creditor Agreement (ICA) in the context of resolving
stressed MSME accounts?

a) It allows individual lenders to independently restructure loans

b) It mandates a uniform restructuring decision across all creditors
c) It gives the government authority to intervene in MSME restructuring

157
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
d) It exempts certain lenders from participating in the recovery process
e) It allows each lender to determine its own recovery strategy

Answer: b) It mandates a uniform restructuring decision across all creditors

Explanation: The Inter-Creditor Agreement (ICA) ensures that all lenders involved in a stressed
MSME account follow a common restructuring or recovery strategy, based on the majority decision
of creditors.

143. When can a wilful defaulter’s MSME account be considered for restructuring under the
Corrective Action Plan?

a) If the borrower pledges new collateral

b) If the borrower has been delinked from the promoters responsible for the default
c) If the borrower agrees to a one-time settlement
d) If the loan is backed by government guarantees
e) If the borrower repays a portion of the outstanding loan

Answer: b) If the borrower has been delinked from the promoters responsible for the default
Explanation: Even a wilful defaulter’s account may be considered for restructuring if the borrower is
no longer associated with the promoters responsible for the default, and the MSME shows potential
for recovery.

144. What is the maximum time allowed for implementing a restructuring plan under the
Corrective Action Plan (CAP)?

a) 30 days
b) 60 days
c) 90 days
d) 120 days
e) 180 days

Answer: c) 90 days
Explanation: The maximum timeline for implementing a restructuring plan under the Corrective
Action Plan (CAP) is 90 days from the date of the first meeting of the CAP Committee.

145. What happens if a borrower under a Corrective Action Plan (CAP) defaults again after
restructuring?

a) The loan is automatically upgraded to a "standard asset"

b) The CAP Committee reviews the account for further restructuring
c) The borrower is given additional time to repay
d) Recovery proceedings are initiated
e) The borrower is allowed to restructure the loan again

Answer: d) Recovery proceedings are initiated

Explanation: If the borrower defaults after restructuring under the CAP, the next step is to initiate
recovery proceedings, as the loan has failed to meet the terms of the restructuring.

146. Under the Corrective Action Plan (CAP), what is the primary purpose of conducting a Techno-
Economic Viability (TEV) study?

a) To calculate the market value of the borrower’s assets

b) To assess the long-term viability of the borrower’s business

158
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
c) To ensure that the borrower can provide additional collateral
d) To evaluate the borrower’s personal financials
e) To estimate the potential recovery from liquidation

Answer: b) To assess the long-term viability of the borrower’s business

Explanation: A Techno-Economic Viability (TEV) study is conducted to evaluate whether the MSME’s
business model is viable in the long term before deciding on restructuring.

147. What should be the Committee’s approach when additional financing is required for
restructuring under the CAP?

a) Prioritize the repayment of existing loans over new financing

b) Provide additional financing without setting any repayment terms
c) Ensure that additional financing has repayment priority over existing loans
d) Delay additional financing until the borrower has repaid a portion of the original loan
e) Provide additional financing only after the MSME shows a profit

Answer: c) Ensure that additional financing has repayment priority over existing loans
Explanation: Any additional financing provided under the CAP must be given repayment priority over
existing loans to protect the new funds and ensure they are repaid first.

148. How is the "right of recompense" applied in MSME restructuring agreements?

a) It allows the borrower to repay only a portion of the outstanding debt

b) It provides the bank the right to recover concessions made during restructuring if the borrower’s
financial condition improves
c) It gives the borrower the right to reduce the interest rate on the restructured loan
d) It forces the lender to forgive part of the outstanding debt
e) It exempts the borrower from repayment in case of bankruptcy

Answer: b) It provides the bank the right to recover concessions made during restructuring if the
borrower’s financial condition improves
Explanation: The "right of recompense" allows the bank to recover any sacrifices (such as reduced
interest rates) if the borrower’s financial condition improves after restructuring.

149. What is the minimum exposure threshold for referring an MSME account to the Committee
for Corrective Action Plan (CAP)?

a) ₹5 lakh
b) ₹10 lakh
c) ₹25 lakh
d) ₹50 lakh
e) ₹1 crore

Answer: b) ₹10 lakh

Explanation: MSME accounts with an aggregate exposure of ₹10 lakh or more must be referred to
the Committee for Corrective Action Plan (CAP) if they show signs of stress.

150. Under what conditions can an additional 30 days be granted for deciding the Corrective
Action Plan (CAP)?

a) If the borrower requests more time to submit financial documents

b) If the Committee is unable to obtain information about the borrower’s statutory dues

159
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
c) If the lender disagrees with the proposed restructuring
d) If the borrower’s assets are undergoing a valuation process
e) If the government mandates an extension for MSME resolution

Answer: b) If the Committee is unable to obtain information about the borrower’s statutory dues
Explanation: If the Committee cannot obtain necessary information about the borrower’s statutory
dues within the prescribed timeline, an additional 30 days can be granted to finalize the CAP.

151. What is the main purpose of the Standstill Clause during the restructuring process under the
CAP?

a) To freeze all interest payments on the loan

b) To allow the borrower to continue operations without making any payments
c) To prevent the borrower from selling assets or securing additional loans without Committee
approval
d) To ensure that the lender can collect overdue payments without delay
e) To provide legal immunity to the borrower during restructuring

Answer: c) To prevent the borrower from selling assets or securing additional loans without

152.Which of the following best describes the exemption provided by SEBI during the restructuring
process under RBI’s regulations?

a) Exemption from filing quarterly reports with SEBI

b) Exemption from regulatory ceilings on capital market exposure
c) Exemption from statutory reporting requirements
d) Exemption from maintaining a minimum debt-to-equity ratio
e) Exemption from obtaining shareholder approval for restructuring

Answer: b) Exemption from regulatory ceilings on capital market exposure

Explanation: SEBI provides exemptions from the regulatory ceilings and restrictions on capital market
exposure during the restructuring process, as per RBI guidelines. This is crucial when debt is
converted into equity.

153.In cases where a fraud or wilful default has been identified, what condition must be met for
restructuring to proceed?

a) The borrower must repay 50% of the outstanding loan

b) The promoters responsible for the default must be replaced
c) The borrower must provide additional collateral
d) A forensic audit must confirm no additional fraud
e) The restructuring must be approved by the borrower’s shareholders

Answer: b) The promoters responsible for the default must be replaced

Explanation: Restructuring can only proceed if the promoters responsible for the fraud or wilful
default are replaced and the company is delinked from the erstwhile promoters.

154.Under the Framework for Revival and Rehabilitation of MSMEs, what action should be taken if
an MSME account is classified as SMA-2?

a) The loan must be classified as an NPA immediately

b) The bank must conduct a forensic audit of the account
c) The account must be referred to the Committee for Corrective Action Plan within five working days

160
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
d) The account should be written off after consultation with RBI
e) The bank must reduce the interest rate on the loan

Answer: c) The account must be referred to the Committee for Corrective Action Plan within five
working days
Explanation: Under the framework, an MSME account classified as SMA-2 must be referred to the
Committee for Corrective Action Plan (CAP) within five working days for resolution.

155.Which of the following actions is mandatory under the Committee for Corrective Action Plan
(CAP) when handling MSME accounts with loan limits above ₹10 lakh?

a) Conversion of debt into equity

b) The Committee must conduct a Techno-Economic Viability (TEV) study
c) Personal guarantees must be waived for all restructuring plans
d) The borrower must provide a corporate guarantee
e) The Committee must automatically write off the debt after 60 days of non-payment

Answer: b) The Committee must conduct a Techno-Economic Viability (TEV) study

Explanation: For MSME accounts with loan limits above ₹10 lakh, the Committee for CAP must
conduct a Techno-Economic Viability (TEV) study to assess the viability of restructuring.

156.If an MSME borrower classified as SMA-2 does not respond to the notice from the Committee
for CAP, what action is the Committee authorized to take?

a) Extend the repayment period by 60 days

b) Proceed with an ex parte decision on the CAP
c) Decrease the interest rate on the loan
d) Write off the loan without further notice
e) Seize the borrower’s assets immediately

Answer: b) Proceed with an ex parte decision on the CAP

Explanation: If the borrower fails to respond to the Committee's notice, the Committee is authorized
to proceed ex parte with a decision on the Corrective Action Plan.

157.What is the primary purpose of the Right of Recompense clause in the restructuring of MSME
loans?

a) To allow the borrower to renegotiate the loan terms at any point

b) To enable the bank to recover sacrifices made if the borrower’s condition improves
c) To automatically convert the loan into a long-term equity stake
d) To protect the borrower from legal action during restructuring
e) To give the borrower the right to reduce the loan interest rate

Answer: b) To enable the bank to recover sacrifices made if the borrower’s condition improves
Explanation: The Right of Recompense clause allows the bank to recover concessions or sacrifices
(such as reduced interest rates) made during the restructuring process if the borrower’s financial
position improves.

158.In cases where an MSME account is classified as SMA-2, what is the timeframe for the
Committee for CAP to implement a restructuring plan if approved?

a) 30 days
b) 45 days

161
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
c) 60 days
d) 90 days
e) 120 days

Answer: d) 90 days
Explanation: If the Committee approves a restructuring plan, it must be implemented within 90 days
from the date of approval.

159.What is the role of an independent expert on the Committee for Corrective Action Plan (CAP)
in resolving MSME stressed accounts?

a) To conduct the forensic audit of the borrower’s accounts

b) To provide expertise in MSME-related matters and advise on the viability of corrective actions
c) To act as a mediator between the borrower and lenders
d) To offer legal counsel to the Committee
e) To provide financial assistance to the borrower

Answer: b) To provide expertise in MSME-related matters and advise on the viability of corrective
actions
Explanation: The independent expert on the Committee brings expertise in MSME-related matters,
helping the Committee assess the viability of the corrective actions proposed.

160.Under the framework for the resolution of stressed MSME advances, what is one of the
eligibility criteria for accounts to undergo restructuring?

a) The account must be classified as NPA for at least 90 days

b) The borrower must be a wilful defaulter
c) The borrower must have provided personal guarantees
d) The account must be classified as Standard, SMA, or Sub-Standard
e) The borrower must have secured assets valued above ₹10 crore

Answer: d) The account must be classified as Standard, SMA, or Sub-Standard

Explanation: The framework specifies that only accounts classified as Standard, SMA, or Sub-
Standard are eligible for restructuring. Wilful defaulters and fraudulent accounts are excluded.

161.Which of the following is an example of a “rectification” action under the Corrective Action
Plan (CAP) framework for MSME accounts?

a) Restructuring the debt by converting it into equity

b) Offering the borrower a new loan to pay off the existing loan
c) Implementing a borrower-driven plan to regularize payments within a set time frame
d) Declaring the account as NPA and initiating legal proceedings
e) Waiving a portion of the outstanding debt as a goodwill gesture

Answer: c) Implementing a borrower-driven plan to regularize payments within a set time frame
Explanation: Under the rectification option, the borrower is expected to submit a concrete proposal
for regularizing the account, which should be supported by identifiable cash flows within a set time
frame.

162.What is the appropriate action for a bank if a borrower’s MSME account is classified as SMA-2,
and the borrower fails to respond to the Committee for Corrective Action Plan (CAP)?

162
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) The bank should immediately classify the loan as NPA
b) The Committee should proceed with the decision ex parte
c) The borrower should be given a 90-day extension
d) The bank should initiate legal recovery against the borrower
e) The loan should be written off automatically

Answer: b) The Committee should proceed with the decision ex parte

Explanation: If the borrower does not respond to the Committee’s notice under the Corrective
Action Plan (CAP), the Committee can proceed ex parte, making a decision without the borrower’s
input.

163.Under the RBI framework, when can a lender invoke the "Right of Recompense" clause in an
MSME restructuring agreement?

a) When the borrower declares bankruptcy

b) When the borrower’s financial condition deteriorates further
c) When the borrower defaults on interest payments again
d) When the borrower’s financial condition improves significantly after restructuring
e) When the borrower sells its assets to another entity

Answer: d) When the borrower’s financial condition improves significantly after restructuring
Explanation: The Right of Recompense allows lenders to recover any concessions made during the
restructuring process if the borrower’s financial situation improves.

164.What action should be taken if an MSME loan with an exposure of ₹15 crore is in SMA-2 status
and the Committee for CAP is unable to obtain statutory dues information from the borrower
within the prescribed timeframe?

a) The loan should be downgraded to NPA

b) The Committee should proceed with an additional 30-day extension
c) The loan should be referred to an Asset Reconstruction Company (ARC)
d) The borrower should be asked to provide collateral within 10 days
e) The Committee should initiate legal proceedings

Answer: b) The Committee should proceed with an additional 30-day extension

Explanation: The Committee can extend the decision-making process by an additional 30 days if
statutory dues information is not available, but the total delay cannot exceed this extension period.

165.Which of the following is required for a restructuring plan to be implemented for MSMEs
under the Corrective Action Plan (CAP)?

a) Approval by the lead bank and 50% of the consortium members by number
b) At least 75% agreement by value and 50% by number of creditors
c) Unanimous approval from all consortium members
d) Consent of the borrower only
e) Restructuring plan review by an independent credit agency

Answer: b) At least 75% agreement by value and 50% by number of creditors

Explanation: Under the CAP framework, restructuring plans for MSMEs can be implemented if 75%
of the creditors by value and 50% by number agree.

166.When restructuring a large MSME loan involving multiple banks, what condition is required for
an MSME to retain its standard asset classification?

163
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) The borrower must repay at least 50% of the outstanding loan amount
b) The loan must be restructured within 90 days from the review period
c) A Techno-Economic Viability (TEV) study must confirm long-term sustainability
d) The borrower must provide personal guarantees
e) The restructuring plan must be approved by the RBI

Answer: c) A Techno-Economic Viability (TEV) study must confirm long-term sustainability

Explanation: A TEV study is necessary to determine the MSME’s long-term sustainability, and if the
study supports viability, the asset can retain its standard classification.

167.In the event that a borrower has been declared a wilful defaulter, what is a key condition
under which restructuring of the loan may still proceed?

a) The borrower must pay at least 25% of the outstanding debt

b) The borrower’s management responsible for the default must be replaced
c) The loan must be downgraded to a loss asset
d) The borrower must agree to provide equity in the company
e) The borrower’s cash flow must exceed the outstanding debt

Answer: b) The borrower’s management responsible for the default must be replaced
Explanation: Restructuring can only proceed for wilful defaulters if the management responsible for
the default is replaced and the borrower is fully delinked from the promoters responsible for the
default.

168.Under RBI’s framework for the resolution of stressed assets, what happens if a restructuring
plan is not implemented within the stipulated 180 days from the end of the Review Period?

a) The borrower is allowed another 180 days to comply

b) The bank must make an additional provision of 20%
c) The loan is automatically written off
d) The borrower’s account is downgraded to “loss asset”
e) The loan remains as a standard asset but requires approval from RBI

Answer: b) The bank must make an additional provision of 20%

Explanation: If a restructuring plan is not implemented within 180 days, banks are required to make
an additional provisioning of 20% to reflect the delay in resolution.

169.Which of the following accounts would NOT be eligible for restructuring under the MSME
Corrective Action Plan (CAP)?

a) Accounts classified as SMA-2

b) Accounts where fraud has been detected
c) Accounts with an exposure above ₹5 crore
d) Accounts with exposure below ₹10 lakh
e) Accounts that have been standard for more than five years

Answer: b) Accounts where fraud has been detected

Explanation: Accounts where fraud has been detected are not eligible for restructuring under the
MSME CAP, as restructuring is intended for viable accounts that are experiencing stress.

170.In a consortium lending arrangement, what should happen if the largest lender, holding 40%
of the exposure, opposes a proposed restructuring plan while the remaining consortium members
support it?

164
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) The restructuring plan cannot proceed unless the largest lender agrees
b) The restructuring plan can proceed if 75% of creditors by value agree
c) The loan must be downgraded to an NPA
d) The borrower must repay 25% of the loan before restructuring
e) The restructuring plan should be referred to the RBI for final approval

Answer: b) The restructuring plan can proceed if 75% of creditors by value agree
Explanation: If 75% of the creditors by value agree to the restructuring plan, it can proceed even if
the largest lender opposes it, as per the Inter-Creditor Agreement (ICA).

171.What is the priority of additional financing provided under the Corrective Action Plan (CAP) for
MSME restructuring?

a) Equal priority with existing debt

b) Lower priority than secured debt
c) Higher priority than the repayment of existing debt
d) Only repayable after the company becomes profitable
e) No special priority is given to additional financing

Answer: c) Higher priority than the repayment of existing debt

Explanation: Additional financing provided under restructuring is given higher priority over the
repayment of existing debt to ensure the success of the fresh infusion of funds.

172.What is the timeline for implementing the Corrective Action Plan (CAP) for an MSME once the
Committee has approved a restructuring plan?

a) 30 days
b) 45 days
c) 60 days
d) 90 days
e) 120 days

Answer: d) 90 days
Explanation: The Committee must implement the approved Corrective Action Plan (CAP) within 90
days to ensure timely resolution of stressed assets.

173. What is the purpose of the Inter-Creditor Agreement (ICA) in the restructuring process for
MSMEs?

a) To ensure that the government is involved in the restructuring

b) To provide a mechanism for setting interest rates during restructuring
c) To bind all lenders to a common restructuring or recovery plan
d) To allow each lender to individually decide on the restructuring plan
e) To increase the provisioning requirements for lenders

Answer: c) To bind all lenders to a common restructuring or recovery plan

Explanation: The Inter-Creditor Agreement (ICA) ensures that all lenders are bound by the decisions
of the Committee regarding the restructuring or recovery plan for MSMEs.

174. When restructuring an MSME loan, what is the general principle regarding stakeholder losses?

a) The lenders bear the first loss

b) The promoters bear the first loss

165
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
c) The government bears the first loss
d) The borrowers bear no loss
e) The creditors are exempt from any losses

Answer: b) The promoters bear the first loss

Explanation: In the restructuring of MSME loans, the general principle is that the promoters bear the
first loss rather than the lenders.

Question 1: SEBI Regulations on Debt-to-Equity Conversion

Under SEBI regulations for debt-to-equity conversions, what is the lower threshold for the pricing of
equity shares during a restructuring process?

a) The average of the last 26 weeks’ high and low prices

b) The average of the last 52 weeks’ high and low prices
c) The book value adjusted from the latest audited balance sheet
d) The weighted average price over the past 10 trading days
e) The highest price from the past 12 months

Answer: c) The book value adjusted from the latest audited balance sheet
Explanation: Under SEBI ICDR Regulations, the issue price of equity during restructuring is the lower
of either the average of the weekly high and low prices over the last 26 weeks or the book value
from the most recent audited balance sheet.

Question 2: RBI Prudential Norms Exemption for Restructuring

Which of the following is a key exemption provided by RBI for the conversion of debt into equity or
non-SLR securities during restructuring?

a) Waiver of provisioning norms for restructured assets

b) Exemption from classification of the asset as NPA
c) Exemption from restrictions on investment in unlisted non-SLR securities
d) Exemption from reporting the restructuring to the RBI
e) Exemption from audit requirements during restructuring

Answer: c) Exemption from restrictions on investment in unlisted non-SLR securities

Explanation: RBI provides an exemption from the prudential limit on investment in unlisted non-SLR
securities when debt is converted to equity as part of a restructuring process.

Question 3: Corrective Action Plan (CAP) for MSMEs

When an MSME is classified as SMA-2, what is the mandatory action that must be taken by the bank
within five working days?

a) Classify the loan as an NPA

b) Forward the account to the Committee for Corrective Action Plan (CAP)
c) Initiate legal recovery actions
d) Restructure the loan without Committee involvement
e) Transfer the account to an Asset Reconstruction Company (ARC)

Answer: b) Forward the account to the Committee for Corrective Action Plan (CAP)
Explanation: For MSME accounts classified as SMA-2, it is mandatory for the bank to refer the case

166
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
to the Committee for Corrective Action Plan (CAP) within five working days for evaluation and
resolution.

Question 4: Committee Composition for Corrective Action Plan (CAP)

In the context of the Committee for Corrective Action Plan for stressed MSMEs, which of the
following is not typically a member of the Committee?

a) Regional or Zonal Head of the convener bank

b) Officer-in-charge of the MSME Credit Department
c) External expert with MSME expertise
d) A representative from the Ministry of Finance
e) Senior representatives from all consortium lenders

Answer: d) A representative from the Ministry of Finance

Explanation: The typical members of the Committee for Corrective Action Plan include the
Regional/Zonal Head, Officer-in-charge of the MSME Credit Department, an external MSME expert,
and representatives from the State Government or consortium lenders.

Question 5: Corrective Action Plan Implementation Timeline

What is the maximum timeline for the Committee for Corrective Action Plan (CAP) to implement a
restructuring plan for MSME accounts with an aggregate exposure above ₹10 crore?

a) 30 days
b) 60 days
c) 90 days
d) 120 days
e) 150 days

Answer: c) 90 days
Explanation: The Committee must implement the restructuring plan within 90 days for MSME
accounts with an aggregate exposure above ₹10 crore.

Question 6: Standstill Clause in Debtor-Creditor Agreements

What is the purpose of the "Standstill Clause" in Debtor-Creditor Agreements during the
restructuring of MSMEs?

a) To stop all payments by the borrower during restructuring negotiations

b) To prevent the borrower from making any asset sales or significant transactions without
Committee approval
c) To exempt the borrower from repaying any existing loans during the CAP process
d) To halt interest accrual during the restructuring period
e) To suspend legal actions from lenders during the CAP process

Answer: b) To prevent the borrower from making any asset sales or significant transactions without
Committee approval
Explanation: The Standstill Clause ensures that the borrower does not undertake any transactions
that could alienate assets or affect the security without Committee approval during the restructuring.

Question 7: Eligibility for MSME Restructuring

167
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Which of the following MSME accounts is eligible for restructuring under the Corrective Action Plan
(CAP)?

a) Accounts declared as wilful default without any rectification by the borrower

b) Fraudulent accounts with no changes in management
c) Accounts classified as Sub-Standard with support from the majority of lenders
d) Loss assets without any collateral
e) Accounts where promoters have refused to offer personal guarantees

Answer: c) Accounts classified as Sub-Standard with support from the majority of lenders
Explanation: MSME accounts classified as Standard, Special Mention Account (SMA), or Sub-
Standard are eligible for restructuring, provided the borrower is not a wilful defaulter or involved in
fraud.

Question 8: Corrective Action Plan Failure

If an MSME account fails to perform as per the terms agreed under the Corrective Action Plan (CAP),
what should the Committee do next?

a) Extend the CAP by another six months

b) Offer additional financing with more favorable terms
c) Proceed with recovery measures according to the bank’s approved policy
d) Automatically convert the loan into equity
e) Waive the borrower’s obligations under the CAP

Answer: c) Proceed with recovery measures according to the bank’s approved policy
Explanation: If the MSME fails to meet the CAP’s terms, the Committee must initiate recovery
actions as per the bank’s approved policy.

Question 9: Techno-Economic Viability (TEV) Study Requirement

When must the Committee conduct a Techno-Economic Viability (TEV) study for MSME accounts
being considered for restructuring?

a) For accounts with any loan exposure

b) Only for accounts classified as NPA
c) For accounts with aggregate exposure of ₹10 crore and above
d) Only for accounts with fraud allegations
e) For accounts with exposure above ₹25 crore

Answer: c) For accounts with aggregate exposure of ₹10 crore and above
Explanation: A detailed Techno-Economic Viability (TEV) study is mandatory for MSME accounts with
an aggregate exposure of ₹10 crore and above before finalizing a restructuring plan.

Question 10: Priority of Repayment for Additional Financing

In a restructuring plan under the Corrective Action Plan (CAP), what is the priority of repayment for
additional financing provided to MSMEs?

a) It is repaid only after the full repayment of existing debt

b) It is given lower priority than existing secured loans
c) It has equal priority with existing loans
d) It is given higher priority over existing debt
e) It is forgiven in the event of the borrower’s default

168
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: d) It is given higher priority over existing debt
Explanation: Additional financing provided under the Corrective Action Plan (CAP) is given higher
repayment priority than existing debt to secure the fresh funds.

Case Study 11: Loan for a Power Project

A bank has sanctioned a ₹200 crore loan to a power generation company for setting up a solar power
plant. The project is considered in the infrastructure sector. Due to delays in obtaining environmental
clearances, the project has been delayed by two years. The bank extended the DCCO (Date of
Commencement of Commercial Operations) twice. The borrower now faces additional delays of one
year due to court cases challenging the environmental clearances. The bank is reviewing its options
for asset classification and provisioning.

What should the bank do next to handle this situation?

a) The loan should be immediately classified as NPA

b) Extend the DCCO by another two years and retain the standard classification
c) Classify the loan as “Doubtful Asset” and make 50% provisioning
d) Extend the DCCO by one more year and retain the standard classification
e) Write off the loan and recover the collateral

Answer: d) Extend the DCCO by one more year and retain the standard classification
Explanation: For infrastructure projects involving court cases, banks can extend the DCCO by up to
four years from the original DCCO. Since the project already faced a two-year delay, the bank can
extend it by one more year while retaining the standard classification.

Case Study 12: Retail Loan Mismanagement

A bank has extended a retail loan of ₹15 lakh to a borrower for purchasing a residential property.
However, the borrower has defaulted on three consecutive payments due to financial
mismanagement. The bank’s internal reports show that the borrower diverted the loan amount for
speculative investments in the stock market. The account is now showing signs of stress and has
been classified as SMA-2.

What should be the bank's next step?

a) Restructure the loan to make repayment easier for the borrower

b) Upgrade the loan to standard classification upon partial repayment
c) Report the borrower to CRILC and downgrade the loan to NPA after 90 days
d) Waive the overdue interest to bring the borrower back on track
e) Extend the loan tenure by five more years

Answer: c) Report the borrower to CRILC and downgrade the loan to NPA after 90 days
Explanation: Since the loan is already classified as SMA-2 (overdue for 61-90 days), the bank must
report the loan to CRILC and downgrade it to NPA if the overdue period exceeds 90 days. The
diversion of funds also suggests a need for stricter recovery measures.

Case Study 13: Restructuring of a Corporate Loan

A manufacturing company has a ₹100 crore term loan from a bank. The company’s cash flow
projections were overly optimistic, and it is now facing liquidity issues due to a market downturn.
The loan is overdue, but the company is still operational and has requested a restructuring of the

169
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
loan under the Prudential Framework for Resolution of Stressed Assets. The borrower has offered a
revised cash flow projection and a new repayment plan, and the bank is considering this request.

What should the bank do to proceed with the restructuring?

a) Approve the restructuring and upgrade the asset to "Standard"

b) Approve the restructuring and immediately classify the asset as "Sub-standard"
c) Reject the restructuring request and classify the loan as a “Loss Asset”
d) Require the borrower to repay at least 50% of the principal before restructuring
e) Grant a moratorium on interest payments for two years and retain the standard classification

Answer: b) Approve the restructuring and immediately classify the asset as "Sub-standard"
Explanation: As per RBI guidelines, any loan that is restructured must be immediately downgraded to
"Sub-standard." The bank can proceed with the restructuring if it deems the borrower’s revised cash
flow projection viable, but the asset classification must be downgraded.

Case Study 14: Wilful Default in a Large Loan

A bank has sanctioned a term loan of ₹250 crore to a large steel manufacturing company. Despite the
company having sufficient cash flow, it has failed to service its loan repayments for the last six
months. Upon investigation, the bank finds that the company has deliberately defaulted on its
payments while diverting funds to unrelated projects. The bank has classified the loan as NPA and is
considering its next steps.

What should the bank do to resolve this case of wilful default?

a) File for restructuring under the Insolvency and Bankruptcy Code (IBC)
b) Classify the loan as "Loss Asset" and write it off
c) Initiate recovery proceedings and report the borrower to RBI as a wilful defaulter
d) Grant the company a six-month moratorium to help it recover
e) Seek an extension of the repayment period and downgrade the loan to sub-standard

Answer: c) Initiate recovery proceedings and report the borrower to RBI as a wilful defaulter
Explanation: Since this is a clear case of wilful default (intentional non-repayment despite sufficient
cash flow), the bank must report the borrower to the RBI as a wilful defaulter and initiate recovery
proceedings. The classification as an NPA is appropriate, and further measures should be taken to
recover the loan.

Case Study 15: Project Loan in the Real Estate Sector

A bank has sanctioned a project loan of ₹500 crore for the construction of a commercial real estate
property. Due to unforeseen regulatory changes in the real estate market, the project has been
delayed by 18 months. The bank had initially set the DCCO at three years from the loan sanction
date. The borrower is now requesting an extension in the repayment schedule and a rescheduling of
the DCCO.

What should the bank consider while restructuring the project loan?

a) Extend the DCCO by an additional year and retain the "Standard Asset" classification
b) Restructure the loan and immediately classify it as "Sub-standard"
c) Classify the loan as "Loss Asset" due to delays in the project
d) Reject the borrower’s request and initiate recovery measures
e) Convert the loan into an overdraft facility for operational flexibility

170
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: a) Extend the DCCO by an additional year and retain the "Standard Asset" classification
Explanation: For commercial real estate (CRE) projects, the DCCO can be extended by up to one year
beyond the originally sanctioned DCCO, allowing the loan to retain its standard classification,
provided all other terms are met.

Case Study 16: SME Loan with Default History

A small manufacturing enterprise (SME) has taken a working capital loan of ₹5 crore from a bank.
The SME has been facing financial difficulties and has defaulted on payments twice in the last year.
The account has been classified as SMA-2 due to delays in servicing the loan. The borrower is now
requesting a one-time settlement (OTS) with a 30% reduction in the outstanding principal.

What should the bank do in this scenario?

a) Reject the OTS proposal and downgrade the account to NPA

b) Approve the OTS and retain the loan as a standard asset
c) Approve the OTS, but classify the account as "Loss Asset"
d) Accept the OTS proposal and immediately upgrade the account to "Standard"
e) Reject the OTS proposal and offer a loan restructuring plan

Answer: a) Reject the OTS proposal and downgrade the account to NPA
Explanation: Since the loan has already been classified as SMA-2 due to multiple defaults, the bank
should reject an OTS proposal that involves a 30% reduction in principal, as this would result in a
significant loss. The account should be downgraded to NPA after 90 days if the default continues.

Case Study 17: Stressed Assets Recovery Department

A large public sector bank has a specialized Stressed Assets Recovery Department (SARD) that deals
with high-value NPAs. The department has been tasked with recovering ₹500 crore from a major
defaulting borrower in the steel industry. After initial negotiations, the borrower has offered to settle
the outstanding amount by selling off some non-core assets and paying 50% of the outstanding
principal upfront.

What should the bank do to maximize recovery in this situation?

a) Accept the borrower’s proposal and settle for 50% of the outstanding principal
b) Reject the proposal and initiate liquidation proceedings
c) Require the borrower to sell all assets and repay 100% of the principal before settlement
d) Accept the proposal but require the borrower to sign an additional repayment agreement for the
remaining principal
e) Extend the loan tenure and offer a moratorium on interest

Answer: d) Accept the proposal but require the borrower to sign an additional repayment agreement
for the remaining principal
Explanation: To maximize recovery, the bank should accept the borrower’s offer of paying 50%
upfront but also require a legally binding agreement for the repayment of the remaining principal.
This approach secures partial recovery and ensures future repayments.

Case Study 18: Loan Recovery from a Large Corporate Borrower

A large corporate borrower with an exposure of ₹1,200 crore has defaulted on interest payments for
the last six months. The borrower has cited a global supply chain disruption and a sharp decline in

171
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
revenue. The loan is classified as SMA-2, and the borrower has proposed restructuring the loan with
a moratorium on interest payments for 12 months. The borrower’s cash flow projections are
optimistic but highly dependent on market recovery, and the bank is considering its options under
the Prudential Framework for Resolution of Stressed Assets.

What should the bank’s next step be?

a) Approve the restructuring request and retain the loan as a "standard" asset
b) Reject the restructuring request and downgrade the loan to "sub-standard" immediately
c) Approve the restructuring, classify the loan as "sub-standard," and require independent credit
evaluation (ICE)
d) Classify the loan as "doubtful" and initiate recovery proceedings
e) Initiate liquidation proceedings under IBC (Insolvency and Bankruptcy Code)

Answer: c) Approve the restructuring, classify the loan as "sub-standard," and require independent
credit evaluation (ICE)
Explanation: Under the Prudential Framework, restructuring requests from borrowers with
significant exposure (₹1,200 crore) must be reviewed carefully. If the restructuring plan is approved,
the loan must be classified as "sub-standard." Additionally, for exposures above ₹100 crore, an
Independent Credit Evaluation (ICE) by a Credit Rating Agency is mandatory.

Case Study 19: Cross-Border Borrower Defaults

A multinational corporation (MNC) based in India has taken a loan of ₹500 crore from an Indian bank
to finance its Indian operations. Due to currency fluctuations and the impact of global trade wars, the
MNC has experienced significant losses in its foreign subsidiaries. The Indian operation is still
profitable, but the company is diverting its domestic profits to cover foreign losses. The bank’s credit
department has detected this diversion and is reviewing the asset classification and recovery
options.

What should the bank do in this situation?

a) Allow the borrower to continue operations and focus on foreign subsidiaries

b) Reclassify the loan as an NPA due to the diversion of funds
c) Issue a notice of default and initiate legal proceedings against the borrower
d) Seek a comprehensive restructuring plan from the borrower
e) Monitor the borrower’s financials and defer any action for six months

Answer: b) Reclassify the loan as an NPA due to the diversion of funds

Explanation: Diversion of funds, even if the Indian operation is profitable, is a violation of the loan
agreement. The bank should reclassify the loan as an NPA and initiate recovery measures. Diversion
of funds is a serious red flag that warrants immediate action.

Case Study 20: Infrastructure Loan for a Highway Project

A bank has extended a ₹700 crore loan to a company for constructing a national highway. The project
is part of a public-private partnership (PPP) model with a concession agreement for 25 years. Due to
land acquisition issues, the project has been delayed by 18 months, and the borrower has requested
an extension of the DCCO by another 12 months. The company has made partial payments, and the
project is expected to generate steady cash flows once operational.

How should the bank proceed with the classification and restructuring of the loan?

172
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) Extend the DCCO by another 12 months and retain the loan as "standard"
b) Extend the DCCO but downgrade the loan to "sub-standard"
c) Classify the loan as "doubtful" and make 50% provisioning
d) Reject the extension request and classify the loan as an NPA
e) Approve the extension and offer additional funding to complete the project

Answer: a) Extend the DCCO by another 12 months and retain the loan as "standard"
Explanation: For infrastructure projects, the DCCO can be extended by up to two years (including any
previous extensions) from the original date, allowing the loan to retain its "standard" classification,
provided all other terms and conditions are met.

Case Study 21: Loan Syndication for a Real Estate Development

A real estate company has borrowed ₹1,000 crore through a syndicated loan from five banks for the
development of a commercial project. The project has faced delays due to regulatory changes, and
the borrower has requested a restructuring of the loan. Two of the banks in the syndicate agree to
the restructuring, while the other three banks are against it. The lead bank is now responsible for
deciding the way forward.

What should the lead bank do next?

a) Proceed with restructuring as the lead bank has the final say
b) Follow the majority decision of the syndicate and reject the restructuring request
c) Escalate the matter to the RBI for a final decision
d) Require all consortium members to follow its decision and restructure the loan
e) Offer an OTS (One Time Settlement) to resolve the issue

Answer: b) Follow the majority decision of the syndicate and reject the restructuring request
Explanation: In syndicated loans, decisions on restructuring or any significant changes must be made
by a majority of the consortium members. Since three out of five banks are against the restructuring,
the lead bank must follow the majority decision and reject the restructuring request.

Case Study 22: Resolution through Insolvency and Bankruptcy Code (IBC)

A large manufacturing company with ₹2,000 crore in debt has defaulted on multiple loans, and the
lenders have initiated insolvency proceedings under the IBC. A resolution professional (RP) has been
appointed, and the creditors’ committee is reviewing bids from several investors interested in
acquiring the company’s assets. One of the bids offers to repay 40% of the outstanding debt upfront,
with a plan to turn the company profitable in the next five years.

What should the creditors’ committee consider while evaluating this bid?

a) Accept the bid as it offers immediate repayment of 40%

b) Reject the bid and proceed with liquidation to recover more
c) Negotiate with the bidder to increase the repayment amount
d) Approve the bid only if the company agrees to repay 100% of the debt over five years
e) Extend the bidding process to attract more investors

Answer: c) Negotiate with the bidder to increase the repayment amount

Explanation: The creditors’ committee should negotiate with the bidder to maximize recovery. While

173
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
40% upfront repayment is attractive, the committee should explore whether the bidder can increase
the repayment amount to ensure better recovery for the lenders.

Case Study 23: SME Working Capital Loan

A small manufacturing company has taken a working capital loan of ₹10 crore from a bank. Due to
economic slowdown, the company has defaulted on several payments, and the loan has been
classified as SMA-2. The borrower has proposed a restructuring plan, offering additional personal
guarantees and reducing its working capital requirements by scaling down production. The bank’s
internal credit team has concerns about the long-term viability of the business, but the borrower has
shown commitment to repayment.

How should the bank handle the restructuring request?

a) Approve the restructuring and retain the loan as "standard"

b) Reject the restructuring and classify the loan as "sub-standard"
c) Approve the restructuring but downgrade the loan to "sub-standard"
d) Reject the restructuring and initiate recovery proceedings
e) Offer a one-time settlement (OTS) with a significant reduction in principal

Answer: c) Approve the restructuring but downgrade the loan to "sub-standard"

Explanation: The bank can approve the restructuring request but must classify the loan as "sub-
standard" immediately as per RBI guidelines. Restructuring of SMA-2 loans requires asset
downgrading even if the borrower shows commitment to repayment.

Case Study 24: Fraudulent Borrowing by a Corporate Entity

A corporate entity in the hospitality sector has borrowed ₹500 crore from a bank for the construction
of a resort. Upon investigation, the bank finds that the borrower has inflated the project costs and
diverted funds to personal accounts. The borrower has failed to make any payments, and the bank is
considering the appropriate course of action for recovery.

What should the bank do to handle this situation?

a) Classify the loan as an NPA and initiate recovery proceedings

b) Report the borrower to the RBI and initiate forensic audit
c) Offer the borrower a restructuring plan to ensure future repayments
d) Write off the loan and recover the collateral
e) Liquidate the borrower’s assets under the Securitization and Reconstruction of Financial Assets
and Enforcement of Security Interest (SARFAESI) Act

Answer: b) Report the borrower to the RBI and initiate forensic audit
Explanation: In cases of fraud, the bank must report the borrower to the RBI and initiate a forensic
audit to investigate the diversion of funds and potential fraudulent activity. This would allow the
bank to pursue legal action and ensure recovery of misappropriated funds.

Case Study 25: Agricultural Loan Recovery (Continued)

A farmer has taken a loan of ₹2 crore for cultivating a long-duration crop. The farmer has
experienced two consecutive crop failures due to natural calamities and has been unable to repay

174
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
the loan. The bank had initially classified the loan as SMA-1, but the overdue period has now crossed
180 days. The farmer has requested additional time for repayment, citing an expected bumper
harvest in the next season.

How should the bank proceed with the classification and recovery of the loan?

a) Extend the repayment period by another year and retain the loan as standard
b) Classify the loan as NPA and initiate recovery proceedings
c) Grant the farmer a restructuring plan and classify the loan as sub-standard
d) Convert the loan into a working capital loan for the next crop season
e) Waive the interest for the previous two years and retain the loan as a standard asset

Answer: c) Grant the farmer a restructuring plan and classify the loan as sub-standard
Explanation: Given the loan has been overdue for more than 180 days and involves long-duration
crops, the bank can offer a restructuring plan. However, as per RBI guidelines, the loan must be
classified as "sub-standard" immediately after restructuring. This allows the farmer to manage
repayment, while the bank accounts for the delayed recovery.

Case Study 26: Trade Finance Default

A bank has extended trade finance to an export company amounting to ₹50 crore. The company has
failed to ship its goods on time due to port strikes and has defaulted on repayments for over 120
days. The company has requested an extension in repayment, claiming that once the goods are
shipped, they will have sufficient funds to repay the loan. The bank is now assessing its options for
recovering the overdue amount.

What should the bank do next?

a) Classify the loan as NPA and initiate legal proceedings

b) Grant the company a six-month extension and retain the loan as standard
c) Approve the request but downgrade the loan to sub-standard
d) Seek government intervention to resolve the port strikes and extend the loan tenure
e) Convert the trade finance loan into a long-term loan with a higher interest rate

Answer: c) Approve the request but downgrade the loan to sub-standard

Explanation: While the bank may consider granting the export company an extension, the loan must
be classified as "sub-standard" after 90 days of non-payment as per RBI norms. The bank can offer
flexibility, but the overdue period triggers a downgrade.

Case Study 27: Resolution of Stressed Assets via One-Time Settlement (OTS)

A bank has an exposure of ₹800 crore to a textile manufacturing company that has been under
financial stress for over a year. The company has defaulted on several payments, and the loan is now
classified as NPA. The company has proposed a One-Time Settlement (OTS) of ₹600 crore to the
bank, offering immediate payment. The bank’s internal audit team has estimated that the market
value of the company’s assets is close to ₹550 crore.

How should the bank proceed with this proposal?

175
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) Accept the OTS offer and settle for ₹600 crore
b) Reject the OTS offer and initiate liquidation proceedings
c) Negotiate with the company to increase the OTS amount to at least ₹700 crore
d) Convert the loan into equity and become a shareholder in the company
e) Accept the OTS offer but require the company to pay an additional 10% in the next financial year

Answer: c) Negotiate with the company to increase the OTS amount to at least ₹700 crore
Explanation: While the OTS offer of ₹600 crore is higher than the estimated market value of the
company’s assets, the bank should aim to maximize its recovery by negotiating for a higher
settlement. Since the company is willing to settle, there may be room to increase the offer and
secure a better financial outcome for the bank.

Case Study 28: Loan Syndication in a Cross-Border Project

A consortium of banks has financed an international project in the oil and gas sector, with a total
exposure of ₹1,500 crore. The project has encountered regulatory delays in the host country, causing
significant cost overruns. The borrower has requested a restructuring plan, and one of the
consortium banks, with a 30% exposure, has already classified the loan as NPA due to its internal
asset classification norms. The lead bank is reviewing its options.

What should the lead bank do to proceed with the restructuring?

a) Classify the loan as an NPA across the entire consortium

b) Negotiate with the borrower to ensure a partial repayment of at least 40% before restructuring
c) Seek approval from all consortium members for a uniform asset classification
d) Proceed with the restructuring and retain the loan as a standard asset if agreed by the majority
e) Offer a moratorium on interest payments for two years and downgrade the loan to sub-standard

Answer: c) Seek approval from all consortium members for a uniform asset classification
Explanation: In syndicated loans, asset classification decisions should be uniform across the
consortium to ensure consistent treatment of the borrower. The lead bank must seek approval from
all consortium members for the restructuring, and a majority decision should be followed.

Case Study 29: NPA Recovery in the Healthcare Sector

A hospital chain has defaulted on a ₹400 crore term loan taken from a bank for the expansion of its
facilities. The loan was classified as NPA 180 days ago, and the hospital is struggling to generate
sufficient cash flow due to a decline in patient inflows. The hospital has offered to sell off one of its
major assets (a diagnostic center) to repay ₹150 crore upfront, with the remaining amount to be
repaid over five years.

What should the bank consider while evaluating this proposal?

a) Accept the proposal and downgrade the loan to sub-standard

b) Reject the proposal and initiate asset liquidation
c) Accept the proposal but require an additional repayment guarantee from the hospital
d) Classify the loan as "Loss Asset" and seek immediate recovery of the full amount
e) Offer a restructuring plan to reduce the loan size and extend the repayment tenure

176
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: c) Accept the proposal but require an additional repayment guarantee from the hospital
Explanation: The bank should consider accepting the hospital’s proposal for partial repayment, but it
should also secure an additional repayment guarantee for the remaining amount to safeguard
against further default. This ensures that the bank maximizes its recovery while allowing the hospital
to continue operations.

Case Study 30: SME Borrower with Multiple Defaults

A small and medium enterprise (SME) has a working capital loan of ₹20 crore with a bank. The SME
has defaulted multiple times in the past year due to market volatility. The account is now classified as
SMA-2. The borrower has requested a restructuring plan with an extension of the repayment
schedule by 18 months, along with a reduction in interest rates. The bank’s internal risk assessment
has flagged the borrower as high-risk due to its inconsistent cash flow.

What should the bank do to proceed with the borrower’s request?

a) Reject the restructuring request and classify the loan as NPA

b) Approve the restructuring but increase the interest rate to account for the risk
c) Approve the restructuring and classify the loan as sub-standard
d) Offer the borrower a One-Time Settlement (OTS) instead of restructuring
e) Accept the request but downgrade the loan to a loss asset

Answer: c) Approve the restructuring and classify the loan as sub-standard

Explanation: The bank may approve the restructuring plan to provide the SME with some relief, but
as per RBI guidelines, the loan must be classified as sub-standard due to the high-risk nature of the
borrower and the restructuring request.

Case Study 31: MSME Restructuring under CAP

A mid-sized manufacturing MSME has a total loan exposure of ₹20 crore from a consortium of three
banks. The MSME has been struggling due to sector-wide slowdowns and missed payments,
classifying the account as SMA-2. The company approached the largest lender, which holds a 40%
exposure, to request a restructuring under the Corrective Action Plan (CAP). The borrower has
provided a detailed restructuring proposal, including personal guarantees from the promoters and a
plan for reducing operational expenses by 20%. The lead bank’s credit committee is now reviewing
the proposal.

What should the lead bank consider as the next step?

a) The restructuring request can only proceed with 100% consent from all consortium members
b) The loan must be classified as an NPA regardless of the restructuring proposal
c) The proposal should be rejected since personal guarantees do not suffice for restructuring
d) The lead bank should assess the proposal, and with 75% agreement by value and 50% by number
of lenders, it can proceed with restructuring
e) The borrower must provide additional collateral for the restructuring to be considered

Answer: d) The lead bank should assess the proposal, and with 75% agreement by value and 50% by
number of lenders, it can proceed with restructuring
Explanation: Under the Inter-Creditor Agreement (ICA), if 75% of lenders by value and 50% by

177
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
number agree to the restructuring, it becomes binding on all lenders in the consortium. Personal
guarantees and operational changes are positive, but do not necessarily negate the need for other
restructuring measures.

Case Study 32: Right of Recompense in MSME Restructuring

A bank has restructured an MSME loan for a borrower with ₹15 crore in outstanding debt, reducing
the interest rate and providing additional financing of ₹5 crore. The restructuring package includes a
Right of Recompense clause. Six months after the restructuring, the MSME has begun generating
significant profits and is now in a much stronger financial position than anticipated.

How should the bank proceed under the Right of Recompense clause?

a) The bank should waive the Right of Recompense since the MSME is profitable
b) The bank should require the borrower to repay the additional financing only
c) The bank should invoke the Right of Recompense to recover the sacrifices made during
restructuring
d) The bank should restructure the loan again to offer more favorable terms
e) The bank should convert the outstanding debt into equity

Answer: c) The bank should invoke the Right of Recompense to recover the sacrifices made during
restructuring
Explanation: The Right of Recompense allows the bank to recover any sacrifices made during the
restructuring, such as reduced interest rates or other concessions, if the borrower’s financial position
improves significantly.

Case Study 33: Forensic Audit in MSME Recovery

An MSME borrower has an exposure of ₹30 crore across multiple banks and has defaulted on its
obligations. The account has been classified as SMA-2, and there are concerns among the lenders
about possible misuse of funds. The lead bank in the consortium has suggested conducting a forensic
audit before proceeding with restructuring or recovery. The borrower denies any wrongdoing and
opposes the audit.

What should the banks do next?

a) Proceed with restructuring based on the borrower’s denial of wrongdoing

b) Conduct the forensic audit despite the borrower’s opposition
c) Delay the decision on recovery or restructuring until the borrower agrees to the audit
d) Write off the loan and initiate legal recovery
e) Request additional collateral instead of conducting the audit

Answer: b) Conduct the forensic audit despite the borrower’s opposition

Explanation: A forensic audit is critical in cases where there are concerns about the misuse of funds
or irregularities in the borrower’s operations. It helps ensure that restructuring or recovery decisions
are based on accurate financial data.

Case Study 34: Corrective Action Plan (CAP) for an MSME in the Textile Sector

178
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
An MSME operating in the textile industry has a loan exposure of ₹12 crore, which has been
classified as SMA-2 due to missed payments over the last three months. The company’s financial
issues stem from both industry challenges and operational inefficiencies. The bank’s Committee for
Corrective Action Plan (CAP) is considering either restructuring or initiating recovery proceedings, but
first wants to assess the company’s long-term viability.

What should the bank’s Committee prioritize before deciding on the restructuring?

a) Liquidating the company’s assets to recover the loan

b) Offering additional financing with a lower interest rate
c) Conducting a Techno-Economic Viability (TEV) study to assess long-term viability
d) Converting the debt into equity and taking a controlling stake in the business
e) Writing off a portion of the loan to improve cash flow

Answer: c) Conducting a Techno-Economic Viability (TEV) study to assess long-term viability

Explanation: The TEV study is crucial in assessing whether the MSME is viable in the long run before
the Committee makes any decisions about restructuring. Without this, decisions on additional
financing or liquidation would be premature.

Case Study 35: Committee Decision for MSME Loan Recovery

A small auto parts manufacturing MSME with a loan exposure of ₹8 crore has been struggling with
debt repayment due to declining market demand. The loan is classified as SMA-2. The borrower has
failed to adhere to a previous rectification plan, and the bank’s Committee is now reviewing whether
to proceed with restructuring or move towards recovery actions.

What should the bank’s Committee consider if it opts for recovery?

a) The bank should initiate legal proceedings only if all lenders agree
b) The Committee should first explore a compromise settlement
c) The Committee should force the borrower into liquidation immediately
d) The bank should offer a One-Time Settlement (OTS) without consulting other lenders
e) The Committee should refer the case to an Asset Reconstruction Company (ARC)

Answer: b) The Committee should first explore a compromise settlement

Explanation: Before proceeding with legal recovery or ARC sale, the Committee can explore a
compromise settlement if there is no prospect of recovering the full loan amount through legal
recovery. This can often maximize recovery while avoiding lengthy legal proceedings.

Case Study 36: SMA Classification and Loan Recovery in a Joint Lending Scenario

A medium-sized MSME in the engineering sector has a total outstanding loan of ₹25 crore from a
group of four lenders. The company has defaulted on its loan payments, and the lead bank has
classified the loan as SMA-2. The borrower has requested a restructuring plan, citing difficulties in
cash flow due to rising input costs. The other three banks are reluctant to restructure and have
proposed legal recovery instead.

What should the lead bank do next?

179
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) The lead bank can proceed with restructuring unilaterally
b) The restructuring can proceed if 75% of lenders by value and 50% by number agree
c) The loan must be classified as NPA and legal recovery initiated immediately
d) The restructuring plan must be approved by 100% of the lenders
e) The lead bank should offer a new financing package to resolve cash flow issues

Answer: b) The restructuring can proceed if 75% of lenders by value and 50% by number agree
Explanation: Under the Inter-Creditor Agreement (ICA), if 75% of lenders by value and 50% by
number agree, the restructuring plan can proceed, and it becomes binding on all lenders in the
consortium.

Case Study 37: Corrective Action Plan Implementation Timeline

A small agro-processing MSME has been referred to the Committee for Corrective Action Plan (CAP)
after missing payments for over 60 days. The Committee held its first meeting on January 1st, and
the company’s management has requested time to present a comprehensive turnaround strategy.
The bank is considering restructuring the loan or initiating recovery.

What is the maximum timeline for the Committee to finalize and implement the Corrective Action
Plan?

a) 60 days from the first meeting

b) 30 days from the first meeting
c) 90 days from the first meeting
d) 120 days from the first meeting
e) 150 days from the first meeting

Answer: b) 30 days from the first meeting

Explanation: The Committee must finalize and implement the Corrective Action Plan (CAP) within 30
days from the first meeting. This ensures timely decision-making and avoids further delays.

Case Study 38: MSME Recovery through Asset Sale

A large MSME in the construction sector has a total loan exposure of ₹50 crore, with the account
classified as NPA. The borrower has proposed a recovery plan, which involves selling some of its non-
core assets to repay ₹30 crore upfront, while requesting an additional year to repay the remaining
amount. The borrower has struggled to generate sufficient cash flow due to project delays.

How should the bank approach this proposal?

a) Reject the proposal and initiate liquidation proceedings

b) Accept the upfront payment but require the borrower to provide a personal guarantee for the
balance
c) Accept the proposal and extend the repayment period by one year
d) Convert the loan into equity and take over the borrower’s management
e) Initiate legal recovery without considering the proposal

Answer: b) Accept the upfront payment but require the borrower to provide a personal guarantee
for the balance
Explanation: Accepting the upfront payment can maximize immediate recovery, but the bank should

180
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
require additional guarantees for the remaining balance to protect its interests. This approach
balances recovery with ongoing borrower support.

Case Study 39: Wilful Defaulter and CAP Restructuring

An MSME borrower has defaulted on a loan of ₹10 crore and has been declared a wilful defaulter
due to fraudulent financial disclosures. The borrower has now replaced its senior management team
and approached the bank for restructuring under the Corrective Action Plan (CAP), offering new
personal guarantees and a recovery plan.

What should the bank consider before proceeding with restructuring?

a) The restructuring can proceed if the borrower is fully delinked from the previous management
b) The restructuring request should be denied due to the borrower’s history of wilful default
c) The restructuring can proceed without any further assessment
d) The bank should first liquidate the borrower’s assets before restructuring
e) The bank should waive the default status and proceed with the original loan terms

Answer: a) The restructuring can proceed if the borrower is fully delinked from the previous
management
Explanation: Restructuring can be considered if the borrower is fully delinked from the previous
management responsible for the wilful default and the new team demonstrates a credible recovery
plan.

Case Study 40: MSME Recovery through Asset Reconstruction Company (ARC)

An MSME borrower with a loan exposure of ₹25 crore has defaulted, and the account has been
classified as an NPA for more than 90 days. The bank’s internal assessment has shown that the
borrower’s business is no longer viable, and the Committee for Corrective Action Plan (CAP) is
considering selling the loan to an Asset Reconstruction Company (ARC) for recovery.

What should the bank prioritize when selling the loan to an ARC?

a) Recovering at least 90% of the outstanding loan amount from the ARC
b) Ensuring that the ARC provides additional financing to the borrower
c) Maximizing the cash recovery and receiving upfront payment from the ARC
d) Allowing the ARC to restructure the loan without the bank’s involvement
e) Ensuring that the ARC retains the same interest rate as the original loan

Answer: c) Maximizing the cash recovery and receiving upfront payment from the ARC
Explanation: When selling a stressed asset to an ARC, the bank should prioritize maximizing the cash
recovery, typically by negotiating for the highest possible upfront payment. This ensures immediate
liquidity for the bank.

Case Study 41: MSME Restructuring under a Multi-Lender Consortium

An MSME engaged in the automobile sector has a total loan exposure of ₹50 crore from a
consortium of six lenders. The account has become stressed and classified as SMA-2. The lead bank,
with 30% exposure, has proposed a restructuring plan, but two lenders holding a combined 40%

181
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
exposure have expressed concerns about the borrower’s long-term viability and prefer legal
recovery.

What should the lead bank do next under the Inter-Creditor Agreement (ICA)?

a) The restructuring can proceed if the lead bank unilaterally approves the plan
b) The lead bank must secure 100% consent from all lenders for the restructuring to proceed
c) The restructuring can proceed if 75% by value and 50% by number of lenders agree to it
d) The lead bank should abandon the restructuring and pursue legal recovery
e) The restructuring should be rejected since not all lenders agree

Answer: c) The restructuring can proceed if 75% by value and 50% by number of lenders agree to it
Explanation: According to the Inter-Creditor Agreement (ICA), restructuring can proceed if at least
75% of lenders by value and 50% by number agree. This decision will be binding on all lenders.

Case Study 42: Forensic Audit Requirement in MSME Loan Default

A bank has extended a working capital loan of ₹20 crore to an MSME borrower in the food
processing industry. After a series of defaults, the bank suspects mismanagement of funds and
possible fraudulent activities. The borrower insists that the issues are due to temporary cash flow
problems and opposes the bank’s decision to conduct a forensic audit.

What is the bank’s best course of action?

a) Proceed with restructuring without conducting a forensic audit

b) Conduct the forensic audit despite the borrower’s opposition
c) Delay recovery proceedings until the borrower agrees to the audit
d) Approve additional financing to help the borrower resolve cash flow issues
e) Cancel the loan and initiate legal recovery without an audit

Answer: b) Conduct the forensic audit despite the borrower’s opposition

Explanation: In cases where fraud or fund mismanagement is suspected, conducting a forensic audit
is essential. It helps uncover any financial irregularities before making decisions on restructuring or
recovery.

Case Study 43: Right of Recompense in MSME Restructuring

A bank restructured an MSME loan of ₹10 crore and provided additional financing of ₹3 crore to help
the borrower overcome financial difficulties. As part of the restructuring, a Right of Recompense
clause was included. One year after restructuring, the MSME has become profitable and has
improved its financial position significantly.

How should the bank apply the Right of Recompense?

a) The bank should waive the Right of Recompense as the borrower is now profitable
b) The bank should invoke the Right of Recompense to recover any concessions made during
restructuring
c) The bank should ask for immediate repayment of the additional ₹3 crore financing
d) The bank should offer to further reduce the interest rate in light of the borrower’s profitability
e) The bank should request the borrower to provide additional collateral

182
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: b) The bank should invoke the Right of Recompense to recover any concessions made
during restructuring
Explanation: The Right of Recompense allows the bank to recover any concessions (e.g., reduced
interest rates, extended repayment terms) made during restructuring if the borrower’s financial
position improves.

Case Study 44: Recovery Process through Compromise Settlement

An MSME borrower with a loan of ₹15 crore has defaulted, and the account has been classified as
NPA. The borrower’s business has been severely affected by market conditions, and there is no
prospect of full recovery through legal means. The bank is considering a compromise settlement,
with the borrower offering to repay ₹8 crore upfront.

What should the bank consider before accepting the compromise settlement?

a) The bank should reject the settlement as it is less than 100% recovery
b) The bank should accept the settlement only if it includes a personal guarantee
c) The bank should proceed with the settlement if it maximizes recovery and legal options are less
feasible
d) The bank should initiate recovery through legal proceedings instead of a compromise
e) The bank should extend the repayment period instead of accepting the settlement

Answer: c) The bank should proceed with the settlement if it maximizes recovery and legal options
are less feasible
Explanation: Compromise settlements are appropriate when the bank determines that full recovery
through legal means is not feasible, and the settlement maximizes the potential recovery of the loan.

Case Study 45: Corrective Action Plan Implementation Timeline

A borrower has missed payments on an MSME loan of ₹12 crore, and the account has been classified
as SMA-2. The bank’s Committee for Corrective Action Plan (CAP) held its first meeting on March 1st
to evaluate the borrower’s request for restructuring. The borrower has presented a detailed recovery
plan but needs time to implement operational changes.

What is the maximum timeline within which the Committee must finalize the Corrective Action
Plan (CAP)?

a) 15 days from the first meeting

b) 30 days from the first meeting
c) 60 days from the first meeting
d) 90 days from the first meeting
e) 120 days from the first meeting

Answer: b) 30 days from the first meeting

Explanation: The Committee must finalize and notify its decision on the Corrective Action Plan (CAP)
within 30 days from the first meeting.

Case Study 46: Additional Financing in Restructuring under CAP

An MSME borrower has a total loan exposure of ₹10 crore and has been struggling with repayments.
The bank’s Committee for Corrective Action Plan (CAP) has proposed restructuring the loan and

183
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
providing additional financing of ₹2 crore to support the borrower’s working capital needs. The bank
is considering the repayment priority for the additional financing.

What is the appropriate repayment priority for the additional financing?

a) The additional financing should be repaid after the existing debt

b) The additional financing should be repaid only after the borrower becomes profitable
c) The additional financing should be repaid with equal priority as the existing debt
d) The additional financing should be given higher priority over the existing debt
e) The additional financing should be forgiven if the borrower continues to face difficulties

Answer: d) The additional financing should be given higher priority over the existing debt
Explanation: Additional financing provided under a restructuring plan is given higher repayment
priority to ensure that the fresh infusion of funds is protected.

Case Study 47: Wilful Defaulter in MSME Restructuring

An MSME borrower has defaulted on a loan of ₹20 crore and has been classified as a wilful defaulter
due to intentional diversion of funds. The borrower has since replaced its senior management team
and submitted a restructuring proposal, offering new personal guarantees and a plan for repaying
the loan over five years.

What should the bank consider before proceeding with the restructuring?

a) The restructuring should be approved if the borrower provides new collateral

b) The restructuring should be rejected due to the borrower’s history of wilful default
c) The restructuring can proceed if the borrower is fully delinked from the previous management
responsible for the default
d) The bank should offer a One-Time Settlement (OTS) instead of restructuring
e) The loan should be written off as a loss

Answer: c) The restructuring can proceed if the borrower is fully delinked from the previous
management responsible for the default
Explanation: Restructuring can be considered for a wilful defaulter if the borrower is fully delinked
from the previous management responsible for the default and demonstrates a viable recovery plan.

Case Study 48: Inter-Creditor Agreement and CAP Decision

An MSME borrower with a total loan exposure of ₹30 crore across five banks has been classified as
SMA-2. The lead bank has proposed a restructuring plan under the Corrective Action Plan (CAP), but
two lenders with a combined 45% exposure have rejected the proposal, favoring legal recovery. The
lead bank holds 35% exposure and supports the restructuring plan.

How should the lead bank proceed under the Inter-Creditor Agreement (ICA)?

a) The lead bank can proceed with restructuring if 75% of lenders by value and 50% by number agree
b) The lead bank must abandon the restructuring plan and initiate legal recovery
c) The restructuring can proceed if the lead bank unilaterally approves the plan
d) The restructuring can only proceed if all lenders agree
e) The restructuring should be rejected and the loan written off

184
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: a) The lead bank can proceed with restructuring if 75% of lenders by value and 50% by
number agree
Explanation: Under the Inter-Creditor Agreement (ICA), restructuring can proceed if 75% of lenders
by value and 50% by number agree, and the decision will be binding on all lenders.

185
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Chapter 27
1. What is the main objective of the Fair Practices Code on Lenders' Liability implemented by the
RBI?

a. To increase the profit margins of banks

b. To regulate foreign investments
c. To protect bank loan borrowers from unfair lending practices
d. To provide incentives for bank employees
e. To establish a uniform interest rate across all banks
Answer: c. To protect bank loan borrowers from unfair lending practices
Explanation: The code aims to hold banks and financial institutions to higher ethical standards,
ensuring fairness and transparency in the lending process.

2. Which body was set up to evolve codes and standards for fair treatment of bank customers?

a. SEBI
b. IRDAI
c. BCSBI
d. NHB
e. NITI Aayog
Answer: c. BCSBI
Explanation: The Banking Codes and Standards Board of India (BCSBI) was established to develop
codes and standards for fair customer treatment by banks.

3. When processing a loan application, banks are required to disclose all the following except:

a. Penalty for delayed repayments

b. Bank's annual profit
c. Pre-payment options and charges
d. Processing fees
e. Conversion charges for switching loan rates
Answer: b. Bank's annual profit
Explanation: The Fair Practices Code mandates that all charges and terms related to the loan must be
disclosed, except for information like the bank's annual profit.

4. Under the Fair Practices Code, how should lenders approach the post-disbursement supervision
for loans up to two lakh rupees?

a. Avoid any supervision

b. Be overly strict to ensure repayment
c. Adopt a constructive approach to address any borrower difficulties
d. Charge additional fees for supervision
e. Treat all loans equally without special consideration for smaller loans
Answer: c. Adopt a constructive approach to address any borrower difficulties
Explanation: For smaller loans, the post-disbursement supervision should be aimed at helping
borrowers with genuine difficulties.

5. What is expected from banks when rejecting a loan application?

a. No explanation is required
b. Notify the borrower via email only

186
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
c. Verbally explain the reasons
d. Convey the reasons in writing within the stipulated time
e. Post the reasons on their website
Answer: d. Convey the reasons in writing within the stipulated time
Explanation: The Fair Practices Code requires lenders to communicate in writing the main reasons
for the rejection of loan applications.

6. What should lenders provide to borrowers at the time of loan disbursement?

a. A certificate of appreciation
b. A copy of the loan agreement and all enclosures
c. A gift voucher
d. A new credit card
e. An interest rate chart
Answer: b. A copy of the loan agreement and all enclosures
Explanation: Lenders are required to furnish a copy of the loan agreement and associated
documents to the borrower to ensure transparency.

7. Which of the following practices is considered unfair when processing loan applications?

a. Charging a processing fee

b. Disclosing all charges upfront
c. Levying undisclosed charges after the loan is sanctioned
d. Offering a loan with a variable interest rate
e. Providing an acknowledgment of loan application receipt
Answer: c. Levying undisclosed charges after the loan is sanctioned
Explanation: All charges must be transparently disclosed upfront, and adding charges afterward
without disclosure is deemed unfair.

8. What is the main focus of the guidelines for lenders under the consortium lending arrangement?

a. Increasing the interest rates for all borrowers

b. Disallowing any loan restructuring
c. Ensuring a time-bound appraisal and communication of financing decisions
d. Reducing the involvement of lenders
e. Raising the credit limits frequently
Answer: c. Ensuring a time-bound appraisal and communication of financing decisions
Explanation: The guidelines emphasize a prompt appraisal and response to financing proposals
under consortium lending.

9. In the case of a change in loan terms or conditions, what must lenders ensure?

a. Changes should be applied retrospectively

b. Borrowers are notified well after the changes take effect
c. Changes are applied only prospectively
d. Loan contracts are terminated immediately
e. No changes can be made once the loan is sanctioned
Answer: c. Changes are applied only prospectively
Explanation: Lenders must notify borrowers in advance and apply changes prospectively.

10. When are penal charges allowed to be levied by lenders?

187
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a. For non-compliance with material terms and conditions of the loan
b. As an additional component to the interest rate
c. Without informing the borrower
d. To increase the loan amount significantly
e. For missing bank appointments
Answer: a. For non-compliance with material terms and conditions of the loan
Explanation: Penal charges can only be imposed for non-compliance with significant terms, and they
must not be capitalized as part of the interest.

11. According to the Fair Practices Code, what should banks do if they need additional documents
from a borrower during the loan processing phase?

a. Ignore the missing documents

b. Wait until the borrower submits the documents without notifying them
c. Immediately inform the borrower of the need for additional documents
d. Impose a penalty for incomplete documentation
e. Automatically reject the loan application
Answer: c. Immediately inform the borrower of the need for additional documents
Explanation: Banks must communicate any additional requirements promptly to avoid delays in
processing the loan.

12. What is the stipulated response time for banks when a borrower requests the transfer of their
loan account to another bank?

a. 7 days
b. 14 days
c. 21 days
d. 30 days
e. 45 days
Answer: c. 21 days
Explanation: Banks must convey their consent or objections regarding the transfer request within 21
days of receiving it.

13. What should lenders do before taking possession of property under the SARFAESI Act?

a. Directly seize the property without any notice

b. Give notice as specified in the loan agreement
c. Wait for a court order
d. Contact the local police for assistance
e. Seek approval from other borrowers
Answer: b. Give notice as specified in the loan agreement
Explanation: The Fair Practices Code requires lenders to provide a notice period, as specified in the
loan agreement, before repossessing property.

14. Which of the following is NOT a part of the loan disbursement process under the Fair Practices
Code?

a. Timely disbursement of sanctioned loans

b. Notifying borrowers of changes in terms
c. Imposing penalties without prior notice
d. Ensuring changes to interest rates are prospective

188
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
e. Following the terms and conditions strictly
Answer: c. Imposing penalties without prior notice
Explanation: Lenders must notify borrowers of any changes to terms or penalties in advance.

15. Which body is responsible for ensuring the adherence to Fair Practices Code by digital lending
platforms?
a. SEBI
b. Ministry of Finance
c. The individual bank/NBFC engaging the platform
d. Indian Banks' Association
e. NASSCOM
Answer: c. The individual bank/NBFC engaging the platform
Explanation: Banks or NBFCs that engage digital lending platforms are responsible for ensuring
compliance with the Fair Practices Code.

16. Under what condition can penal charges NOT exceed the charges applicable to non-individual
borrowers?

a. When loans are taken for agricultural purposes

b. In the case of individual borrowers for non-business purposes
c. When borrowers have a high credit score
d. For small loans below two lakh rupees
e. When the loan is secured by collateral
Answer: b. In the case of individual borrowers for non-business purposes
Explanation: Penal charges for individual borrowers taking loans for non-business purposes must not
be higher than those for non-individual borrowers.

17. What mechanism must banks establish regarding the grievances related to the recovery
process?

• a. A third-party arbitration service

• b. A mechanism for resolving grievances internally

• c. No specific mechanism is required

• d. An online public complaint forum

• e. Only a physical complaints register at each branch

Answer: b. A mechanism for resolving grievances internally

Explanation: Banks must have a mechanism to address grievances related to the recovery process as
part of their adherence to the Fair Practices Code.

18. What is the main requirement for the collection of dues by banks?

a. Use of force is allowed if borrowers refuse payment

b. Repossession must always involve the police
c. The process should follow the law and be fair and courteous
d. Collections can be made at any time of day
e. Borrowers must pay an additional service fee for collections

189
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: c. The process should follow the law and be fair and courteous
Explanation: The Fair Practices Code emphasizes lawful and respectful collection practices to
maintain the dignity and privacy of borrowers.

19. What should be the banks' approach in the case of recovery agents using abusive practices?

a. Ignore the complaints

b. Investigate and ensure adherence to guidelines
c. Transfer the case to another recovery agent
d. Support the recovery agent unconditionally
e. Allow only verbal abuse
Answer: b. Investigate and ensure adherence to guidelines
Explanation: Banks are responsible for their recovery agents' actions and must investigate and
address any complaints about abusive practices.

20. According to the Fair Practices Code, when can banks consider waiving the notice period before
repossession?

a. When the borrower is not responding to phone calls

b. If it is included as an option in the loan agreement
c. When the loan amount is less than one lakh rupees
d. Never, notice periods are mandatory
e. If the borrower has a good repayment history
Answer: b. If it is included as an option in the loan agreement
Explanation: Waiving the notice period is allowed only if it is specified in the loan agreement under
certain conditions.

21. What is required from recovery agents while contacting borrowers?

a. They must always appear in person
b. Calls can be made only after 10 p.m.
c. They should carry identification and authorization letters
d. Email communication is sufficient
e. Borrowers' details should not be verified
Answer: c. They should carry identification and authorization letters
Explanation: Recovery agents must have proper identification and authorization to prove their
legitimacy while dealing with borrowers.

22. How should banks deal with a complaint regarding harassment by recovery agents?

a. Forward the case immediately to a legal team

b. Halt the recovery process until the complaint is resolved
c. Ignore the complaint if it's the first time
d. Continue with recovery efforts while monitoring the situation
e. Shift the case to a different recovery agency without further investigation
Answer: b. Halt the recovery process until the complaint is resolved
Explanation: The Fair Practices Code requires banks to address any grievances or complaints before
proceeding with recovery efforts.

23. When should banks communicate the details of penal charges to the borrower?

a. Only when a penalty is applied

b. When the borrower requests the information

190
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
c. In the loan agreement and Key Fact Statement (KFS)
d. After the borrower fails to make two consecutive payments
e. Only if the charges exceed a certain amount
Answer: c. In the loan agreement and Key Fact Statement (KFS)
Explanation: Penal charges and the reasons for them must be disclosed in the loan agreement and
the KFS to ensure transparency.

24. For what purpose is the Indian Institute of Banking and Finance's certification course for
recovery agents recommended?

a. To increase the recovery agents' salary

b. To comply with legal requirements for debt collection
c. To provide training on handling borrowers sensitively
d. To grant authority for repossessing property
e. To specialize in loan disbursement processes
Answer: c. To provide training on handling borrowers sensitively
Explanation: The certification course aims to equip recovery agents with skills to manage their
responsibilities with care and adherence to ethical standards.

25. What is a key requirement when banks use digital lending platforms as their agents?

a. The digital platform must only operate during banking hours

b. The platform must disclose upfront the bank or NBFC it represents
c. The platform can charge additional processing fees
d. The platform should not share the borrower’s information with the bank
e. There is no specific requirement for digital platforms
Answer: b. The platform must disclose upfront the bank or NBFC it represents
Explanation: The Fair Practices Code requires digital lending platforms to inform the customer about
the bank or NBFC on whose behalf they are interacting.

26. Which of the following practices is prohibited during the recovery of overdue loans?

a. Making persistent calls before 8:00 a.m. or after 7:00 p.m.

b. Visiting borrowers during regular business hours
c. Sending notifications about the overdue amount
d. Allowing borrowers a grace period for payment
e. Using legal proceedings to collect the debt
Answer: a. Making persistent calls before 8:00 a.m. or after 7:00 p.m.
Explanation: The guidelines prohibit calling borrowers during odd hours to avoid harassment.

27. How should banks communicate the reasons for penal charges to the borrower?

a. Only when the borrower inquires

b. Through an annual statement
c. During every instance of sending reminders
d. By publishing it on the bank’s notice board
e. No specific communication is needed
Answer: c. During every instance of sending reminders
Explanation: Banks must notify the borrower about applicable penal charges and reasons whenever
reminders for non-compliance are sent.

28. In case of non-compliance with the guidelines for loan recovery, what action can the RBI take?

191
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a. Impose a ban on engaging recovery agents
b. Reduce the interest rates for the bank
c. Directly penalize the borrower
d. Suspend loan processing in the concerned branch
e. Increase the penalties for borrowers
Answer: a. Impose a ban on engaging recovery agents
Explanation: RBI can ban banks from engaging recovery agents if guidelines are persistently
breached.

29. Which factor should NOT be a basis for discrimination when lending under the Fair Practices
Code?

a. Borrower’s creditworthiness
b. Religion
c. Gender
d. Caste
e. All of the above (b, c, and d)
Answer: e. All of the above (b, c, and d)
Explanation: Discrimination based on religion, gender, or caste is prohibited under the Fair Practices
Code.

30. When should the grievance redressal mechanism for loan-related disputes be reviewed by the
bank's Board of Directors?

a. Annually
b. Monthly
c. Whenever a dispute arises
d. At regular intervals as prescribed by the Board
e. Only after receiving customer complaints
Answer: d. At regular intervals as prescribed by the Board
Explanation: The Fair Practices Code requires regular reviews of the grievance redressal mechanism
to ensure effectiveness.

31. What should banks do when using the forum of Lok Adalats for loan recovery?

a. Refer loans below ten lakh rupees only

b. Refer loans above ten lakh rupees only
c. Use Lok Adalats for agricultural loans only
d. Avoid Lok Adalats for personal loans
e. Make it mandatory for all borrowers
Answer: a. Refer loans below ten lakh rupees only
Explanation: The RBI guidelines encourage the use of Lok Adalats for recovering loans up to ten lakh
rupees, as suggested by the Supreme Court.

32. What is the role of credit counselors according to the Fair Practices Code?

a. To process loan applications

b. To provide counseling for borrowers in financial difficulties
c. To assist in calculating interest rates
d. To approve loan restructuring proposals
e. To act as mediators in legal disputes

192
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: b. To provide counseling for borrowers in financial difficulties
Explanation: Credit counselors are utilized to help borrowers manage financial issues
sympathetically.

33. What should banks avoid when offering incentives to recovery agents?

a. Setting high recovery targets

b. Providing fixed salaries
c. Offering performance-based incentives
d. Allowing agents to operate independently
e. Giving bonuses for recovered loans
Answer: a. Setting high recovery targets
Explanation: High recovery targets may induce recovery agents to adopt unethical practices, so
banks should avoid this.

34. In what circumstances can banks adopt an aggressive loan recovery process?

a. When borrowers refuse to respond to calls

b. When the loan agreement explicitly allows it
c. When legal provisions permit such actions
d. During legal proceedings with the borrower's consent
e. Banks must never adopt an aggressive process
Answer: c. When legal provisions permit such actions
Explanation: Banks must follow lawful methods while recovering loans, relying on legal remedies
where applicable.

35. Which training is mandatory for recovery agents according to RBI guidelines?

a. Sales training
b. Customer service training
c. Certification from the Indian Institute of Banking and Finance
d. Training on investment strategies
e. Loan disbursement training
Answer: c. Certification from the Indian Institute of Banking and Finance
Explanation: Recovery agents are required to complete a certification course offered by the Indian
Institute of Banking and Finance.

36. When is it permissible for recovery agents to visit a borrower's residence?

a. At any time of the day

b. Only with a court order
c. During the hours specified by the bank
d. Between 7:00 a.m. and 7:00 p.m.
e. After notifying the local authorities
Answer: d. Between 7:00 a.m. and 7:00 p.m.
Explanation: Visits to the borrower's residence must be within these hours, as per the guidelines to
avoid inconvenience.

37. What should banks do in case of sub-judice matters related to loan recovery?

a. Stop all recovery proceedings

b. Proceed cautiously based on circumstances

193
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
c. Continue aggressive recovery measures
d. Hire private investigators
e. Withdraw the loan
Answer: b. Proceed cautiously based on circumstances
Explanation: For sub-judice matters, banks must exercise caution while proceeding with recovery to
respect legal considerations.

38. What is prohibited for recovery agents during interactions with borrowers?
a. Offering a settlement
b. Sending written notices
c. Making false or misleading representations
d. Negotiating a repayment plan
e. Accepting payments directly from the borrower
Answer: c. Making false or misleading representations
Explanation: The guidelines prohibit recovery agents from using deception or providing false
information to borrowers.

39. What should banks ensure when taking possession of property?

a. Follow the SARFAESI Act procedures strictly

b. Use any available means to repossess
c. Delegate the task to local authorities
d. Charge additional fees for repossession
e. Rely on verbal agreements
Answer: a. Follow the SARFAESI Act procedures strictly
Explanation: Banks are required to adhere to the SARFAESI Act's defined procedures for taking
possession of property.

40. What aspect of the Fair Practices Code should be made publicly available?

a. Loan approval criteria

b. Fair Practices Code policies and loan application forms
c. Details of all loan rejections
d. Specific recovery targets
e. Customer grievances
Answer: b. Fair Practices Code policies and loan application forms
Explanation: The code and related materials should be accessible to ensure borrowers are informed
about their rights.

41. When must banks release all securities related to a loan?

a. After the final installment is paid

b. Once payment of the loan is confirmed, subject to any legitimate right of set-off
c. After a three-month waiting period
d. Only upon the borrower’s request
e. If the borrower defaults
Answer: b. Once payment of the loan is confirmed, subject to any legitimate right of set-off
Explanation: Banks must release securities promptly, provided there are no other legitimate claims.

42. What are the training requirements for recovery agents?

a. No specific training is needed

194
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
b. Must be trained on legal requirements only
c. Training should include customer privacy, sensitive handling, and hours of calling
d. Only sales training is required
e. Training is optional
Answer: c. Training should include customer privacy, sensitive handling, and hours of calling
Explanation: Recovery agents need training on aspects like customer privacy and proper conduct
during calls.

43. Which legal framework guides the auctioning of movable and immovable property by banks?

a. The Indian Penal Code

b. The Negotiable Instruments Act
c. The SARFAESI Act
d. The Transfer of Property Act
e. The Companies Act
Answer: c. The SARFAESI Act
Explanation: The SARFAESI Act outlines procedures for enforcing security interest, including the
auctioning of properties.

44. What are the banks' obligations when using Lok Adalats for resolving loan disputes?

a. They must ensure borrowers do not attend

b. Refer cases of all loan amounts
c. Use Lok Adalats only when legally mandated
d. Encourage borrowers to participate for loans below ten lakh rupees
e. Avoid Lok Adalats altogether
Answer: d. Encourage borrowers to participate for loans below ten lakh rupees
Explanation: Lok Adalats are used to resolve disputes for smaller loans as a part of amicable
settlement measures.

45. How should banks treat requests to avoid calls at certain times or places?

a. Ignore such requests

b. Honour these requests as far as possible
c. Reject the requests outright
d. Continue with recovery efforts regardless
e. Restrict contact to only written communication
Answer: b. Honour these requests as far as possible
Explanation: Banks should make an effort to respect borrowers' preferences to avoid harassment.

46. What are the obligations of banks in relation to their recovery agents?

a. Disregard their actions

b. Ensure compliance with guidelines and address complaints
c. Pay agents based on their recovery rates only
d. Never disclose the agents’ identities
e. Always provide unconditional support to agents
Answer: b. Ensure compliance with guidelines and address complaints
Explanation: Banks are responsible for ensuring their agents adhere to guidelines and handle
grievances appropriately.

47. What documentation is required when a recovery agent visits a borrower?

195
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a. A letter from the borrower's lawyer
b. An authorization letter from the bank
c. Only an identity card
d. Proof of loan default
e. No documentation is required
Answer: b. An authorization letter from the bank
Explanation: Recovery agents must carry an authorization letter to verify their legitimacy to
borrowers.

48. What does the Fair Practices Code emphasize regarding the processing of large project loans?

a. Faster processing with minimal due diligence

b. Adhering strictly to the regulatory timelines for loan processing
c. Complete relaxation of documentation requirements
d. Ensuring all loan proposals are approved quickly
e. Avoiding project loans entirely
Answer: b. Adhering strictly to the regulatory timelines for loan processing
Explanation: Timeliness in credit decisions is important, but due diligence cannot be compromised.

49. How should the terms and conditions of a loan be documented according to the Fair Practices
Code?

a. Verbally explained to the borrower

b. Kept confidential by the lender
c. Reduced to writing and certified by an authorized official
d. Provided only if the borrower insists
e. Not documented for loans below a certain amount
Answer: c. Reduced to writing and certified by an authorized official
Explanation: Documenting loan terms in writing ensures transparency and protects the interests of
both parties.

50. How should banks notify borrowers about the adoption of the Fair Practices Code?

a. Through personal calls

b. By posting the code on the bank’s website
c. Sending notifications via social media
d. Only during loan approval
e. No notification is required
Answer: b. By posting the code on the bank’s website
Explanation: Making the Fair Practices Code available on the bank's website ensures borrowers are
informed and can access the information easily.

51. Under the guidelines for lenders, if a borrower disputes the calculation of penal charges, what
steps should the bank follow to ensure compliance with the Fair Practices Code?

a. The bank should waive the penal charges immediately if the borrower files a complaint.
b. Penal charges should continue to accrue until the dispute is resolved by a third-party arbitrator.
c. The bank should first investigate the borrower's complaint internally and ensure the charges were
communicated as specified in the loan agreement.
d. The bank must seek a court order to validate the penal charges.
e. The borrower should be required to make a partial payment to halt further penalties.

196
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: c. The bank should first investigate the borrower's complaint internally and ensure the
charges were communicated as specified in the loan agreement.
Explanation: Banks must follow the Fair Practices Code, which mandates an internal review of
grievances and verification that penal charges have been disclosed per the loan agreement terms.

52. In a consortium lending scenario, what should be the primary basis for determining the credit
limit for a borrower?

a. The borrower’s credit score from a single credit bureau.

b. The total assets declared by the borrower, irrespective of their liquidity.
c. The individual security and margin stipulations set by each participating lender.
d. The consolidated appraisal of the borrower's financial position and projected cash flows as agreed
upon by the consortium.
e. The highest credit limit offered by any participating bank in the consortium.
Answer: d. The consolidated appraisal of the borrower's financial position and projected cash
flows as agreed upon by the consortium.
Explanation: In consortium lending, the credit limit should be based on a joint assessment of the
borrower’s overall financial position, ensuring uniformity in the credit decision.

53. Which of the following statements best aligns with the RBI guidelines regarding loan recovery
from borrowers when the loan contract contains a repossession clause?

a. Banks may take possession of the security without notice if the borrower defaults.
b. The repossession clause can override state laws on recovery procedures if specified in the
contract.
c. The bank must ensure that the repossession clause is legally valid and complies with the Indian
Contract Act, including giving the borrower a final opportunity to repay before repossession.
d. The borrower must initiate a legal process to dispute any repossession of assets under the
SARFAESI Act.
e. The repossession clause should be applicable only if the borrower consents to it after default.
Answer: c. The bank must ensure that the repossession clause is legally valid and complies with
the Indian Contract Act, including giving the borrower a final opportunity to repay before
repossession.
Explanation: Even when a repossession clause exists, it must be in line with the law, and borrowers
should be given a final chance to settle the outstanding dues before any repossession takes place.

54. If a bank levies a processing fee for a loan but fails to disclose other charges such as conversion
fees for switching interest rates, which of the following best describes the bank's adherence to the
Fair Practices Code?

a. The bank is fully compliant as long as the processing fee was disclosed upfront.
b. The bank has violated the Fair Practices Code by not disclosing all applicable charges in advance.
c. The charges can be levied if they are mentioned in the loan sanction letter sent after approval.
d. The bank can retrospectively notify the borrower about such charges within three months of the
loan disbursement.
e. The bank's non-disclosure is permissible if the charges are below a certain percentage of the loan
amount.
Answer: b. The bank has violated the Fair Practices Code by not disclosing all applicable charges in
advance.

197
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Explanation: The Fair Practices Code mandates the upfront disclosure of all charges related to the
loan. Failure to do so constitutes a breach of the guidelines.

55. In the context of training requirements for recovery agents, which of the following practices
would be considered non-compliant with RBI guidelines?

a. Training recovery agents to handle disputes with empathy and adherence to privacy norms.
b. Allowing recovery agents to commence their duties after completing a 50-hour training program.
c. Ensuring that recovery agents pass the IIBF certification exam before engaging with customers.
d. Utilizing the bank's internal training facilities to train recovery agents, provided the training aligns
with IIBF standards.
e. Providing recovery agents with continuous training updates only when significant regulatory
changes occur.
Answer: b. Allowing recovery agents to commence their duties after completing a 50-hour training
program.
Explanation: RBI guidelines specify a minimum of 100 hours of training for recovery agents to ensure
thorough preparation for handling borrowers sensitively.

56. When a borrower applies for a loan restructuring due to financial distress, what should be the
bank's approach in accordance with the Fair Practices Code?

a. Immediately approve the restructuring to provide relief.

b. Deny the request if the borrower has a history of late payments.
c. Conduct a detailed assessment of the borrower's current financial situation and restructuring
proposal before making a decision.
d. Demand an additional security deposit before considering restructuring.
e. Automatically extend the loan tenure without altering other terms.
Answer: c. Conduct a detailed assessment of the borrower’s current financial situation and
restructuring proposal before making a decision.
Explanation: Banks should carefully evaluate the borrower’s circumstances and proposed
restructuring plan to ensure that the modified terms are feasible and fair.

57. Which of the following best describes the responsibility of banks regarding complaints about
undue harassment by recovery agents?

a. The bank must refer all complaints to an external ombudsman for resolution.
b. Banks should ensure that complaints are addressed through their internal grievance
mechanism and take corrective action if guidelines are violated.
c. Complaints should be logged and ignored unless multiple borrowers report the same recovery
agent.
d. Recovery efforts can continue while the complaint is being investigated.
e. Complaints should only be addressed if they come directly from the borrower and not third
parties.
Answer: b. Banks should ensure that complaints are addressed through their internal grievance
mechanism and take corrective action if guidelines are violated.
Explanation: Banks are required to investigate complaints and resolve them as part of their internal
grievance redressal process.

58. How should banks communicate changes to loan terms and conditions that occur post-
sanction?

198
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 a. Verbally inform the borrower and note the details internally.
b. Update the loan agreement without notifying the borrower.
c. Provide written notice to the borrower and implement changes prospectively.
d. Implement the changes immediately and update the borrower at the next meeting.
e. Notify the borrower only if the change affects the interest rate.
Answer: c. Provide written notice to the borrower and implement changes prospectively.
Explanation: Any changes to loan terms and conditions must be communicated in writing and
applied prospectively to ensure transparency.

59. What should be the bank's approach if a borrower requests an extension on the repayment
timeline due to temporary cash flow issues?

a. Reject the request and proceed with standard recovery procedures.

b. Automatically grant a one-time extension without reviewing the borrower’s financial situation.
c. Assess the borrower's cash flow projections and provide an extension if it aligns with the
bank's credit policy.
d. Increase the interest rate for the extended period to compensate for the delay.
e. Approve the extension only if the borrower provides additional collateral.
Answer: c. Assess the borrower's cash flow projections and provide an extension if it aligns with
the bank's credit policy.
Explanation: The bank should evaluate the borrower’s situation and the potential for repayment
before deciding on an extension, following prudent credit practices.

60. Which of the following practices would most likely lead to reputational risk for a bank when
using recovery agents?

a. Ensuring recovery agents carry proper identification during visits.

b. Setting reasonable targets for recovery based on past loan performance.
c. Engaging recovery agents who have not undergone the prescribed training.
d. Communicating the assignment of a recovery agent to the borrower in advance.
e. Using the Lok Adalat for loan disputes below ten lakh rupees.
Answer: c. Engaging recovery agents who have not undergone the prescribed training.
Explanation: Using untrained recovery agents increases the risk of improper handling of borrowers,
leading to potential reputational damage and legal liabilities for the bank.

1. Case Study: Loan Disbursement Delays

XYZ Bank has approved a loan for Mr. Sharma for the construction of a small business unit. The loan
agreement specifies that disbursement will occur in three stages, contingent upon the completion of
certain construction milestones. However, due to internal administrative issues, the bank delays the
first disbursement by 45 days. Mr. Sharma experiences significant financial strain as a result and
lodges a complaint. How should the bank respond to ensure compliance with the Fair Practices
Code?

a. Apologize for the delay and proceed with the next disbursement without any penalty.
b. Compensate Mr. Sharma for any financial losses incurred due to the delay, as per the bank’s
compensation policy.
c. Offer to increase the loan amount to cover Mr. Sharma’s financial losses.
d. Extend the loan tenure by 45 days to accommodate for the delay.
e. Cancel the loan agreement and suggest Mr. Sharma reapply.

199
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: b. Compensate Mr. Sharma for any financial losses incurred due to the delay, as per the
bank’s compensation policy.
Explanation: The Fair Practices Code requires banks to ensure timely disbursement of loans in
accordance with the terms of the agreement. If a delay occurs due to the bank’s fault, the bank
should compensate the borrower for financial losses as part of their compensation policy.

2. Case Study: Recovery Agent Misconduct

A customer, Mrs. Rao, has filed a complaint against a recovery agent engaged by ABC Bank. She
alleges that the agent visited her residence multiple times in a single day and used threatening
language to demand payment. The loan is overdue by 60 days, but Mrs. Rao has not refused to settle
the dues and has requested more time. What should be ABC Bank’s immediate action in this
scenario?

a. Temporarily suspend the recovery agent’s activities until the investigation is complete.
b. Increase the frequency of recovery attempts, as the loan is overdue.
c. Ignore Mrs. Rao's complaint as the loan is overdue and continue with recovery efforts.
d. Waive off the overdue amount and close the loan account.
e. Transfer the account to a legal department for further action.
Answer: a. Temporarily suspend the recovery agent’s activities until the investigation is complete.
Explanation: The Fair Practices Code mandates that banks must not engage in harassment or use of
abusive practices for loan recovery. Complaints against recovery agents must be taken seriously, and
any further action should be suspended until an investigation is conducted.

3. Case Study: Loan Terms Alteration Post-Disbursement

Mr. Gupta has taken a home loan from DEF Bank with a floating interest rate. Six months after the
disbursement, the bank decided to increase the margin applied to the interest rate due to changes in
internal risk assessment policies. The bank informed Mr. Gupta about this change one week after
implementing it. What should Mr. Gupta do in this situation?

a. Accept the new terms, as the bank has the discretion to change interest rates.
b. File a complaint with the bank’s grievance redressal cell, as changes were not communicated
prospectively.
c. Continue paying the increased amount and seek legal recourse simultaneously.
d. Refuse to pay the increased rate and wait for the bank's response.
e. Request a transfer of the loan to another bank without any pre-payment penalties.
Answer: b. File a complaint with the bank’s grievance redressal cell, as changes were not
communicated prospectively.
Explanation: The Fair Practices Code requires that any changes in interest rates or loan terms must
be communicated prospectively, i.e., before they take effect, to give the borrower time to plan
accordingly.

4. Case Study: Miscommunication of Loan Charges

Ms. Neha took a personal loan from GHI Bank with an upfront disclosure of all charges, including
processing fees and pre-payment penalties. Six months into the loan, she decided to prepay the
entire outstanding amount. At this point, she was informed about an additional “foreclosure charge”
that was not disclosed at the time of loan disbursement. How should GHI Bank address this
situation?

a. Proceed with the foreclosure and charge Ms. Neha the additional fee.

200
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 b. Waive the foreclosure charge as it was not disclosed initially.
c. Ask Ms. Neha to pay the charge but offer a discount on the amount.
d. Suggest that Ms. Neha continue with the loan to avoid the foreclosure charge.
e. Compensate Ms. Neha for any inconvenience caused due to the undisclosed charge.
Answer: b. Waive the foreclosure charge as it was not disclosed initially.
Explanation: The Fair Practices Code mandates that all charges associated with the loan must be
disclosed upfront. Any undisclosed charges are considered unfair practices, and the borrower should
not be made to pay them.

5. Case Study: Handling of Disputed Payments

Mr. Kumar has a loan with JKL Bank and has recently made an EMI payment. However, due to a
technical issue, the payment was not reflected in his account, leading to a notification from the bank
indicating a missed payment. Mr. Kumar has provided proof of the payment, but the bank insists on
charging a late payment fee. What would be the appropriate course of action for the bank in line
with the Fair Practices Code?

a. Charge the late payment fee as per the loan agreement terms.
b. Reverse the late payment fee and investigate the issue to ensure accurate payment processing.
c. Request Mr. Kumar to make an additional payment to avoid further penalties.
d. Allow Mr. Kumar to delay the next EMI payment without any additional charges.
e. Offer a partial waiver of the late payment fee while keeping the original amount due.
Answer: b. Reverse the late payment fee and investigate the issue to ensure accurate payment
processing.
Explanation: Banks should not penalize borrowers for errors beyond their control. The Fair Practices
Code requires banks to address customer complaints fairly and transparently, especially when there
is evidence of the customer's compliance.

6. Case Study: Digital Lending Platform Transparency

ABC Bank has partnered with a digital lending platform to source personal loan customers. A
customer, Mr. Raghav, claims that the digital platform did not disclose that the loan was being
offered on behalf of ABC Bank, nor were the details of the bank made available before the loan
agreement was executed. Which of the following actions would best align with RBI's guidelines?

a. The bank should continue with the partnership as the customer signed the agreement.
b. ABC Bank should provide Mr. Raghav with complete details of the bank and offer to cancel the
loan without penalties.
c. The digital platform should be instructed to disclose the bank's details to Mr. Raghav
retrospectively.
d. The bank should impose a penalty on the digital platform for non-compliance.
e. No action is required as digital platforms are independent entities.
Answer: b. ABC Bank should provide Mr. Raghav with complete details of the bank and offer to
cancel the loan without penalties.
Explanation: The Fair Practices Code and RBI guidelines require that when digital lending platforms
act on behalf of a bank, they must disclose the bank’s details upfront. The bank is responsible for
ensuring transparency.

7. Case Study: Security Release Post Loan Repayment

201
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Mrs. Sharma has repaid her home loan with MNO Bank in full. However, the bank has delayed the
release of the original property documents, citing internal verification processes. It has been over 60
days since the loan repayment was completed. What should be MNO Bank’s next step in accordance
with the Fair Practices Code?

a. Continue with internal processes until the verification is complete, regardless of the delay.
b. Issue a formal apology to Mrs. Sharma and expedite the release of the documents
immediately.
c. Charge a fee for the administrative work involved in releasing the documents.
d. Inform Mrs. Sharma that the documents will only be released once a new verification fee is
paid.
e. Suggest that Mrs. Sharma wait for another 30 days for the process to be completed.
Answer: b. Issue a formal apology to Mrs. Sharma and expedite the release of the documents
immediately.
Explanation: The Fair Practices Code stipulates that banks must release all securities upon
repayment of the loan, barring any other legitimate claims. Delays beyond a reasonable period are
not justified.

8. Case Study: Discrimination in Lending

Mr. Ahmed, a small business owner, applied for a loan with PQR Bank. Despite having a good credit
score and providing all the necessary documents, his loan was denied without any explanation. Later,
he discovered that loans for similar businesses owned by individuals of different communities were
approved. What should PQR Bank do to ensure compliance with the Fair Practices Code?

a. Reassess Mr. Ahmed’s loan application and provide a detailed explanation for the original
decision.
b. Approve the loan without any further assessment to avoid discrimination claims.
c. Suggest Mr. Ahmed approach another bank.
d. Provide a verbal explanation to Mr. Ahmed about the reasons for rejection.
e. No action is needed since loan approval is discretionary.
Answer: a. Reassess Mr. Ahmed’s loan application and provide a detailed explanation for the
original decision.
Explanation: The Fair Practices Code requires banks to avoid discrimination based on community or
other non-economic factors. Reassessing the application and providing a reasoned explanation
promotes transparency and fairness.

9. Case Study: Loan Appraisal and Security Requirements

XYZ Pvt. Ltd. applied for a business loan at STU Bank, offering a high-value property as collateral. The
bank, without conducting a detailed creditworthiness assessment, approved the loan solely based on
the collateral's value. Six months later, the company defaulted due to cash flow issues. What should
have been STU Bank’s approach to comply with the Fair Practices Code?

a. Approve the loan based solely on the value of the collateral.

b. Deny the loan if there were any doubts about the collateral's market value.
c. Conduct a thorough creditworthiness assessment in addition to accepting the collateral.
d. Approve the loan but charge a higher interest rate due to the cash flow risk.
e. Increase the collateral requirements before approving the loan.

202
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: c. Conduct a thorough creditworthiness assessment in addition to accepting the collateral.
Explanation: The Fair Practices Code emphasizes that collateral should not be a substitute for a
proper assessment of the borrower’s creditworthiness.

10. Case Study: Notification of Loan Account Transfer

LMN Bank decided to transfer the loan account of Mrs. Verma to a different financial institution for
strategic reasons. However, Mrs. Verma was informed about the transfer only two weeks after the
process was completed. Which of the following steps should LMN Bank take to address the issue in
line with the Fair Practices Code?

a. Explain to Mrs. Verma that such transfers do not require prior notice.
b. Compensate Mrs. Verma for any inconvenience caused by the delayed notification.
c. Offer to transfer the loan back to LMN Bank if Mrs. Verma is dissatisfied.
d. Ensure Mrs. Verma is notified prospectively in the future regarding any changes to her loan
account.
e. Waive the interest for the period of transfer processing.
Answer: d. Ensure Mrs. Verma is notified prospectively in the future regarding any changes to her
loan account.
Explanation: The Fair Practices Code requires lenders to communicate any changes to loan terms or
ownership in a timely manner. Notification should be given prospectively.

11. Case Study: Interest Rate Change After Loan Sanction

Mr. Desai took a term loan from UVW Bank with a fixed interest rate of 8.5% per annum for the first
five years, as specified in the loan agreement. After three years, due to changing market conditions,
the bank decided to adjust its interest rate policy and increased the interest rate on all loans,
including fixed-rate loans. The bank sent a notice to Mr. Desai, informing him of the new interest rate
of 10.5% per annum, effective immediately. What action should Mr. Desai take in this scenario?

a. Accept the new interest rate, as market conditions can affect all loans.
b. File a complaint with the banking ombudsman, as fixed-rate loans should not have rate
changes within the fixed period.
c. Request the bank to provide a loan restructuring based on the new rate.
d. Make partial payments to continue servicing the loan at the original rate.
e. Refinance the loan with another bank at a lower interest rate.
Answer: b. File a complaint with the banking ombudsman, as fixed-rate loans should not have rate
changes within the fixed period.
Explanation: Fixed-rate loans are meant to protect borrowers from fluctuations in interest rates. The
Fair Practices Code and lending guidelines prohibit changing the terms of a fixed-rate loan during the
fixed period unless explicitly stated otherwise in the loan agreement.

12. Case Study: Misleading Loan Terms Disclosed During Digital Lending

XYZ Bank uses a digital lending platform to offer small-ticket personal loans. A customer, Mr. Kapoor,
was informed by the platform that the loan had an "effective interest rate" of 12% per annum.
However, after disbursement, he realized that the interest rate was calculated monthly, resulting in
an annual percentage rate (APR) significantly higher than 12%. Mr. Kapoor feels misled and lodges a
complaint. What should XYZ Bank do to rectify the situation?

a. Inform Mr. Kapoor that the calculation method is standard practice.

b. Waive off part of the interest to align with Mr. Kapoor's original expectations.

203
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 c. Recalculate the loan terms to reflect the disclosed interest rate and offer to refund any excess
interest.
d. Offer Mr. Kapoor a lower interest rate for future loans as compensation.
e. Suggest Mr. Kapoor consult a financial advisor for clarification on loan interest rates.
Answer: c. Recalculate the loan terms to reflect the disclosed interest rate and offer to refund any
excess interest.
Explanation: The Fair Practices Code requires full transparency in loan terms. Any discrepancies in
the disclosed terms versus the actual loan conditions must be corrected to avoid misleading the
borrower.

13. Case Study: Handling of an Unsolicited Pre-Approved Loan Offer

ABC Bank sent an unsolicited pre-approved loan offer to Ms. Verma, a long-time customer. The offer
mentioned that the loan would be disbursed automatically unless she declined it within seven days.
Ms. Verma did not respond, as she was traveling. The bank disbursed the loan to her account, and
she was charged a processing fee and interest. Upon her return, Ms. Verma discovered the loan and
lodged a complaint. What should ABC Bank do to resolve this issue in accordance with fair lending
practices?

a. Retain the processing fee and offer to close the loan without additional charges.
b. Waive the processing fee, reverse the loan disbursement, and any accrued interest.
c. Inform Ms. Verma that pre-approved loans do not require explicit consent.
d. Offer Ms. Verma a discount on the interest rate if she decides to keep the loan.
e. Explain that the loan cannot be canceled once disbursed and suggest early repayment.
Answer: b. Waive the processing fee, reverse the loan disbursement, and any accrued interest.
Explanation: Disbursing a loan without explicit consent from the customer is against fair lending
practices. The bank should take corrective action by reversing the loan and waiving any charges
associated with it.

14. Case Study: Security Release with Outstanding Minor Charges

Mr. Patil has fully repaid his vehicle loan with PQR Bank. However, there is a minor outstanding fee of
₹500 for document processing that the bank did not initially disclose. The bank refuses to release the
original documents for the vehicle until the fee is paid. Mr. Patil feels this is unfair since he was not
informed about this charge earlier. What would be the correct approach for PQR Bank to resolve this
issue?

a. Release the documents immediately and waive the undisclosed fee.

b. Retain the documents until Mr. Patil pays the outstanding fee.
c. Request Mr. Patil to pay the fee and reimburse it later after investigating.
d. Offer to reduce the fee to ₹250 as a goodwill gesture.
e. Suggest Mr. Patil file a complaint if he disagrees with the charge.
Answer: a. Release the documents immediately and waive the undisclosed fee.
Explanation: The Fair Practices Code stipulates that all charges should be disclosed upfront. The bank
should not withhold important documents over an undisclosed charge and must release the
documents without demanding the fee.

15. Case Study: Disputed Credit Card Charges During Debt Recovery

Ms. Fernandes has an outstanding credit card balance with LMN Bank. She recently noticed several
disputed charges on her account and raised a complaint with the bank. During this time, the bank

204
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
initiated recovery proceedings and reported the overdue amount, including the disputed charges, to
the credit bureau. Ms. Fernandes is concerned about the negative impact on her credit score. What
should LMN Bank do to address her concerns appropriately?

a. Continue with the recovery process and recommend Ms. Fernandes settle the disputed
charges separately.
b. Pause the recovery process and correct the credit report once the disputed charges are
resolved.
c. Advise Ms. Fernandes to clear the entire outstanding amount to avoid further credit score
impact.
d. Settle the disputed charges by offering a partial waiver and proceed with the recovery.
e. Suggest Ms. Fernandes file a complaint with the credit bureau.
Answer: b. Pause the recovery process and correct the credit report once the disputed charges are
resolved.
Explanation: The Fair Practices Code emphasizes that recovery processes should not include
disputed amounts. The bank must resolve the dispute and correct any erroneous reporting to credit
bureaus before proceeding.

16. Case Study: Loan Agreement Amendment After Customer Default

UVW Bank issued a working capital loan to XYZ Ltd. The original loan agreement contained a clause
allowing the bank to modify the terms if XYZ Ltd. defaulted. Following a default, UVW Bank
unilaterally increased the interest rate and reduced the credit limit without giving prior notice to XYZ
Ltd. The company objects to these changes, claiming they were not informed in advance. How should
UVW Bank handle this situation in compliance with the Fair Practices Code?

a. Enforce the new terms immediately, as the agreement allowed for changes upon default.
b. Reverse the changes and notify XYZ Ltd. before implementing any modifications.
c. Offer to negotiate new terms with XYZ Ltd. while maintaining the modified conditions.
d. Ignore the company's objection, as the default triggered the bank's rights under the
agreement.
e. Maintain the credit limit reduction but revert to the original interest rate.
Answer: b. Reverse the changes and notify XYZ Ltd. before implementing any modifications.
Explanation: Even if a loan agreement allows for modifications upon default, the Fair Practices Code
requires that changes be communicated prospectively. XYZ Ltd. should have been informed in
advance before implementing any changes.

17. Case Study: Loan Restructuring with Multiple Creditors

ABC Enterprises has loans from multiple banks, including DEF Bank and GHI Bank, which are part of a
consortium lending arrangement. Due to cash flow issues, ABC Enterprises has requested a loan
restructuring. DEF Bank is willing to proceed, but GHI Bank has concerns about the company's future
cash flow. How should the consortium proceed in line with fair lending practices?

a. DEF Bank should restructure the loan independently, regardless of GHI Bank's position.
b. The consortium should deny the restructuring request and initiate recovery proceedings.
c. A joint assessment should be conducted, and restructuring should be considered if it meets
agreed conditions.
d. GHI Bank should veto the restructuring, and DEF Bank should accept the decision.
e. The consortium should approve the restructuring if ABC Enterprises provides additional
collateral.

205
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: c. A joint assessment should be conducted, and restructuring should be considered if it
meets agreed conditions.
Explanation: In a consortium lending arrangement, decisions should be made collectively,
considering the borrower’s situation. A joint assessment ensures a fair approach to restructuring.

18. Case Study: Confidentiality Breach by Recovery Agent

MNO Bank hired a third-party recovery agent to collect overdue loan payments from Mr. Banerjee.
During a visit, the agent disclosed Mr. Banerjee's debt situation to his neighbors, causing
embarrassment and reputational damage. Mr. Banerjee lodged a formal complaint with the bank,
citing a breach of confidentiality. What should MNO Bank do to rectify the situation?

a. Apologize to Mr. Banerjee and continue with the recovery process using the same agent.
b. Terminate the recovery agent's contract and waive a portion of Mr. Banerjee’s debt.
c. Investigate the incident, issue a formal apology, and take disciplinary action against the
recovery agent.
d. Ignore the complaint, as recovery agents are allowed to use any means necessary.
e. Suggest Mr. Banerjee resolve the issue directly with the recovery agent.
Answer: c. Investigate the incident, issue a formal apology, and take disciplinary action against the
recovery agent.
Explanation: The Fair Practices Code mandates respect for the borrower’s privacy, and any breach
must be addressed through investigation, corrective action, and an apology.

19. Case Study: Discriminatory Lending Practices Allegation

Mr. Thomas, an applicant from a minority community, applied for a business loan with EFG Bank.
Despite meeting all the eligibility criteria and having a good credit history, his loan application was
rejected. A subsequent review revealed that other applicants with similar financial backgrounds but
from different communities had their loans approved. What action should EFG Bank take to address
this situation?

a. Re-evaluate Mr. Thomas's application and provide a valid reason for the initial rejection.
b. Approve Mr. Thomas's loan immediately to avoid discrimination claims.
c. Ignore the allegations, as lending decisions are subjective.
d. Suggest Mr. Thomas apply to another bank and offer a reference letter.
e. Approve the loan but charge a higher interest rate to mitigate perceived risks.
Answer: a. Re-evaluate Mr. Thomas's application and provide a valid reason for the initial
rejection.
Explanation: The Fair Practices Code prohibits discrimination based on community or other non-
economic factors. Providing a clear, valid reason for rejection ensures transparency and compliance
with fair lending standards.

20. Case Study: Change in Loan Terms Due to Borrower Misrepresentation

XYZ Co. secured a loan from ABC Bank, providing audited financial statements that later turned out
to be inaccurate. Upon discovering the misrepresentation, the bank decided to increase the interest
rate and demand additional collateral. XYZ Co. argues that the terms should remain unchanged since
the loan agreement did not include specific clauses addressing misrepresentation consequences.
What should be ABC Bank’s approach in this situation?

a. Proceed with increasing the interest rate and demand for additional collateral.
b. Maintain the original loan terms but impose a financial penalty.

206
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 c. Reassess the borrower’s creditworthiness and renegotiate the loan terms based on the new
information.
d. Forgive the misrepresentation and continue the loan as per the original terms.
e. File a lawsuit against XYZ Co. for fraudulent misrepresentation.
Answer: c. Reassess the borrower’s creditworthiness and renegotiate the loan terms based on the
new information.
Explanation: The Fair Practices Code requires that changes to loan terms be justified by valid
reasons. Since misrepresentation affects the borrower’s risk profile, a reassessment is appropriate
before altering loan terms.

21. Case Study: Interest Rate Revision During Restructuring

ABC Manufacturing has a term loan with DEF Bank at a fixed interest rate of 9% for the first five
years. Due to cash flow issues, ABC Manufacturing requested loan restructuring, including an
extension of the loan tenure and a reduction in monthly payments. DEF Bank agreed to the
restructuring but revised the interest rate to 11% to reflect the increased credit risk. ABC
Manufacturing argues that the original fixed rate should still apply. What should DEF Bank do in this
situation?

a. Maintain the original interest rate since it was a fixed-rate loan.

b. Apply the revised interest rate as the loan restructuring constitutes a new credit assessment.
c. Keep the original rate but impose additional fees to compensate for the increased risk.
d. Offer a blended rate that averages the original and revised interest rates.
e. Reject the restructuring request if ABC Manufacturing does not agree to the new rate.
Answer: b. Apply the revised interest rate as the loan restructuring constitutes a new credit
assessment.
Explanation: Restructuring a loan due to financial distress involves reassessing the borrower's risk,
and the terms can be revised accordingly. The bank is justified in changing the interest rate if it
reflects the new risk profile post-restructuring.

22. Case Study: Miscommunication Regarding Loan Prepayment Penalties

Mr. Nair took a housing loan from XYZ Bank with a 15-year tenure. Five years later, he decided to
prepay the entire outstanding amount. At the time of loan disbursement, Mr. Nair was informed that
there would be no prepayment penalty. However, upon prepayment, XYZ Bank charged him a 2%
penalty, citing an amendment in its policy. Mr. Nair claims that the penalty was not disclosed in the
original agreement. What is the best course of action for XYZ Bank?

a. Waive the prepayment penalty as it was not disclosed in the original loan agreement.
b. Retain the penalty since the policy change was within the bank's discretion.
c. Refund 50% of the penalty to Mr. Nair as a goodwill gesture.
d. Offer to waive the penalty if Mr. Nair agrees to extend the loan term instead.
e. Keep the penalty and suggest Mr. Nair consult the bank's updated policies.
Answer: a. Waive the prepayment penalty as it was not disclosed in the original loan agreement.
Explanation: The Fair Practices Code requires transparency in disclosing all charges. If the
prepayment penalty was not part of the original agreement, charging it after the fact would be
considered an unfair practice.

23. Case Study: Recovery Action Despite Pending Dispute Resolution

207
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Ms. Rao has an unsecured loan with PQR Bank, which became overdue by 90 days. She disputed
certain fees and charges, claiming they were incorrectly applied. While the bank has acknowledged
the complaint, no resolution has been reached yet. However, PQR Bank initiated recovery
proceedings and reported the overdue amount to a credit bureau. What should PQR Bank do in this
scenario?

a. Continue the recovery process since the loan is overdue.

b. Suspend recovery proceedings until the dispute is resolved.
c. Offer Ms. Rao a settlement on the overdue amount to expedite the resolution.
d. Proceed with recovery but exclude disputed charges from the amount being collected.
e. Report the entire outstanding amount as non-performing to the credit bureau.
Answer: b. Suspend recovery proceedings until the dispute is resolved.
Explanation: The Fair Practices Code stipulates that recovery actions should not be initiated while a
legitimate dispute regarding fees or charges is under consideration. The bank should pause the
recovery process until the dispute is resolved.

24. Case Study: Unilateral Change to Loan Agreement by the Lender

UVW Ltd. obtained a business loan from GHI Bank, which included a clause that allowed the bank to
review the loan terms annually. After the first year, GHI Bank unilaterally increased the interest rate
and introduced new fees without informing UVW Ltd. in advance. The company only learned of the
changes when the new terms were reflected in their monthly statements. How should GHI Bank
address this situation?

a. Enforce the new terms immediately, as the clause permits an annual review.
b. Reverse the changes and issue a formal notice to UVW Ltd. before implementing them.
c. Maintain the increased rate but waive the additional fees for the first year.
d. Negotiate a new agreement with UVW Ltd. to settle the terms of the loan.
e. Offer a temporary rate reduction to address the lack of prior notification.
Answer: b. Reverse the changes and issue a formal notice to UVW Ltd. before implementing them.
Explanation: Even if the loan agreement allows for changes, the Fair Practices Code requires that any
revisions to the loan terms must be communicated in advance to allow the borrower to plan
accordingly. Retroactive changes without notice are not permissible.

25. Case Study: Collateral Repossession Despite Payment Arrangement

DEF Bank extended a secured loan to Mr. Mehta, who has recently experienced financial difficulties.
Although Mr. Mehta missed two consecutive payments, he contacted the bank and proposed a
revised repayment schedule, which the bank verbally accepted. Despite this arrangement, the bank
initiated repossession of the collateral without prior written notice. What should DEF Bank do to
comply with fair lending practices?

a. Continue with the repossession since Mr. Mehta defaulted on the original terms.
b. Halt the repossession process and formally agree to the new repayment schedule.
c. Allow Mr. Mehta to keep the collateral only if he makes a lump sum payment immediately.
d. Offer Mr. Mehta an additional grace period to bring the account current.
e. Proceed with repossession but refund any fees associated with the revised payment
arrangement.
Answer: b. Halt the repossession process and formally agree to the new repayment schedule.
Explanation: The Fair Practices Code mandates that borrowers should be given written notice before

208
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
repossession if a revised payment arrangement has been agreed upon. The bank should formalize
the new schedule and suspend repossession efforts.

26. Case Study: Dispute over Loan Restructuring Terms in a Consortium Lending Agreement

XYZ Corporation has a working capital loan from a consortium of banks, led by ABC Bank. Due to
liquidity challenges, XYZ requested a restructuring of its loan terms, including reduced interest rates
and extended repayment periods. While ABC Bank agreed to the restructuring, other consortium
members refused to change the terms. XYZ contends that all consortium members should follow the
lead of the largest creditor, ABC Bank. How should this situation be handled?

a. The restructuring should proceed according to ABC Bank's decision as the lead lender.
b. The restructuring request should be denied unless all consortium members agree.
c. Each consortium member should independently decide whether to participate in the
restructuring.
d. XYZ should negotiate separately with each member to reach a mutually agreeable
restructuring plan.
e. The consortium should vote on the restructuring proposal, with the majority decision
prevailing.
Answer: c. Each consortium member should independently decide whether to participate in the
restructuring.
Explanation: In consortium lending, each bank retains the discretion to accept or reject restructuring
proposals based on its own risk assessment. The lead lender's decision does not bind other
members.

27. Case Study: Handling a Loan Overdue Despite Borrower Dispute Over Loan Misappropriation

Mrs. Singh took a business loan from UVW Bank, and she alleges that part of the disbursed loan
amount was mistakenly used for unauthorized fees by the bank. While Mrs. Singh has not missed any
payments until now, she is refusing to make further repayments until the issue is resolved. The bank,
however, insists that she continue repayments as scheduled and threatens to report the loan as non-
performing. What should UVW Bank do to resolve this in line with the Fair Practices Code?

a. Report the loan as non-performing to the credit bureau, as Mrs. Singh missed payments.
b. Place further repayments on hold and investigate Mrs. Singh's claims promptly.
c. Continue collecting repayments while investigating the claims, but not report the loan as
overdue.
d. Offer Mrs. Singh a settlement on the disputed fees to avoid further delay in payments.
e. Waive the disputed fees immediately to incentivize continued payments.
Answer: b. Place further repayments on hold and investigate Mrs. Singh's claims promptly.
Explanation: If there is a legitimate dispute regarding the loan's use, the bank should resolve the
issue before taking any recovery actions. It is inappropriate to report the loan as overdue until the
dispute is settled.

28. Case Study: Unjust Loan Denial Due to Discriminatory Practices

Mr. Ahmed, a prospective borrower, applied for a loan at PQR Bank and was denied, despite having a
strong credit score and meeting all other financial criteria. He later discovered that applicants from
his ethnic community had a higher loan rejection rate compared to others. Mr. Ahmed filed a
complaint alleging discriminatory practices. How should PQR Bank address this issue?

a. Offer Mr. Ahmed a loan immediately to avoid further allegations.

209
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 b. Review Mr. Ahmed's application and provide a detailed explanation for the rejection.
c. Ignore the complaint, as lending is a discretionary activity of the bank.
d. Suggest that Mr. Ahmed apply for a different loan product with easier approval criteria.
e. Provide Mr. Ahmed with a letter stating that rejection was based on internal policy reasons.
Answer: b. Review Mr. Ahmed's application and provide a detailed explanation for the rejection.
Explanation: The Fair Practices Code prohibits discriminatory practices. The bank should address the
complaint transparently by reassessing the application and providing a valid reason for the original
decision.

29. Case Study: Unfair Debt Collection Practices After Loan Transfer

Mr. Kumar had a personal loan with LMN Bank, which was transferred to a debt collection agency
after he missed two payments. The agency contacted Mr. Kumar's employer and disclosed his debt
situation, causing embarrassment. He filed a complaint with the bank regarding this breach of
privacy. How should LMN Bank handle this situation?

a. Deny responsibility, as the debt was transferred to a third-party agency.

b. Investigate the complaint, issue an apology, and instruct the agency to adhere to privacy
standards.
c. Explain that contacting employers is a standard practice in debt collection.
d. Offer Mr. Kumar a settlement discount on the debt to resolve the matter quickly.
e. Suggest that Mr. Kumar take legal action against the collection agency.
Answer: b. Investigate the complaint, issue an apology, and instruct the agency to adhere to
privacy standards.
Explanation: The bank remains responsible for ensuring that debt collection agencies comply with
fair practices, including respecting the borrower’s privacy. LMN Bank should address the breach and
take corrective actions.

30. Case Study: Legal and Regulatory Compliance in Loan Repossession

Mr. Banerjee's car loan with ABC Bank became overdue by 120 days. The loan agreement included a
clause allowing repossession without notice in the event of a default. The bank repossessed the car
from Mr. Banerjee’s residence without prior notice, and he argued that the repossession was illegal
as the clause violated statutory requirements for notification. What is the correct course of action for
ABC Bank?

a. Return the car to Mr. Banerjee immediately and issue a notice before repossessing it again.
b. Continue with the repossession, as the agreement allowed it.
c. Compensate Mr. Banerjee for the inconvenience caused and settle the loan account.
d. Offer Mr. Banerjee a revised payment plan to recover the car.
e. Retain the car but waive all additional repossession charges.
Answer: a. Return the car to Mr. Banerjee immediately and issue a notice before repossessing it
again.
Explanation: Even if a loan agreement allows repossession without notice, it must comply with legal
and regulatory requirements. The Fair Practices Code requires that borrowers be given notice before
repossession.

210
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Chapter 28
1. What was one of the primary reasons for the introduction of the Insolvency and Bankruptcy
Code (IBC) 2016?

A. To facilitate quick liquidation of companies.

B. To prioritize government dues over other debts.
C. To consolidate multiple laws into a single insolvency law.
D. To replace the Indian Contract Act, 1872.
E. To discourage foreign investments in India.
Answer: C. To consolidate multiple laws into a single insolvency law.
Explanation: The IBC was introduced to unify and consolidate various laws dealing with insolvency
and bankruptcy into one comprehensive code.

2. Which entities are specifically excluded from the applicability of IBC?

A. Limited Liability Partnerships (LLPs)

B. Companies incorporated under Companies Act, 2013
C. Financial Service Providers like banks
D. Partnership firms
E. Individual persons
Answer: C. Financial Service Providers like banks.
Explanation: The IBC does not apply to financial service providers such as banks, financial
institutions, and insurance companies.

3. What is the minimum default amount for initiating the Corporate Insolvency Resolution Process
(CIRP) under IBC, after the 2020 amendment?

A. INR 1 lakh
B. INR 5 lakh
C. INR 10 lakh
D. INR 50 lakh
E. INR 1 crore
Answer: E. INR 1 crore.
Explanation: The minimum default amount for CIRP was increased from INR 1 lakh to INR 1 crore by
the amendment in 2020.

4. Which of the following is NOT one of the four pillars of the IBC institutional framework?

A. Insolvency Professionals
B. Credit Rating Agencies
C. Adjudicating Authorities
D. Insolvency and Bankruptcy Board of India
E. Information Utilities
Answer: B. Credit Rating Agencies.
Explanation: The four pillars are Insolvency Professionals, Information Utilities, Adjudicating
Authorities, and the Insolvency and Bankruptcy Board of India.

5. Which section of IBC provides for a moratorium during the Corporate Insolvency Resolution
Process?

A. Section 5

211
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 B. Section 14
C. Section 21
D. Section 33
E. Section 53
Answer: B. Section 14.
Explanation: Section 14 of the IBC mandates a moratorium that prohibits certain actions against the
debtor's assets during the insolvency process.

6. Under the liquidation waterfall as per Section 53, which category of debts is given the highest
priority?

A. Secured creditors' debts

B. Employees' wages for the last 12 months
C. Unsecured creditors' debts
D. Insolvency resolution process costs and liquidation costs
E. Government dues
Answer: D. Insolvency resolution process costs and liquidation costs.
Explanation: Insolvency resolution process costs and liquidation costs have the highest priority in the
liquidation process.

7. The term "creditor-in-control" refers to what significant shift under the IBC?

A. Control of the company shifts from the shareholders to the creditors during CIRP.
B. Creditors gain ownership of the company's assets.
C. Creditors can appoint the company's directors.
D. Creditors have exclusive rights to liquidate the company.
E. Creditors are legally bound to manage the company’s operations.
Answer: A. Control of the company shifts from the shareholders to the creditors during CIRP.
Explanation: Under IBC, the control shifts to creditors to assess the viability of a distressed business,
marking a departure from the earlier debtor-in-possession regime.

8. Who appoints the Interim Resolution Professional (IRP) under IBC?

A. The Committee of Creditors

B. The Insolvency and Bankruptcy Board of India
C. The Adjudicating Authority (NCLT)
D. The Central Government
E. The Corporate Debtor's management
Answer: C. The Adjudicating Authority (NCLT).
Explanation: The IRP is appointed by the NCLT upon the admission of an insolvency application.

9. For a Pre-Packaged Insolvency Resolution Process (PPIRP) to be initiated, what is the minimum
default amount for an MSME corporate debtor?

A. INR 10 lakh
B. INR 20 lakh
C. INR 30 lakh
D. INR 50 lakh
E. INR 1 crore

212
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: A. INR 10 lakh.
Explanation: PPIRP is available for MSME corporate debtors in respect of defaults of at least INR 10
lakh.

10. Which entity has the power to regulate Insolvency Professionals (IPs) in India?

A. National Company Law Tribunal (NCLT)

B. Insolvency and Bankruptcy Board of India (IBBI)
C. Reserve Bank of India (RBI)
D. Securities and Exchange Board of India (SEBI)
E. Ministry of Corporate Affairs
Answer: B. Insolvency and Bankruptcy Board of India (IBBI).
Explanation: The IBBI is the regulatory body overseeing the functioning and regulation of Insolvency
Professionals.

11. Under IBC, what is the maximum allowable extension for the Corporate Insolvency Resolution
Process (CIRP) beyond the initial 180 days?

A. 30 days
B. 60 days
C. 90 days
D. 120 days
E. 150 days
Answer: C. 90 days.
Explanation: The CIRP can be extended for a maximum of 90 days beyond the initial 180 days,
subject to approval.

12. What happens if no resolution plan is approved within the stipulated time during CIRP?

A. The debtor is given more time to submit a new resolution plan.

B. The Corporate Debtor's assets are automatically liquidated.
C. The case is transferred to a higher authority.
D. The management regains control over the debtor's assets.
E. The creditors are allowed to appoint a new Resolution Professional.
Answer: B. The Corporate Debtor's assets are automatically liquidated.
Explanation: If no resolution plan is approved, the assets of the debtor proceed to liquidation as per
IBC provisions.

13. Which court decision clarified that Section 14 of IBC does not apply to personal guarantors of a
corporate debtor?

A. Essar Steel India Ltd. case

B. State Bank of India v. V. Ramakrishnan
C. Swiss Ribbons Pvt. Ltd. v. Union of India
D. Pioneer Urban Land and Infrastructure Ltd. v. Union of India
E. Jaypee Infratech Ltd. case
Answer: B. State Bank of India v. V. Ramakrishnan.
Explanation: In this case, the Supreme Court ruled that the moratorium under Section 14 does not
apply to the assets of personal guarantors.

14. What role does an Information Utility (IU) play in the IBC framework?

213
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 A. Conducts liquidation process
B. Maintains electronic databases on lenders and terms of lending
C. Acts as a mediator between creditors and debtors
D. Provides legal advice during CIRP
E. Manages the sale of debtor's assets
Answer: B. Maintains electronic databases on lenders and terms of lending.
Explanation: Information Utilities collect, store, and authenticate financial information and help
eliminate delays and disputes during defaults.

15. Which of the following amendments introduced a minimum threshold for filing an insolvency
application by certain financial creditors?

A. Amendment Act 2017

B. Amendment Act 2018
C. Amendment Act 2019
D. Amendment Act 2020
E. Amendment Act 2021
Answer: D. Amendment Act 2020.
Explanation: The 2020 amendment introduced a minimum threshold for filing an insolvency
application by certain classes of financial creditors, such as allottees in real estate projects.

16. In a Corporate Insolvency Resolution Process (CIRP), what percentage of creditor votes is
required to approve a critical decision like the approval of a resolution plan?

A. 33%
B. 51%
C. 60%
D. 66%
E. 75%
Answer: D. 66%.
Explanation: For critical matters, including the approval of a resolution plan, a minimum of 66% of
the voting rights is needed to pass a decision in the Committee of Creditors.

17. Under the IBC, what happens if a secured creditor chooses to enforce its security interest
instead of relinquishing it to the liquidation estate?

A. They receive payment after unsecured creditors.

B. The secured creditor's claim is reduced by 50%.
C. The creditor can sell the secured asset directly.
D. The creditor's claim is ranked equally with workmen's dues.
E. The secured asset is sold by the liquidator.
Answer: C. The creditor can sell the secured asset directly.
Explanation: Under liquidation proceedings, a secured creditor can choose to enforce its security
interest independently.

18. Which section of the IBC was amended to provide that a license, permit, quota, or similar grant
cannot be suspended or terminated during the moratorium period?

A. Section 4
B. Section 11
C. Section 14

214
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 D. Section 29A
E. Section 53
Answer: C. Section 14.
Explanation: The explanation to Section 14 clarified that certain government grants and permits
cannot be terminated during the moratorium period as long as there is no default in payments
arising from their use.

19. Who confirms the appointment of the Resolution Professional in a CIRP after the Committee of
Creditors (CoC) approves the appointment?

A. National Company Law Tribunal (NCLT)

B. Insolvency and Bankruptcy Board of India (IBBI)
C. Supreme Court
D. Registrar of Companies
E. Debt Recovery Tribunal
Answer: A. National Company Law Tribunal (NCLT).
Explanation: The NCLT confirms the appointment of the Resolution Professional upon receiving
approval from the Committee of Creditors.

20. Which amendment introduced Section 32A, providing immunity to the corporate debtor from
past offenses once a resolution plan is approved?

A. 2017 Amendment Act

B. 2018 Amendment Act
C. 2019 Amendment Act
D. 2020 Amendment Act
E. 2021 Amendment Act
Answer: D. 2020 Amendment Act.
Explanation: The 2020 Amendment introduced Section 32A, which provides immunity to the
corporate debtor and its property from past offenses after the approval of a resolution plan.

21. What is the minimum amount of voting share required by creditors to initiate a Pre-Packaged
Insolvency Resolution Process (PPIRP)?

A. 33%
B. 51%
C. 60%
D. 66%
E. 75%
Answer: D. 66%.
Explanation: For initiating a PPIRP, creditors representing not less than 66% of the financial debt's
value need to approve the initiation.

22. Which of the following statements is true regarding the voluntary liquidation process under
IBC?

A. The company must have a minimum default amount.

B. The company must be insolvent.
C. The company must pass a resolution for liquidation approved by a 51% majority.
D. The company must be able to pay off its debts fully from the liquidation proceeds.
E. The liquidation process is not available for LLPs.

215
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: D. The company must be able to pay off its debts fully from the liquidation proceeds.
Explanation: For a voluntary liquidation, the company must declare its ability to pay off all debts
from the liquidation proceeds.

23. If a resolution plan is approved by the Committee of Creditors (CoC), what is the next step in
the Corporate Insolvency Resolution Process (CIRP)?

A. Implementation of the plan by the debtor

B. Approval of the plan by the Supreme Court
C. Submission of the plan to the National Company Law Tribunal (NCLT)
D. Liquidation of the company
E. Appointment of a new management team
Answer: C. Submission of the plan to the National Company Law Tribunal (NCLT).
Explanation: After the CoC approves the resolution plan, it is submitted to the NCLT for final approval
and implementation.

24. Under IBC, which of the following situations could directly lead to the commencement of the
liquidation process?

A. Dispute over the appointment of an Interim Resolution Professional

B. Approval of a resolution plan by NCLT
C. Failure to approve a resolution plan within the stipulated time
D. The debtor's voluntary application for liquidation
E. Objection by the debtor's management
Answer: C. Failure to approve a resolution plan within the stipulated time.
Explanation: If no resolution plan is approved within the stipulated period, the corporate debtor
automatically proceeds to liquidation.

25. What is the consequence if a related financial creditor participates in the Committee of
Creditors (CoC)?

A. Their voting rights are reduced by 50%.

B. They cannot represent or vote in the CoC.
C. They must exit the insolvency process.
D. They are given double voting rights.
E. Their claims are subordinated to operational creditors.
Answer: B. They cannot represent or vote in the CoC.
Explanation: A related financial creditor is not allowed to represent, participate, or vote in the CoC.

26. How is the Committee of Creditors (CoC) formed in cases where a corporate debtor has no
financial creditors?

A. By including government representatives

B. By appointing an external consultant
C. By forming a group of the largest operational creditors
D. By including shareholders
E. By allowing the debtor's management to participate
Answer: C. By forming a group of the largest operational creditors.
Explanation: If a corporate debtor has no financial creditors, the CoC is constituted by the largest
operational creditors and representatives of workmen and employees.

216
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
27. What is the duration of the initial moratorium period when a Pre-Packaged Insolvency
Resolution Process (PPIRP) is initiated?

A. 90 days
B. 120 days
C. 150 days
D. 180 days
E. 210 days
Answer: B. 120 days.
Explanation: The PPIRP process must be completed within 120 days from the date of initiation.

28. Under the IBC, which entity is responsible for maintaining a list of claims against the debtor
after the initiation of the insolvency process?

A. Committee of Creditors (CoC)

B. Insolvency Professional
C. National Company Law Tribunal (NCLT)
D. Information Utility (IU)
E. Debtor's Management
Answer: B. Insolvency Professional.
Explanation: The Insolvency Professional is responsible for collecting and verifying claims from
creditors.

29. In the liquidation process, which category of debts is explicitly excluded from being part of the
liquidation estate?

A. Workmen's dues
B. Government dues
C. Provident fund dues
D. Secured creditors’ claims
E. Equity shareholders' interests
Answer: C. Provident fund dues.
Explanation: The provident fund, pension fund, and gratuity fund dues are not included in the
liquidation estate.

30. What is the primary objective of introducing the Pre-Packaged Insolvency Resolution Process
(PPIRP) for MSMEs?

A. To increase government revenue through penalties

B. To liquidate MSMEs quickly
C. To provide a cost-effective and less disruptive insolvency resolution
D. To eliminate the role of creditors
E. To prioritize debt repayment over business continuity
Answer: C. To provide a cost-effective and less disruptive insolvency resolution.
Explanation: PPIRP aims to ensure a quicker and cost-effective insolvency resolution for MSMEs with
minimal disruption to business operations.

31. What is the purpose of Section 12A in the IBC?

A. To extend the moratorium period indefinitely

B. To allow withdrawal of an insolvency application with 90% creditor approval
C. To prioritize government dues in the resolution process

217
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 D. To introduce voluntary liquidation provisions
E. To increase the minimum default amount for initiating insolvency
Answer: B. To allow withdrawal of an insolvency application with 90% creditor approval.
Explanation: Section 12A permits the withdrawal of a CIRP application if 90% of the Committee of
Creditors approve the withdrawal.

32. Which of the following best describes the role of the Insolvency and Bankruptcy Board of India
(IBBI)?

A. Conducts insolvency proceedings for individual debtors

B. Regulates the insolvency professionals, insolvency professional agencies, and information
utilities
C. Approves resolution plans for corporate debtors
D. Acts as an appellate authority for insolvency cases
E. Manages the liquidation of corporate entities
Answer: B. Regulates the insolvency professionals, insolvency professional agencies, and
information utilities.
Explanation: The IBBI is the regulatory body overseeing insolvency professionals, agencies, and
information utilities under the IBC framework.

33. How can a corporate debtor initiate a Corporate Insolvency Resolution Process (CIRP) against
itself?

A. By filing an application under Section 7

B. By passing a resolution in the CoC
C. By filing an application under Section 10
D. By approaching the IBBI
E. By declaring bankruptcy in a civil court
Answer: C. By filing an application under Section 10.
Explanation: Section 10 of the IBC allows a corporate debtor to voluntarily initiate CIRP by filing an
application.

34. What happens to the management of a corporate debtor once the CIRP is initiated?

A. It remains with the existing management.

B. It is transferred to a government official.
C. It is handed over to the Resolution Professional.
D. It is suspended, and a liquidator is appointed.
E. It continues under the supervision of the shareholders.
Answer: C. It is handed over to the Resolution Professional.
Explanation: Upon initiation of CIRP, the Resolution Professional takes over the management of the
corporate debtor's affairs.

35. What is a Base Resolution Plan (BRP) in the context of PPIRP?

A. The original business plan of the debtor

B. The first liquidation proposal submitted by the creditors
C. A preliminary resolution plan submitted by the debtor before CIRP
D. The debtor's resolution plan that is subject to competitive bidding
E. A plan proposed by the Insolvency Professional

218
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: D. The debtor's resolution plan that is subject to competitive bidding.
Explanation: In PPIRP, the Base Resolution Plan is initially submitted by the debtor and can be
challenged by other resolution applicants.

36. Which of the following is NOT a consequence of initiating a moratorium under Section 14 of
the IBC?

A. Institution of suits or continuation of pending suits against the corporate debtor is prohibited.
B. Transferring or disposing of the corporate debtor’s assets is restricted.
C. Execution of any court decree against the corporate debtor is halted.
D. The supply of essential goods or services to the corporate debtor can be suspended.
E. Recovery of property in possession of the corporate debtor is prohibited.
Answer: D. The supply of essential goods or services to the corporate debtor can be suspended.
Explanation: During the moratorium, essential goods and services required to preserve the debtor's
business cannot be suspended.

37. What must happen for a corporate debtor to undergo voluntary liquidation under the IBC?

A. The creditors must force the debtor into liquidation.

B. The company must default on its payments.
C. A majority of directors must declare the company is solvent.
D. The NCLT must first approve the liquidation.
E. The company must convert into a partnership firm.
Answer: C. A majority of directors must declare the company is solvent.
Explanation: The directors must declare the company solvent, and a resolution for voluntary
liquidation must be passed before the NCLT.

38. Which entity primarily handles the adjudication of insolvency cases for corporate debtors
under the IBC?

A. Debt Recovery Tribunal (DRT)

B. National Company Law Tribunal (NCLT)
C. High Court
D. Supreme Court
E. Securities and Exchange Board of India (SEBI)
Answer: B. National Company Law Tribunal (NCLT).
Explanation: The NCLT is the adjudicating authority for corporate insolvency resolution processes
under the IBC.

39. What is the consequence of non-compliance with an approved resolution plan by a corporate
debtor?

A. The resolution plan is automatically modified.

B. The plan is referred back to the Committee of Creditors.
C. The liquidation process may be initiated.
D. The debtor is given additional time to comply.
E. The resolution plan is annulled.
Answer: C. The liquidation process may be initiated.
Explanation: If a corporate debtor fails to comply with an approved resolution plan, the NCLT may
order the commencement of liquidation.

40. What does the term "haircut" refer to in the context of the IBC?

219
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 A. Reduction in the liquidation costs
B. Reduction in the debtor's liabilities
C. A discount offered to creditors during resolution
D. A reduction in the repayment amount to creditors as part of the resolution plan
E. The sale of assets at a lower than market value
Answer: D. A reduction in the repayment amount to creditors as part of the resolution plan.
Explanation: "Haircut" refers to creditors agreeing to accept less than the full amount owed as part
of the insolvency resolution plan.

41. What is the timeline for the Resolution Professional to submit a resolution plan to the NCLT
after receiving approval from the Committee of Creditors (CoC)?

A. 7 days
B. 14 days
C. 30 days
D. 45 days
E. 60 days
Answer: C. 30 days.
Explanation: The Resolution Professional must submit the approved resolution plan to the NCLT
within 30 days.

42. If a dispute regarding an operational creditor's claim exists, what is the required action before
the operational creditor can file an insolvency petition?

A. File directly with the NCLT.

B. Initiate arbitration proceedings.
C. Send a demand notice to the corporate debtor.
D. Obtain approval from the Committee of Creditors.
E. Resolve the dispute in a civil court.
Answer: C. Send a demand notice to the corporate debtor.
Explanation: An operational creditor must issue a demand notice giving the debtor 10 days to settle
the claim or show the existence of a dispute before approaching the NCLT.

43. What is the voting threshold required to replace the Resolution Professional during the CIRP?

A. 33%
B. 51%
C. 60%
D. 66%
E. 75%
Answer: D. 66%.
Explanation: A minimum of 66% voting share in the CoC is required to replace the Resolution
Professional during the CIRP.

44. Which amendment to the IBC introduced the provision for personal guarantors to be included
in the insolvency framework?

A. 2017 Amendment
B. 2018 Amendment
C. 2019 Amendment
D. 2020 Amendment

220
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 E. 2021 Amendment
Answer: B. 2018 Amendment.
Explanation: The 2018 amendment extended the applicability of the IBC to include personal
guarantors to corporate debtors.

45. What does Section 66 of the IBC deal with?

A. Moratorium provisions during insolvency

B. Insolvency and Bankruptcy Board of India's regulatory powers
C. Fraudulent trading or wrongful trading by the corporate debtor
D. Appointment of Interim Resolution Professional
E. Withdrawal of insolvency applications
Answer: C. Fraudulent trading or wrongful trading by the corporate debtor.
Explanation: Section 66 allows the NCLT to hold directors or partners liable for fraudulent or
wrongful trading during insolvency proceedings.

46. Which of the following statements regarding the liquidation process under IBC is TRUE?

A. All assets of the debtor are included in the liquidation estate.

B. Secured creditors are always given priority over other creditors.
C. The liquidator has no power to reject claims.
D. Workmen's dues for the last 24 months are given priority over unsecured creditors.
E. Equity shareholders receive payments before operational creditors.
Answer: D. Workmen's dues for the last 24 months are given priority over unsecured creditors.
Explanation: Under the liquidation waterfall, workmen’s dues for the last 24 months have priority
over unsecured creditors.

47. What is the maximum time allowed for the completion of a Corporate Insolvency Resolution
Process (CIRP), including extensions, under the IBC?

A. 180 days
B. 270 days
C. 330 days
D. 360 days
E. 400 days
Answer: C. 330 days.
Explanation: The IBC stipulates a maximum of 330 days for the completion of CIRP, including any
extensions.

48. Which of the following is a key characteristic of the Pre-Packaged Insolvency Resolution
Process (PPIRP)?

A. It involves mandatory liquidation if no resolution is reached.

B. It is only applicable to non-MSME companies.
C. The management remains with the existing promoters during the process.
D. It requires a minimum debt default of INR 5 crore.
E. It eliminates the role of Insolvency Professionals.
Answer: C. The management remains with the existing promoters during the process.
Explanation: In PPIRP, the management continues with the existing promoters while the creditors are
in control.

221
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
49. What happens if an application for PPIRP is not admitted within 14 days by the Adjudicating
Authority?

A. The process is considered automatically admitted.

B. The applicant can appeal to the High Court.
C. The applicant is given 7 more days to rectify any defects.
D. The application is deemed rejected.
E. The application is referred to the Supreme Court.
Answer: C. The applicant is given 7 more days to rectify any defects.
Explanation: If an application for PPIRP is not admitted, the applicant is given a chance to rectify any
defects within 7 days.

50. What is the role of an Information Utility (IU) in a CIRP?

A. Approving the resolution plan

B. Managing the debtor’s assets during insolvency
C. Collecting and providing financial information to the creditors
D. Conducting the valuation of the debtor's assets
E. Initiating insolvency proceedings on behalf of creditors
Answer: C. Collecting and providing financial information to the creditors.
Explanation: Information Utilities collect, store, and authenticate financial information that can be
used during the insolvency resolution process.

51. Under the IBC, which of the following creditors is entitled to be part of the Committee of
Creditors (CoC)?

A. Operational Creditors with debts exceeding 5% of total debt

B. Financial Creditors only
C. Any creditor with approved claims
D. Secured creditors only
E. Creditors with overdue invoices
Answer: B. Financial Creditors only.
Explanation: The CoC is composed of financial creditors, while operational creditors do not have
voting rights but may attend meetings if their dues exceed 10% of the total debt.

52. What is the role of a Resolution Professional (RP) during the Corporate Insolvency Resolution
Process (CIRP)?

A. Liquidate the company’s assets immediately

B. Propose a repayment plan for unsecured creditors
C. Manage the operations of the Corporate Debtor and conduct the resolution process
D. Approve the resolution plan on behalf of the creditors
E. Act as an arbitrator between the debtor and the creditors
Answer: C. Manage the operations of the Corporate Debtor and conduct the resolution process.
Explanation: The RP takes control of the debtor’s management and operations and oversees the
insolvency resolution process.

53. What condition must be met for a secured creditor to enforce their security interest outside
the liquidation estate under IBC?

A. They must relinquish their security interest to the liquidation estate

B. They must pay a penalty to the Insolvency and Bankruptcy Board of India

222
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 C. They must get approval from the Committee of Creditors
D. They must ensure that the asset is not a priority debt
E. They must not recover any part of their debt through the insolvency resolution process
Answer: A. They must relinquish their security interest to the liquidation estate.
Explanation: Secured creditors can either relinquish their security interest to the liquidation estate or
realize their security interest independently.

54. During the liquidation process, which of the following debts is considered subordinate to
financial debts to unsecured creditors?

A. Insolvency resolution process costs

B. Workmen's dues for the preceding 24 months
C. Debts owed to the Central and State Governments
D. Secured creditors who have not relinquished their security interest
E. Preference shareholders' claims
Answer: C. Debts owed to the Central and State Governments.
Explanation: Under the liquidation waterfall in Section 53, government dues have a lower priority
than unsecured financial debts.

55. Which of the following amendments added Section 32A to the IBC, providing immunity to a
corporate debtor for prior offenses once a resolution plan is approved?

A. Amendment Act 2016

B. Amendment Act 2017
C. Amendment Act 2019
D. Amendment Act 2020
E. Amendment Act 2021
Answer: D. Amendment Act 2020.
Explanation: The 2020 amendment introduced Section 32A

56. Under IBC, which of the following factors does NOT affect the eligibility of a Resolution
Applicant as per Section 29A?

A. Conviction for any offense punishable with imprisonment for two years or more
B. Disqualification to act as a director under the Companies Act, 2013
C. Involvement in a preferential, undervalued, or fraudulent transaction under the IBC within the
past five years
D. Holding more than 10% equity in a company declared as a non-performing asset for one year
E. Payment of overdue amounts related to non-performing assets within 30 days of resolution
plan submission
Answer: E. Payment of overdue amounts related to non-performing assets within 30 days of
resolution plan submission.
Explanation: As per Section 29A, a person is disqualified if they have an overdue loan classified as a
non-performing asset (NPA) for more than a year. However, if the overdue amounts are paid off
before submitting the resolution plan, the applicant can still qualify.

57. The Committee of Creditors (CoC) decides to replace the Resolution Professional (RP) during
the CIRP. If there is a tie in the voting share, what happens?

A. The current RP continues in the role.

B. The NCLT appoints a new RP at its discretion.

223
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 C. The voting process is conducted again within 7 days.
D. The RP with the highest number of creditor recommendations is chosen.
E. A senior Insolvency Professional from the IBBI is automatically appointed.
Answer: A. The current RP continues in the role.
Explanation: In case of a tie, the status quo is maintained, meaning the existing Resolution
Professional continues in their role.

58. When a secured creditor chooses to enforce their security interest outside the liquidation
process under Section 52 of IBC, what is the consequence for any surplus generated from the sale
of the secured asset?

A. The surplus is returned to the secured creditor.

B. The surplus must be deposited with the liquidator for distribution.
C. The secured creditor can retain the surplus and deduct it from future claims.
D. The surplus is shared equally among all creditors.
E. The liquidator uses the surplus to pay off government dues first.
Answer: B. The surplus must be deposited with the liquidator for distribution.
Explanation: If the secured creditor realizes more than their dues from the sale, the surplus must be
deposited with the liquidator for distribution according to the priority of claims in the liquidation
process.

59. Which court ruling clarified the interpretation of the term "existence of a dispute" for
operational creditors filing an application under Section 9 of the IBC?

A. Essar Steel India Ltd. case

B. Mobilox Innovations Private Limited v. Kirusa Software Private Limited
C. State Bank of India v. V. Ramakrishnan
D. Pioneer Urban Land and Infrastructure Ltd. v. Union of India
E. Jaypee Infratech Ltd. case
Answer: B. Mobilox Innovations Private Limited v. Kirusa Software Private Limited.
Explanation: In this case, the Supreme Court clarified that the "existence of a dispute" must be
genuine and not spurious, speculative, or illusory for the operational creditor to proceed under
Section 9.

60. In which scenario can a Corporate Insolvency Resolution Process (CIRP) be terminated under
Section 12A of the IBC?

A. When the Committee of Creditors (CoC) withdraws the application with 66% voting.
B. When the NCLT orders the termination due to non-compliance with the resolution plan.
C. When the original applicant requests a withdrawal after CoC's approval with a 90% voting
share.
D. When the Resolution Professional decides to terminate the process unilaterally.
E. When an operational creditor withdraws their claim before the CoC's constitution.
Answer: C. When the original applicant requests a withdrawal after CoC's approval with a 90%
voting share.
Explanation: Section 12A permits the withdrawal of the insolvency application if approved by at least
90% of the voting share in the Committee of Creditors.

61. What is the main difference between the Pre-Packaged Insolvency Resolution Process (PPIRP)
and the Corporate Insolvency Resolution Process (CIRP)?

224
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 A. PPIRP allows creditors to initiate the process, whereas CIRP does not.
B. In PPIRP, the debtor retains control, whereas in CIRP, creditors take control.
C. PPIRP requires the approval of at least 75% of financial creditors, while CIRP requires 66%.
D. PPIRP automatically leads to liquidation if no resolution plan is approved, while CIRP does not.
E. PPIRP does not allow for a moratorium, while CIRP includes a moratorium.
Answer: B. In PPIRP, the debtor retains control, whereas in CIRP, creditors take control.
Explanation: In PPIRP, the management remains with the debtor while creditors oversee the process,
combining elements of debtor-in-possession with creditor control.

62. Under Section 53 of the IBC, how are the claims of secured creditors who have relinquished
their security interest treated during liquidation?

A. They are given priority over workmen's dues.

B. They rank equally with unsecured creditors.
C. They share the same priority as insolvency resolution costs.
D. They are ranked along with workmen's dues for the last 24 months.
E. They are subordinated to financial debts owed to unsecured creditors.
Answer: D. They are ranked along with workmen's dues for the last 24 months.
Explanation: Secured creditors who relinquish their security interest rank equally with workmen's
dues for the last 24 months prior to the liquidation commencement.

63. In the context of IBC, what is an Information Memorandum, and what is its purpose?

A. A document detailing the liquidation estate for potential buyers

B. A report outlining the financial condition of the corporate debtor for creditors
C. A regulatory document issued by the IBBI to insolvency professionals
D. A list of legal disputes involving the corporate debtor
E. A proposal for voluntary liquidation submitted by the debtor
Answer: B. A report outlining the financial condition of the corporate debtor for creditors.
Explanation: The Information Memorandum provides relevant financial information about the
debtor to enable potential resolution applicants to prepare a resolution plan.

64. What are the conditions under which an appeal can be made to the National Company Law
Appellate Tribunal (NCLAT) against an NCLT order?

A. Any creditor disagrees with the resolution plan.

B. The appeal is based on a question of law.
C. The resolution plan is rejected by a 51% majority in the CoC.
D. The operational creditor was not included in the CoC meetings.
E. The debtor requests an extension of the CIRP period.
Answer: B. The appeal is based on a question of law.
Explanation: Appeals to the NCLAT can be made on questions of law arising from an order passed by
the NCLT.

65. If a secured creditor opts to enforce their security outside the liquidation process, under what
conditions can they recover the shortfall from the liquidation estate?

A. The shortfall will be treated as an unsecured claim.

B. The creditor is entitled to the entire proceeds from the sale of assets.
C. The secured creditor cannot claim the shortfall from the liquidation estate.
D. The shortfall is ranked equally with employee dues.

225
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 E. The liquidator must first settle all government dues.
Answer: A. The shortfall will be treated as an unsecured claim.
Explanation: If a secured creditor enforces their security interest outside the liquidation process and
there is a shortfall, the remaining claim will be treated as an unsecured debt.

66. What is the primary objective of a moratorium during the Corporate Insolvency Resolution
Process (CIRP)?

A. To liquidate the assets of the debtor

B. To ensure creditors receive timely payments
C. To maintain the status quo and prevent deterioration of the corporate debtor's assets
D. To prevent shareholders from claiming dividends
E. To impose penalties on defaulting creditors
Answer: C. To maintain the status quo and prevent deterioration of the corporate debtor's assets.
Explanation: The moratorium aims to maintain the corporate debtor’s value and prevent asset
depletion during the insolvency resolution process.

67. How does the IBC define an "operational debt"?

A. Debt arising from loans given by financial institutions

B. Debt arising out of transactions involving goods or services, employment, or government dues
C. Any financial liability of a corporate debtor
D. Debt secured against the corporate debtor's assets
E. Debt owed to an affiliate company or related party
Answer: B. Debt arising out of transactions involving goods or services, employment, or
government dues.
Explanation: Operational debt refers to liabilities that arise from the supply of goods or services,
employment, or any dues owed to the government.

68. Under Section 12 of the IBC, which of the following conditions must be met for the National
Company Law Tribunal (NCLT) to approve an extension of the Corporate Insolvency Resolution
Process (CIRP) beyond the initial 180 days?

A. The extension must be requested by the Resolution Professional only.

B. The extension must be approved by at least 90% of the Committee of Creditors (CoC).
C. The extension must be recommended by the Insolvency and Bankruptcy Board of India (IBBI).
D. The Committee of Creditors must approve the extension with a vote of at least 66%.
E. The NCLT can grant an extension without approval from the Committee of Creditors if the case
is complex.
Answer: D. The Committee of Creditors must approve the extension with a vote of at least 66%.
Explanation: The CIRP can be extended beyond 180 days if the Committee of Creditors approves the
extension with at least a 66% voting share.

69. When considering a resolution plan, which factor is the Committee of Creditors (CoC) allowed
to prioritize under the IBC?

A. The interests of unsecured creditors over secured creditors.

B. The maximization of the corporate debtor’s value.
C. Payment of government dues as the highest priority.
D. Preferences given to the largest creditor.
E. Distribution of dividends to shareholders before insolvency resolution costs.

226
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: B. The maximization of the corporate debtor’s value.
Explanation: The IBC prioritizes maximizing the value of the distressed assets and ensuring the
revival of the corporate debtor over other considerations.

70. If a resolution plan has been approved by the Committee of Creditors (CoC), under what
circumstances can the National Company Law Tribunal (NCLT) reject the plan?

A. If the plan fails to consider operational creditors' interests.

B. If it is found that the plan does not provide for payment of government dues in full.
C. If the resolution plan does not comply with the provisions of Section 30(2) of the IBC.
D. If any creditor files an appeal against the plan.
E. If the Resolution Professional recommends a liquidation process instead.
Answer: C. If the resolution plan does not comply with the provisions of Section 30(2) of the IBC.
Explanation: NCLT can reject a resolution plan if it fails to meet the requirements specified in Section
30(2), such as payment to operational creditors and compliance with other laws.

71. What happens to the existing management of a company once the Corporate Insolvency
Resolution Process (CIRP) begins?

A. The management remains with the existing board of directors.

B. The Insolvency Professional takes control of the company’s operations.
C. The shareholders regain full control over the company.
D. The company’s management is transferred to a government-appointed committee.
E. The management is split between creditors and the existing board of directors.
Answer: B. The Insolvency Professional takes control of the company’s operations.
Explanation: When CIRP is initiated, the management of the company is handed over to the
Insolvency Professional, who oversees the resolution process.

72. Which of the following best describes the function of a Committee of Creditors (CoC) during
the Corporate Insolvency Resolution Process (CIRP)?

A. To represent the interests of only the secured creditors.

B. To assist the Resolution Professional in managing the day-to-day affairs of the debtor.
C. To decide on the approval or rejection of the resolution plan and other significant matters.
D. To act as a legal advisor to the National Company Law Tribunal (NCLT).
E. To implement the resolution plan after approval by the NCLT.
Answer: C. To decide on the approval or rejection of the resolution plan and other significant
matters.
Explanation: The CoC is primarily responsible for approving or rejecting the resolution plan and
other critical decisions during the CIRP.

73. Which one of the following conditions must be met for a voluntary liquidation process to be
initiated under the IBC?

A. The company must first undergo the Corporate Insolvency Resolution Process.
B. A special resolution must be passed by a two-thirds majority of the shareholders.
C. The company must have defaulted on a minimum outstanding debt of INR 1 crore.
D. The National Company Law Tribunal (NCLT) must initiate liquidation proceedings.
E. The company must declare that it has no pending financial obligations.

227
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: B. A special resolution must be passed by a two-thirds majority of the shareholders.
Explanation: For voluntary liquidation, the company must pass a special resolution indicating its
intention to liquidate, typically with the approval of two-thirds of the shareholders.

74. Under the IBC, which scenario would result in the appointment of an Interim Resolution
Professional (IRP) for a maximum of 30 days?

A. When a financial creditor initiates insolvency proceedings.

B. When the debtor requests the appointment directly from the NCLT.
C. When an operational creditor files an insolvency application.
D. When the existing management of the debtor requests an extension of the CIRP.
E. When the Insolvency and Bankruptcy Board of India (IBBI) intervenes to replace the current
Resolution Professional.
Answer: A. When a financial creditor initiates insolvency proceedings.
Explanation: Upon initiation of insolvency by a financial creditor, the NCLT appoints an Interim
Resolution Professional for an initial period of 30 days, during which the CoC may confirm or replace
the IRP.

75. During the Pre-Packaged Insolvency Resolution Process (PPIRP), what role does the base
resolution plan play?

A. It sets the minimum liquidation value for the debtor’s assets.

B. It is a standard plan proposed by the creditors before the insolvency process begins.
C. It acts as the debtor's initial proposal, which can be challenged for value maximization.
D. It represents the valuation of the company’s assets based on market conditions.
E. It includes the penalties imposed on the corporate debtor for past non-compliances.
Answer: C. It acts as the debtor's initial proposal, which can be challenged for value maximization.
Explanation: In PPIRP, the debtor submits a base resolution plan, which serves as the initial proposal
for resolving the insolvency. Other prospective applicants can challenge it to maximize the value.

76. When can a secured creditor initiate a recovery process under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002,
while the Corporate Insolvency Resolution Process (CIRP) is underway?

A. At any point, provided they give notice to the NCLT.

B. Only after the moratorium period is lifted by the NCLT.
C. Only if the secured creditor is not a part of the Committee of Creditors.
D. If the moratorium under Section 14 does not apply to the secured asset in question.
E. Secured creditors are completely prohibited from using SARFAESI during CIRP.
Answer: D. If the moratorium under Section 14 does not apply to the secured asset in question.
Explanation: Section 14 imposes a moratorium during CIRP, which typically restricts secured
creditors from enforcing their security interest. However, if a specific exemption applies, the
SARFAESI process may continue.

77. Which provision under the IBC allows the Resolution Professional to avoid transactions made
to defraud creditors or conducted with malafide intent before the initiation of CIRP?

A. Section 43 (Preferential Transactions)

B. Section 66 (Fraudulent Trading or Wrongful Trading)
C. Section 52 (Secured Creditor’s Right to Enforce)
D. Section 53 (Liquidation Waterfall)

228
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 E. Section 29A (Ineligibility of Resolution Applicant)
Answer: B. Section 66 (Fraudulent Trading or Wrongful Trading).
Explanation: Section 66 empowers the Resolution Professional to report fraudulent or wrongful
trading conducted before the initiation of CIRP, and the NCLT may hold directors or partners liable for
such activities.

78. What is the purpose of the "clean slate" principle in the context of IBC resolution?

A. It allows shareholders to retain their equity in the company.

B. It ensures that all unresolved claims are carried over after the resolution plan.
C. It facilitates a fresh start for the corporate debtor by wiping out pre-resolution liabilities.
D. It enables the liquidator to sell assets without any liabilities.
E. It prevents operational creditors from filing future claims against the debtor.
Answer: C. It facilitates a fresh start for the corporate debtor by wiping out pre-resolution
liabilities.
Explanation: The "clean slate" principle under IBC ensures that once a resolution plan is approved,
the corporate debtor can start afresh, free from previous liabilities.

79. What is the maximum voting share required to approve a decision to liquidate the company
during the Corporate Insolvency Resolution Process (CIRP)?

A. 33%
B. 51%
C. 66%
D. 75%
E. 90%
Answer: C. 66%.
Explanation: The decision to liquidate the company during CIRP requires the approval of at least 66%
of the voting share of the Committee of Creditors.

80. Which of the following transactions is considered a "preferential transaction" under Section 43
of the IBC?

A. A transaction that involves the sale of assets at market value.

B. A payment made to a creditor who is not related to the corporate debtor.
C. A transaction made two years before the insolvency commencement date that benefits a
related party.
D. A transfer of an asset for full consideration received immediately before the insolvency
process.
E. A payment to an operational creditor made within the ordinary course of business.
Answer: C. A transaction made two years before the insolvency commencement date that benefits
a related party.
Explanation: Section 43 defines preferential transactions as those made within two years before the
insolvency commencement date for related parties (or one year for unrelated parties) that benefit
one creditor over others.

81. Under the IBC, which of the following scenarios can potentially lead to the "avoidance of
undervalued transactions" under Section 45?

A. A transfer of assets below market value to a third party within two years before the initiation
of CIRP.

229
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 B. A transaction made by the debtor after the insolvency commencement date.
C. Any transaction carried out by the debtor within five years of incorporation.
D. Payment made for an operational expense during the moratorium.
E. The sale of non-core assets after the resolution plan approval.
Answer: A. A transfer of assets below market value to a third party within two years before the
initiation of CIRP.
Explanation: Section 45 allows for the avoidance of transactions made within two years before the
insolvency commencement date if the assets were transferred at less than their fair market value.

82. How does the IBC address "extortionate credit transactions" under Section 50?

A. The transactions are automatically voided if made within three years prior to CIRP.
B. The transactions are deemed valid if they were approved by the Committee of Creditors.
C. The Resolution Professional may apply to the NCLT to avoid them if found to be exorbitant.
D. The NCLT must approve all credit transactions within five years of the CIRP.
E. The IBC does not provide a mechanism for dealing with extortionate credit transactions.
Answer: C. The Resolution Professional may apply to the NCLT to avoid them if found to be
exorbitant.
Explanation: Under Section 50, the Resolution Professional can apply to the NCLT to set aside credit
transactions made within two years before the insolvency commencement date if the terms are
deemed excessively unfavorable.

83. What distinguishes a "financial debt" from an "operational debt" under the IBC?

A. Financial debt arises from the purchase of goods or services, while operational debt is related
to loans or advances.
B. Operational debt is associated with loans, whereas financial debt is associated with employee
dues.
C. Financial debt involves debt along with interest accrued, whereas operational debt arises from
employment, goods, services, or statutory dues.
D. Financial debt has no priority over operational debt during the liquidation process.
E. There is no distinction between financial debt and operational debt in the IBC.
Answer: C. Financial debt involves debt along with interest accrued, whereas operational debt
arises from employment, goods, services, or statutory dues.
Explanation: Financial debt refers to loans and advances, typically with interest, while operational
debt arises from liabilities incurred in the ordinary course of business, such as employment or trade
payables.

84. In the liquidation process, if the Resolution Professional is appointed as the liquidator,
which of the following is NOT one of their duties?
A. To realize and distribute the liquidation estate.
B. To manage the corporate debtor as a going concern.
C. To ensure that workmen’s dues are settled as per the priority list.
D. To examine the validity of creditors' claims and admit or reject them.
E. To represent the debtor in legal proceedings with NCLT approval.
Answer: B. To manage the corporate debtor as a going concern.
Explanation: Once liquidation is ordered, the primary duty of the liquidator is to realize the assets
and distribute the proceeds according to the IBC's priority list, not to manage the debtor as a going
concern.

230
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
85. Under the Insolvency and Bankruptcy Code, what does the term "moratorium" refer to?

A. The temporary cessation of payments to creditors during insolvency.

B. A ban on new business activities by the debtor during CIRP.
C. A period during which no legal actions can be initiated or continued against the corporate
debtor.
D. The extension of the CIRP period by the NCLT.
E. A restriction on the sale of debtor's assets without the creditors' consent.
Answer: C. A period during which no legal actions can be initiated or continued against the
corporate debtor.
Explanation: The moratorium under Section 14 provides for a temporary halt to legal actions against
the debtor to protect its assets and operations during CIRP.

86. Which of the following conditions is necessary for a company to qualify for the Pre-Packaged
Insolvency Resolution Process (PPIRP)?

A. The company must have been in existence for at least five years.
B. The company must have undergone a previous CIRP within three years.
C. The default amount must be at least INR 10 lakh for MSMEs.
D. All creditors must unanimously agree to initiate PPIRP.
E. The corporate debtor must be classified as a large corporate entity.
Answer: C. The default amount must be at least INR 10 lakh for MSMEs.
Explanation: For MSMEs, the minimum default threshold for initiating PPIRP is INR 10 lakh, making it
suitable for smaller defaults compared to the regular CIRP threshold.

87. During the liquidation of a corporate debtor, what is the significance of the "liquidation
waterfall" as specified in Section 53 of the IBC?

A. It prioritizes the repayment of shareholder equity over other debts.

B. It determines the order in which assets are liquidated.
C. It specifies the order in which creditors are paid from the liquidation proceeds.
D. It ensures that all creditors receive equal payment irrespective of their category.
E. It provides a detailed methodology for valuing the liquidation estate.
Answer: C. It specifies the order in which creditors are paid from the liquidation proceeds.
Explanation: The liquidation waterfall in Section 53 sets the priority for distributing the proceeds
from the sale of a debtor's assets, starting with insolvency resolution costs and moving down to
shareholders.

88. What is the impact of the "cross-border insolvency" provision, once enacted under the IBC, on
the insolvency process of a multinational corporate debtor?

A. It will automatically liquidate foreign assets of the corporate debtor.

B. It will provide for recognition and cooperation with foreign insolvency proceedings.
C. It will only affect assets located in India.
D. It allows creditors to claim in any jurisdiction without restriction.
E. It requires foreign creditors to be paid before Indian creditors.
Answer: B. It will provide for recognition and cooperation with foreign insolvency proceedings.
Explanation: Cross-border insolvency provisions aim to harmonize the process across different
jurisdictions by recognizing foreign proceedings and fostering cooperation.

231
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
89. In the context of insolvency proceedings, what is the relevance of the "Information Utilities"
(IUs) under the IBC?

A. They perform the valuation of the debtor's assets.

B. They assist in the liquidation of the corporate debtor's estate.
C. They store, validate, and disseminate financial information related to debt transactions.
D. They regulate the conduct of insolvency professionals.
E. They mediate disputes between creditors and debtors.
Answer: C. They store, validate, and disseminate financial information related to debt transactions.
Explanation: Information Utilities are responsible for authenticating financial information related to
debt transactions and providing this data to stakeholders during insolvency proceedings.

90. Under what conditions can an application for initiating the Corporate Insolvency Resolution
Process (CIRP) be rejected by the NCLT?

A. The application is filed by an operational creditor for a default of INR 50 lakh.

B. The debtor is currently undergoing another CIRP process.
C. The resolution plan has already been approved by the Committee of Creditors.
D. The financial creditor has already filed an application within the last three years.
E. The debtor has no operational debt exceeding INR 1 crore.
Answer: B. The debtor is currently undergoing another CIRP process.
Explanation: If a debtor is already undergoing a CIRP, the NCLT cannot initiate a second concurrent
CIRP.

91. In a situation where an operational creditor files an application for CIRP, which of the following
requirements must be fulfilled according to the IBC?

A. A demand notice must have been issued to the debtor at least 30 days before filing.
B. The default amount must be at least INR 1 crore.
C. The operational creditor must provide a certificate from an Information Utility confirming the
debt.
D. The debtor must not have disputed the debt within 10 days of receiving the demand notice.
E. The operational creditor must be a secured creditor with a registered charge on the debtor's
assets.
Answer: D. The debtor must not have disputed the debt within 10 days of receiving the demand
notice.
Explanation: If the debtor does not respond to the demand notice within 10 days by either paying
the debt or showing the existence of a dispute, the operational creditor can file for CIRP.

Case Study 1: Insolvency Initiation and Default Threshold

ABC Ltd., a manufacturing company, is facing severe financial distress due to declining sales and
high debt levels. The company's total outstanding debt includes financial debts amounting to INR
70 lakh and operational debts of INR 30 lakh. One of the financial creditors, XYZ Bank, has initiated
proceedings under the Insolvency and Bankruptcy Code, citing a default of INR 70 lakh. However,
the company's management contends that the default amount does not meet the required
threshold for initiating a Corporate Insolvency Resolution Process (CIRP).

1. What is the minimum default amount required to initiate CIRP under the IBC?

A. INR 10 lakh
B. INR 50 lakh

232
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 C. INR 1 crore
D. INR 5 crore
E. INR 75 lakh
Answer: C. INR 1 crore.
Explanation: As per the amendment in 2020, the minimum default threshold for initiating a
Corporate Insolvency Resolution Process (CIRP) under the IBC is INR 1 crore. Since XYZ Bank's claim is
only INR 70 lakh, it does not meet the required threshold.

Case Study 2: Approval of Resolution Plan

XYZ Ltd. underwent a Corporate Insolvency Resolution Process (CIRP) due to defaults on significant
loans taken from various banks. The Resolution Professional received multiple resolution plans,
but the Committee of Creditors (CoC) approved one plan with a 70% voting share. The approved
plan offered to pay 40% of the outstanding financial debt to secured creditors, while operational
creditors were to receive only 10% of their dues. The plan was then submitted to the National
Company Law Tribunal (NCLT) for approval.

2. What is the minimum voting share required in the CoC for a resolution plan to be approved and
submitted to the NCLT?

A. 33%
B. 51%
C. 60%
D. 66%
E. 75%
Answer: D. 66%.
Explanation: For a resolution plan to be approved by the Committee of Creditors, at least 66% of the
voting share is required. Since XYZ Ltd.'s resolution plan was approved with a 70% voting share, it
meets the IBC requirement.

Case Study 3: Moratorium Implications

PQR Ltd. is undergoing the Corporate Insolvency Resolution Process (CIRP), and a moratorium has
been declared as per Section 14 of the IBC. However, a secured creditor, ABC Bank, has approached
the National Company Law Tribunal (NCLT) to enforce its security interest by taking possession of
the company's primary manufacturing unit, which is mortgaged as security against a loan. PQR Ltd.
argues that such an action is prohibited during the moratorium period.

3. What actions are prohibited during the moratorium under Section 14 of the IBC?

A. Filing of any new lawsuits by creditors against the debtor

B. Sale of the debtor’s assets to satisfy claims
C. Transfer of ownership of secured assets by creditors
D. All of the above
E. None of the above
Answer: D. All of the above.
Explanation: Section 14 of the IBC imposes a moratorium on initiating or continuing legal
proceedings, selling or transferring the debtor's assets, and enforcing any security interest. Thus, ABC
Bank's attempt to take possession of the manufacturing unit is prohibited.

233
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Case Study 4: Avoidance of Undervalued Transactions

LMN Pvt. Ltd. has been undergoing a Corporate Insolvency Resolution Process (CIRP) for three
months. During the forensic audit, it was found that the company had sold some of its key assets
to a related party at significantly lower than the market value just six months before the CIRP
commencement. The Resolution Professional has filed an application to the NCLT to reverse these
transactions, citing them as undervalued transactions under the IBC.

4. Under the IBC, within what period prior to the commencement of CIRP can a transaction be
considered an "undervalued transaction" if it involves a related party?

A. 1 year
B. 2 years
C. 3 years
D. 5 years
E. No time limit applies if the transaction involves a related party.
Answer: B. 2 years.
Explanation: The IBC allows the reversal of transactions involving undervaluation if they occurred
within two years prior to the insolvency commencement date and benefited a related party.

Case Study 5: Liquidation Preference

OPQ Ltd. is undergoing liquidation after a failed CIRP. The total liquidation value of the company's
assets is estimated at INR 10 crore. The claims against the company include insolvency resolution
process costs of INR 1 crore, secured creditors’ claims of INR 6 crore, workmen's dues for the past
two years amounting to INR 1.5 crore, and government dues of INR 2 crore.

5. According to the liquidation waterfall under Section 53 of the IBC, what is the correct order of
payment for the above claims?

A. Insolvency resolution process costs, secured creditors, workmen's dues, government dues
B. Secured creditors, insolvency resolution process costs, workmen's dues, government dues
C. Insolvency resolution process costs, workmen's dues, government dues, secured creditors
D. Workmen's dues, insolvency resolution process costs, secured creditors, government dues
E. Secured creditors, workmen's dues, insolvency resolution process costs, government dues
Answer: A. Insolvency resolution process costs, secured creditors, workmen's dues, government
dues.
Explanation: As per the liquidation waterfall in Section 53, the order of priority is: 1) insolvency
resolution process costs, 2) secured creditors, 3) workmen’s dues for the last two years, and 4)
government dues.

Case Study 6: Eligibility of Resolution Applicants

RST Ltd., a company undergoing insolvency proceedings, has received a resolution plan from XYZ
Pvt. Ltd., a company in which one of the directors is a promoter of a firm that had been classified
as a non-performing asset (NPA) for the past two years. However, XYZ Pvt. Ltd. has offered to settle
the overdue amount of the NPA firm within 30 days of submitting the resolution plan.

6. Under Section 29A of the IBC, can XYZ Pvt. Ltd. be considered eligible to submit a resolution
plan?

A. Yes, because the overdue amount can be settled within 30 days of submitting the resolution
plan.

234
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 B. No, because any connection with a non-performing asset disqualifies the resolution applicant.
C. Yes, but only if the CoC grants a waiver for eligibility.
D. No, unless the overdue amount is settled before submitting the resolution plan.
E. Yes, because the 30-day settlement period applies only to government dues.
Answer: A. Yes, because the overdue amount can be settled within 30 days of submitting the
resolution plan.
Explanation: Section 29A allows a resolution applicant to be eligible if the overdue amount related to
a non-performing asset is settled within 30 days of submitting the resolution plan.

Case Study 7: Avoidance of Preferential Transactions

UVW Ltd. is under CIRP, and it is observed that the company had repaid a substantial amount to a
particular creditor within six months before the insolvency commencement date. The repayment is
considered preferential because it was made to settle outstanding dues while other creditors were
not paid. The Resolution Professional decides to file an application with the NCLT to reverse this
payment.

7. What is the "look-back period" for identifying preferential transactions under the IBC for
transactions involving non-related parties?

A. 6 months before the insolvency commencement date

B. 1 year before the insolvency commencement date
C. 2 years before the insolvency commencement date
D. 3 years before the insolvency commencement date
E. There is no specified look-back period for preferential transactions.
Answer: B. 1 year before the insolvency commencement date.
Explanation: The IBC defines the look-back period for preferential transactions involving non-related
parties as one year before the insolvency commencement date.

Case Study 8: Related Party Transactions

JKL Ltd., a company undergoing insolvency proceedings, had transferred a substantial amount of
inventory to its sister concern MNO Ltd. at a discounted price two months before the
commencement of the Corporate Insolvency Resolution Process (CIRP). The Resolution
Professional suspects that the transaction may have been executed to defraud the creditors. The
Committee of Creditors (CoC) has advised the Resolution Professional to file an application with
the NCLT to avoid the transaction as a related party transaction.

What is the "look-back period" for avoiding transactions with related parties under the IBC?

A. 1 year before the insolvency commencement date

B. 2 years before the insolvency commencement date
C. 6 months before the insolvency commencement date
D. 3 years before the insolvency commencement date
E. No specified period for related party transactions
Answer: B. 2 years before the insolvency commencement date.
Explanation: The IBC provides for a look-back period of two years before the insolvency
commencement date for avoiding transactions with related parties. If such transactions are found to
be undervalued, they can be set aside by the NCLT.

Case Study 9: Insolvency of Personal Guarantors

235
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
ABC Ltd. defaulted on a loan amounting to INR 5 crore. The loan had a personal guarantee given by
Mr. Sharma, a director of ABC Ltd. The financial creditor, PQR Bank, initiated insolvency
proceedings under the IBC against both ABC Ltd. and Mr. Sharma as the personal guarantor. The
NCLT admitted the application for ABC Ltd., but Mr. Sharma contended that the proceedings
against him as a personal guarantor could not proceed simultaneously.

Under the IBC, can insolvency proceedings against a corporate debtor and its personal guarantor
proceed simultaneously?

A. Yes, they can proceed simultaneously as per recent amendments.

B. No, proceedings against the personal guarantor can only start after the resolution process of
the corporate debtor is complete.
C. Yes, but only if the CoC approves the simultaneous proceedings.
D. No, the proceedings can never run concurrently under the IBC.
E. Yes, but only if the NCLT passes a separate order for the personal guarantor.
Answer: A. Yes, they can proceed simultaneously as per recent amendments.
Explanation: The IBC allows simultaneous insolvency proceedings against a corporate debtor and its
personal guarantor, providing for a more holistic resolution process for all stakeholders involved.

Case Study 10: Approval of a Resolution Plan and Dissenting Creditors

DEF Ltd. is undergoing a Corporate Insolvency Resolution Process (CIRP), and a resolution plan has
been approved by 70% of the voting share of the Committee of Creditors (CoC). However, some of
the financial creditors who hold 30% of the voting rights have opposed the plan. The approved
plan proposes to pay 25% of the outstanding amount to the dissenting creditors, while the other
creditors are to receive 50% of their claims. The dissenting creditors have approached the NCLT,
claiming unfair treatment.

Under the IBC, how should payments to dissenting financial creditors be structured in an
approved resolution plan?

A. They should receive payments equal to the amount paid to other financial creditors.
B. They must be paid in full regardless of the resolution plan.
C. They must receive at least the liquidation value of their debts.
D. They should be paid only if the CoC approves a special resolution for it.
E. The NCLT will determine the amount to be paid to them.
Answer: C. They must receive at least the liquidation value of their debts.
Explanation: As per the IBC, dissenting financial creditors must receive at least the amount they
would have received if the company were liquidated, i.e., the liquidation value, ensuring fair
treatment in the resolution plan.

Case Study 11: Liquidation Process and Secured Creditor’s Rights

GHI Ltd. is undergoing liquidation after a failed Corporate Insolvency Resolution Process (CIRP).
One of the secured creditors, XYZ Bank, has decided to enforce its security interest outside the
liquidation process under Section 52 of the IBC. The liquidator, however, contends that XYZ Bank
must relinquish its security interest and file a claim as an unsecured creditor. XYZ Bank argues that
it has the right to enforce its security interest independently.

Under the IBC, what rights do secured creditors have during the liquidation process?

A. They must relinquish their security interest to the liquidation estate.

236
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 B. They have the right to enforce their security interest outside the liquidation process.
C. They can only claim a proportionate share of the liquidation estate.
D. They must accept payments based on the liquidation waterfall.
E. They can enforce their security interest only with the liquidator’s consent.
Answer: B. They have the right to enforce their security interest outside the liquidation process.
Explanation: Under Section 52 of the IBC, secured creditors have the option to enforce their security
interest outside the liquidation process, allowing them to recover their dues independently.

Case Study 12: Avoidance of Fraudulent Transactions

MNP Ltd. was found to have transferred substantial funds to an overseas account owned by the
company's promoters just one month before filing for insolvency. The transfer lacked any valid
business purpose, and the Resolution Professional suspected it was intended to defraud the
creditors. The Resolution Professional decided to apply to the NCLT to reverse the transaction as a
fraudulent transaction under Section 66 of the IBC.

Under what conditions can a transaction be considered "fraudulent" under Section 66 of the IBC?

A. If it was made within six months before the insolvency commencement date.
B. If it was made with the intent to deceive creditors or defraud the creditors.
C. If it involved a related party only.
D. If the transaction amount exceeded INR 1 crore.
E. If it was approved by the company's board of directors before the insolvency process.
Answer: B. If it was made with the intent to deceive creditors or defraud the creditors.
Explanation: Section 66 of the IBC allows for the reversal of transactions that were carried out with
the intent to defraud creditors or to deceive any person concerned with the insolvency resolution
process.

Case Study 13: Withdrawal of Insolvency Application

QRS Ltd., a large manufacturing company, defaulted on a loan amount of INR 2 crore, leading one
of its financial creditors, ABC Bank, to initiate insolvency proceedings under the IBC. After the
insolvency application was admitted, QRS Ltd. managed to settle the debt with ABC Bank, and both
parties approached the NCLT for withdrawal of the insolvency application. The Committee of
Creditors (CoC) had not yet been constituted at this point.

Under Section 12A of the IBC, what is required for the withdrawal of an insolvency application
after admission?

A. Approval from at least 66% of the Committee of Creditors.

B. Approval from the NCLT without the need for CoC approval.
C. Approval from the applicant and the debtor only.
D. Approval from at least 90% of the Committee of Creditors.
E. Withdrawal is not allowed once an application is admitted.
Answer: B. Approval from the NCLT without the need for CoC approval.
Explanation: If the Committee of Creditors has not yet been constituted, the NCLT can approve the
withdrawal of the insolvency application based on the applicant's request and the settlement
between the parties.

Case Study 14: Cross-Border Insolvency Framework

237
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
RST Ltd., an Indian company, is undergoing insolvency proceedings in India, and its subsidiary
located in the UK has also filed for bankruptcy under UK laws. The insolvency professionals in both
countries are seeking cooperation to maximize the value of the assets across jurisdictions. The
Indian NCLT is considering recognizing the UK insolvency proceedings as a foreign main proceeding
to facilitate coordination.

What is a "foreign main proceeding" under the draft provisions of cross-border insolvency in the
IBC?

A. Insolvency proceedings conducted in a country where the debtor has a registered office.
B. Insolvency proceedings conducted in a country where the debtor has its center of main
interests (COMI).
C. Proceedings initiated in any country other than the debtor’s home country.
D. Proceedings involving multiple jurisdictions, regardless of COMI.
E. Proceedings that involve only secured creditors across different countries.
Answer: B. Insolvency proceedings conducted in a country where the debtor has its center of main
interests (COMI).
Explanation: A "foreign main proceeding" is defined as insolvency proceedings taking place in a
jurisdiction where the debtor has its center of main interests (COMI), which generally refers to the
primary place of business or headquarters.

Case Study 15: Pre-Packaged Insolvency Resolution Process (PPIRP) for MSMEs

UVW Ltd., a small manufacturing company classified as an MSME, has defaulted on its debt
obligations. The management is keen on preserving the business through a quicker insolvency
resolution process. They are considering initiating a Pre-Packaged Insolvency Resolution Process
(PPIRP) under the IBC and have already obtained consent from creditors representing 66% of the
debt.

What is one key feature of the PPIRP that distinguishes it from the regular Corporate Insolvency
Resolution Process (CIRP)?

A. The moratorium does not apply during the PPIRP.

B. The management remains with the promoters during the process.
C. PPIRP can be initiated without any creditor approval.
D. The Committee of Creditors has no role in approving the resolution plan.
E. PPIRP is only available for companies with debts exceeding INR 1 crore.
Answer: B. The management remains with the promoters during the process.
Explanation: A key feature of the PPIRP is that the management remains with the existing promoters
while the process is supervised by the Resolution Professional and the Committee of Creditors,
offering a debtor-in-possession approach.

Case Study 16: Group Insolvency

XYZ Group consists of multiple companies, including XYZ Ltd. (parent company) and its subsidiaries
ABC Ltd. and DEF Ltd. XYZ Ltd. has defaulted on significant loan obligations, triggering insolvency
proceedings. The parent company, as well as both subsidiaries, have cross-guarantees for each
other's debts. The creditors of XYZ Ltd. argue that all three companies should undergo a
consolidated Corporate Insolvency Resolution Process (CIRP) to maximize the group's asset value.

238
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
However, ABC Ltd. contends that its financial health is stable, and it should not be part of the
insolvency proceedings.

Under the IBC, what is the current legal position regarding the conduct of insolvency proceedings
for group companies with interlinked debts?

A. Consolidated CIRP is mandatory for all group companies with cross-guarantees.

B. The IBC explicitly allows for the consolidation of insolvency proceedings for group companies.
C. Each company must undergo separate CIRP unless the NCLT orders otherwise on a case-by-
case basis.
D. Only the NCLT can initiate insolvency proceedings for subsidiaries without creditor approval.
E. Group companies cannot be considered for a consolidated insolvency process under the IBC.
Answer: C. Each company must undergo separate CIRP unless the NCLT orders otherwise on a case-
by-case basis.
Explanation: The IBC does not currently provide explicit provisions for group insolvency. Each
company is treated as a separate legal entity, and CIRP must be initiated individually. However, the
NCLT may allow consolidation on a case-by-case basis if it determines that it would lead to better
value realization.

Case Study 17: Information Utilities and Debt Verification

MNO Ltd. has defaulted on a loan amounting to INR 5 crore, which was reported to an Information
Utility (IU). The financial creditor, PQR Bank, initiated CIRP based on the default information
recorded with the IU. MNO Ltd. contends that the default is not accurate and that part of the
payment had already been made. The Resolution Professional has requested verification of the
debt information with the IU.

What role does an Information Utility (IU) play in the verification of debt information during
insolvency proceedings under the IBC?

A. It only stores information but does not verify the accuracy of the debt.
B. It verifies the authenticity of the information submitted by creditors and debtors.
C. It acts as a mediator between creditors and the corporate debtor.
D. It conducts an independent valuation of the defaulted amount.
E. It has no role in debt verification once CIRP is initiated.
Answer: B. It verifies the authenticity of the information submitted by creditors and debtors.
Explanation: Information Utilities under the IBC are responsible for storing financial information and
authenticating the data submitted by creditors and debtors. This verified information can be used as
evidence during insolvency proceedings.

Case Study 18: Compromise Arrangement vs. Liquidation

PQR Ltd., after going through a failed CIRP, is now in the liquidation phase. The liquidator has
found a group of investors willing to offer a compromise arrangement to settle the claims of the
creditors, which could potentially bring in higher value than the liquidation sale. The Committee of
Creditors (CoC) is debating whether to pursue this compromise arrangement or continue with the
liquidation. The liquidation estate consists of assets worth INR 15 crore, while the proposed
compromise arrangement offers INR 20 crore to settle the claims.

239
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Under what conditions can a compromise or arrangement be considered as an alternative to
liquidation under the IBC?

A. Only if it is approved by 66% of the creditors in the CoC.

B. If the NCLT finds that the compromise arrangement is more beneficial than liquidation.
C. Only if the proposal is submitted before the liquidation order is passed.
D. If approved by a majority representing three-fourths in value of the creditors.
E. Compromise arrangements are not allowed once the liquidation process begins.
Answer: D. If approved by a majority representing three-fourths in value of the creditors.
Explanation: Under Section 230 of the Companies Act, a compromise or arrangement can be
considered if approved by creditors representing at least three-fourths in value. The NCLT may then
allow the proposal as an alternative to liquidation.

Case Study 19: Impact of a Moratorium on Lease Agreements

LMN Ltd., which is undergoing CIRP, had entered into a lease agreement for a commercial property
three years before the insolvency proceedings. The lease agreement has a remaining term of five
years. Upon commencement of the CIRP, the lessor sent a notice to LMN Ltd. for termination of the
lease due to the ongoing insolvency. The Resolution Professional has rejected the notice, citing the
moratorium imposed under Section 14 of the IBC. The lessor argues that the moratorium does not
apply to lease agreements.

How does the moratorium under Section 14 of the IBC affect lease agreements?

A. The moratorium does not apply to lease agreements, and the lessor can terminate the lease.
B. The moratorium prevents the termination of lease agreements, provided the lease is essential
for the business.
C. The moratorium only applies if the lease agreement was signed within one year of the
insolvency commencement.
D. The lease agreement is automatically terminated upon commencement of the CIRP.
E. The lessor can continue with the termination if the lease has more than five years remaining.
Answer: B. The moratorium prevents the termination of lease agreements, provided the lease is
essential for the business.
Explanation: The moratorium under Section 14 prevents the termination of essential agreements,
including leases, that are critical to the continuation of the business during the CIRP. The Resolution
Professional has the authority to decide whether the lease should be continued.

Case Study 20: Eligibility of Resolution Applicants under Section 29A

RST Ltd., a company undergoing CIRP, has received a resolution plan from ABC Pvt. Ltd. However,
ABC Pvt. Ltd. is a company where one of the directors was previously associated with a firm that
was classified as a non-performing asset (NPA) for over two years. ABC Pvt. Ltd. has now offered to
pay off the overdue amount of the NPA within 30 days of submitting the resolution plan. The CoC
is deliberating whether to approve the plan, considering the ineligibility conditions under Section
29A.

Under Section 29A of the IBC, can ABC Pvt. Ltd. be considered eligible to submit a resolution plan
in this scenario?

240
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 A. Yes, because the overdue amount can be settled within 30 days of submitting the resolution
plan.
B. No, because any connection with a non-performing asset disqualifies the resolution applicant.
C. Yes, but only if the CoC grants a waiver for eligibility.
D. No, unless the overdue amount is settled before the resolution plan is submitted.
E. Yes, because Section 29A does not apply to financial institutions.
Answer: A. Yes, because the overdue amount can be settled within 30 days of submitting the
resolution plan.
Explanation: Section 29A of the IBC allows an applicant to be eligible if the overdue amount related
to a non-performing asset is settled within 30 days of submitting the resolution plan.

Case Study 21: Treatment of Contingent Claims

XYZ Ltd., a company undergoing CIRP, has several contingent liabilities, including ongoing litigation
and potential penalties amounting to INR 5 crore. The Resolution Professional has received claims
from various creditors, including those contingent claims. The Committee of Creditors (CoC) is
evaluating how to address these contingent claims in the resolution plan to avoid any future
disputes.

How should contingent claims be treated in the resolution plan under the IBC?

A. They should be completely excluded from the resolution process.

B. The Resolution Professional should estimate the potential liability and include it in the
resolution plan.
C. Contingent claims must be prioritized over all other claims.
D. The NCLT should resolve these claims separately after approving the resolution plan.
E. Contingent claims are automatically considered null and void during CIRP.
Answer: B. The Resolution Professional should estimate the potential liability and include it in the
resolution plan.
Explanation: The Resolution Professional must estimate the value of contingent liabilities and ensure
they are appropriately accounted for in the resolution plan to avoid any future legal disputes.

Case Study 22: Insolvency Resolution for Personal Guarantors

ABC Ltd., a company undergoing CIRP, had a personal guarantee provided by Mr. Singh for a loan
taken from XYZ Bank. With the ongoing insolvency proceedings for ABC Ltd., XYZ Bank has also
initiated insolvency proceedings against Mr. Singh as a personal guarantor under the IBC. Mr. Singh
has challenged the proceedings, arguing that his liabilities should be considered only after the
resolution of ABC Ltd.'s CIRP.

Under the IBC, what is the legal position regarding the insolvency resolution process for personal
guarantors?

A. The insolvency resolution process for personal guarantors can proceed only after the CIRP for
the corporate debtor is completed.
B. The insolvency resolution for personal guarantors can be initiated simultaneously with the
CIRP for the corporate debtor.
C. Personal guarantors can be excluded from CIRP unless the CoC approves their inclusion.

241
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 D. The NCLT must prioritize corporate debtor proceedings before starting personal guarantor
insolvency.
E. Personal guarantor insolvency can only be initiated if the corporate debtor goes into
liquidation.
Answer: B. The insolvency resolution for personal guarantors can be initiated simultaneously with
the CIRP for the corporate debtor.
Explanation: Recent amendments to the IBC allow for simultaneous insolvency resolution processes
for the corporate debtor and its personal guarantors, aiming for a comprehensive resolution.

Case Study 23: Avoidance of Preferential Transactions

XYZ Ltd. is undergoing CIRP, and during the process, it was discovered that the company had made
a payment to a financial creditor, PQR Bank, just three months before the insolvency
commencement date. The payment was made to settle an outstanding loan in full, while other
creditors were not paid. The Resolution Professional suspects that this payment might constitute a
preferential transaction.

What criteria must be met for a transaction to be considered "preferential" under the IBC?

A. It must have been made within one year before the insolvency commencement date for
unrelated parties.
B. It must have been made for a loan exceeding INR 1 crore.
C. It must involve an asset sale at less than fair market value.
D. It must have been made within two years for all creditors.
E. It should have been made without the approval of the CoC.
Answer: A. It must have been made within one year before the insolvency commencement date
for unrelated parties.
Explanation: Under the IBC, preferential transactions can be avoided if made within one year before
the insolvency commencement date for unrelated parties, or two years for related parties.

Case Study 24: Pre-Packaged Insolvency Resolution Process (PPIRP) Challenges

LMN Ltd., an MSME, has initiated a Pre-Packaged Insolvency Resolution Process (PPIRP) after
obtaining the required approval from financial creditors representing 66% of the total debt. The
base resolution plan submitted by LMN Ltd. proposes to pay operational creditors 20% of their
outstanding claims, whereas secured financial creditors are offered a 60% recovery. Some
operational creditors have opposed the plan, citing unfair treatment. The Resolution Professional
has submitted the base resolution plan to the Committee of Creditors (CoC) for approval.

What percentage of voting share is required in the CoC to approve the base resolution plan under
PPIRP?

A. 51%
B. 60%
C. 66%
D. 75%
E. 90%
Answer: C. 66%.
Explanation: Under the Pre-Packaged Insolvency Resolution Process (PPIRP), the approval of a

242
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
resolution plan requires a minimum of 66% of the voting share in the Committee of Creditors. If the
base resolution plan is not approved, the CoC can invite competing resolution plans.

Case Study 25: Avoidance of Transactions during CIRP

XYZ Ltd. is undergoing a Corporate Insolvency Resolution Process (CIRP). During the review, the
Resolution Professional found that the company transferred assets worth INR 3 crore to a related
party without consideration, just one month before the insolvency commencement date. The
related party argues that the transaction was a gift, made voluntarily by the company. The
Resolution Professional has filed an application with the NCLT to avoid the transaction as an
undervalued transaction under the IBC.

Under the IBC, what is the look-back period for transactions involving related parties that can be
avoided as undervalued?

A. 6 months before the insolvency commencement date

B. 1 year before the insolvency commencement date
C. 2 years before the insolvency commencement date
D. 3 years before the insolvency commencement date
E. There is no specified look-back period for related party transactions.
Answer: C. 2 years before the insolvency commencement date.
Explanation: Under the IBC, transactions with related parties can be considered undervalued if they
occurred within two years prior to the insolvency commencement date and involved a transfer of
assets for inadequate or no consideration.

Case Study 26: Insolvency of Cross-Border Entities

ABC Ltd., an Indian company, is undergoing insolvency proceedings under the IBC. It has a
subsidiary, DEF Inc., located in the United States, which is also financially distressed. Creditors of
DEF Inc. have initiated insolvency proceedings under U.S. bankruptcy law. Both companies have
inter-company loans, and there is a need for coordinated proceedings to maximize value for
creditors across jurisdictions. The Resolution Professional of ABC Ltd. is seeking recognition of the
U.S. insolvency proceedings as a "foreign main proceeding" under the draft cross-border
insolvency provisions in India.

Under the draft cross-border insolvency provisions, what does "foreign main proceeding" refer to?

A. Insolvency proceedings initiated in any country other than the debtor's place of incorporation.
B. Insolvency proceedings conducted in a country where the debtor has its center of main
interests (COMI).
C. Insolvency proceedings involving assets located in a foreign country.
D. Proceedings where foreign creditors represent the majority of the debtor's claims.
E. Proceedings initiated by a foreign entity that is not a subsidiary of the debtor.
Answer: B. Insolvency proceedings conducted in a country where the debtor has its center of main
interests (COMI).
Explanation: Under the draft cross-border insolvency provisions, a "foreign main proceeding" is
defined as insolvency proceedings that take place in a jurisdiction where the debtor has its center of
main interests (COMI), typically where its principal place of business or headquarters is located.

243
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Case Study 27: Resolution Plan Challenges and Withdrawal

PQR Ltd. is undergoing CIRP, and a resolution plan has been approved by the Committee of
Creditors (CoC) with a 70% voting share. However, due to changing market conditions, the
Resolution Applicant has requested to withdraw the resolution plan before its approval by the
NCLT. The CoC is divided on whether to allow the withdrawal, as some members believe it would
harm creditors' interests.

Under the IBC, can a Resolution Applicant withdraw a resolution plan after it has been approved
by the CoC but before NCLT approval?

A. Yes, if the Resolution Applicant obtains consent from 66% of the CoC.
B. No, once the CoC has approved a resolution plan, it cannot be withdrawn.
C. Yes, with approval from the NCLT even if the CoC is divided.
D. Yes, if the CoC approves the withdrawal with at least a 90% voting share.
E. No, withdrawal of a resolution plan is not permitted under the IBC.
Answer: C. Yes, with approval from the NCLT even if the CoC is divided.
Explanation: The IBC allows for the withdrawal of a resolution plan before NCLT approval, but only
with the NCLT's consent. The NCLT may consider the circumstances and impact on creditors before
granting approval.

Case Study 28: Treatment of Secured Creditors in Liquidation

ABC Ltd. has entered the liquidation process after a failed CIRP. XYZ Bank, a secured creditor with a
charge on certain plant and machinery, has chosen to enforce its security interest outside the
liquidation process. The liquidator has asked XYZ Bank to relinquish its security interest and submit
its claim as an unsecured creditor. XYZ Bank, however, insists on selling the assets independently
and recovering its dues.

What rights does a secured creditor have under the IBC during the liquidation process?

A. The secured creditor must relinquish its security interest to the liquidation estate.
B. The secured creditor has the right to enforce its security interest outside the liquidation
process.
C. The secured creditor can only sell the secured asset with the liquidator’s permission.
D. The secured creditor must accept payments based on the liquidation waterfall.
E. The secured creditor can enforce its security only if approved by the CoC.
Answer: B. The secured creditor has the right to enforce its security interest outside the liquidation
process.
Explanation: Under Section 52 of the IBC, secured creditors may choose to enforce their security
interest independently, outside of the liquidation process, and recover their dues. However, if there
is any shortfall after realizing the security, the balance amount would rank as an unsecured claim.

Case Study 29: Treatment of Statutory Dues in Resolution Plans

RST Ltd., undergoing CIRP, has statutory dues pending, including unpaid taxes and government
levies amounting to INR 2 crore. The resolution plan submitted by a Resolution Applicant proposes
a settlement of 30% of the outstanding statutory dues, whereas the financial creditors are offered

244
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
60% recovery. The tax authorities have raised objections, claiming that statutory dues must be
settled in full as they are secured by law.

Under the IBC, how should statutory dues be treated in a resolution plan?

A. Statutory dues must be paid in full to be compliant with the IBC.

B. The resolution plan can provide for a haircut on statutory dues, similar to other creditors.
C. Statutory dues have priority over all other debts in the resolution plan.
D. The plan should prioritize statutory dues before operational creditors.
E. Statutory dues can only be waived if approved by the NCLT.
Answer: B. The resolution plan can provide for a haircut on statutory dues, similar to other
creditors.
Explanation: Under the IBC, statutory dues are treated like other creditors’ claims, and a resolution
plan can propose a haircut. The CoC has the discretion to decide on the distribution among creditors,
including statutory dues.

Case Study 30: Insolvency of Personal Guarantors Post CIRP

ABC Ltd. underwent a successful CIRP, and the resolution plan was approved by the NCLT. However,
the approved plan did not fully cover the claims of the creditors, and XYZ Bank, one of the
creditors, has now initiated insolvency proceedings against Mr. Gupta, a personal guarantor for
ABC Ltd. Mr. Gupta argues that his liability should be considered extinguished after the approval of
the resolution plan for ABC Ltd.

What is the legal position under the IBC regarding the liability of personal guarantors after the
approval of a resolution plan for the corporate debtor?

A. The liability of personal guarantors is automatically extinguished once the resolution plan is
approved.
B. The personal guarantor's liability remains unless explicitly discharged under the resolution
plan.
C. The NCLT must determine whether the personal guarantor's liability continues.
D. The liability can be pursued only if the resolution plan provides for it.
E. Personal guarantors cannot be held liable once the corporate debtor is resolved.
Answer: B. The personal guarantor's liability remains unless explicitly discharged under the
resolution plan.
Explanation: The liability of personal guarantors continues unless explicitly addressed in the
resolution plan. Creditors can pursue recovery from personal guarantors even after the approval of
the resolution plan for the corporate debtor.

Case Study 31: Consequences of Non-Compliance with Approved Resolution Plan

XYZ Ltd. has an approved resolution plan that has been upheld by the NCLT. The Resolution
Applicant was supposed to infuse funds and make payments to creditors as per the approved
timeline. However, there have been significant delays, and some creditors have not received their
dues as specified in the plan. The creditors have now approached the NCLT, seeking a remedy for
non-compliance.

245
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
What action can the NCLT take in case of non-compliance with an approved resolution plan under
the IBC?

A. Cancel the resolution plan and restore the company to its original management.
B. Direct the resolution applicant to pay penalties for the delay.
C. Initiate liquidation proceedings against the corporate debtor.
D. Mandate the creditors to accept revised payment terms.
E. Allow creditors to initiate new insolvency proceedings.
Answer: C. Initiate liquidation proceedings against the corporate debtor.
Explanation: If the resolution plan is not complied with, the NCLT has the authority to initiate
liquidation proceedings as per Section 33 of the IBC. This is considered when the terms of the
resolution plan are not fulfilled.

246
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Chapter 29
1. Which of the following is considered an Early Warning Signal (EWS) for detecting fraud in loan
accounts?

a) Delay in payment of interest by a month

b) Frequent changes in the accounting policies
c) Temporary overdraft in an account
d) Increase in promoter’s stake
e) Increase in gross revenues

Answer: b) Frequent changes in the accounting policies

Explanation: Changes in accounting policies often conceal actual financial performance and are a red
flag for fraudulent practices.

2. According to RBI guidelines, which threshold value triggers the classification of an account as a
Red Flagged Account (RFA)?

a) Rs. 10 crore
b) Rs. 50 crore
c) Rs. 25 crore
d) Rs. 100 crore
e) Rs. 5 crore

Answer: b) Rs. 50 crore

Explanation: As per RBI guidelines, accounts with exposure of Rs. 50 crore or more are classified as
Red Flagged Accounts if any EWS is identified.

3. In the context of fraud risk management, what is the primary objective of a forensic audit?

a) To find discrepancies in tax payments

b) To examine financial statements for criminal use
c) To evaluate stock and receivables
d) To estimate the future income of the borrower
e) To perform regular financial audits

Answer: b) To examine financial statements for criminal use

Explanation: A forensic audit is specifically conducted to unearth malfeasance and is used as
evidence in legal proceedings.

4. Which of the following would qualify as siphoning of funds?

a) Transfer of funds between two subsidiary companies

b) Investment in mutual funds by the borrower
c) Utilization of short-term funds for long-term projects
d) Non-routing of sales proceeds through the lender bank
e) Transferring borrowed funds to the lender bank's account

Answer: d) Non-routing of sales proceeds through the lender bank

Explanation: Siphoning occurs when borrowed funds are not used for their intended purpose or
routed as agreed, to the detriment of the lender.

5. Which of these actions would NOT be classified as a form of wilful default under RBI guidelines?

247
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) Default on repayment despite sufficient cash flow
b) Using loan funds for unapproved purposes
c) Failure to repay due to a global financial crisis
d) Siphoning off funds for personal gain
e) Removing secured assets without informing the lender

Answer: c) Failure to repay due to a global financial crisis

Explanation: Wilful default is when a borrower intentionally defaults despite having the ability to
pay. A global financial crisis would be considered an external reason.

6. Which of the following conditions would typically NOT be covered under Early Warning Signals
(EWS)?

a) High-value RTGS payments to unrelated parties

b) Discrepancies in the stock audit report
c) Consistent increase in working capital requirements
d) Introduction of a new product line by the borrower
e) Delay in the payment of statutory dues

Answer: d) Introduction of a new product line by the borrower

Explanation: Introducing a new product line is a business decision and not an indicator of financial
distress or fraud.

7. In consortium lending arrangements, what is the responsibility of individual banks regarding

fraud monitoring?

a) Solely rely on the lead bank for updates

b) Conduct independent due diligence
c) Only monitor when prompted by the RBI
d) Share all findings with competitors
e) Cease all independent investigations

Answer: b) Conduct independent due diligence

Explanation: Each bank in a consortium is responsible for conducting its own due diligence and
monitoring to prevent fraud.

8. What role does the Central Fraud Registry (CFR) play in fraud risk management?

a) Penalizes banks for delayed reporting

b) Provides real-time alerts on fraud cases
c) Acts as a repository for fraudulent borrowers' details
d) Conducts forensic audits
e) Issues fines on fraudsters

Answer: c) Acts as a repository for fraudulent borrowers' details

Explanation: The CFR maintains and disseminates information on frauds and unscrupulous
borrowers for banks to take preventive actions.

9. Which agency is responsible for investigating bank frauds involving amounts over Rs. 25 crore in
public sector banks?

a) CBI Anti-Corruption Branch

b) Enforcement Directorate

248
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
c) Economic Offences Wing
d) Serious Fraud Investigation Office
e) State Police

Answer: a) CBI Anti-Corruption Branch

Explanation: For amounts over Rs. 25 crore, CBI's Banking Security and Fraud Cell handles
investigations involving public sector banks.

10. Which of the following is a key measure suggested to prevent diversion of funds?

a) Regular payments to all creditors

b) Obtaining certification from Chartered Accountants
c) Increasing the loan limits periodically
d) Using short-term working capital for long-term investments
e) Encouraging personal guarantees from directors

Answer: b) Obtaining certification from Chartered Accountants

Explanation: Certification from Chartered Accountants helps ensure that funds are used for their
intended purposes and not diverted.

11. Which of the following measures is NOT considered part of forensic audit procedures?

a) Examination of liabilities
b) Review of working capital reports
c) Inspection of stock inventory
d) Comparison with market trends
e) Reassessing loan agreements

Answer: d) Comparison with market trends

Explanation: Forensic audits focus on verifying the borrower’s use of funds and compliance, not
comparing their performance with market trends.

12. Which agency is responsible for dealing with fugitive economic offenders under the Fugitive
Economic Offenders Act 2018?

a) Central Bureau of Investigation

b) Reserve Bank of India
c) Directorate of Revenue Intelligence
d) Director under the Prevention of Money Laundering Act
e) Serious Fraud Investigation Office

Answer: d) Director under the Prevention of Money Laundering Act

Explanation: The Director appointed under the PMLA is authorized to apply to the Special Court to
declare someone a fugitive economic offender.

13. Which of the following actions is NOT included in the guidelines for reporting frauds to police
or CBI?

a) Lodging a complaint after 1 month of detection

b) Reporting frauds involving staff of private sector banks
c) Reporting frauds over Rs. 50 crore to CBI
d) Providing details of fraud in FMR format
e) Engaging with local police for frauds involving outsiders

249
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: a) Lodging a complaint after 1 month of detection
Explanation: Delays in reporting frauds can allow perpetrators to escape, and RBI mandates
reporting within 21 days of detection.

14. What is the main objective of the Look Out Circular (LOC) in fraud cases?

a) To detain a person leaving the country

b) To verify credit history across borders
c) To increase loan limits for borrowers
d) To notify foreign banks of defaults
e) To prevent loan disbursement delays

Answer: a) To detain a person leaving the country

Explanation: The LOC is designed to prevent fraudsters from fleeing India by alerting immigration
authorities.

15. The failure to utilize loan funds for their approved purposes and diverting them is considered
as:

a) Asset stripping
b) Wilful default
c) Loan mismanagement
d) Diversion of funds
e) Structured financing

Answer: d) Diversion of funds

Explanation: Diverting funds means using borrowed money for purposes other than what was
approved in the loan terms.

16. According to RBI, how much time is allowed for the completion of a forensic audit from the
date of assignment?

a) 6 months
b) 1 month
c) 3 months
d) 2 months
e) 15 days

Answer: c) 3 months
Explanation: RBI guidelines mandate that forensic audits must be completed within three months
from the date of assignment.

17. What is the key purpose of classifying an account as a Red Flagged Account (RFA)?

a) To accelerate the disbursement of loans

b) To initiate criminal proceedings
c) To monitor possible fraudulent activities
d) To provide additional funding
e) To allow for debt restructuring

Answer: c) To monitor possible fraudulent activities

Explanation: RFAs are accounts where fraudulent activities are suspected, triggering detailed
investigations by the bank.

250
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
18. When is a Flash Report (FR) required to be submitted in fraud cases?

a) Within 1 month of detecting a fraud

b) Within 48 hours of a fraud being detected
c) Within 1 week of detecting frauds above Rs. 5 crore
d) Within 3 days of any fraud detection
e) When the fraud exceeds Rs. 50 lakh

Answer: c) Within 1 week of detecting frauds above Rs. 5 crore

Explanation: Flash Reports are required within a week when frauds involve amounts of Rs. 5 crore or
more.

19. What is the major goal of the RBI's Early Warning Signal (EWS) system in loan monitoring?

a) To generate new loan opportunities

b) To prevent business expansions
c) To reduce non-performing assets
d) To flag potential defaults early
e) To support management in making profit decisions

Answer: d) To flag potential defaults early

Explanation: The EWS system is designed to detect early signs of financial stress or potential
defaults, allowing banks to take preventive actions.

20. Which of the following actions could trigger the issuance of a Look Out Circular (LOC)?

a) Wilful default of a loan

b) A minor delay in loan repayment
c) A borrower requesting an increase in loan limits
d) Application for restructuring of debt
e) A borrower seeking an extension for loan inspection

Answer: a) Wilful default of a loan

Explanation: LOCs are issued to prevent wilful defaulters and fraudsters from fleeing the country.

21. In what situation must a bank report a loan as a fraud on the CRILC platform?

a) When there is a delay in payment of interest for 6 months

b) After the completion of a forensic audit
c) After all recovery options have been exhausted
d) As soon as an account is classified as a Red Flagged Account
e) Only when a criminal case is filed

Answer: d) As soon as an account is classified as a Red Flagged Account

Explanation: RFAs must be reported to CRILC to alert other banks to potential fraud risks.

22. What is the threshold amount beyond which wilful defaults must be reported to RBI for further
dissemination to banks?

a) Rs. 25 crore
b) Rs. 50 lakh
c) Rs. 1 crore
d) Rs. 10 lakh
e) Rs. 25 lakh

251
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: e) Rs. 25 lakh
Explanation: According to RBI, wilful defaults above Rs. 25 lakh must be reported to ensure timely
corrective actions.

23. What happens if an account continues to show signs of fraudulent activity after 6 months of
investigation?

a) It is written off by the bank

b) It is immediately classified as a fraud
c) The loan limits are increased
d) The forensic audit is extended indefinitely
e) A warning is issued to the borrower

Answer: b) It is immediately classified as a fraud

Explanation: If fraud suspicions persist beyond six months, the account is to be officially classified as
a fraud.

24. Under which conditions can photographs of wilful defaulters be published by banks, as per RBI
guidelines?

a) Only after a forensic audit

b) Once the bank receives approval from the RBI
c) When the defaulter has been declared as such by the bank’s board
d) In any case of default over Rs. 1 crore
e) When the defaulter's company fails for the first time

Answer: c) When the defaulter has been declared as such by the bank’s board
Explanation: The publication of photographs is permitted after the bank declares the borrower as a
wilful defaulter through the proper board-approved process.

25. What is the purpose of the Central Fraud Monitoring Cell (CFMC) as mentioned in the
document?

a) To monitor foreign exchange transactions

b) To maintain records of criminal cases
c) To issue sanctions for high-value loans
d) To receive reports of all frauds in the banking sector
e) To review business expansion plans

Answer: d) To receive reports of all frauds in the banking sector

Explanation: CFMC is a dedicated RBI unit responsible for monitoring and investigating bank frauds
across India.

26. What is the role of the Special Committee of the Board for Monitoring and Follow-Up of Frauds
(SCBF)?

a) Issuing financial advice to borrowers

b) Reviewing early warning signals for financial success
c) Overseeing investigations and remedial actions on fraudulent accounts
d) Handling routine credit monitoring processes
e) Approving large loan disbursements

252
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: c) Overseeing investigations and remedial actions on fraudulent accounts
Explanation: SCBF monitors fraud cases, reviews early warning signals, and directs remedial actions.

27. How often are banks required to review the status of non-cooperative borrowers?

a) Annually
b) Every month
c) Every quarter
d) Every six months
e) Every two years

Answer: d) Every six months

Explanation: Banks are required to review the status of non-cooperative borrowers on a half-yearly
basis.

28. What happens when a forensic audit confirms fraudulent activities?

a) The loan is written off

b) The fraud is reported to RBI and law enforcement agencies
c) The borrower’s loan is restructured
d) The audit findings are kept confidential
e) The loan account is immediately closed

Answer: b) The fraud is reported to RBI and law enforcement agencies

Explanation: Once fraud is confirmed, it must be reported to both the RBI and relevant law
enforcement agencies for further action.

29. Which of the following statements is TRUE about wilful default under RBI guidelines?

a) Wilful defaulters are automatically exempt from loan penalties

b) Wilful default is only applicable to large companies
c) Non-compliance with loan terms due to genuine hardship qualifies as wilful default
d) Wilful default involves deliberate non-payment despite the ability to pay
e) Wilful default does not impact the borrower's credit score

Answer: d) Wilful default involves deliberate non-payment despite the ability to pay
Explanation: A borrower who defaults intentionally, despite having the ability to pay, is classified as a
wilful defaulter.

30. Which of the following conditions is NOT covered by the definition of siphoning of funds?

a) Borrowing money and transferring it to group companies

b) Using funds for purposes not specified in the loan
c) Utilizing loan funds for business expansion
d) Misusing funds in a manner that affects the lender’s financial position
e) Directing borrowed funds to personal accounts

Answer: c) Utilizing loan funds for business expansion

Explanation: Using loan funds for business expansion is generally acceptable unless it violates the
terms of the loan.

31. How long does a Look Out Circular (LOC) remain valid if not renewed?

253
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) 6 months
b) 1 year
c) 3 years
d) Indefinitely
e) 5 years

Answer: b) 1 year
Explanation: A Look Out Circular is valid for one year and needs to be renewed if the circumstances
remain unchanged.

32. What is the key difference between a wilful defaulter and a non-cooperative borrower?

a) Wilful defaulter delays payment, while non-cooperative borrower refuses to provide information
b) Wilful defaulter cooperates with the bank, while non-cooperative borrower evades payments
c) Non-cooperative borrowers cannot restructure their loans, but wilful defaulters can
d) Non-cooperative borrowers are always small enterprises
e) Wilful defaulters provide regular financial updates to the bank

Answer: a) Wilful defaulter delays payment, while non-cooperative borrower refuses to provide
information
Explanation: A wilful defaulter intentionally delays repayment, while a non-cooperative borrower
obstructs the bank’s recovery process by refusing to provide necessary information or access to
assets.

33. What is the appropriate penalty for wilful defaulters, as outlined by RBI?

a) Complete write-off of the loan

b) Ban on accessing institutional finance for 5 years
c) Relaxation in payment terms
d) Exemption from criminal proceedings
e) Extension of loan repayment period

Answer: b) Ban on accessing institutional finance for 5 years

Explanation: Wilful defaulters are barred from accessing institutional finance for a period of five
years from the date their name is removed from the wilful defaulter list.

34. Which of the following is NOT a measure to prevent diversion of funds by borrowers?

a) Scrutiny of quarterly progress reports

b) System of regular stock audits
c) Immediate sanction of additional facilities
d) Regular inspection of assets charged to the bank
e) Regular visits to the borrower’s premises

Answer: c) Immediate sanction of additional facilities

Explanation: Sanctioning additional facilities without proper checks can lead to fund diversion.
Monitoring and audits are key preventive measures.

35. Under which circumstances can a borrower be declared a Fugitive Economic Offender (FEO)?

a) Only when involved in cross-border transactions

b) When they avoid prosecution by leaving India
c) When they fail to repay a small personal loan

254
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
d) When their business goes bankrupt
e) When they apply for debt restructuring

Answer: b) When they avoid prosecution by leaving India

Explanation: A Fugitive Economic Offender is someone who has left India to avoid facing criminal
prosecution.

36. Which of the following is considered a key indicator of potential fraud during a forensic audit?

a) Consistent growth in revenues

b) Satisfactory stock and receivable audits
c) Unexplained large cash withdrawals
d) Increased foreign investment
e) Payment of dividends to shareholders

Answer: c) Unexplained large cash withdrawals

Explanation: Large cash withdrawals without proper documentation or explanation are often a sign
of fraudulent activities.

37. What is the main function of a Fraud Monitoring Group (FMG) within a bank?

a) Approving large loans for high-net-worth individuals

b) Reviewing and classifying potential fraudulent accounts
c) Investigating criminal cases filed by customers
d) Monitoring stock market trends
e) Promoting customer relationship management

Answer: b) Reviewing and classifying potential fraudulent accounts

Explanation: The FMG is responsible for identifying, investigating, and classifying accounts that may
be involved in fraudulent activities.

38. In the case of a consortium lending arrangement, who is responsible for convening a meeting
of all lenders when a fraud is detected?

a) RBI
b) The largest lender or consortium leader
c) The borrower
d) The Ministry of Finance
e) The enforcement agency

Answer: b) The largest lender or consortium leader

Explanation: The largest lender or the consortium leader is responsible for coordinating with other
lenders when fraud is detected.

39. What is the primary purpose of the Central Repository of Information on Large Credits (CRILC)?

a) To monitor daily banking transactions

b) To provide loans to high-risk borrowers
c) To share information on large exposures and non-performing assets
d) To conduct audits of small borrowers
e) To monitor foreign transactions of banks

255
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: c) To share information on large exposures and non-performing assets
Explanation: CRILC serves as a platform for banks to report and monitor large exposures and non-
performing assets, enabling better risk management.

40. In cases of project finance, what is one measure banks use to ensure the end-use of funds?

a) Regular social audits of the borrower’s business

b) Quarterly forensic audits
c) Certification from Chartered Accountants
d) Allowing self-reporting by the borrower
e) Direct communication with foreign lenders

Answer: c) Certification from Chartered Accountants

Explanation: Chartered Accountants provide certifications that help ensure the funds are used for
their intended purpose.

41. What is a quick mortality account as per the document?

a) An account that is closed within a year of being opened

b) An account that becomes non-performing within two years of sanction
c) A fraudulent account detected during the first month
d) An account that receives funds from foreign lenders
e) An account that shows consistent profits

Answer: b) An account that becomes non-performing within two years of sanction

Explanation: Quick mortality accounts are those that become non-performing assets (NPA) within
two years of being sanctioned or disbursed.

42. Which of the following is NOT a recommended action against wilful defaulters as per RBI
guidelines?

a) Criminal proceedings
b) Foreclosure of loans
c) Debarment from institutional finance
d) Reduction of interest rates
e) Change of management

Answer: d) Reduction of interest rates

Explanation: Wilful defaulters are penalized with criminal proceedings, foreclosure, debarment, or a
change of management, but they are not offered reduced interest rates.

43. What is the role of a forensic audit in fraud risk management?

a) Estimating future market trends

b) Monitoring customer satisfaction levels
c) Investigating misappropriation of funds
d) Approving loan disbursements
e) Managing foreign exchange risks

Answer: c) Investigating misappropriation of funds

Explanation: Forensic audits are conducted to investigate and confirm instances of misappropriation
or fraudulent use of funds.

256
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
44. Under which scenario would a Look Out Circular (LOC) be issued?

a) When a loan becomes a non-performing asset

b) When the bank receives a restructuring request
c) When there is credible information that the borrower may flee India
d) When the borrower seeks an extension on loan repayment
e) When the borrower starts a new business

Answer: c) When there is credible information that the borrower may flee India
Explanation: LOCs are issued when it is believed that the borrower might leave the country to evade
prosecution or repayment.

45. What is a key criterion for classifying a borrower as a non-cooperative borrower?

a) Refusal to engage in forensic audits

b) Failure to repay due to external factors
c) Intentional default with cooperation
d) Hindering recovery efforts and denying access to assets
e) Filing for bankruptcy

Answer: d) Hindering recovery efforts and denying access to assets

Explanation: A non-cooperative borrower is someone who actively thwarts the bank’s recovery
efforts by not providing necessary information or denying access to collateral or assets.

46. What is the first step banks must take when fraud is suspected in a loan account?

a) Stop all disbursements immediately

b) Report the suspicion directly to the Ministry of Finance
c) Classify the account as a Red Flagged Account (RFA)
d) Issue a Look Out Circular
e) Cancel the loan agreement

Answer: c) Classify the account as a Red Flagged Account (RFA)

Explanation: When fraud is suspected, banks must first classify the account as an RFA, which triggers
further investigation.

47. What happens if a fraud is confirmed after a forensic audit?

a) The borrower is given an extension for repayment

b) The loan is restructured to minimize losses
c) The fraud is reported to RBI and law enforcement agencies
d) The fraud case is closed without any action
e) The borrower is granted another loan to cover losses

Answer: c) The fraud is reported to RBI and law enforcement agencies

Explanation: Once fraud is confirmed, it must be reported to the appropriate regulatory and law
enforcement bodies for action.

48. Which of the following actions would NOT be considered part of a diversion of funds?

a) Using short-term funds for long-term investments

b) Transferring loan funds to another subsidiary without approval
c) Deploying borrowed funds for business expansion as per loan terms

257
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
d) Routing funds through a different bank without notifying the lender
e) Investing loan money in unrelated ventures

Answer: c) Deploying borrowed funds for business expansion as per loan terms
Explanation: Using borrowed funds for business expansion, as long as it aligns with the loan terms, is
not considered fund diversion.

49. Who is responsible for declaring an individual as a Fugitive Economic Offender (FEO)?

a) The Ministry of Finance

b) A Special Court
c) The Reserve Bank of India
d) The Central Bureau of Investigation
e) The Securities and Exchange Board of India

Answer: b) A Special Court

Explanation: A Special Court under the Fugitive Economic Offenders Act has the authority to declare
an individual as a Fugitive Economic Offender.

50. What is the purpose of an Early Warning Signal (EWS) in loan accounts?

a) To estimate the profitability of loans

b) To trigger early detection of possible defaults or frauds
c) To identify high-growth businesses
d) To predict market trends
e) To ensure compliance with international banking standards

Answer: b) To trigger early detection of possible defaults or frauds

Explanation: Early Warning Signals (EWS) help banks detect potential defaults or fraudulent activities
before they escalate into serious issues.

51. What is the primary purpose of tracking Early Warning Signals (EWS) in credit monitoring?

a. To increase loan processing speed

b. To detect signs of potential default or fraud early
c. To decrease the risk of high interest loans
d. To manage loan disbursements more efficiently
e. To generate more profits for the bank
Answer: b. To detect signs of potential default or fraud early
Explanation: The primary purpose of EWS is to identify early signs of credit stress or fraud, allowing
banks to take proactive measures to mitigate risks.

52. Which of the following would most likely be considered a Red Flagged Account (RFA)?

a. An account with a high volume of deposits

b. A loan account with frequent ad hoc sanctions and high-value RTGS payments to unrelated parties
c. An account with regular EMI payments
d. A new loan account with minimal activity
e. An account showing significant withdrawals for business operations
Answer: b. A loan account with frequent ad hoc sanctions and high-value RTGS payments to
unrelated parties
Explanation: A Red Flagged Account is one where Early Warning Signals (EWS) suggest fraudulent
activities, such as unusual payments to unrelated parties.

258
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
53. According to the RBI’s fraud management framework, what should banks do when they
observe Early Warning Signals (EWS)?
a. Ignore the signals and continue normal operations
b. Report the signals immediately to the board of directors
c. Initiate an internal investigation into the loan account and inform the Fraud Monitoring Group
(FMG)
d. Terminate the loan agreement immediately
e. Increase the interest rate on the account
Answer: c. Initiate an internal investigation into the loan account and inform the Fraud Monitoring
Group (FMG)
Explanation: Upon observing EWS, banks must immediately investigate the account and inform the
FMG to determine if further action, such as red-flagging or fraud classification, is needed.

54. What is the purpose of a forensic audit in the context of fraud risk management?

a. To increase the borrower’s loan limit

b. To investigate the borrower’s financial statements for fraud or irregularities
c. To improve loan recovery rates
d. To provide the borrower with additional time for repayment
e. To adjust the loan terms based on the borrower’s credit history
Answer: b. To investigate the borrower’s financial statements for fraud or irregularities
Explanation: A forensic audit is conducted to examine a borrower’s financial activities in order to
detect any potential fraud or mismanagement of funds.

55. Which of the following is NOT considered an Early Warning Signal (EWS) by the RBI?

a. Frequent changes in the scope of the borrower’s project

b. High-value cheques bouncing
c. Regular payments of loan installments
d. Frequent requests for postponing inspections
e. Disproportionate changes in inventory
Answer: c. Regular payments of loan installments
Explanation: Regular payments do not indicate stress or fraud; on the contrary, they reflect normal
loan servicing.

56. What is the timeframe within which banks should report frauds involving ₹1 crore or more to
the Central Bureau of Investigation (CBI)?

a. 1 month
b. 45 days
c. 6 months
d. 21 days
e. 7 days
Answer: d. 21 days
Explanation: Banks are required to report fraud cases involving amounts above ₹1 crore to the CBI
within 21 days of detection, ensuring timely intervention by investigative authorities.

57. Which of the following is an example of siphoning of funds?

a. Delaying project milestones

b. Routing borrowed funds through non-lender banks for unrelated purposes

259
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
c. Under-reporting liabilities
d. Over-insuring assets
e. Delaying loan disbursements
Answer: b. Routing borrowed funds through non-lender banks for unrelated purposes
Explanation: Siphoning of funds occurs when borrowed money is used for purposes not related to
the borrower’s operations, often to the detriment of the lender.

58. Which of the following is a key characteristic of a Non-Cooperative Borrower?

a. Borrower who frequently makes payments before the due date

b. Borrower who refuses to engage with lenders in recovery efforts despite the ability to repay
c. Borrower who regularly communicates with the bank
d. Borrower who provides additional collateral when requested
e. Borrower who requests loan restructuring in times of financial distress
Answer: b. Borrower who refuses to engage with lenders in recovery efforts despite the ability to
repay
Explanation: A Non-Cooperative Borrower deliberately avoids repayment or obstructs the recovery
process despite having the capacity to repay.

59. Which of the following should banks do when they classify an account as a Red Flagged
Account (RFA)?

a. Immediately recover the loan

b. Submit a fraud report to the CBI
c. Conduct a detailed forensic audit
d. Notify the borrower of the RFA classification
e. Close the borrower’s account immediately
Answer: c. Conduct a detailed forensic audit
Explanation: When an account is classified as RFA, the bank should investigate thoroughly, often
through a forensic audit, to assess the potential for fraud.

60. What is the purpose of a Look Out Circular (LOC) in fraud management?

a. To track the movements of borrowers making large payments

b. To prevent fugitive economic offenders from leaving the country
c. To expedite loan disbursements
d. To recover collateral from defaulting borrowers
e. To facilitate communication between lenders and borrowers
Answer: b. To prevent fugitive economic offenders from leaving the country
Explanation: A Look Out Circular is issued to immigration authorities to prevent individuals who are
involved in fraud or economic offenses from fleeing the country.

61. What is the primary function of the Fraud Monitoring Return (FMR) submitted to the RBI?

a. To request loan restructuring

b. To report fraud cases to the RBI for further action
c. To apply for additional credit facilities
d. To inform borrowers about the status of their loans
e. To report profit and loss statements of borrowers

260
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: b. To report fraud cases to the RBI for further action
Explanation: The FMR is a mandatory reporting mechanism through which banks report fraud cases
to the RBI, allowing for coordinated action against fraudulent borrowers.

62. When should a forensic audit be conducted in a borrower’s account?

a. Only when a loan reaches 50% of its tenure

b. After two consecutive defaults in loan payments
c. When the account is classified as an RFA or when a significant fraud is suspected
d. Only at the time of loan disbursement
e. When the borrower requests a higher credit limit
Answer: c. When the account is classified as an RFA or when a significant fraud is suspected
Explanation: Forensic audits are generally initiated when the account shows signs of potential fraud,
typically after being classified as a Red Flagged Account.

63. What is a key feature of the RBI’s guidelines on wilful defaulters?

a. Wilful defaulters should be given more time to repay loans

b. Wilful defaulters can still receive institutional finance
c. Wilful defaulters must be debarred from receiving institutional finance for five years
d. Wilful defaulters can only receive non-funded facilities
e. Wilful defaulters can continue to secure loans if they offer collateral
Answer: c. Wilful defaulters must be debarred from receiving institutional finance for five years
Explanation: RBI mandates that wilful defaulters be debarred from receiving institutional finance for
at least five years as a penalty for their intentional default.

64. In the context of fraud risk management, what is the significance of the CRILC platform?

a. It facilitates faster loan disbursements

b. It tracks wilful defaulters across banks
c. It is used for submitting fraud monitoring returns
d. It allows banks to monitor large borrowers and red-flagged accounts
e. It is a platform for borrower grievances
Answer: d. It allows banks to monitor large borrowers and red-flagged accounts
Explanation: The Central Repository of Information on Large Credits (CRILC) is used by banks to track
and report on large borrowers and accounts that are classified as Red Flagged or fraudulent.

65. Which of the following is a common red flag that indicates possible diversion of funds by the
borrower?

a. Increased profits in the borrower’s financial statements

b. Funds routed through banks not involved in the lending arrangement
c. Regular repayments of the loan
d. High inventory levels in the borrower’s business
e. Loan payments made directly to suppliers
Answer: b. Funds routed through banks not involved in the lending arrangement
Explanation: Routing funds through non-lender banks without approval is a common indicator of
fund diversion, suggesting that the borrower may not be using the funds for the intended purpose.

66. What action should banks take when an account shows multiple Early Warning Signals (EWS)?

a. Increase the loan interest rate

261
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
b. Decrease the credit limit
c. Classify the account as a Red Flagged Account (RFA)
d. Extend the loan repayment period
e. Impose additional collateral requirements
Answer: c. Classify the account as a Red Flagged Account (RFA)
Explanation: When multiple EWS are present, the bank should classify the account as RFA and
investigate further for potential fraud.

67. What is an example of a wilful default as per RBI guidelines?

a. A borrower who missed payments due to a business downturn

b. A borrower who is unable to repay due to unforeseen circumstances
c. A borrower who deliberately defaults despite having the capacity to pay
d. A borrower who makes partial payments on the loan
e. A borrower who applies for loan restructuring
Answer: c. A borrower who deliberately defaults despite having the capacity to pay
Explanation: Wilful default occurs when the borrower intentionally avoids repayment despite having
the resources to meet their obligations.

68. What is the primary objective of forensic audits in cases of suspected fraud?

a. To extend the loan tenure

b. To identify any criminal malfeasance and misappropriation of funds
c. To ensure the borrower receives additional credit
d. To adjust the borrower’s interest rate based on risk
e. To help the borrower restructure the loan
Answer: b. To identify any criminal malfeasance and misappropriation of funds
Explanation: Forensic audits are conducted to detect fraudulent activities such as misappropriation
of funds, ensuring that any criminal actions are uncovered and addressed.

69. What is the role of private investigative agencies in fraud risk management for banks?

a. To recover outstanding dues from borrowers

b. To assist in locating missing borrowers and uncharged assets
c. To replace the bank’s internal audit functions
d. To process loan applications more quickly
e. To provide legal assistance to the bank in fraud cases
Answer: b. To assist in locating missing borrowers and uncharged assets
Explanation: Private investigative agencies are engaged to assist in gathering information, such as
locating missing borrowers or identifying uncharged assets, that can help in the recovery of fraud-
related losses.

70. What constitutes a wilful default due to siphoning of funds?

a. The borrower failed to repay the loan due to market conditions

b. The borrower uses loan proceeds for purposes unrelated to the intended operations
c. The borrower uses funds to pay off another lender
d. The borrower pays down the loan earlier than agreed
e. The borrower invests in market securities with the loan amount

262
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: b. The borrower uses loan proceeds for purposes unrelated to the intended operations
Explanation: Siphoning of funds refers to using loan proceeds for purposes other than those
intended, harming the financial health of the borrowing entity or the lender.

71. What must banks ensure before publishing the photographs of wilful defaulters?

a. They must have a court order

b. The borrower must consent to the publication
c. The borrower must have been declared a wilful defaulter following RBI's prescribed mechanism
d. They must publish the photograph of any defaulter who has defaulted on loans above ₹50 lakh
e. They must wait until the loan reaches a certain overdue period
Answer: c. The borrower must have been declared a wilful defaulter following RBI's prescribed
mechanism
Explanation: Publishing the photograph of a defaulter is allowed only after the borrower has been
officially declared a wilful defaulter as per the RBI’s guidelines.

72. What is the role of the Special Committee of the Board for Monitoring and Follow-Up of Frauds
(SCBF)?

a. To approve new loans

b. To review and follow up on accounts flagged for fraud
c. To review borrower grievances
d. To adjust loan interest rates
e. To classify wilful defaulters
Answer: b. To review and follow up on accounts flagged for fraud
Explanation: The SCBF reviews cases of suspected fraud and ensures that appropriate follow-up
actions are taken by the bank to mitigate risks.

73. What should banks do if they detect that a borrower has diverted funds?

a. Increase the credit limit to account for the diverted funds

b. Impose additional penalties on the borrower
c. Conduct a forensic audit and report the borrower as a wilful defaulter if necessary
d. Extend the loan tenure to allow the borrower more time to repay
e. Charge a higher interest rate to compensate for the risk
Answer: c. Conduct a forensic audit and report the borrower as a wilful defaulter if necessary
Explanation: Upon detecting fund diversion, banks should conduct a forensic audit and report the
borrower as a wilful defaulter if the diversion is deliberate.

74. What is a critical indicator of fraud in a company’s annual report?

a. Higher revenues than the previous year

b. Discrepancies between different sections of the report
c. Stable cash flow year after year
d. Increase in net profit margin
e. Addition of new directors to the board
Answer: b. Discrepancies between different sections of the report
Explanation: Discrepancies or inconsistencies within a company’s annual report are red flags that
may indicate manipulation of financial data, potentially signaling fraud.

75. When should banks classify an account as a Red Flagged Account (RFA)?

263
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a. Only when the borrower applies for a new loan
b. When multiple Early Warning Signals (EWS) are observed
c. After two missed payments
d. When a borrower has requested a loan restructuring
e. Only when a forensic audit confirms fraudulent activity
Answer: b. When multiple Early Warning Signals (EWS) are observed
Explanation: Banks should classify accounts as Red Flagged when multiple Early Warning Signals
suggest the potential for fraud or credit risk.

76. What should banks do after completing a forensic audit that confirms fraud?

a. Close the borrower’s account immediately

b. Publish the borrower’s photograph in local newspapers
c. Report the borrower as a fraud to the RBI and initiate legal proceedings
d. Increase the borrower’s credit limit to recover losses
e. Extend the loan tenure to allow repayment
Answer: c. Report the borrower as a fraud to the RBI and initiate legal proceedings
Explanation: After confirming fraud through a forensic audit, banks are required to report the case to
the RBI and initiate criminal or legal proceedings as necessary.

77. What is the role of the Central Fraud Monitoring Cell (CFMC) of the RBI?

a. To approve new loans

b. To monitor and follow up on all fraud cases reported by banks
c. To handle customer grievances
d. To oversee loan disbursements
e. To sanction penal interest rates for high-risk loans
Answer: b. To monitor and follow up on all fraud cases reported by banks
Explanation: The CFMC is responsible for overseeing fraud cases and ensuring that appropriate
actions are taken by the banks.

78. What must banks do within 15 days of completing a forensic audit if fraud is detected?

a. Request additional collateral from the borrower

b. File a complaint with the CBI
c. Reclassify the borrower as a non-performing asset
d. Reduce the loan interest rate
e. Seek approval from the board to take action
Answer: b. File a complaint with the CBI
Explanation: If fraud is detected through a forensic audit, banks must report the case to the CBI
within 15 days to initiate legal proceedings.

79. Which of the following is a key action banks must take against wilful defaulters?

a. Allow them to restructure their loans

b. Provide them with additional credit facilities
c. Debar them from institutional finance for at least five years
d. Increase their credit limits for recovery
e. Offer them a reduced interest rate

264
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: c. Debar them from institutional finance for at least five years
Explanation: Wilful defaulters are barred from accessing institutional finance for a minimum of five
years as a penalty for intentional defaults.

80. What is the threshold for reporting accounts with exposure as Red Flagged Accounts (RFA) or
fraud to CRILC?

a. ₹25 crore
b. ₹50 crore
c. ₹75 crore
d. ₹100 crore
e. ₹150 crore
Answer: b. ₹50 crore
Explanation: The RBI mandates that accounts with exposure of ₹50 crore or more that are classified
as RFA or fraud must be reported on the CRILC platform

81. Which of the following actions by a borrower would NOT generally be flagged as a Red Flag
Account (RFA), despite involving a potential Early Warning Signal (EWS)?

a) The borrower’s foreign bills remain overdue, showing delayed payments.

b) The borrower requests an ad hoc limit increase due to business expansion.
c) The borrower requests postponement of the bank’s inspection of collateral.
d) The borrower transfers a large sum to unrelated parties through RTGS.
e) The borrower liquidates inventory through transactions that bypass the consortium lenders.

Answer: b) The borrower requests an ad hoc limit increase due to business expansion.
Explanation: A request for an ad hoc limit increase due to business expansion may indicate financial
stress, but it's not necessarily an indicator of fraudulent behavior unless coupled with other signals,
unlike liquidations or significant RTGS transfers.

82. In a consortium lending arrangement, if one bank red-flags an account due to multiple EWS,
what action is required by the consortium leader or the largest lender?

a) Call for an immediate board meeting to restructure the loan

b) Initiate forensic audit at the request of the bank with the largest exposure
c) Report to the Reserve Bank of India (RBI) directly, bypassing other banks
d) Convene a consortium-wide meeting within 15 days to discuss the issue
e) Defer any decisions until further review of the borrower’s market conditions

Answer: d) Convene a consortium-wide meeting within 15 days to discuss the issue

Explanation: The consortium leader must convene a meeting within 15 days to discuss and
coordinate responses when one bank red-flags the account. This ensures all banks are aligned in
their approach to handling suspected fraud.

83. Which of the following would most likely indicate siphoning of funds as per RBI’s guidelines,
rather than diversion of funds?

a) Transferring borrowed funds to a group company without the lender’s approval

b) Investing borrowed money into unrelated speculative ventures
c) Using working capital loans for long-term asset creation
d) Routing funds through a third-party foreign bank account with no reporting
e) Utilizing funds for paying unrelated personal expenses of the borrower’s directors

265
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: d) Routing funds through a third-party foreign bank account with no reporting
Explanation: Siphoning of funds occurs when borrowed funds are moved away from their intended
use without transparency, such as routing through foreign accounts, making them inaccessible to the
lender.

84. A forensic audit report highlights that the borrower has systematically overstated their assets
and understated liabilities in their financials, misleading banks over several years. What immediate
action should the bank take based on this information?

a) Increase collateral requirements and restructure the loan

b) Issue a Look Out Circular (LOC) and classify the borrower as a wilful defaulter
c) Report the fraud to RBI and initiate criminal proceedings
d) Reduce the loan limit and extend the repayment period
e) Liquidate the borrower’s assets to cover the loan amount

Answer: c) Report the fraud to RBI and initiate criminal proceedings

Explanation: Systematic overstatement of assets and misleading financial reporting constitutes
fraud, and the bank must report it to RBI and initiate legal action, including criminal proceedings.

85. When a borrower is classified as a wilful defaulter, which of the following actions is NOT in
compliance with RBI’s recommended measures for penal action?

a) Barring the borrower from accessing institutional finance for 5 years

b) Publishing the borrower’s photograph in newspapers after following due process
c) Filing a criminal case against the borrower for fraudulent misrepresentation
d) Increasing the interest rate on the borrower’s loan to compensate for risk
e) Initiating legal proceedings to change the borrower’s management team

Answer: d) Increasing the interest rate on the borrower’s loan to compensate for risk
Explanation: RBI guidelines mandate barring institutional finance, criminal action, and even a change
in management. Increasing interest rates is not an appropriate or prescribed penalty for wilful
defaulters.

86. Which of the following conditions would justify classifying an account as quick mortality, as per
standard banking practices?

a) The borrower defaults on interest payments within the first 3 months of loan disbursal
b) The borrower diverts funds to a personal account within one year of loan sanction
c) The loan becomes non-performing within two years of the first disbursement
d) The borrower engages in fraudulent transactions during the first quarter
e) The borrower fails to submit required collateral documentation within one year

Answer: c) The loan becomes non-performing within two years of the first disbursement
Explanation: A quick mortality account is one where the loan becomes a non-performing asset (NPA)
within two years of sanction, indicating a potential underlying problem in the credit risk assessment
or the borrower’s financials.

87. Which of the following is a critical shortcoming of merely relying on quarterly progress reports
to monitor the end-use of loan funds in a large project finance scenario?

a) The reports do not account for fluctuations in the borrower’s market conditions
b) Quarterly progress reports are often delayed, providing late indications of fraud
c) The reports may be manipulated by the borrower and miss critical fund diversions

266
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
d) These reports do not cover the borrower’s liabilities in foreign markets
e) Reports are only reviewed by internal teams and not external auditors

Answer: c) The reports may be manipulated by the borrower and miss critical fund diversions
Explanation: Progress reports can be easily manipulated, especially when fraudulent borrowers want
to hide fund diversion, making them unreliable without additional checks such as external audits.

88. When reporting fraud cases involving cross-border transactions, which agency is primarily
responsible for leading the investigation if the amount involved exceeds Rs. 50 crore?

a) Enforcement Directorate (ED)

b) Central Bureau of Investigation (CBI)
c) Serious Fraud Investigation Office (SFIO)
d) Ministry of Finance
e) State Police

Answer: b) Central Bureau of Investigation (CBI)

Explanation: For frauds exceeding Rs. 50 crore, the CBI, specifically the Banking Security and Fraud
Cell (BSFC), takes the lead in the investigation, especially in cases involving cross-border transactions.

89. A borrower classified as a Non-Cooperative Borrower (NCB) refuses to submit critical financial
documents required for a forensic audit. What should the bank do next?

a) Increase the loan interest rate until the borrower complies

b) Terminate the loan agreement immediately
c) File a legal complaint for obstruction and report the borrower to CRILC
d) Request the RBI to intervene in the audit process
e) Provide a grace period to allow the borrower to comply with document submission

Answer: c) File a legal complaint for obstruction and report the borrower to CRILC
Explanation: A non-cooperative borrower who refuses to engage in the process obstructs the
lender's efforts, warranting legal action and reporting to CRILC for further consequences.

90. Which of the following would NOT be considered siphoning of funds under the RBI’s definition?

a) Using borrowed funds to invest in unrelated ventures

b) Purchasing personal assets using loan proceeds intended for business purposes
c) Shifting borrowed funds to a foreign subsidiary without informing the bank
d) Using borrowed funds to create non-operational assets in line with the loan terms
e) Transferring borrowed money to group companies for unrelated purposes

Answer: d) Using borrowed funds to create non-operational assets in line with the loan terms
Explanation: As long as the borrowed funds are used for the purpose stated in the loan agreement
(even if for non-operational assets), it would not be considered siphoning of funds.

91. Which scenario would prompt the issuance of a Look Out Circular (LOC), even without
immediate evidence of the borrower fleeing the country?

a) The borrower has an outstanding civil lawsuit with another lender

b) A forensic audit reveals fund diversion into foreign accounts
c) The borrower defaults on a minor payment to a statutory authority
d) The borrower requests a change in loan repayment schedule
e) The borrower’s stock value drops by 10% due to market fluctuations

267
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: b) A forensic audit reveals fund diversion into foreign accounts
Explanation: If a forensic audit indicates that funds have been diverted into foreign accounts, there is
a heightened risk that the borrower may attempt to flee, justifying an LOC issuance.

92. How can a forensic audit be most effectively used in dealing with a large consortium loan
suspected of fraud?

a) By targeting only the lead bank’s financial transactions with the borrower
b) By focusing on high-value domestic transactions above Rs. 100 crore
c) By auditing the borrower’s entire group of companies across the consortium lenders
d) By investigating only the borrower’s tax filings over the past five years
e) By restricting the audit scope to the borrower’s capital expenditure statements

Answer: c) By auditing the borrower’s entire group of companies across the consortium lenders
Explanation: To fully assess the potential for fraud, the forensic audit must cover the borrower’s
entire group of companies, especially when multiple lenders are involved in consortium lending.

93. If a borrower has defaulted on repayment obligations but claims that the default was
unintentional due to external market conditions, which factor would still justify classifying the
borrower as a wilful defaulter?

a) The borrower has submitted updated financial reports

b) The borrower was in possession of sufficient funds but diverted them elsewhere
c) The borrower’s foreign investments yielded losses during the loan tenure
d) The borrower successfully completed a partial repayment
e) The borrower’s management team resigned due to financial pressure

Answer: b) The borrower was in possession of sufficient funds but diverted them elsewhere
Explanation: Wilful default is determined by the borrower’s ability to pay but choosing not to repay
due to fund diversion or mismanagement, despite external market factors.

94. In a situation where multiple Early Warning Signals (EWS) are detected but none indicate
outright fraud, what is the recommended course of action for the bank?

a) Immediately classify the account as fraud

b) Reduce the borrower’s credit limits to mitigate risk
c) Conduct a comprehensive review and possible forensic audit
d) Publish the borrower’s name on the CRILC platform
e) Halt all further credit facilities until repayment is complete

Answer: c) Conduct a comprehensive review and possible forensic audit

Explanation: When multiple EWS are detected, a forensic audit may be necessary to investigate any
hidden or underlying fraudulent activities before taking drastic steps.

95. What is the primary limitation of solely relying on reports from Chartered Accountants to
monitor the end-use of funds?

a) Chartered Accountants may not be aware of foreign investments by the borrower

b) The reports may lack granular details on cash flow management
c) They are limited in scope and may overlook concealed fund diversions
d) They provide too much detailed information, overwhelming the bank’s audit teams
e) They focus exclusively on tax liabilities rather than fraud indicators

268
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: c) They are limited in scope and may overlook concealed fund diversions
Explanation: Chartered Accountant reports, while useful, can miss deeper fund diversions or
fraudulent activities, necessitating additional checks and forensic audits.

96. When a loan account shows signs of both EWS and delays in statutory payments, but the
borrower claims temporary cash flow issues, which of the following actions would be the most
prudent first step for the bank?

a) Classify the account as a Non-Performing Asset (NPA)

b) File a complaint with the Enforcement Directorate (ED)
c) Conduct a forensic audit to identify potential fund diversion
d) Postpone the review of the loan until the borrower recovers
e) Increase the loan exposure to help the borrower stabilize

Answer: c) Conduct a forensic audit to identify potential fund diversion

Explanation: In such cases, a forensic audit is necessary to investigate whether the borrower is
diverting funds or experiencing genuine cash flow issues, before deciding further action.

97. Which of the following does NOT typically fall under the responsibilities of a Fraud Monitoring
Group (FMG) within a bank?

a) Reviewing accounts flagged with multiple Early Warning Signals (EWS)

b) Conducting criminal investigations of suspected fraudsters
c) Recommending remedial actions for accounts classified as Red Flagged Accounts (RFA)
d) Monitoring fraud-prone sectors and developing preventive measures
e) Classifying accounts as either RFAs or fraudulent based on investigative findings

Answer: b) Conducting criminal investigations of suspected fraudsters

Explanation: Criminal investigations are handled by law enforcement agencies (CBI, police, etc.), not
the bank’s internal FMG, which focuses on reviewing suspicious accounts and recommending further
actions.

98. Under RBI guidelines, which of the following situations would most likely lead to mandatory
forensic audit even if no Red Flagged Account (RFA) status has been assigned yet?

a) The borrower’s project cost has exceeded the original estimates by 10%
b) The borrower’s working capital has increased in proportion to turnover
c) The borrower’s loan has become an NPA within the first two years of disbursement
d) The borrower has requested a loan restructuring due to market downturn
e) The borrower’s financials show significant increase in receivables but no issues with creditors

Answer: c) The borrower’s loan has become an NPA within the first two years of disbursement
Explanation: Loans that become NPAs within the first two years (quick mortality accounts) are strong
indicators of potential fraud and typically warrant a forensic audit.

99. A diversion of funds would NOT be considered under which of the following circumstances?

a) Transferring borrowed funds to group companies without informing the lender

b) Utilizing loan funds for purchasing unrelated financial assets without lender approval
c) Using working capital loans to fund long-term capital expenditures
d) Using short-term loans for personal asset purchases by the borrower’s management
e) Investing borrowed funds in stock market portfolios as a risk management strategy

269
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: e) Investing borrowed funds in stock market portfolios as a risk management strategy
Explanation: Even though it may seem legitimate, using borrowed funds for speculative or unrelated
investments without lender approval would still qualify as diversion of funds, including investing in
the stock market.

100. If a borrower has been classified as a wilful defaulter and it’s discovered that the borrower’s
director has started a new company, which action should the bank take in accordance with RBI
guidelines?

a) Blacklist the new company from accessing institutional finance

b) Report the director to CRILC as a high-risk individual
c) Prevent the director from becoming a part of any company’s management
d) Issue a Look Out Circular (LOC) for the director
e) Provide an opportunity for the new company to establish its credibility

Answer: c) Prevent the director from becoming a part of any company’s management
Explanation: RBI guidelines specify that wilful defaulters or their directors cannot serve on the
boards of new companies, and steps must be taken to prevent them from continuing such activities.

101. In the event of a borrower’s foreign assets being misrepresented during loan approval, what
would be the most appropriate course of action for the bank if the loan value exceeds Rs. 50 crore?

a) Seek immediate loan repayment in full

b) File a report with the Enforcement Directorate (ED) for further investigation
c) Increase interest rates to offset the risk exposure
d) Impose penalties on the borrower for non-disclosure
e) Conduct a stock audit and adjust the loan terms

Answer: b) File a report with the Enforcement Directorate (ED) for further investigation
Explanation: When foreign assets are misrepresented and the loan value is high, the Enforcement
Directorate (ED) is responsible for investigating such matters, especially when there is a cross-border
element.

102. If multiple EWS are detected and the bank’s Fraud Monitoring Group (FMG) classifies the
account as RFA, but forensic audit findings are inconclusive, what is the next step as per RBI
guidelines?

a) Downgrade the account from RFA to standard

b) Continue to classify the account as RFA until conclusive evidence is obtained
c) Cancel all loan agreements with the borrower
d) Temporarily freeze the borrower’s assets until a conclusion is reached
e) Report the borrower to CRILC for precautionary measures

Answer: b) Continue to classify the account as RFA until conclusive evidence is obtained
Explanation: RBI guidelines specify that if a forensic audit does not provide conclusive evidence of
fraud, the account should remain classified as RFA until a clear determination can be made.

103. A Look Out Circular (LOC) is most likely to be requested in which of the following cases, even if
the borrower has not fled the country yet?

a) The borrower has engaged in fund diversion but remains in India

b) The borrower has failed to provide timely statutory payments
c) The borrower has delayed loan repayments for over 6 months

270
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
d) The borrower’s business expansion plan was denied by the bank
e) The borrower refused to cooperate with forensic auditors

Answer: a) The borrower has engaged in fund diversion but remains in India
Explanation: Even if the borrower has not fled, fund diversion is a strong indicator of potential fraud
and risk of absconding, justifying the issuance of an LOC.

104. In which situation would a bank not classify an account as a Red Flagged Account (RFA)
despite the presence of Early Warning Signals (EWS)?

a) Frequent changes in accounting periods

b) Large RTGS payments to unrelated parties
c) Over-insured inventory with no underlying business justification
d) Temporary liquidity shortfall due to a major client’s delayed payment
e) Significant unexplained increase in working capital borrowing

Answer: d) Temporary liquidity shortfall due to a major client’s delayed payment

Explanation: Temporary liquidity shortfalls caused by delayed payments from major clients may not
indicate fraud if the borrower provides transparency and eventual resolution. However, other signals
listed above could indicate fraudulent intent.

105. Which of the following measures would be the least effective in preventing siphoning of funds
in a large infrastructure project?

a) Quarterly certification from a Chartered Accountant

b) Continuous monitoring of the borrower’s bank accounts
c) Regular site visits to inspect the project progress
d) Periodic comprehensive forensic audits
e) Analysis of the borrower’s group company transactions

Answer: a) Quarterly certification from a Chartered Accountant

Explanation: While useful, certification from a Chartered Accountant may not provide deep insights
into siphoning, especially if fraudulent transactions are hidden. More detailed forensic audits and
ongoing monitoring are more effective.

106. In cases where a loan account has been red-flagged due to fund diversion, what is the
maximum permissible time within which the bank must complete the investigation and make a
final decision?

a) 1 month
b) 3 months
c) 6 months
d) 9 months
e) 21 days

Answer: c) 6 months
Explanation: As per RBI guidelines, the bank must complete its investigation, including any forensic
audits, within 6 months and decide whether to classify the account as fraud or remove the red-flag
status.

107. Which of the following would be considered a clear indicator of fraudulent activity in a
consortium loan arrangement?

271
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) The borrower requests to extend the loan tenure due to economic downturn
b) The borrower consistently routes proceeds through a non-consortium bank without lender
approval
c) The borrower provides regular updates on project completion with minor delays
d) The borrower requests an ad-hoc limit increase citing operational needs
e) The borrower increases collateral security to cover an expanded loan limit

Answer: b) The borrower consistently routes proceeds through a non-consortium bank without
lender approval
Explanation: Routing proceeds through non-consortium banks without informing or getting approval
from consortium lenders is a clear indicator of fund diversion and fraudulent intent.

108. In a consortium lending arrangement, which of the following entities is responsible for
initiating a forensic audit if EWS are observed in one of the banks’ loan accounts?

a) The bank with the smallest exposure

b) The bank that first identifies the EWS
c) The lead bank or the largest lender in the consortium
d) RBI, upon receiving a report of the EWS
e) The borrower, under instructions from the consortium

Answer: c) The lead bank or the largest lender in the consortium

Explanation: In consortium lending arrangements, the lead bank or the largest lender is responsible
for initiating a forensic audit when EWS are observed.

109. If a borrower is classified as a Non-Cooperative Borrower (NCB), what is the minimum

exposure required before this classification can be reported to the Central Repository of
Information on Large Credits (CRILC)?

a) Rs. 25 lakh
b) Rs. 1 crore
c) Rs. 5 crore
d) Rs. 10 crore
e) Rs. 50 crore

Answer: c) Rs. 5 crore

Explanation: As per RBI guidelines, the minimum exposure required for classifying a borrower as a
Non-Cooperative Borrower (NCB) and reporting to CRILC is Rs. 5 crore.

110. Which of the following actions by the bank would violate RBI’s guidelines on the penal
measures against wilful defaulters?

a) Imposing a financial penalty on the borrower

b) Denying the borrower any additional credit facilities
c) Filing criminal charges for fund diversion
d) Preventing the borrower from floating new ventures for 5 years
e) Reporting the borrower to RBI for inclusion in the wilful defaulter list

Answer: a) Imposing a financial penalty on the borrower

Explanation: RBI’s penal measures against wilful defaulters include denying future credit, filing
criminal charges, and preventing them from floating new ventures, but imposing a direct financial
penalty on the borrower is not part of the prescribed measures.

272
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Case Study 1: Loan Account with Multiple EWS (Q 1-3)

Scenario:
XYZ Pvt. Ltd., a manufacturing firm, obtained a working capital loan of Rs. 100 crore from a
consortium of banks. Over the past year, several Early Warning Signals (EWS) were detected,
including frequent high-value RTGS payments to unrelated parties, delayed payments to statutory
bodies, and frequent requests for ad-hoc limit increases. The company has also postponed multiple
site inspections citing operational disruptions. The lead bank, Alpha Bank, has now classified the
account as a Red Flagged Account (RFA) and initiated a forensic audit. The forensic audit revealed a
potential diversion of funds but could not conclusively prove fraudulent intent.

1. What should Alpha Bank’s next step be in this case, given that the forensic audit findings are
inconclusive?

a) Immediately downgrade the account to Non-Performing Asset (NPA)

b) Maintain the RFA classification and monitor closely for further evidence
c) File a criminal case based on the suspicion of fraud
d) Reclassify the account as standard since no conclusive evidence was found
e) Seek an extension of the forensic audit until conclusive evidence is gathered

Answer: b) Maintain the RFA classification and monitor closely for further evidence
Explanation: According to RBI guidelines, if a forensic audit does not provide conclusive evidence of
fraud, the bank should maintain the RFA status and continue monitoring. Only when more evidence
emerges or within the stipulated timeline of six months, should further action be taken.

2. Given that XYZ Pvt. Ltd. has delayed statutory payments and there are unexplained RTGS
transactions, what would be a red flag that could escalate the situation to a confirmed fraud
classification?

a) Borrower requests an additional limit increase

b) Borrower submits a new loan application with another bank
c) Borrower resigns key personnel from its finance department
d) Borrower refuses to cooperate in producing original documents for verification
e) Borrower issues a press statement blaming market conditions for financial stress

Answer: d) Borrower refuses to cooperate in producing original documents for verification

Explanation: Refusal to cooperate or produce original documents upon request is a strong indicator
of concealment and fraudulent behavior. This would typically escalate the situation, potentially
leading to the classification of the account as a fraud.

3. In the consortium arrangement, what is the lead bank’s responsibility once Alpha Bank classifies
XYZ Pvt. Ltd. as an RFA and suspects fraud?

a) Wait for the borrower to resolve internal issues before taking action
b) File a report directly with the Ministry of Finance
c) Request a meeting of all consortium members to discuss findings
d) Unilaterally declare the borrower a wilful defaulter
e) Freeze all transactions and assets of XYZ Pvt. Ltd. immediately

Answer: c) Request a meeting of all consortium members to discuss findings

Explanation: The lead bank must request a consortium-wide meeting to share the forensic audit

273
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
findings and discuss further actions. Decisions regarding the classification of the account as fraud or
further investigation must be done collectively by the consortium.

Case Study 2: Sudden Business Expansion and Unclear Fund Utilization (Q4-6)

Scenario:
ABC Ltd., a mid-sized infrastructure company, secured a term loan of Rs. 200 crore from Delta Bank
for a new construction project. After the disbursement, ABC Ltd. suddenly expanded its business into
a new unrelated sector—retail. Additionally, a stock audit report indicated that the company’s
inventory was over-insured, and there were discrepancies in invoices submitted for loan utilization.
Delta Bank has received a request for an additional Rs. 50 crore loan for business expansion.

4. What should Delta Bank’s first step be in response to the suspicious activities and the additional
loan request?

a) Approve the new loan as it will help the company with its business expansion
b) Conduct a forensic audit to determine if there is fund diversion or fraud
c) Report the borrower immediately to RBI as a wilful defaulter
d) Reduce the loan exposure to mitigate risk
e) File a criminal complaint against ABC Ltd. for misrepresentation

Answer: b) Conduct a forensic audit to determine if there is fund diversion or fraud

Explanation: The sudden expansion into unrelated sectors and discrepancies in loan utilization
warrant a forensic audit to check for fund diversion or fraud before approving any further loan
disbursements.

5. If the forensic audit reveals that ABC Ltd. has diverted funds into the retail sector without
informing the bank, what is the correct classification of this activity?

a) Legal business expansion based on market conditions

b) Diversion of funds
c) Siphoning of funds
d) Restructuring of business operations
e) Asset enhancement for future loan purposes

Answer: b) Diversion of funds

Explanation: Diversion of funds occurs when borrowed money is used for purposes other than those
specified in the loan agreement. In this case, expanding into retail without informing the bank
qualifies as fund diversion.

6. During the forensic audit, it was found that ABC Ltd. transferred loan funds to its foreign
subsidiary without disclosing this to Delta Bank. How should the bank classify this behavior?

a) Legal internal transaction within a corporate group

b) Diversion of funds
c) Siphoning of funds
d) Expansion of business activities
e) Routine international business transaction

Answer: c) Siphoning of funds

Explanation: Siphoning of funds refers to using borrowed money for purposes unrelated to the

274
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
borrower’s operations or using it in ways that are hidden from the lender, especially through foreign
subsidiaries.

Case Study 3: Project Financing Fraud Allegations (Q 7-9)

Scenario:
DEF Infra Ltd. received a project financing loan of Rs. 500 crore from Beta Bank to develop a large
housing project. Six months after the disbursement, DEF Infra Ltd. failed to provide updated project
progress reports and delayed payment to contractors. A site inspection revealed that the project had
barely started despite 50% of the funds being utilized. Beta Bank also discovered that DEF Infra Ltd.
invested Rs. 100 crore in a luxury resort project in a different state. The company has now requested
an extension on the loan repayment period.

7. What is the most appropriate first action for Beta Bank in response to the findings?

a) Approve the loan repayment extension to provide DEF Infra Ltd. more time
b) Initiate a forensic audit to investigate fund diversion
c) Increase the loan limit to cover the luxury resort project
d) Provide additional funds for the housing project to restart
e) Negotiate a restructuring of the loan terms with DEF Infra Ltd.

Answer: b) Initiate a forensic audit to investigate fund diversion

Explanation: The significant delay in the project, lack of progress, and the use of funds for a luxury
resort without informing the bank suggest potential fund diversion. A forensic audit would help
clarify the situation before any further actions are taken.

8. If the forensic audit confirms that DEF Infra Ltd. diverted Rs. 100 crore to another project, what
should Beta Bank’s next course of action be?

a) Classify the account as a wilful default and file a criminal case

b) Allow the borrower to repay the loan from the other project’s revenue
c) Convert the luxury resort project into collateral for the loan
d) Extend the loan tenure to allow for more time to repay
e) Request that DEF Infra Ltd. replace its management team

Answer: a) Classify the account as a wilful default and file a criminal case
Explanation: Fund diversion without the bank’s consent is a serious violation, especially on this scale.
Beta Bank should classify the borrower as a wilful defaulter and initiate legal proceedings to recover
the funds.

9. What might have been an effective preventive measure to detect early signs of fund diversion in
this project?

a) Conducting monthly forensic audits of the borrower

b) Regularly inspecting the project site and verifying fund utilization
c) Allowing the borrower more flexibility in fund allocation
d) Reducing the loan amount based on market conditions
e) Shifting the loan to a different bank with stricter guidelines

275
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: b) Regularly inspecting the project site and verifying fund utilization
Explanation: Regular inspections and verification of how the funds are being utilized would have
helped detect discrepancies early, preventing the diversion of Rs. 100 crore into another project.

Case Study 4: Non-Cooperative Borrower (Q 10-11)

Scenario:
GHI Group has an outstanding loan of Rs. 150 crore with Omega Bank. Over the past year, GHI Group
has refused to provide critical financial statements, denied access to collateral, and delayed several
meetings with bank officials. Despite multiple attempts to resolve the issues, GHI Group continues to
obstruct the bank’s recovery efforts. Omega Bank has classified the borrower as a Non-Cooperative
Borrower (NCB).

10. What should Omega Bank’s next step be after classifying GHI Group as a Non-Cooperative
Borrower?

a) File a Look Out Circular (LOC) against GHI Group’s directors

b) Increase the loan’s interest rate to penalize the borrower
c) Report GHI Group to the Central Repository of Information on Large Credits (CRILC)
d) Restructure the loan terms to encourage cooperation
e) Issue a public notice warning other banks of GHI Group

Answer: c) Report GHI Group to the Central Repository of Information on Large Credits (CRILC)
Explanation: After classifying a borrower as Non-Cooperative, the bank must report the borrower to
CRILC to alert other banks about the risk and ensure coordinated action across the banking system.

11. What might be the consequence for GHI Group as a result of being classified as a Non-
Cooperative Borrower?

a) GHI Group will be given a grace period to submit documents

b) Omega Bank will extend the loan repayment period
c) GHI Group will face higher provisioning requirements for future loans
d) GHI Group will be required to pay a penalty fee for non-cooperation
e) GHI Group’s loan will be restructured with stricter terms

Answer: c) GHI Group will face higher provisioning requirements for future loans
Explanation: Once classified as a Non-Cooperative Borrower, any new exposure to GHI Group will
require higher provisioning due to the increased risk, making it difficult for the company to obtain
future credit.

Case Study 5: Complex Consortium Lending with Multiple Triggers (12-16)

Scenario:
PQR Ltd., a large textile manufacturing company, secured a Rs. 600 crore loan from a consortium of 5
banks led by Zenith Bank. The loan was intended to expand PQR’s manufacturing capacity. However,
within a year, several issues emerged:

1. PQR Ltd. diverted a significant portion of the funds to a newly formed subsidiary in an
unrelated sector without notifying the consortium.

2. The project progress reports from the borrower showed inconsistent financial disclosures,
and a stock audit revealed that raw material inventory was inflated by 40%.

276
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
 3. Zenith Bank’s investigation found that PQR Ltd. was routing a portion of its cash flows
through non-consortium banks.

4. PQR Ltd. has requested additional funding of Rs. 100 crore to "stabilize operations," claiming
liquidity issues due to a global downturn.

5. Multiple lenders in the consortium have conflicting views on whether to conduct a forensic
audit, with some lenders requesting an immediate downgrade to Non-Performing Asset
(NPA).

12. What should be the immediate first step taken by Zenith Bank, as the lead lender, given the
conflicting opinions within the consortium?

a) Immediately downgrade the account to NPA to mitigate risk

b) Convene a meeting of all consortium lenders to discuss the findings
c) Approve the Rs. 100 crore additional funding to avoid further liquidity issues
d) File a criminal case against PQR Ltd. for fund diversion
e) Report the borrower as a wilful defaulter to RBI

Answer: b) Convene a meeting of all consortium lenders to discuss the findings

Explanation: The lead bank must first convene a meeting with all consortium members to share the
investigation findings and come to a consensus. Immediate downgrades or funding approvals
without collective agreement could lead to conflicts within the consortium.

13. Given the findings of inflated inventory, cash flow routing, and potential fund diversion, which
regulatory action would be most prudent before further steps are taken?

a) Initiate a forensic audit to investigate the fund diversion and financial inconsistencies
b) Proceed with additional funding to cover liquidity issues
c) Report the borrower to CRILC and suspend all loan disbursements
d) Freeze all assets of the borrower immediately
e) Reduce the loan exposure to mitigate potential future losses

Answer: a) Initiate a forensic audit to investigate the fund diversion and financial inconsistencies
Explanation: A forensic audit is critical at this stage to establish whether there has been any
fraudulent activity such as fund diversion or misrepresentation. This must be done before
downgrading or approving additional funding.

14. If the forensic audit confirms that PQR Ltd. routed funds through non-consortium banks and
inflated inventory levels, what classification is most appropriate for the account?

a) Standard asset
b) Restructured asset
c) Non-Performing Asset (NPA)
d) Wilful defaulter
e) Quick mortality account

Answer: d) Wilful defaulter

Explanation: When a borrower deliberately diverts funds and provides false information such as
inflated inventory levels, it constitutes wilful default. The borrower intentionally misleads lenders
despite having the means to comply with loan terms.

277
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
15. Assuming some consortium lenders oppose the decision to classify PQR Ltd. as a wilful
defaulter, what is the minimum shareholding percentage required among lenders to move forward
with this classification?

a) 60% of total lending in the consortium

b) 75% of the consortium’s total lending
c) 50% of the lead lender’s exposure
d) Unanimous consent from all lenders
e) Majority of the consortium members regardless of loan exposure

Answer: a) 60% of total lending in the consortium

Explanation: According to RBI guidelines, at least 60% of the total lending in the consortium must
agree to classify an account as fraud or wilful default. This ensures that decisions are made
collectively, considering the exposure levels of different lenders.

16. If Zenith Bank and other consortium members classify the account as a fraud, what should be
their immediate step after reporting to RBI?

a) Allow the borrower a grace period for recovery

b) File a Look Out Circular (LOC) to prevent the borrower from leaving the country
c) File a criminal case and initiate a forensic audit on the borrower’s subsidiary as well
d) Publicly announce the fraud classification to safeguard other lenders
e) Transfer the case to the Ministry of Finance for review

Answer: b) File a Look Out Circular (LOC) to prevent the borrower from leaving the country
Explanation: After reporting the fraud to RBI, a Look Out Circular should be filed to prevent the
borrower or key personnel from fleeing the country, especially given the magnitude of the fraud.

Case Study 6: Restructuring Amid Financial Stress (Q 17-19)

Scenario:
UVW Corp., a leading construction company, has been experiencing severe financial distress due to
delays in project completion and rising input costs. It secured a Rs. 300 crore term loan from Sigma
Bank to fund its operations. UVW Corp. has now requested a restructuring of the loan due to a cash
flow crisis. However, upon deeper investigation, Sigma Bank found that UVW Corp. had diverted Rs.
75 crore into real estate investments unrelated to the original project. The borrower claims that this
was done to secure returns to offset rising costs and stabilize the business.

17. What is the most appropriate immediate course of action for Sigma Bank in response to the
borrower’s restructuring request?

a) Approve the restructuring request to give the borrower time to stabilize

b) Deny the restructuring request and classify the account as NPA
c) Conduct a forensic audit to investigate the diversion of Rs. 75 crore
d) Accept a partial restructuring of the loan while closely monitoring future transactions
e) Seek approval from the borrower’s shareholders before making any decision

Answer: c) Conduct a forensic audit to investigate the diversion of Rs. 75 crore

Explanation: Before considering any restructuring, Sigma Bank must conduct a forensic audit to fully
investigate the diversion of funds. Only after determining the cause and nature of the diversion can
further decisions be made.

278
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
18. If the forensic audit confirms the diversion of Rs. 75 crore into unrelated real estate
investments, what should Sigma Bank classify the borrower as?

a) Wilful defaulter
b) Standard borrower facing financial stress
c) Quick mortality account
d) Fraudulent borrower
e) Non-cooperative borrower

Answer: a) Wilful defaulter

Explanation: Diverting loan funds into unrelated real estate investments without notifying the bank
is a clear case of wilful default, as the borrower misused the funds despite having the means to
utilize them as per the loan terms.

19. In the context of loan restructuring, what is one key condition that Sigma Bank must verify
before agreeing to restructure the loan for UVW Corp.?

a) That UVW Corp.’s shareholders unanimously support the restructuring

b) That UVW Corp. has no previous history of restructuring requests
c) That UVW Corp. has sufficient future cash flow projections to service the restructured loan
d) That UVW Corp. agrees to collateralize personal assets of its directors
e) That UVW Corp. maintains a positive working capital ratio throughout the restructuring process

Answer: c) That UVW Corp. has sufficient future cash flow projections to service the restructured
loan
Explanation: For any restructuring to be viable, Sigma Bank must ensure that UVW Corp. has the
ability to service the restructured loan based on realistic future cash flow projections.

Case Study 7: Foreign Exchange Exposure and NPA Risk (Q 20-21)

Scenario:
XYZ Exports, an international trading firm, took a Rs. 200 crore loan from National Bank to expand its
foreign operations. A significant portion of the loan was used for setting up operations in multiple
countries. However, due to a sharp depreciation in the Indian Rupee and adverse market conditions
abroad, XYZ Exports defaulted on loan interest payments for two consecutive quarters. National
Bank’s internal review has flagged concerns over XYZ Exports’ foreign exchange (forex) risk exposure
and the possibility of further defaults. The borrower has requested an extension on the loan tenure,
citing currency fluctuations as the primary cause of distress.

20. What should National Bank’s immediate focus be when assessing XYZ Exports’ request for an
extension?

a) Approving the extension since currency fluctuations are beyond the borrower’s control
b) Conducting a detailed forex risk analysis to evaluate the borrower’s foreign exchange exposure
c) Converting the loan into equity to avoid future defaults
d) Raising the interest rate to compensate for the increased risk
e) Filing a complaint with the Ministry of Finance due to the forex exposure

Answer: b) Conducting a detailed forex risk analysis to evaluate the borrower’s foreign exchange
exposure
Explanation: National Bank needs to assess the borrower’s forex risk exposure thoroughly before

279
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
making any decisions on an extension. This will help understand whether the borrower can manage
currency fluctuations and recover.

21. If the forex risk analysis reveals that XYZ Exports has not hedged its forex exposure, what
would be the most prudent course of action for National Bank?

a) Immediately classify the account as an NPA

b) Allow the borrower to enter into a forex hedging agreement before any further loan
disbursements
c) Deny any loan extension and proceed with legal recovery
d) Restructure the loan with higher interest rates to cover the forex losses
e) Provide a new foreign currency loan to offset losses

Answer: b) Allow the borrower to enter into a forex hedging agreement before any further loan
disbursements
Explanation: A hedging agreement would help mitigate the borrower’s forex risk, making it a prudent
step before considering any loan extension or additional disbursements.

Case Study 8: High-Risk Borrower with Political Connections (Q 22-23)

Scenario:
MNO Ltd., a politically connected infrastructure firm, received a Rs. 500 crore loan from Sovereign
Bank to build a highway. A recent review of the project revealed that MNO Ltd. has made significant
contributions to political parties and diverted Rs. 100 crore into non-operational ventures. MNO Ltd.
is now behind on its loan payments and has requested a moratorium, claiming that construction
delays were due to government policy changes. Sovereign Bank is facing pressure from political
figures to grant the moratorium.

22. What should Sovereign Bank prioritize when dealing with MNO Ltd.’s moratorium request?

a) Seek approval from the Ministry of Road Transport before making a decision
b) Conduct an independent forensic audit to verify the fund diversion claims
c) Grant the moratorium due to political pressure
d) Negotiate new loan terms with MNO Ltd. to avoid further delays
e) Increase collateral requirements to offset the delayed payments

Answer: b) Conduct an independent forensic audit to verify the fund diversion claims
Explanation: Given the sensitive nature of the case, Sovereign Bank must first verify whether the
borrower has diverted funds. A forensic audit will clarify the financial mismanagement before any
decisions are made about the moratorium.

23. If the forensic audit confirms that MNO Ltd. diverted Rs. 100 crore into non-operational
ventures, what should Sovereign Bank’s next course of action be?

a) Revoke the moratorium request and classify the account as a wilful default
b) Seek political approval before taking any action
c) Allow the borrower to repay the diverted funds over time
d) Increase the loan tenure to accommodate the borrower’s financial stress
e) Reclassify the loan as standard after negotiating new terms

280
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
Answer: a) Revoke the moratorium request and classify the account as a wilful default
Explanation: Diverting loan funds into non-operational ventures is a serious violation, and Sovereign
Bank should classify the borrower as a wilful defaulter, denying the moratorium request.

Case Study 9: Borrower’s Multiple Banking Arrangements and Fund Diversion (Q 24-26)

Scenario:
GHI Tech Ltd., a mid-sized IT company, has loan exposure of Rs. 150 crore across three banks under
multiple banking arrangements. Recently, GHI Tech has shown signs of financial stress, including
delayed vendor payments and high-value transactions routed through third-party financial
institutions. Upon closer review, one of the lenders, Bank Alpha, discovered that GHI Tech has been
making large payments to offshore entities without any declared business purpose. GHI Tech claims
these payments were for "consultancy services," but no formal contracts or invoices were provided.
There are also discrepancies in the company’s cash flow statement and a sudden increase in
receivables. Bank Alpha is now considering conducting a forensic audit.

24. What should be Bank Alpha’s immediate priority in response to the discovery of large offshore
payments and financial discrepancies?

a) Seek immediate repayment of the entire loan from GHI Tech Ltd.
b) Report the borrower to the Central Bureau of Investigation (CBI)
c) Initiate a forensic audit to investigate the offshore payments and discrepancies
d) Approve a loan restructuring request from the borrower
e) File a Look Out Circular (LOC) to prevent the company’s directors from leaving the country

Answer: c) Initiate a forensic audit to investigate the offshore payments and discrepancies
Explanation: Bank Alpha should first conduct a forensic audit to gather conclusive evidence of fund
diversion and fraud. Without proper documentation or legitimate business purposes, large offshore
payments are a red flag, warranting deeper investigation.

25. If the forensic audit confirms that GHI Tech Ltd. made these offshore payments without any
legitimate business contracts, how should Bank Alpha classify the account?

a) As a Non-Performing Asset (NPA)

b) As a Restructured Loan Account
c) As a Wilful Default
d) As a Red Flagged Account (RFA)
e) As a Quick Mortality Account

Answer: c) As a Wilful Default

Explanation: If the borrower has intentionally misused funds for purposes other than those disclosed
and provided false explanations, the account should be classified as a wilful default. This signifies
intentional wrongdoing by the borrower despite having the means to service the loan.

26. Given that GHI Tech Ltd. operates under multiple banking arrangements, how should Bank
Alpha proceed in terms of coordinating with the other lenders?

a) Independently classify the borrower as a fraud and report it to the RBI

b) Convene a joint meeting of all lenders to discuss the forensic audit findings
c) Share the findings confidentially with RBI without informing the other lenders

281
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
d) Allow the other banks to decide individually and follow their lead
e) Wait for the borrower to submit additional financial statements before taking any action

Answer: b) Convene a joint meeting of all lenders to discuss the forensic audit findings
Explanation: In multiple banking arrangements, the lead bank should initiate a joint meeting with
other lenders to share forensic audit findings and coordinate the response. Decisions such as fraud
classification and legal action must be aligned to avoid conflicting approaches.

Case Study 10: Sudden Request for Additional Funding Amidst Market Downturn (Q 27-29)

Scenario:
JKL Pharmaceuticals, a leading manufacturer, secured a Rs. 500 crore term loan from Omega Bank for
expansion into a new product line. Six months into the project, JKL Pharmaceuticals faced major
delays due to a sudden market downturn and increased competition. The borrower now claims a
severe liquidity crunch and requests an additional Rs. 150 crore to complete the project. However, a
recent stock audit revealed that JKL Pharmaceuticals overstated its inventory levels, and a deeper
review showed that a significant portion of the funds had been diverted to investments in unrelated
ventures.

27. What should Omega Bank prioritize before deciding on the additional funding request?

a) Conduct a forensic audit to investigate fund diversion and inflated inventory

b) Approve the additional funding to help JKL Pharmaceuticals complete the project
c) Reduce the loan exposure to mitigate future risks
d) Demand that JKL Pharmaceuticals sell off unrelated investments to cover loan obligations
e) Extend the loan repayment period and waive penalties to support the borrower

Answer: a) Conduct a forensic audit to investigate fund diversion and inflated inventory
Explanation: Before considering any additional funding, Omega Bank must prioritize a forensic audit
to confirm whether funds were diverted and whether inventory figures were inflated. This
investigation will provide a clearer picture of the borrower’s financial health and intentions.

28. If the forensic audit confirms that JKL Pharmaceuticals diverted funds into unrelated
investments, what would be the most appropriate course of action for Omega Bank?

a) Classify the account as a Non-Performing Asset (NPA)

b) Approve the additional Rs. 150 crore with tighter loan conditions
c) Declare the borrower a wilful defaulter and initiate legal action
d) Allow the borrower to repay from the proceeds of the unrelated investments
e) Report the borrower to the Central Economic Intelligence Bureau (CEIB)

Answer: c) Declare the borrower a wilful defaulter and initiate legal action
Explanation: Diverting loan funds without informing the bank is a clear case of wilful default. Omega
Bank should declare the borrower a wilful defaulter and initiate legal proceedings to recover the
loan.

29. What could have been an effective preventive measure by Omega Bank to detect early signs of
financial mismanagement by JKL Pharmaceuticals?

a) Regularly conducting forensic audits

b) Scrutiny of quarterly financial reports with a focus on fund utilization

282
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
c) Increasing the interest rate to discourage fund diversion
d) Requiring the borrower to hedge against market downturns
e) Delegating monitoring responsibilities to an external auditor

Answer: b) Scrutiny of quarterly financial reports with a focus on fund utilization

Explanation: Regular scrutiny of financial reports, including detailed monitoring of fund utilization,
would have helped the bank detect early signs of fund diversion and mismanagement, reducing the
risk of default.

Case Study 11: Real Estate Developer Facing Regulatory Delays (Q 30-32)

Scenario:
MNO Builders, a large real estate developer, took a Rs. 700 crore loan from Delta Bank to develop a
high-end residential project. Regulatory delays, legal disputes over land acquisition, and rising
material costs have delayed the project significantly. MNO Builders has not been able to service the
loan for the past three months and has requested Delta Bank to restructure the loan and extend the
repayment period. Delta Bank’s internal review found that MNO Builders had used Rs. 100 crore of
the loan to finance unrelated projects, including acquiring a stake in a hotel chain. The borrower
claims that the hotel investment was meant to diversify revenue streams in response to delays in the
real estate market.

30. What should be Delta Bank’s immediate response to MNO Builders’ request for restructuring?

a) Deny the request and classify the account as a Non-Performing Asset (NPA)
b) Approve the restructuring and extend the repayment period
c) Conduct a forensic audit to investigate the Rs. 100 crore investment in the hotel chain
d) Report the borrower to the RBI and file criminal charges for fund diversion
e) Approve the restructuring but demand additional collateral to cover the loan

Answer: c) Conduct a forensic audit to investigate the Rs. 100 crore investment in the hotel chain
Explanation: Given that funds were diverted into unrelated ventures, a forensic audit is necessary to
determine the full extent of the fund diversion and any possible misrepresentation before deciding
on restructuring or any other action.

31. If the forensic audit confirms that MNO Builders diverted Rs. 100 crore without informing Delta
Bank, what should the bank do next?

a) Classify the borrower as a wilful defaulter and initiate legal action

b) Proceed with loan restructuring after the borrower agrees to repay the diverted funds
c) Allow the borrower more time to explain the rationale behind the investment
d) Accept the hotel chain as additional collateral to cover the diverted funds
e) Request the borrower to sell off the hotel stake and repay the loan

Answer: a) Classify the borrower as a wilful defaulter and initiate legal action
Explanation: The borrower’s intentional diversion of funds without informing the lender qualifies as
wilful default. Delta Bank should classify the borrower as a wilful defaulter and take legal action to
recover the loan.

32. What proactive measure could Delta Bank have taken to detect MNO Builders’ fund diversion
earlier?

283
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
a) Requiring MNO Builders to submit daily cash flow statements
b) Regular site inspections and third-party verification of project progress
c) Implementing stricter penalties for delayed project completion
d) Assigning a special monitoring officer to oversee the borrower’s accounts
e) Reducing the loan limit in anticipation of market downturns

Answer: b) Regular site inspections and third-party verification of project progress

Explanation: Regular inspections and third-party verification of project progress would have helped
Delta Bank detect that funds were being diverted into unrelated ventures much earlier, potentially
preventing further misuse.

Case Study 12: Consortium Lending for a Steel Manufacturer (Q 33-35)

Scenario:
RST Steel Ltd., a major steel manufacturer, secured a Rs. 800 crore loan from a consortium of 6
banks, led by Apex Bank. The loan was intended for modernizing its manufacturing plants and
expanding production capacity. However, an internal review by one of the consortium members,
Gamma Bank, revealed that RST Steel had made unauthorized payments to shell companies and
diverted Rs. 200 crore for speculative investments in commodities. Apex Bank has yet to classify the
account as Red Flagged, while some consortium members are pressing for immediate action,
including conducting a forensic audit.

33. What is the most prudent course of action for Apex Bank as the lead lender in this situation?

a) Approve an additional Rs. 200 crore to stabilize RST Steel’s cash flow
b) File an independent complaint with the RBI without consulting the consortium
c) Convene an urgent meeting of all consortium members and initiate a forensic audit
d) Report the borrower as a wilful defaulter and freeze all loan disbursements
e) Wait for Gamma Bank to present more evidence before taking any action

Answer: c) Convene an urgent meeting of all consortium members and initiate a forensic audit
Explanation: As the lead lender, Apex Bank must convene a meeting of all consortium members to
discuss the findings and agree on initiating a forensic audit. This will ensure that any further actions
are coordinated among all consortium members.

34. If the forensic audit reveals that RST Steel Ltd. made payments to shell companies and engaged
in speculative investments, what should the consortium’s next step be?

a) Downgrade the loan to Non-Performing Asset (NPA) immediately

b) Classify the borrower as a wilful defaulter and initiate legal action
c) Allow the borrower to return the diverted funds and continue business operations
d) Provide an opportunity for the borrower to explain the rationale for the payments
e) Issue a Look Out Circular (LOC) for the company’s directors to prevent them from leaving the
country

Answer: b) Classify the borrower as a wilful defaulter and initiate legal action
Explanation: Diverting funds into speculative investments and making payments to shell companies
constitutes wilful default, requiring the consortium to classify the borrower accordingly and take
legal action.

284
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details
35. What preventive action could the consortium have taken to avoid the diversion of funds by RST
Steel Ltd.?

a) Conducting quarterly forensic audits of the borrower

b) Requiring weekly reports on project progress and fund utilization
c) Mandating joint monitoring by all consortium members
d) Implementing higher interest rates to discourage speculative investments
e) Restricting the borrower from making any payments to external entities

Answer: b) Requiring weekly reports on project progress and fund utilization

Explanation: Requiring frequent and detailed reporting on project progress and fund utilization
would have helped the consortium detect the early signs of fund diversion and speculative
investments.

285
For any query and suggestions - whats app to author of this material S DEVANARAYANAN @ 9894660795 with your details