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1 IBPS PROBATIONARY OFFICERS Banking Knowledge Bank advances and loans Banks collect deposits for low rates of interest and lend for higher rate of interest. The margin between these two rates of interest is banks profit. Here the banks should follow a perfect and safe ways in lending, as they need to pay back the money to depositors on demand. Lending business is a risky activity. As banks' main function is lending, they must follow certain principles in order to protect their funds. The basic principles that banks follow while lending are Safety: Banks need to consider the borrowers' capacity to pay, willingness to pay, and income generation of the person or business entity. This is a safety check that banks need to consider while lending. 2. Liquidity: Lent amount is to be paid in proper repayment schedules and inflow towards the loan or advance must be proper in order to fulfill the demand of their depositors. 3. Profitability: The activity of lending is done in order to make some profit out of it. 4. Purpose: The loans must be grant for some income generation purpose and not for speculation or some anti social activity. The purpose must be genuine. 5. Diversification of risk: Banks need to diversify their risk by lending to different type, sectors and areas of businesses. 6. Security: Security on the loan is the primary criteria for the bank. All secure loans are safe and can be recovered even the borrower is a defaulter. Different types of lending... Banks lend money in different ways. These are classified into following categories: Fund based advances: Fund based advances are those where the bank give money as loan or advance. These are for business entities and individuals. These are like term loans and working capital loans. Those may be secure or unsecure loans. R

2 Working capital loans: These are generally unsecure loans but vary from bank to bank and borrower to borrower. This is a type of loan taken to meet day to day cash requirement of the business entities. Requirements like purchase of raw material, payment of wages, payments to vendors etc.,. As said the criteria differ in lending, the documentation and securities also differ, where the loan will not have a fixed amount, or fixed intervals, or fixed period or fixed schedule for repayment. The best example is Overdraft (OD). Term loans: As the word 'term' denotes period these loans have to be paid back in a fixed period and fixed schedule. For these loans the rate of interest will be fixed as well as payment period and payment amount (like EMIs). These loans may be secure or unsecure loans and rate of interest varies for both, as rate of interest will be lower to secure loans compared with unsecure loans. The best examples are: business loans, vehicle loans, jewellery loans. These are secure loans. And personal loan, credit cards etc are unsecure loans. Secure loans: These are loans that are granted on basis of certain security against it as collateral. If the borrower defaults in payment of the loan the security will be used for repayment. Security may be land, house, factory, jewellry, vehicle, shares, life insurance policies, fixed deposits etc. Unsecure loans: These loans are granted by banks without any security against it. Banks may be at high risk in these cases. The examples are loans like credit cards, personal loans, overdraft etc. 1. What are the measures taken by RBI to reduce liquidity in the banking system? a) RBI increases the CRR. b) RBI increases the SLR c) RBI increases the repo rate. d) RBI increases the bank rate. e) All the above 2. LAF stands for... a) Loan Adjustment Fund b) Liquidity Adjustment Facility c) Long Awaited Funds d) Loan Against Funds 3. Open market operations, one of the measures taken by RBI in order to control credit expansion in the economy, means... a) Sale or purchase of govt. securities b) Issuance of different types of bonds

3 c) Auction of gold d) To make available the direct finance to borrowers 4. Truncation of cheques means... a) The cheques in the paper form will be retained by the collecting banker and he will submit only photograph image of cheque to the clearing house. b) A trunk call will be booked by banks to the payee bank and requests them to clear the cheque. c) Cheques will be scanned and the electronic image, instead of physical cheque, will be transmitted in the clearing cycle. d) Debiting the drawers account through internet banking. 5. Which of the following institution plays a major role in promotion of cross border trade and investment? a) SIDBI b) IFCI c) NHB d) EXIM Bank 6. Forged cheque means... a) The cheque which is post dated cheque b) The cheque in which the signature of the drawer of the cheque is not genuine. c) A stale cheque d) All of the above 7. Amalgamation of Regional Rural Banks is recommended by? a) K.C. Chakravarthy Committee b) Usha Thorat Committee c) Vyas Committee d) C.V. Anand Bose Committee 8. Which of the following loan products is also known as 'teaser loans'? a) Working capital loan b) Education loans c) Jewel loans d) Home loans e) Consumer durable products loans

4 9. Lending to customers with less than ideal credit status is known as? a) sub - prime lending b) Banks don't lend c) Ideal credit lending d) Risky lending 10. Expand NPA in the context of loan products? a) Non - performing assets b) New product ascendant c) Net performing assets d) Net profit on assets 11. Loan period or term of loan in case of repo is... a) Greaterthan 365 days b) Lessthan 30 days c) Greaterthan 30 days d) No limit in case of term in repo 12. Identify lending institution from the following... a) Exports and Imports Bank (EXIM Bank) b) Small Industries Development Bank of India (SIDBI) c) Housing Development Finance Corporation (HDFC) d) All the above 13. Advancing term loan or cash credit or working capital requirements is known as... a) Retail lending b) Corporate financing c) Multilateral lending d) Company financing 14. EXIM Bank's Line of credit preclude... for Indian exporters. a) Credit risk b) Legal Risk c) Systemic Risk and settlement Risk d) Market Risk 15. Money with the public and money with banks in form demand deposits and money with RBI in other deposits is known as? a) Narrow banking money or M2 b) Narrow Money or M1 c) Broad money or M3 d) High powered money or M0 e) None

5 16. The concept of classifying banks into weak banks and permitting them to invest only in government securities is known as? a) Narrow Banking concept b) Tarapore and Narasimham concept c) Banking investment concept d) Four - tire banking concept e) None 17. Automatically converting amount from savings bank account into fixed deposit, beyond a fixed limit, set as per the customer's request is known as... a) Re - investment deposit b) Demand Term deposit c) Flexi deposit d) Recurring deposit 18. What are loans and advances provided by banks to meet working capital requirements of a business entity? a) Overdraft b) Cash credit c) Purchase and discounting of bills d) Loans e) All the above 19. As per RBI guidelines what percentage does Indian banks must lend to Priority Sector? a) 40% b) 32% c) More than 50% d) 18% e) As per the individual bank's capacity 20. Exchange Earner's Foreign Currency (EEFC) account... a) It is a current account so no interest is paid to the deposits in the account b) Account deposits are not in Indian Rupee c) This account can be opened by all categories of foreign exchange earners but resident in India d) The amount have to be convert into Indian rupee before a month e) All the above 21. Which of the following credit rating institutions is promoted by RBI along with SBI, HDFC Bank and ICICI Bank? a) ICRA b) CIBIL c) CRISIL d) CRO

6 22. Identify the odd one from the following. While lending banks will follow certain cardinal principle, those are... a) Safety and Security b) Liquidity and Profitability c) Purpose d) Diversification of risk e) None 23. What are methods used to estimate the working capital needs? a) Operating cycle b) Turn over projection c) Net working capital projection d) All the above 24. What is the mode of charges laid on vehicle loan? a) Pledge b) Hypothecation c) Assignment d) Mortgage e) All the above 25. Generally banks face a credit risk when... a) Customer defaulting to repay the loan b) Banks lend money to RBI c) Banks lend money to government d) Credit given to the customer e) All the above 26. Identify the odd out of following with respect to priority sector... a) Agriculture b) Education c) Housing d) Consumer durable credit e) Export Credit 27. What is the percent of advances does Khadi and Village Industries Sector (KVI) must be lent by banks in the SME and MSME category of Priority Sector advancing? a) More than 50% SME and MSME category b) 60% of total Priority Sector advances c) 60% of SME and MSME category d) Less than 40% SME and MSME category

7 28. As per present RBI guidelines what is minimum percentage does commercial banks need to lend Government? a) 22% b) 4% c) 9% d) 8% e) No need to lend 29. A reduction in SLR rate leads to... a) Gold rate decrease b) Support the credit growth in India. c) Government will be funded more as the rate is reduced. d) Reduction in credit growth in India KEY 1-a; 2-b; 3-a; 4-c; 5-d; 6-b; 7-c; 8-d; 9-a; 10-a; 11-c; 12-d; 13-b; 14-a; 15-b; 16-a; 17-c; 18-e; 19-a; 20-e; 21-b; 22-e; 23-d; 24-b; 25-a; 26-d; 27-c; 28-a; 29-b. Writer : S Rudranand

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