Credit

Policy
Chapter 2
Credit Policy
▪ Credit Policy Objectives: The Credit Policy of a bank aims to balance credit
volumes, earnings, and asset quality within regulatory and corporate frameworks.
▪ Role of Credit Policy: It guides the sanctioning, managing, and monitoring of
credit risks, ensuring adherence to high standards of commercial prudence and
ethical business practices.
▪ Credit Functions: The Credit Policy encompasses activities like sanctioning,
issuing, and collecting loans and advances, ensuring compliance with regulatory
standards and internal risk profiles.
▪ Credit Delivery: Traditionally managed through bank branches, credit delivery
now includes various channels and caters to a diverse range of customers, from
individuals to large enterprises.
Credit Policy
Credit Policy of a Bank is to include the following:
▪ a. Customer Acceptance Policy
▪ b. Know Your Customer Policy
▪ c. Retail and corporate lending guidelines
▪ d. Customer due diligence.
 Policy Framework
▪ Credit Policy Framework: A bank's Credit Policy is a formal document approved by the Board,
designed to ensure operations within prescribed risk limits and compliance with regulatory
guidelines.
▪ Risk Management in Credit Policy: The Credit Policy explicitly details risk management processes,
requiring periodic updates to adapt to new products, regulatory changes, and environmental
conditions.
▪ Credit Risk Management Committee (CRMC): Banks must establish a high-level committee, such as
the CRMC, to formulate policies on credit risk, including setting standards for credit proposals,
collateral, and loan portfolio management.
▪ Credit Risk Management Department (CRMD): Each bank should have a CRMD, independent of the
Credit Administration Department, responsible for enforcing compliance with risk parameters and
maintaining the quality of the loan portfolio.
Contents of A Credit Policy
(a) Purpose and contents: This is a statement of what the policy seeks
to achieve and outlines its contents.
▪ Usually, this would include a review of the economy, environment,
regulatory concerns, and the bank’s approach towards the business
mix based on its performance, more particularly the previous years’
performance.
▪ Such a review would set the tone for the current year’s policy.
 Contents of A Credit Policy
(b) Objectives Statement: This sets out the details of the policy. Some of the important objectives of the bank that will focus would be:

(a) maintenance and improvement of asset quality

(b) growth in assets consistent with risk management imperatives

(c) maintaining reasonable risk-adjusted return on credit exposures

(d) achieving or retaining market share consistent with overall policy of the bank

(e) lending to the priority sector

(f) maintaining stipulated proportion in share of fund based assets and non-fund based assets

(g) directions on focus areas like Corporate, Mid Corporate or retail to maximize yields or achieve better risk dispersal for the policy year

(h) targets for short-term, medium-term, long-term assets, emphasis on fee-based income such as Letters of Credit (LCs) Bank
Guarantees (BGs), acceptances, etc.

(i) cut off credit score below which the bank will not book assets.

(j) asset exposures that are undesirable and banned, assets that are considered of limited interest (restricted list) and would require
specific approvals by Committees and

(k) approach on term premium and risk premium over the benchmark with reference to the pricing, etc.
 Contents of A Credit Policy
Lending authority and responsibility: "Lending authority in banks involves a hierarchical delegation
of financial powers, documented in a 'Delegation of Authority,' specifying approval limits for credit
sanctions at various levels, updated as needed.“
Controlling authority: "Controlling authority in banks oversees sanctions by higher authorities,
ensuring compliance with conditions, except for board-level sanctions which require no further
control.“
Sign off: "Sign-off by the Screening Committee or Credit Risk Officer ensures that loan proposals
align with bank policies, regulatory requirements, and acceptable lending practices before
sanctioning.“
Credit denial and recording procedure: "Banks must follow a specific procedure and keep a written
record when denying credit requests as mandated by many regulators.“
"Portfolio composition, credit concentration, and diversification limits define sector exposure
levels, ensuring risk diversification and clarity for loan officers."
 Contents of A Credit Policy
Types of loans section details the forms of loan sanctions, limits on syndicated loans, and
policies on loans to various borrowers, including employees and directors.“
Appraisal standards, policy, procedures and formats: "Appraisal standards in banks ensure
thorough evaluation of financial strength and credit risk, with specific formats and higher
thresholds for certain loan assessments."
Appraisal Standards
Appraisal standards form an important part of a bank's Credit Policy.
Banks have, over the years, developed scientific credit appraisal methodologies
which are being constantly honed in the light of the experiences gained by the
bankers from time to time.
Traditionally, appraisal methods include:
(a) Security based,
(b) Balance Sheet based.
(c) Cash flow based methods
Qualitative
• Formulation of loan policy is influenced by various factors like market
conditions, policies of the competitors, bank’s own SWOT analysis and, of
course, the RBI guidelines.
• The loan policy normally contains guidelines about the following aspects:
(a) Exposure limits for single counterparty and groups of connected
counterparties.
(b) Exposure limits, fixed on the basis of risk perception the bank has on different
sectors, for individual sectors like real estate, capital market, steel, cement,
software, etc. The loan policy also covers the thrust areas, low priority areas, etc.
(c) Discretionary powers at various levels for sanctioning of credit proposals.
Normally, the policy also lays down the powers of various authorities for allowing
over drawings/ad hoc limits.
Quantative
▪ For Working Capital: Basic quantative parameters underpinning the
banks’s credit appraisal:
▪ Liquidity
▪ Financial soundness
▪ Turnover
▪ Profits
▪ Credit rating
▪ Capital market Perception
Quantative
▪ For Term loan/DPGs: Basic quantative parameters underpinning the
Banks's credit appraisal:
▪ Technical feasibility
▪ Promoters’ Contribution
▪ Commercial Viability parameters
▪ Other parameters: end use of funds, credit rating, triggers of
interest rate reset
Quantative
(c) Lending to Non-Banking Financial Companies (NBFCs)
▪ Lending to Non-Banking Finance Companies is a separate game
altogether as the RBI regulates NBFCs as it does banks and NBFCs
are also into lending as banks do, though all the NBFCs do not
accept deposits from the public.
▪ Business model of NBFCs is quite distinct from all other models of
business and has close resemblance to banks’ business model.
▪ Usual system of credit assessment will not suit NBFCs.
▪ Hence, the loan policy must spell out different aspects of financing
NBFCs.
Quantative
(d) Financing of infrastructure projects:
▪ "Banks have established dedicated Project Finance Divisions for
financing infrastructure projects due to their national importance
and economic impact.“
▪ "Infrastructure financing includes sectors like power, roads, airports,
water supply, and more, as notified by the Ministry of Finance.“
▪ "Loan policies must define the maximum amount and debt-equity
ratio for different types of infrastructure projects.“
▪ "Parameters for determining the commercial viability of
infrastructure projects are specified in the bank's loan policy."
Quantative
(e) "Bank's lease finance policies must align with RBI guidelines,
incorporating stricter stipulations if required.“
(f) "Banks should issue Letters of Credit, guarantees, and discount
bills only for genuine transactions of sanctioned borrowers, as per
RBI guidelines."
(g) Loan policy should clarify if banks can extend credit facilities or
issue guarantees against those issued by other banks or financial
institutions."
(h) Syndication of loans: "Loan policies must outline if the bank will
engage in loan syndication, especially for large infrastructure projects,
either independently or with other companies.“
Quantative
"Banks must have a separate, Board-approved 'Hedging Policy' for
managing forex risks, with references included in the loan policy.“
"The loan policy should adhere to the Fair Practices Code (FPC),
ensuring transparency and fairness in loan application processing,
sanctioning, and post-disbursement supervision.“
"The Risk Policy section outlines the accepted risk levels, risk
tolerance, and risk measurement tools, specific to different
industries and elaborated with precise terms and numbers.“
"Banks' loan policies must specify documentation completion,
waiver authority, and exception handling procedures, with records
kept for any non-compliance or outlier events.“
"Banks must maintain a detailed loan register, with loan
administration departments responsible for documentation, waiver
approvals, and rectifications, as outlined in the Credit Policy."
 Quantative
"Loan loss provisions, guided by RBI norms, are outlined in the Credit Policy,
covering recognition standards and asset classification with minimal flexibility for
banks.“
"Banks must adopt a Board-approved policy for provisioning standard assets at
rates above the regulatory minimum, reflecting sector-specific risk and stress.“
"Quarterly reviews of sectoral performance, including various financial ratios and
stress indicators, guide banks in adjusting provisions and monitoring exposure
closely.“
"Loan Grading/Credit Scoring assigns grades or credit scores to loan assets based on
parameters, linking loan pricing to these scores.“
"Loan Review and Renewal Policy outlines procedures for reviewing and renewing
credit facilities, incorporating regulatory guidelines and addressing delays in
financial statements.“
"Charged-off accounts policy focuses on the follow-up process for recovering dues
from accounts that have been written off."
Priority
"Credit priorities of banks evolve with changes in liberalization,
globalization, and market conditions, with Credit Policy playing a key role in
managing these shifts."
MIS and REVIEW
"The Board should regularly review the credit portfolio and MIS to ensure
adherence to policy, identify violations, and assess if the credit policy meets
its objectives, avoiding frequent changes driven by short-term profit goals."
CCP

MOD-A
UNIT-2
 CCP UNIT-2

• Q. Consider the following statements about the Credit Policy of a bank:

1.The Credit Policy is also referred to as the Loan Policy of a bank.
2.The main objective of the Credit Policy is solely to maximize profits.
3.The bank's board is the apex authority in formulating the Credit Policy.
4.Credit activities include only sanctioning and collecting loans and advances.
5.Branches are traditionally the main delivery unit of credit in a bank.
• Which of the above statements are correct?
• A. 1, 3, and 5 Statement 2 is incorrect. The objective of the
B. 1 and 4 Credit Policy is broader than just maximizing
C. 2, 3, and 4 profits; it includes customer service, shareholder
D. 1, 3, 4, and 5 satisfaction, and employee satisfaction.
Statement 4 is incorrect. Credit activities
encompass a wide range of functions, including
Answer:A. 1, 3, and 5.
sanctioning, issuing, and collecting various types
of loans and advances.
 CCP UNIT-2

• Q . Consider the following statements about the Credit Policy and credit management in a bank:

1. A bank's customers can only be individuals or partnerships.

2. Credit Policy ensures that the bank adheres to regulatory standards and internal risk profiles.
3. Credit/Loan officers are responsible for marketing and appraising loans.
4. The Credit Policy is a flexible document that allows for significant deviations based on the officer's
discretion.
5. A well-orchestrated and well-written Credit Policy helps maintain the quality of the credit portfolio.
• Which of the above statements are correct?
• A. 1, 3, and 5
B. 2, 3, and 5 Statement 1 is incorrect. A bank's customers can
C. 1, 2, and 4 include individuals, partnerships, and companies
D. 3 and 5 of varied sizes and locations.
Statement 4 is incorrect. The Credit Policy
contains specific guidelines and does not allow
for significant deviations based on discretion..
Answer:B. 2, 3, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding the objectives and components of a bank's Credit Policy:

1. The main objective of the Credit Policy is to maximize profits without considering regulatory prescriptions or asset
quality.
2. The Credit Policy aims for steady, sustained, and prudent expansion of credit.
3. The Credit Policy should balance credit volumes, earnings, and asset quality while adhering to social responsibilities.
4. The components of the Credit Policy include Customer Acceptance Policy, Know Your Customer Policy, and Customer
Due Diligence.
5. The Credit Policy disregards ethical business practices and commercial prudence in its guidelines.
• Which of the above statements are correct?
• A. 1, 3, and 5
B. 2, 3, and 4 Statement 1 is incorrect. The Credit Policy
C. 1, 2, and 5 considers regulatory prescriptions, asset quality,
D. 2 and 4 and aims to maintain a healthy balance between
credit volumes, earnings, and asset quality.
Statement 5 is incorrect. The Credit Policy is
guided by the highest standards of commercial
Answer:B. 2, 3, and 4.
prudence and ethical business practices.
 CCP UNIT-2

• Q . Consider the following statements regarding the Policy Framework of a bank's Credit Policy:

1. The Credit Policy is a formal statement objective of a bank and is approved by the bank's Board.
2. The main purpose of the Credit Policy is to ensure that the bank maximizes profits, irrespective of the
risk levels.
3. The policy should specify procedures and responsibilities for deviations from specified risk levels.
4. The policy does not need to include the authorities and responsibilities attached to each functionary in
credit departments.
5. The Credit Policy must be explicit about risk management and should clearly define risk tolerances.
• Which of the above statements are correct?
• A. 1, 3, and 5 Statement 2 is incorrect. The main purpose of the
B. 2 and 4 Credit Policy is to ensure the bank operates
C. 1 and 5 within prescribed risk tolerances/limits, not to
D. 3 and 4 maximize profits irrespective of risk levels.
Statement 4 is incorrect. The policy must include
the authorities and responsibilities attached to
Answer:A. 1, 3, and 5.
each functionary in the credit
departments/branches.
 CCP UNIT-2

• Q . Consider the following statements regarding the periodic update and application of a bank's Credit
Policy:
1. The Credit Policy should be updated periodically to include new products and respond to changes in the
risk environment.
2. The Credit Policy should remain unchanged to maintain consistency and avoid confusion among staff.
3. An unrealistic Credit Policy is often observed in its breaches.
4. The same Credit Policy is applicable to both domestic and foreign branches of the bank.
5. Foreign branches of a bank must follow local laws and regulations, which are incorporated separately in
the policy.
• Which of the above statements are correct? Statement 2 is incorrect. The policy should adapt
• A. 1, 3, and 5 to new regulatory directives and market
B. 2 and 4 conditions to remain relevant and effective.
C. 1 and 5 Statement 4 is incorrect. The same Credit Policy
D. 2, 3, and 4 may not be applicable to foreign branches; they
must comply with local laws and regulations.
Answer: A. 1, 3, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding the Credit Policy Committee (also known as the Credit Risk
Management Committee or Credit Control Committee) in banks as per RBI guidelines:
1. The Credit Policy Committee is responsible for analyzing, managing, and controlling credit risk on a bank-wide basis.
2. The Committee should be chaired by the Head of the Credit Department.
3. The Committee's responsibilities include formulating policies on financial covenants, rating standards, and prudential
limits on large credit exposures.
4. The Committee does not deal with regulatory or legal compliance issues.
5. The Committee should include the heads of Credit Department, Treasury, Credit Risk Management Department (CRMD),
and the Chief Economist.
• Which of the above statements are correct?
• A. 2 and 4 Statement 2 is incorrect. The Committee should
B. 1, 3, and 5 be chaired by the Chairman/CEO/ED, not the Head
C. 1, 2, and 3 of the Credit Department.
D. 3, 4, and 5
Statement 4 is incorrect. The Committee does
deal with regulatory and legal compliance issues,
as part of its broad responsibilities..
Answer:B. 1, 3, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding the Credit Risk Management Department (CRMD) in banks:

1. The CRMD should be independent of the Credit Administration Department.

2. The CRMD is responsible for enforcing and monitoring compliance with risk parameters and prudential limits set by the
Credit Policy Committee (CPC).
3. The CRMD should lay down risk assessment systems, monitor the quality of the loan portfolio, and identify problems.
4. Large banks must have a separate setup for loan review/audit under the CRMD.
5. The CRMD should undertake portfolio evaluations and conduct comprehensive studies on the environment to test the
resilience of the loan portfolio.
• Which of the above statements are correct?
• A. 1, 3, and 5
B. 1, 2, 3, and 5 Statement 4 is incorrect. While large banks may
C. 2 and 4 consider having a separate setup for loan
D. 1, 2, and 4 review/audit, it is not a mandatory requirement..

Answer:B. 1, 2, 3, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding the key elements of a bank's Credit Policy:

1. The Credit Policy includes maintaining a stipulated proportion in the share of fund-based and non-fund-
based assets.
2. It provides directions on focus areas like Corporate, Mid Corporate, or retail to maximize yields or
achieve better risk dispersal for the policy year.
3. The policy sets targets for long-term assets only, with no emphasis on short-term or medium-term assets.
4. It includes a cutoff credit score below which the bank will not book assets.
5. The Credit Policy covers asset exposures that are undesirable and banned, requiring specific approvals
from committees.
• Which of the above statements are correct? Statement 3 is incorrect. The policy sets targets
• A. 1, 2, 4, and 5 for short-term, medium-term, and long-term
B. 2, 3, and 5 assets, with emphasis on fee-based income..
C. 1, 3, and 4
D. 2 and 4
Answer:A. 1, 2, 4, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding the Lending Authority and Responsibilities in a bank's Credit Policy:

1. The Lending Authority is responsible only for sanctioning loans and does not have the power to approve actions taken by
lower authorities.
2. The policy segment covers the powers of the Board of Directors, Credit Committee, and officers at various levels
concerning credit sanctions.
3. A separate document titled 'Delegation of Financial Powers' or 'Delegation of Authority' could detail the approval
authority for officers at different levels.
4. The document specifying approval authorities is static and does not require updates.
5. The Board of Directors has no involvement in the approval authority hierarchy.
• Which of the above statements are correct?
• A. 2 and 3 Statement 1 is incorrect. The Lending Authority
B. 1, 4, and 5 has the power to accord approvals and grant
C. 3, 4, and 5 confirmation of actions taken by lower
D. 2 and 4
authorities/operating functionaries.
Statement 4 is incorrect. The document
specifying approval authorities should be updated
Answer:A. 2 and 3.
whenever the bank revises the powers delegated
to the functionaries.
Statement 5 is incorrect. The Board of Directors
is involved in the approval authority hierarchy..
 CCP UNIT-2

• Q . Consider the following statements regarding the Controlling Authority in a bank's Credit Policy:

1. The Controlling Authority is responsible for sanctions/approvals and confirms them without any higher-
level control.
2. The Sanctioning Authority must report all sanctions to a higher authority for control, according to the
bank's hierarchy.
3. The Controlling Authority can record and convey observations or conditions regarding the sanctions.
4. Operating functionaries are not required to comply with conditions conveyed by the Controlling Authority.
5. There is no need for control submission for board-level sanctions, as there is no higher authority above it.
• Which of the above statements are correct?
• A. 3 and 5 Statement 1 is incorrect. The Controlling
Authority reviews and confirms sanctions made
• B. 1, 4, and 5 by the Sanctioning Authority, which is typically a
C. 1, 2, and 4 higher authority in the hierarchy.
D. 2, 3, and 5
Statement 4 is incorrect. Operating functionaries
must comply with the conditions conveyed by the
Answer:D. 2, 3, and 5.
Controlling Authority or report actions taken
through the Sanctioning Authority..
 CCP UNIT-2

• Q . Consider the following statements regarding the Sign-off process in a bank's credit policy:

1. The sign-off process occurs before due diligence and assessment of credit facilities.
2. A screening committee or designated credit risk officer(s) signs off on the credit recommended by the
processing department/relationship officers.
3. The sign-off process ensures that the loan proposal aligns with the bank's Risk Policy and Credit Policy.
4. The sign-off process does not need to confirm that the credit meets regulatory requirements.
5. The acceptance of deviations, if any, is sought and confirmed during the sign-off process.
• Which of the above statements are correct?
• A. 2, 3, and 5
B. 1, 3, and 4 Statement 1 is incorrect. The sign-off process
C. 1, 4, and 5 occurs after due diligence, assessment of credit
D. 2 and 4 facilities, and appraisal of proposals.
Statement 4 is incorrect. The sign-off process
must confirm that the credit meets regulatory
requirements.
Answer:A. 2, 3, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding the Credit Denial and Recording Procedure in a bank's
credit policy:
1. The bank's policy does not need to include a procedure for handling credit requests that are turned down.
2. It is mandatory for banks to keep a written record of each credit request refusal.
3. The procedure for credit denial is left to the discretion of individual bank branches without a
standardized policy.
4. Regulatory requirements may necessitate maintaining a detailed record of all credit denials.
5. The policy for credit denial only applies to large corporate clients.
• Which of the above statements are correct?
• A. 2, 3, and 5 Statement 1 is incorrect. The bank's policy
B. 1, 3, and 5 should include a procedure for handling credit
C. 2 and 4 requests that are turned down.
D. 1 and 4 Statement 3 is incorrect. The procedure for credit
denial should be standardized and not left to the
discretion of individual branches.
Answer:C. 2 and 4.
Statement 5 is incorrect. The policy for credit
denial applies to all clients, not just large
corporate clients..
 CCP UNIT-2

• Q . Consider the following statements regarding portfolio composition, credit concentration, and diversification limits
in a bank's credit policy:
1. The desired level of exposure to different sectors is defined relative to the capital of the bank and asset levels in each
sector.
2. Diversification of risk across sectors and geographical areas is not considered under this policy head.
3. Concentration limits are defined only for high-risk sectors.
4. Portfolio composition is generally defined based on the levels at the beginning of a credit period.
5. Credit extensions to certain sectors may be considered desirable, while others may be avoided.
• Which of the above statements are correct?
• A. 1, 4, and 5 Statement 2 is incorrect. Diversification of risk
B. 1, 3, and 4
C. 2 and 5 across sectors and geographical areas is
D. 3 and 4 considered and mentioned under this policy head.
Statement 3 is incorrect. Concentration limits are
defined for all sectors, not just high-risk ones, to
manage the bank's overall risk exposure.
Answer:A. 1, 4, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding the section on "Types of Loans" in a bank's credit
policy:
1. The section elaborates on the form in which loans may be sanctioned.
2. It specifies the limits for participation in loans syndicated by other banks.
3. The policy on loans to employees, officers, and directors is excluded from this section.
4. This section does not cover the types of borrowers.
5. The section includes policies regarding loans to various categories of borrowers, including internal staff.
• Which of the above statements are correct?
• A. 1 and 5
B. 3 and 4 Statement 3 is incorrect. The policy on loans to
C. 1, 2, and 5 employees, officers, and directors is mentioned in
D. 2, 3, and 4 this section.
Statement 4 is incorrect. The section covers the
types of borrowers..
Answer:C. 1, 2, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding Appraisal Standards, Policy, Procedures, and Formats in a bank's
credit policy:
1. Banks usually detail the procedures for loan appraisal and the standards to be followed.
2. Loan origination or marketing departments are not involved in sourcing loans for the bank.
3. Borrowers selected through marketing efforts often undergo prior evaluation of their financial strength, and their credit
risk is deemed desirable.
4. The appraisal process ignores credit risks associated with walk-in customers.
5. Banks may use specific formats for loan appraisals to ensure thorough evaluation of credit quality and risks.
• Which of the above statements are correct?
• A. 1, 3, and 5
B. 2, 3, and 4 Statement 2 is incorrect. Some banks have loan
C. 1 and 4 origination or marketing departments that
D. 2 and 5 actively source loans for the bank.
Statement 4 is incorrect. The appraisal process
does consider credit risks, even for walk-in
customers, though it may require more stringent
Answer:A. 1, 3, and 5.
evaluation.
 CCP UNIT-2

• Q . Consider the following statements regarding Appraisal Standards in a bank's credit policy:

1. Appraisal standards are a minor part of a bank's Credit Policy.

2. Scientific credit appraisal methodologies have been developed over the years based on bankers'
experiences.
3. Traditional appraisal methods include security-based, balance sheet-based, and cash-flow-based
methods.
4. The basic standards for working capital facilities and term credit facilities have changed frequently over
time.
5. Appraisal parameters can be broadly classified as qualitative and quantitative.
• Which of the above statements are correct? Statement 1 is incorrect. Appraisal standards
• A. 1, 2, and 4 form an important part of a bank's Credit Policy.
B. 2, 3, and 5 Statement 4 is incorrect. The basic standards for
working capital facilities and term credit
• C. 3 and 5
D. 1, 4, and 5 facilities have stood the test of time and are well
understood.

Answer: B. 2, 3, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding the qualitative aspects of a bank's loan policy:

1. Each bank formulates its own loan policy, and the sanction of any credit proposal must be within the
framework of this policy.
2. The formulation of the loan policy is influenced solely by the bank's SWOT analysis.
3. RBI guidelines are not considered in the formulation of a bank's loan policy.
4. Exposure limits for single counterparties and groups of connected counterparties are a part of the loan
policy's qualitative aspects.
5. Market conditions and policies of competitors do not influence the loan policy of a bank.
• Which of the above statements are correct?
• A. 1 and 4 Statement 2 is incorrect. The formulation of the
B. 2, 3, and 5 loan policy is influenced by various factors,
C. 1, 4, and 5 including market conditions, policies of
D. 3 and 4 competitors, and the bank's SWOT analysis.
Statement 3 is incorrect. RBI guidelines are
considered in the formulation of a bank's loan
Answer:A. 1 and 4.
policy.
Statement 5 is incorrect. Market conditions and
policies of competitors do influence the loan
policy of a bank..
 CCP UNIT-2

• Q . Consider the following statements regarding the qualitative aspects of exposure limits and
discretionary powers in a bank's credit policy:
1. Exposure limits for individual sectors are based on the bank's risk perception and are subject to change.
2. Exposure limits remain constant irrespective of changes in the bank's perception of any particular
sector.
3. The loan policy includes provisions for exit strategies in case of deteriorating sectoral conditions.
4. Discretionary powers for sanctioning credit proposals are uniform across all levels in the bank.
5. The policy also defines the powers of various authorities for allowing overdrawings or ad hoc limits.
• Which of the above statements are correct?
• A. 3, 4, and 5 Statement 2 is incorrect. Exposure limits can be
adjusted if the bank's perception of a particular
• B. 2 and 4 sector deteriorates.
C. 1, 2, and 3 Statement 4 is incorrect. Discretionary powers
D. 1, 3, and 5
for sanctioning credit proposals vary at different
levels within the bank..
Answer:D. 1, 3, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding the quantitative aspects of credit facilities in a bank's
credit policy:
1. The credit facilities extended to a borrower are assessed based on the borrower's need-based credit
requirements.
2. Only working capital funds are considered when assessing the borrower's credit requirements.
3. Correct assessment of required facilities and limits is not crucial for the business performance of the
borrowing unit.
4. The credit assessment includes working capital funds, non-fund-based credit facilities, and term loans
for capital expenditure.
5. Both under-financing and over-financing can impact the business performance of the borrowing unit.
• Which of the above statements are correct?
• A. 1, 4, and 5 Statement 2 is incorrect. The assessment includes not
B. 2 and 3
only working capital funds but also non-fund-based credit
C. 1, 3, and 4
D. 2 and 5 facilities and term loans for capital expenditure and
other long-term funding requirements.
Answer:A. 1, 4, and 5. Statement 3 is incorrect. Correct assessment of required
facilities and limits is vital as it can significantly impact
the business performance of the borrowing unit.
 CCP UNIT-2

• Q . Consider the following statements regarding Working Capital and Liquidity in a bank's credit policy:

1. The Loan Policy should state which liquidity ratios the bank will examine when considering a credit
proposition.
2. The bank's Loan Policy does not need to specify the levels of liquidity ratios it is comfortable with for
different sizes and sectors of borrowers.
3. The Loan Policy should indicate whether the levels of liquidity ratios are mandatory or indicative.
4. If the liquidity ratios are below the specified levels, the Loan Policy should outline the treatment,
including possible rejection or approval for deviations.
5. The Loan Policy does not require a specific approval process for deviations from liquidity ratio
requirements.
Statement 2 is incorrect. The Loan Policy should
• Which of the above statements are correct? clearly state the levels of liquidity ratios the bank
• A. 3 and 4 is comfortable with for different sizes and sectors
of borrowers.
• B. 2, 4, and 5
C. 1, 2, and 5 Statement 5 is incorrect. The Loan Policy should
D. 1, 3, and 4 include a process for obtaining specific approval
for deviations from the liquidity ratio
Answer:D. 1, 3, and 4. requirements.
 CCP UNIT-2

• Q . Consider the following statements regarding Financial Soundness in a bank's loan policy:

1. The loan policy of a bank specifies desirable financial ratios to determine the acceptability of borrowers.
2. The loan policy does not need to include financial covenants.
3. Financial covenants and remedies for events of defaults are outlined to ensure the financial soundness of
borrowers.
4. The financial covenants in the loan policy are optional and only applied at the discretion of the bank.
5. The loan policy is expected to include provisions for continued monitoring of the financial health of
borrowers.
• Which of the above statements are correct?
• A. 1, 3, and 5 Statement 2 is incorrect. The loan policy should
B. 2 and 4 include financial covenants to ensure continued
C. 1, 2, and 5 financial soundness.
D. 3 and 4 Statement 4 is incorrect. Financial covenants are
not optional; they are essential components of
the loan policy.
Answer:A. 1, 3, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding the Turnover aspect in a bank's loan policy:

1. The trend in quantity and value-wise turnover should be analyzed, including market share data where
available.
2. The loan policy should stipulate an unreasonable year-on-year increase in turnover to ensure growth.
3. Establishing a steady output or rising trend in quantitative terms is more important than price
fluctuations.
4. The year-on-year increase should be assessed only in value terms, not quantity terms.
5. Sales realization fluctuations due to price changes should be disregarded when evaluating turnover.
• Which of the above statements are correct?
• A. 1 and 3 Statement 2 is incorrect. The loan policy should
B. 2, 4, and 5 not stipulate an unreasonable year-on-year
C. 1, 3, and 4 increase; it should be reasonable.
D. 1 and 4 Statement 5 is incorrect. Sales realization
fluctuations due to price changes should not be
disregarded; they are an important factor in
Answer:C. 1, 3, and 4.
evaluating turnover.
 CCP UNIT-2

• Q. Consider the following statements regarding the Profits aspect in a bank's loan policy:
1.The loan policy is expected to outline the method of assessing profitability.
2.Treatment of non-operating income is not relevant and should not be specified in the loan
policy.
3.Non-operating income is typically considered as one-time or extraordinary income.
4.The loan policy should discuss the treatment of existing and prospective borrowers incurring
net losses.
5.The loan policy is ambiguous about how to handle net losses for borrowers.
• Which of the above statements are correct? Statement 2 is incorrect. The treatment of non-
• A. 1, 3, and 4 operating income should be specified in the loan
B. 2 and 5 policy, as it is relevant for proper assessment.
C. 1, 2, and 3 Statement 5 is incorrect. The loan policy should
D. 3 and 5 clearly address how to handle net losses for
borrowers.
Answer: A. 1, 3, and 4.
 CCP UNIT-2

• Q. Consider the following statements regarding the Credit Rating aspect in a bank's loan policy:

1. For most banks, obtaining an External Credit Rating (ECR) is mandatory for exposures above a specific
threshold.
2. The Internal Credit Risk Assessment (ICRA) is not used for capital adequacy calculation.
3. Concessionary pricing may be extended to borrowers with a credit rating of BBB- ('Investment Grade') or
higher.
4. For capital adequacy framework purposes, the validity of an ECR is generally treated as 15 months from
the date of rating.
5. Borrowers with an expired ECR are treated as unrated, and ICRA-linked interest shall be charged.
• Which of the above statements are correct? Statement 2 is incorrect. Internal Credit Risk
• A. 1, 2, and 4 Assessment (ICRA) is used alongside ECR for
B. 2, 4, and 5 capital adequacy calculation, particularly for
C. 1, 3, 4, and 5 assigning risk weights.
D. 3 and 5
Answer:C. 1, 3, 4, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding Capital Market Perception in a bank's loan policy:

1. The market value of a company's shares compared to its competitors in the same industry is a factor
considered in the loan policy.
2. The loan policy ignores the company's response to public or rights issues when assessing capital market
perception.
3. The movement of a company's share price on stock exchanges reflects the corporate image in the eyes
of investors.
4. The loan policy should specify the treatment for different scenarios, such as the company's shares
outperforming or underperforming the broader market.
5. Capital market perception is not relevant to the evaluation of a borrower's creditworthiness.
• Which of the above statements are correct?
• A. 2, 4, and 5 Statement 2 is incorrect. The company's response to public
B. 1, 3, and 4 or rights issues is an important factor in assessing capital
C. 1 and 5
D. 3 and 5 market perception.
Statement 5 is incorrect. Capital market perception is
Answer:B. 1, 3, and 4. relevant to the evaluation of a borrower's creditworthiness
as it reflects the company's market standing and investor
confidence.
 CCP UNIT-2

• Q. Consider the following statements regarding the Technical Feasibility aspect in the loan policy for
Term Loans/DPGs:
1. The loan policy should require a project report from the customer for Term Loans and Deferred Payment
Guarantees (DPGs) only for projects above a certain amount.
2. The project report must always be compiled by a firm of expert consultants or merchant bankers.
3. The loan policy should state whether the project report can be compiled in-house or needs external
compilation.
4. The technical feasibility and economic viability must always be vetted by external experts empaneled by
the banks.
5. The loan policy specifies the amount of exposure/project cost above which external vetting is necessary.
• Which of the above statements are correct?
• A. 1, 3, and 5 Statement 2 is incorrect. The policy may allow
B. 2 and 4 the project report to be compiled either in-house
C. 1, 4, and 5 or by external experts, depending on the
D. 3 and 4 circumstances.
Statement 4 is incorrect. While external vetting
Answer:A. 1, 3, and 5. may be necessary, it is not always mandatory for
all cases; the policy should specify the
circumstances under which it is required.
 CCP UNIT-2

• Q . Consider the following statements regarding the Promoters' Contribution aspect in a bank's loan
policy:
1. The loan policy should specify an absolute or indicative maximum debt-equity ratio.
2. The promoter's contribution is fixed and does not vary according to the size and nature of the project.
3. The loan policy cannot set a definitive benchmark for the promoter's contribution due to practical
variations.
4. The sanctioning authority or other appropriate authority should not have the discretion to permit
deviations from the specified promoter's contribution.
5. The policy should allow flexibility in the promoter's contribution based on project-specific circumstances.
• Which of the above statements are correct? Statement 2 is incorrect. The promoter's
• A. 3 and 5 contribution may vary according to the size and
nature of the project, so it is not fixed.
• B. 2 and 4 Statement 4 is incorrect. The sanctioning
C. 1, 2, and 3
D. 1, 3, and 5 authority or other appropriate authority should
have the necessary discretion to permit
Answer: D. 1, 3, and 5. deviations from the specified promoter's
contribution.
 CCP UNIT-2

• Q . Consider the following statements regarding the Commercial Viability Parameters in a bank's loan
policy:
1. The loan policy should specify the minimum and maximum break-even capacity utilization.
2. Debt service coverage ratio (DSCR) includes both Gross DSCR and Net DSCR.
3. The loan policy does not need to specify the fixed assets coverage ratio.
4. Security margin coverage ratio is a parameter that should be included in the loan policy.
5. The commercial viability parameters can be desirable, indicative, or mandatory.
• Which of the above statements are correct?
• A. 1, 2, and 4
B. 1, 2, 4, and 5 Statement 3 is incorrect. The loan policy should
C. 1, 3, and 5 specify the fixed assets coverage ratio as part of
D. 3 and 4 the commercial viability parameters.

Answer:B. 1, 2, 4, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding the Other Parameters governing working capital
facilities in a bank's loan policy:
1. The end use of funds is not discussed in the loan policy.
2. Credit Rating is considered as a parameter that can affect working capital facilities.
3. The loan policy should specify triggers for interest rate reset.
4. Other parameters in the loan policy apply to credit facilities to the extent applicable.
5. The loan policy does not need to include any discussion on working capital facilities.
• Which of the above statements are correct?
• A. 2, 3, and 4
B. 1, 3, and 5 Statement 1 is incorrect. The end use of funds is
C. 1, 2, and 4 discussed in the loan policy as it is an important
D. 3 and 5 aspect of governing working capital facilities.
Statement 5 is incorrect. The loan policy should
include discussions on various aspects of
working capital facilities.
Answer:A. 2, 3, and 4.
 CCP UNIT-2

• Q . Consider the following statements regarding Lending to Non-Banking Financial Companies (NBFCs)
in a bank's loan policy:
1. The RBI regulates NBFCs in the same manner as it regulates banks.
2. NBFCs are involved in lending activities similar to banks.
3. All NBFCs accept deposits from the public, similar to banks.
4. The usual system of credit assessment used for banks is suitable for NBFCs.
5. The loan policy must outline specific aspects of financing NBFCs due to their distinct business model.
• Which of the above statements are correct?
• A. 1, 2, and 5
B. 2, 3, and 4 Statement 3 is incorrect. Not all NBFCs accept
C. 1, 3, and 5 deposits from the public; only a specific category
D. 1, 2 and 5 of NBFCs is allowed to accept deposits.
Statement 4 is incorrect. The usual system of
credit assessment for banks may not be suitable
for NBFCs, given their distinct business model.
Answer:D. 1, 2 and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding the Financing of Infrastructure Projects in a bank's loan policy:

1. Infrastructure development is considered of national importance due to its role in the economic development of the
country.
2. Infrastructure projects typically involve small volume business with minimal credit appraisal requirements.
3. Banks have established a separate Project Finance Division/Department specifically for financing infrastructure
projects.
4. Special skills are not required for the credit appraisal and assessment of infrastructure projects.
5. The potential for large volume business in infrastructure projects justifies the establishment of specialized divisions in
banks.
• Which of the above statements are correct?
• A. 1, 3, and 5 Statement 2 is incorrect. Infrastructure projects
B. 2, 4, and 5 often involve large volume business and require
C. 1, 2, and 4 thorough credit appraisal and assessment.
D. 3 and 4
Statement 4 is incorrect. Special skills are indeed
required for the credit appraisal and assessment
of infrastructure projects due to their complexity
Answer:A. 1, 3, and 5.
and scale.
 CCP UNIT-2

• Q . Consider the following statements regarding the Infrastructure Sector and the approach to lending for
infrastructure projects in a bank's loan policy:
1. Infrastructure sectors include power, roads, highways, and bridges, but exclude sectors like telecommunications and
housing.
2. The definition of infrastructure sectors can be notified by the Ministry of Finance and published in the Gazette.
3. The loan policy should specify the maximum amount and percentage of debt funding for infrastructure projects.
4. Debt-equity ratios for different types of infrastructure projects are not relevant to the loan policy.
5. The loan policy may include parameters for establishing the commercial viability of different types of infrastructure
projects.
• Which of the above statements are correct?
• A. 3 and 5 Statement 1 is incorrect. Infrastructure sectors
• B. 1, 3, and 4
include power, roads, highways, bridges, ports,
C. 2 and 4 airports, rail systems, water supply, irrigation,
D. 2, 3, and 5 sanitation, sewerage systems,
telecommunications, housing, industrial parks,
and other public facilities.
Answer:D. 2, 3, and 5.
Statement 4 is incorrect. The debt-equity ratios
for different types of infrastructure projects are
relevant and should be included in the loan policy.
 CCP UNIT-2

• Q. Consider the following statements regarding Letters of Credit, Guarantees, and Bills Discounting in
a bank's loan policy:
1. The bank should issue Letters of Credit (LCs) and guarantees only for non-commercial transactions.
2. The loan policy should emphasize that LCs and guarantees are provided only to borrowers with regular
credit facilities sanctioned by the bank.
3. The discounting of bills under LCs should only occur for genuine commercial and trade transactions.
4. The loan policy does not need to reflect RBI instructions regarding acceptances and guarantees.
5. The loan policy should capture the RBI's instructions from time to time regarding acceptances and
guarantees.
Statement 1 is incorrect. The bank should issue
• Which of the above statements are correct?
LCs and guarantees only for genuine commercial
• A. 2, 3, and 5 and trade transactions, not non-commercial
B. 1, 3, and 4 transactions.
C. 2 and 4 Statement 4 is incorrect. The loan policy must
D. 1, 2, and 5
reflect RBI instructions regarding acceptances
Answer:A. 2, 3, and 5. and guarantees to ensure compliance.
 CCP UNIT-2

• Q . Consider the following statements regarding Guarantees and Co-acceptances favoring FIs/Banks/other lending
agencies in a bank's loan policy:
1. The loan policy should specify whether the bank can extend fund-based credit facilities against guarantees issued by
other banks or FIs.
2. Non-fund-based (NFB) credit facilities are not considered when discussing guarantees issued by other banks or FIs.
3. The policy must address whether the bank may issue guarantees favoring other financial institutions (FIs), banks, or
lending agencies for loans they extend.
4. The loan policy does not need to mention the conditions under which guarantees and co-acceptances are issued.
5. The bank's ability to extend credit facilities based on external guarantees is not influenced by the loan policy.
• Which of the above statements are correct?
• A. 1, 3, and 4 Statement 2 is incorrect. Non-fund-based (NFB)
B. 2, 4, and 5 credit facilities are also considered in the context
C. 1 and 3 of guarantees issued by other banks or FIs.
D. 2 and 5
Statement 4 is incorrect. The loan policy should
detail the conditions under which guarantees and
co-acceptances are issued.
Answer: C. 1 and 3.
Statement 5 is incorrect. The bank's ability to
extend credit facilities based on external
guarantees is guided by the loan policy..
 CCP UNIT-2

• Q . Consider the following statements regarding the Syndication of Loans in a bank's loan policy:

1. The market for syndication of loans is expected to grow significantly, especially for infrastructure
projects.
2. Syndication is applicable only when a bank can fully meet the financial needs of a borrower.
3. The loan policy must specify whether the bank will undertake syndication on its own or jointly with other
companies.
4. Syndication involves the balance term loan or working capital finance being provided by multiple lenders.
5. The national thrust on infrastructure projects does not impact the growth of the syndication market.
• Which of the above statements are correct?
• A. 1, 3, and 4 Statement 2 is incorrect. Syndication typically
B. 2, 4, and 5 occurs when a bank cannot fully meet the
C. 1, 2, and 5 financial needs of a borrower.
D. 3 and 4 Statement 5 is incorrect. The national thrust on
infrastructure projects is a key factor in the
expected growth of the syndication market..
Answer:A. 1, 3, and 4.
 CCP UNIT-2

• Q . Consider the following statements regarding the Hedging of Forex Risks in a bank's policies:

1. The Reserve Bank of India (RBI) mandates banks to have a separate Board Approved 'Hedging Policy.'
2. The hedging policy should be entirely included in the loan policy.
3. The loan policy should include key aspects or glimpses of the hedging policy where relevant.
4. Banks are not required to address forex risk management in their policies.
5. The hedging policy for forex risks is optional and can be omitted if the bank chooses.
• Which of the above statements are correct?
• A. 1, 3, and 4 Statement 2 is incorrect. While the hedging policy
B. 2 and 5 is separate, relevant aspects or glimpses can be
C. 1 and 3 included in the loan policy where appropriate, but
D. 1, 2, and 4 it is not necessary to include the entire policy.
Statement 4 is incorrect. Banks are required to
address forex risk management through
appropriate policies, including a Board Approved
Answer:C. 1 and 3. 'Hedging Policy.’
Statement 5 is incorrect. The hedging policy for
forex risks is not optional; it is required as per
RBI mandates.
 CCP UNIT-2

• Q . Consider the following statements regarding the Fair Practices Code (FPC) for lenders in a bank's
loan policy:
1. The loan policy should include provisions for transparent and fair practices as envisioned by the RBI.
2. The FPC covers aspects such as acknowledging loan applications, quick processing, appraisal, and
sanction.
3. Post-disbursement supervision is not a part of the Fair Practices Code for lenders.
4. Changes in terms and conditions and recovery efforts are aspects that should be addressed under the
FPC.
5. The loan policy should focus only on pre-disbursement activities and ignore post-disbursement actions.
• Which of the above statements are correct? Statement 3 is incorrect. Post-disbursement
• A. 1, 2, and 4 supervision is part of the Fair Practices Code for
B. 2 and 5 lenders, ensuring that the bank monitors the
C. 1, 3, and 5 proper use of funds and compliance with the
D. 3 and 4 terms.
Statement 5 is incorrect. The loan policy should
Answer:A. 1, 2, and 4.
address both pre-disbursement and post-
disbursement actions to ensure comprehensive
management of the lending process.
 CCP UNIT-2

• Q. Consider the following statements regarding the Risk Policy in a bank's loan policy:
1.The accepted level of risk must be specified in the bank's risk policy.
2.Banks may indicate risk tolerance levels or provide cross-references to a separate risk policy.
3.The risk policy does not need to mention the bank's approach to different industries.
4.Risk measurement tools are included as part of the risk policy.
5.The policy typically includes elaboration in terms of specific percentage terms and/or
numbers.
• Which of the above statements are correct?
• A. 3 and 5 Statement 3 is incorrect. The risk policy should
mention the bank's approach to different
• B. 2, 4, and 5 industries, as risk levels can vary significantly
C. 1, 3, and 4 across sectors.
D. 1, 2, 4, and 5
Answer: D. 1, 2, 4, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding Documentation Responsibilities, Waivers, and Waiver
Authority in a bank's loan policy:
1. Loans may be disbursed without the completion of documentation, perfection of security, or ensuring the
end use of funds.
2. Exceptions, such as allowing a director's guarantee while traveling abroad, can be permitted if the loan
policy allows it.
3. The loan policy should maintain a record of exceptions, indicating when formalities will be completed.
4. The authority for approving an exception should be one level higher than the authority approving the loan
limit.
5. The policy should not include provisions for documenting outlier events or reporting them to management
or the board.
• Which of the above statements are correct? Statement 1 is incorrect. Loans should only be
disbursed upon the completion of documentation,
• A. 2, 3, and 4
B. 1, 3, and 5 perfection of security, and ensuring the end use
C. 1, 4, and 5 of funds.
D. 2 and 4 Statement 5 is incorrect. The policy should
include provisions for documenting outlier events
Answer:A. 2, 3, and 4.
and reporting them to management or the board.
 CCP UNIT-2

• Q. Consider the following statements regarding Lease Finance in a bank's loan policy:
1.The bank's loan policy on lease finance must align with RBI instructions.
2.The loan policy may diverge from RBI guidelines if the bank prefers a less stringent approach.
3.The bank must incorporate more stringent stipulations than RBI guidelines if it has no
appetite for certain types of lease finance.
4.The loan policy does not need to mention specific conditions related to lease finance.
5.RBI's permissions and restrictions on lease finance must be clearly reflected in the bank's
loan policy.
• Which of the above statements are correct?
• A. 2 and 4 Statement 2 is incorrect. The loan policy cannot
B. 1, 3, and 5 diverge from RBI guidelines to adopt a less
C. 1, 2, and 5 stringent approach; it must at least meet the
D. 3 and 4 minimum requirements set by the RBI.
Statement 4 is incorrect. The loan policy must
mention specific conditions related to lease
Answer: B. 1, 3, and 5. finance, especially where the bank decides to
impose additional restrictions.
 CCP UNIT-2

• Q . Consider the following statements regarding Loan-file Requirements/Maintenance/Administration in a bank's loan

policy:
1. Banks must maintain a loan register or record in the computer system with all details of the loan.
2. The need to keep a physical copy of the loan in the loan file should be mentioned in the loan policy or a separate
executive order.
3. Where there is a separate Loan Administration department, its duties and responsibilities should be outlined briefly in
the loan policy.
4. The detailed Standard Operating Procedure (SoP) for the Loan Administration department should be included in the loan
policy.
5. The Credit Policy should include instructions on handling loan waiver approvals and rectification of documents.
• Which of the above statements are correct?
Statement 4 is incorrect. The detailed Standard
• A. 1, 2, and 3 Operating Procedure (SoP) for the Loan
B. 1, 2, 3, and 5 Administration department is typically separate
C. 2, 4, and 5
D. 3 and 4 from the loan policy.

Answer: B. 1, 2, 3, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding the Loan Loss Provision Policy in a bank's loan policy:

1. Loan loss provisions are part of accounting disclosures and are typically separated from the Credit
Policy.
2. If there is no separate stressed assets policy, loan loss provisions may be included in the Credit Policy.
3. Banks have significant leeway in setting their own loan loss provisions and recognition standards.
4. The Reserve Bank of India (RBI) provides instructions on loan loss provisions that banks must follow.
5. Banks are required to have a Board-approved policy for making provisions for standard assets at rates
higher than the regulatory minimum.
• Which of the above statements are correct?
• A. 1, 3, and 5 Statement 3 is incorrect. Banks have little leeway
B. 1, 2, 4, and 5 in setting their own loan loss provisions and
C. 1, 2, and 4 recognition standards as these are regulated by
D. 3 and 4 the RBI.

Answer:B. 1, 2, 4, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding the Quarterly Review and Risk Assessment in a bank's loan policy:

1. The policy mandates a review of the performance of various sectors of the economy at least on a quarterly basis.
2. The review should include both quantitative aspects like debt-equity ratio and qualitative aspects like industry
performance and outlook.
3. The reviews may exclude sector-specific parameters and focus only on general economic indicators.
4. After reviewing each sector, banks may consider making provisions for standard assets at rates lower than the
regulatory minimum.
5. Banks should subject exposures to sectors identified as stressed or high-risk to closer monitoring.
• Which of the above statements are correct?
• A. 1, 2, and 5
B. 1, 3, and 4 Statement 3 is incorrect. The reviews may
C. 2, 4, and 5 include sector-specific parameters, which are
D. 3 and 4 crucial for assessing risks in particular sectors.
Statement 4 is incorrect. Banks should consider
making provisions for standard assets at higher
rates than the regulatory minimum to build
Answer:A. 1, 2, and 5.
resilience against sector-specific risks.
 CCP UNIT-2

• Q. Consider the following statements regarding Loan Grading/Credit Scoring in a bank's loan
policy:
1.Every loan asset is assigned a credit score based on defined parameters.
2.Loan pricing is independent of the credit score assigned to the loan asset.
3.Credit policies specify the accepted scores and ratings for different types of loans and
advances.
4.The credit score is not considered when determining the risk level of a loan asset.
5.Credit scoring is used solely for regulatory reporting purposes and not for internal risk
assessment.
Statement 2 is incorrect. Loan pricing is linked to
• Which of the above statements are correct? the credit score, as the score reflects the risk
• A. 1 and 3 associated with the loan.
B. 2, 4, and 5 Statement 4 is incorrect. The credit score is a
C. 1, 2, and 4 key factor in determining the risk level of a loan
D. 3 and 5 asset.
Statement 5 is incorrect. Credit scoring is used
Answer:A. 1 and 3. not only for regulatory reporting but also for
internal risk assessment and management..
 CCP UNIT-2

• Q . Consider the following statements regarding the Loan Review and Renewal Policy in a bank's loan
policy:
1. The policy outlines how and when a loan should be reviewed.
2. Regulatory instructions related to loan review and renewal are incorporated into this policy.
3. The policy covers the renewal of only fund-based (FB) credit facilities.
4. Instructions regarding the renewal of credit facilities must include provisions for delays in financial
statement submissions.
5. Non-fund-based (NFB) credit facilities are excluded from the loan review and renewal process.
• Which of the above statements are correct?
• A. 1, 2, and 4 Statement 3 is incorrect. The policy covers the
B. 1, 3, and 5 renewal of both fund-based (FB) and non-fund-
C. 2 and 4 based (NFB) credit facilities.
D. 3 and 5 Statement 5 is incorrect. Non-fund-based (NFB)
credit facilities are included in the loan review
and renewal process.
Answer:A. 1, 2, and 4.
 CCP UNIT-2

• Q . Consider the following statements regarding the Charged Off Accounts in a bank's loan policy:

1. Charged off accounts refer to accounts that have been fully recovered by the bank.
2. The policy related to charged off accounts includes follow-up actions for recovering dues.
3. The loan policy should not address charged off accounts, as they are considered fully resolved.
4. Follow-up actions in the policy may involve legal proceedings or other recovery efforts.
5. The policy aims to recover the bank's dues even after accounts have been written off.
• Which of the above statements are correct?
• A. 1, 2, and 5
B. 1, 3, and 4
C. 2, 4, and 5 Statement 1 is incorrect. Charged off accounts
D. 3 and 4 refer to accounts that have been written off by
the bank, not fully recovered.
Statement 3 is incorrect. The loan policy should
address charged off accounts to outline recovery
strategies.
Answer:C. 2, 4, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding the Priority section in a bank's Credit Policy:

1. The credit priorities of a bank remain static over time and are not influenced by external factors.
2. Changes in credit priorities may occur due to factors such as liberalization and globalization.
3. The Credit Policy does not play a role in managing changes in the bank's priorities.
4. Tapping available opportunities and achieving social obligations are reasons for adjusting credit
priorities.
5. Protecting the bank's share and position in the local environment is one of the objectives of adjusting
credit priorities.
• Which of the above statements are correct?
• A. 2, 4, and 5 Statement 1 is incorrect. The credit priorities of a
B. 1, 3, and 4 bank do change over time, influenced by factors
C. 2 and 3 such as market conditions, regulatory changes,
D. 1, 2, and 5 and external economic factors.
Statement 3 is incorrect. The Credit Policy plays
a crucial role in managing these changes and
Answer:A. 2, 4, and 5.
adapting to new priorities.
 CCP UNIT-2

• Q . Consider the following statements regarding the Role of Credit Policy in a bank:

1. In the past, banks had formal loan policies regulated by authorities.

2. Informal internal guidelines previously focused on maintaining asset quality and market share.
3. Lack of a formal, well-documented policy can lead to higher credit risk for banks.
4. The absence of a formal policy and regular review makes it easier for banks to manage risk events.
5. It is now compulsory for banks to have a written credit policy approved by their Board of Directors.
• Which of the above statements are correct?
• A. 1, 3, and 4
B. 2, 3, and 5
C. 1, 2, and 5 Statement 1 is incorrect. In the past, there was no
D. 2 and 4 regulatory insistence on a formal loan policy, and banks
operated with informal internal guidelines.
Statement 4 is incorrect. The absence of a formal policy
and regular review can make it more challenging, not
easier, for banks to manage risk events.
Answer:B. 2, 3, and 5.
 CCP UNIT-2

• Q . Consider the following statements regarding MIS and Review in a bank's loan policy:

1. The Board should review the credit portfolio infrequently, focusing only on significant changes.
2. A review must ensure that the covenants of the credit policy are adhered to and that the credit portfolio contributes to
the profit as envisaged.
3. The Board should investigate the reasons for any shortfall or violations of the credit policy.
4. Frequent reviews imply that policy aspects such as risk estimation and accounting standards should be changed
frequently.
5. The review should focus on credit performance and whether the policy has achieved the intended objectives.
• Which of the above statements are correct?
• A. 2, 3, and 5
B. 1, 4, and 5 Statement 1 is incorrect. The Board should
C. 1, 2, and 3 review the credit portfolio frequently, not
D. 3 and 4 infrequently, to ensure effective monitoring and
compliance.
Statement 4 is incorrect. Frequent reviews do not
necessarily imply frequent changes in policy
Answer: A. 2, 3, and 5.
aspects such as risk estimation and accounting
standards. The focus should be on maintaining
stability and avoiding changes driven by short-
term profit motives.
 CCP UNIT-2

• Q . Consider the following statements regarding the Conclusions of a bank's Credit Policy:

1. The Credit Policy defines thrust areas concerning credit culture, profit objectives, and regulatory
directions.
2. It identifies industry segments for fresh exposures and sets limits to prevent risk concentrations.
3. Pricing strategies through the use of the Credit Risk Rating framework are not included in the Credit
Policy.
4. The policy's effectiveness depends on how well it is understood and implemented by bank officials.
5. An ideal Credit Policy should be user-friendly, comprehensive, and avoid official jargon that may lead to
different interpretations.
• Which of the above statements are correct? Statement 3 is incorrect. Pricing strategies,
• A. 1, 2, and 5 including the use of the Credit Risk Rating
B. 3, 4, and 5 framework, are included in the Credit Policy.
C. 1, 3, and 4
D. 1, 2, 4, and 5
Answer:D. 1, 2, 4, and 5.