School of Management and Commerce

Question Bank - Unit no.: II

Program: MBA
Course Name: FINANCIAL SERVICES Course Code: 21MBFI411
Academic year: 2023- 2024 Sem: IV Semester / Year: Second
Level A. Easy Questions (2 marks each)
S. No. Questions CO*
Q1 What is bank?

A bank is a financial institution that accepts deposits from individuals

and businesses, and uses those funds to provide loans,
investments, and other financial services. They play a crucial role in
the financial system by:

 Mobilizing savings: Encouraging individuals and businesses

to save their money by offering various deposit accounts.
 Allocating capital: Channeling these savings to individuals
and businesses who need them for investments and growth,
through loans and other financial instruments.
 Facilitating payments: Providing safe and efficient ways to
transfer money between individuals and businesses through
various payment methods like checks, electronic transfers,
and debit/credit cards.

Q2 What are the Different types of bank

There are various types of banks, each with specific functions and
target clientele:

 Commercial banks: Offer a wide range of financial services

to individuals and businesses, including deposits, loans,
payment services, and wealth management.
 Central banks: Act as the government's bank, setting
monetary policy, regulating other banks, and managing the
national currency.
 Investment banks: Assist corporations and governments
with raising capital through various means like issuing stocks
and bonds.
 Retail banks: Focus on providing financial products and
services to individual consumers, such as savings accounts,
loans, and credit cards.
 Cooperative banks: Owned and operated by their members,
typically focusing on serving specific communities or
professions.
  Regional rural banks: Established to cater to the financial
needs of rural areas and underbanked communities.

Q3 What is Retail Banking? Explain its features.

Retail banking refers to the segment of banking that focuses on

providing financial products and services directly to individual
consumers.

Features:

 Customer focus: Caters to the diverse financial needs of

individual customers, from everyday banking to saving for
long-term goals.
 Product variety: Offers a broad range of products and
services, including:
o Deposit accounts (savings accounts, current accounts,
fixed deposits)
o Loans (personal loans, home loans, car loans, etc.)
o Payment instruments (debit cards, credit cards)
o Online and mobile banking services
o Wealth management and investment products for
individual investors
 Convenience: Provides convenient access to banking
services through various channels:
o Branch networks
o ATMs
o Online banking platforms
o Mobile apps
 Customer service: Emphasizes building long-term
relationships with individual customers and providing
personalized service.

Q4 Briefly explain Modern Banking Facilities.

Modern banking facilities encompass various technological

advancements and innovative services that have transformed the
banking landscape. Some examples include:

 Online and mobile banking: Enables customers to manage

their accounts, make payments, and access various banking
services remotely through internet banking and mobile
banking apps.
 Debit and credit cards: Provide convenient and secure
alternatives to cash for making payments in stores and online.
 Automated teller machines (ATMs): Allow customers to
 withdraw cash, deposit checks, and perform other
transactions 24/7 without visiting a branch.
 Electronic payments: Facilitate online and digital payments
through various methods like electronic fund transfers (EFTs),
internet banking, and mobile wallets.
 Real-time banking: Enables instant access to account
information and transaction updates.
 Contactless payments: Allow customers to make secure
payments by tapping their debit or credit cards or
smartphones against a contactless reader.

These modern facilities offer greater convenience, efficiency, and

security for both banks and their customers.

Q5 Explain the advantages of E-Banking.

E-banking (electronic banking) refers to using electronic channels

like the internet or mobile apps to access and manage your bank
accounts. It offers several advantages:

 Convenience: Allows you to bank anytime, anywhere, 24/7,

eliminating the need to visit a physical branch during business
hours.
 Efficiency: Enables quick and easy transactions, saving time
and effort compared to traditional methods.
 Cost-effective: E-banking services are often cheaper than
traditional banking methods, as they eliminate the need for
physical infrastructure and human resources.
 Security: Modern e-banking platforms employ robust security
features to protect your financial information and transactions.
 Improved control: Provides real-time access to account
information and facilitates managing your finances more
effectively.
 Increased accessibility: Makes banking services more
accessible to individuals in remote locations or those with
limited mobility.

Q6 What is Demat account

A Demat account, short for dematerialized account, is an electronic

account that holds your shares and other securities in digital form, instead
of physical certificates. This eliminates the need for physical certificates,
simplifies the trading process, and reduces the risk of loss, theft, or
 damage.

Q7 Where the Lead manager is appointed

The lead manager is appointed by the issuing company when they plan
to raise capital through a public issue of shares or bonds. This appointment
typically happens through a formal agreement between the company and
the chosen lead manager.

Q8 Differentiate between Convertible and non - convertible debenture

Convertible Debentures:

 Definition: A type of debt security that can be converted into

a predetermined number of shares of the issuing company's
common stock at the holder's discretion after a specific date
or within a specified time frame.
 Benefits: Offer investors the potential for capital appreciation
if the company's stock price increases and the option to
receive regular interest payments like traditional bonds.

Non-Convertible Debentures:

 Definition: A debt security that cannot be converted into

equity shares of the issuing company.
 Benefits: Generally offer higher interest rates compared to
convertible debentures due to the lack of conversion option,
making them attractive to investors seeking fixed income.

Q9 Discuss few points on National Stock Exchange

National Stock Exchange (NSE):

 Function: The leading stock exchange in India, established in

1992.
 Features:
o Provides a trading platform for investors to buy and sell
shares of listed companies.
o Employs electronic trading systems for faster and more
efficient execution of trades.
o Offers various trading products, including equity
shares, derivatives, and mutual funds.
o Implements regulations to ensure fair and transparent
trading practices.
Q10 What is commercial bank?

Commercial Banks:

 Definition: Financial institutions that accept deposits from

individuals and businesses and use those funds to provide
loans, investments, and other financial services.
 Functions:
o Play a crucial role in the financial system by mobilizing
savings and allocating capital.
o Offer a wide range of products and services, including:
 Deposit accounts (savings accounts, current
accounts, fixed deposits)
 Loans (personal loans, home loans, car loans,
etc.)
 Payment instruments (debit cards, credit cards)
 Cash management services for businesses
o Contribute to economic growth by providing credit to
businesses and individuals, facilitating investment and
consumption.

Q11 Define Banker and Customer

Banker and Customer:

The relationship between a bank and its customer is unique and

carries certain special characteristics:

 Fiduciary relationship: The bank acts as a fiduciary to its

customers, meaning it has a legal and ethical obligation to act
in the best interests of its customers and avoid conflicts of
interest.
 Confidentiality: Banks are obligated to maintain the
confidentiality of customer information and transactions,
except in specific circumstances mandated by law.
 Care and skill: Banks are expected to exercise due care and
skill in managing customer accounts and providing services.
 Good faith: Both the bank and the customer are expected to
act in good faith and deal with each other honestly and fairly.

This special relationship underscores the importance of trust,

transparency, and ethical conduct between banks and their
customers.
Q12 What is the Structure of co-operative bank

Cooperative Banks:

 Structure:
o Owned and controlled by their members, who are also
depositors.
o Function on the principles of cooperation and mutual
benefit.
o Governed by a board of directors elected by the
members.
o Profits are shared among members in the form of
dividends.
 Focus:
o Primarily cater to the financial needs of specific
communities or professions.
o Play a significant role in promoting financial inclusion
and providing banking services in rural and
underbanked areas.

Drawbacks:

 May face challenges in attracting and retaining professional

staff compared to commercial banks.
 Decision-making processes may be slower due to democratic
structures.
 Limited capital base compared to commercial banks,
potentially impacting their ability to offer competitive products
and services.

Q13 What is Debit Card, how it is useful for customer?

Debit Card (Q13):

 A debit card is a payment card linked to your bank account.

 Functionality: When you use a debit card to make a
purchase, the funds are immediately deducted from your bank
account.
 Benefits for customers:
o Convenient and secure way to make payments without
carrying cash.
o Widely accepted by merchants, both online and offline.
o Offers real-time transaction tracking and helps manage
expenses.
o May offer rewards programs or cashback benefits
 depending on the card issuer.

Q14 Explain the function of Credit Card

 A credit card is a type of loan offered by a bank or financial

institution.
 Functionality: When you use a credit card to make a
purchase, you borrow money from the issuer up to a certain
limit. You are then obligated to repay the borrowed amount
with interest within a specified timeframe, typically by the next
billing cycle.
 Benefits for customers:
o Convenient way to make purchases even when you
don't have enough funds in your account.
o Can help build your credit score with responsible use
and timely repayments.
o May offer various rewards programs, travel insurance,
and other benefits depending on the card type.

Important to Note:

 Using a credit card responsibly is crucial to avoid

accumulating debt and high-interest charges.
 It's essential to compare different credit card options and
choose one that best suits your spending habits and financial
situation.

Q15 Discuss few negative feature of Net Banking

While net banking offers numerous advantages, it's essential to be

aware of its potential downsides:

 Security risks: Phishing scams, malware, and cyberattacks

can pose a risk to your online banking information if proper
security measures are not taken.
 Dependence on technology: Requires a stable internet
connection and access to electronic devices, which may not
be readily available in all areas.
 Limited functionalities: Certain banking transactions may
still require visiting a physical branch.
 Potential for errors: Mistakes can occur during online
transactions, and resolving them may involve contacting
customer service.

It's crucial to exercise caution and adopt security best practices like
strong passwords, two-factor authentication, and using trusted
 websites to minimize these risks and ensure a safe and secure net
banking experience.

Q16 Explain the procedure for opening of Bank Accounts.

The procedure for opening a bank account generally involves the

following steps:

1. Choose a bank: Consider factors like location, services

offered, fees, and online banking capabilities.
2. Select the type of account: Different accounts cater to
various needs, such as savings accounts, current accounts,
or fixed deposit accounts.
3. Gather required documents: These typically include proof of
identity, address proof, and income proof (if applicable).
4. Visit a branch or use online application: Submit the
required documents, complete the application form, and
provide your signature.
5. Initial deposit: Most banks require an initial deposit to
activate the account.
6. Receive account details: You will receive your account
number, ATM card (if applicable), and internet banking
credentials (if opted for).

It's advisable to compare different banks and account options before

choosing one that aligns with your financial needs and preferences.

Q17 What is Priority Sector Lending?

Priority Sector Lending (PSL):

 An initiative by the Reserve Bank of India (RBI) to ensure that

a specific portion of bank credit is directed towards specific
sectors considered crucial for the development of the Indian
economy and society.
 Target sectors: Agriculture, small and medium industries
(SMIs), micro and small enterprises (MSEs), export finance,
education, housing, and weaker sections of society.
 Objectives:
o Promote inclusive growth by providing financial access
to these sectors.
o Encourage development in critical areas like
agriculture, education, and housing.
 o Empower weaker sections of society and contribute to
social development

Q18 Explain the precautions to be taken by a customer while opening an

account.

Opening a bank account requires some important precautions to

ensure your financial safety:

 Compare different banks and accounts: Research and

compare different options based on fees, interest rates,
services offered, and online banking capabilities.
 Choose a reputable bank: Look for a bank with a strong
reputation and a track record of financial stability.
 Read the terms and conditions carefully: Understand the
terms and conditions associated with the account, including
fees, interest rates, and any potential risks or limitations.
 Be cautious of unsolicited offers: Do not share personal or
financial information with individuals claiming to represent
banks unless you have initiated the contact.
 Protect your account information: Keep your passwords,
PINs, and other account details confidential.

Q19 What is Tele Banking?

Tele Banking (Q19)

Tele banking, also known as telephone banking, is a service
provided by banks that allows customers to access and manage
their bank accounts over the telephone.

Key features:

 Convenience: Allows customers to perform banking

transactions remotely without visiting a branch.
 Accessibility: Available 24/7, eliminating limitations of
branch timings.
 Services offered: May include checking account balances,
transferring funds, making bill payments, requesting account
statements, and more (specific services may vary depending
on the bank).

How it works:

 Customers typically call a dedicated phone number provided

 by their bank.
 They use their phone's keypad or voice recognition to identify
themselves and navigate the system.
 Once authenticated, they can access various banking
functions through automated menus or by speaking to a live
customer service representative

Q20 Define Banker and Customer.

The relationship between a banker and a customer is unique and

carries certain special characteristics:

Fiduciary relationship: The bank acts as a fiduciary to its

customers, meaning it has a legal and ethical obligation to:

 Act in the best interests of its customers: This means

avoiding conflicts of interest and prioritizing the customer's
financial well-being.
 Exercise due care and skill: The bank is expected to
manage customer accounts and provide services with
reasonable care and competence.

Confidentiality: Banks are obligated to maintain the confidentiality

of customer information and transactions, except in specific
circumstances mandated by law.

Good faith: Both the bank and the customer are expected to act in
good faith and deal with each other honestly and fairly. This
includes:

 Transparency: The bank should provide clear and accurate

information about products, services, and fees.
 Fairness: Both parties should treat each other with respect
and avoid any unfair or deceptive practices.

Level B. Intermediate Questions (5 marks each)

Q21 What are the advantages and disadvantages of vehicle finance services?

Vehicle Finance Services (Q21)

Advantages:

 Affordability: Allows individuals to purchase a vehicle even if

they cannot afford the entire cost upfront.
 Spreads out the cost: Enables individuals to pay for the
 vehicle over a longer period through affordable monthly
installments.
 Variety of options: Different loan terms, interest rates, and
down payment options cater to diverse financial situations.
 Convenience: Simplifies the car buying process by financing
the purchase through the dealership or a lender.
 Potential tax benefits: Depending on the location and loan
type, tax deductions might be available on interest payments.

Disadvantages:

 Debt burden: Vehicle loans can be a significant financial

commitment, putting a strain on the borrower's budget for an
extended period.
 Risk of default: Failing to make loan payments can lead to
repossession of the vehicle.
 Interest costs: The total amount paid over the loan term can
be significantly higher than the original loan amount due to
accumulated interest.
 Depreciation: The value of the vehicle will likely decrease
over time, potentially leading to negative equity if the loan is
not fully paid before the end of the term.
 Additional costs: Insurance, maintenance,

Q22 Briefly describe the functions of commercial banks.

Functions of Commercial Banks:

 Accepting deposits: Commercial banks accept deposits

from individuals and businesses in various forms, such as
savings accounts, current accounts, and fixed deposits.
 Lending: They use these deposits to provide loans to
individuals, businesses, and other entities, earning interest
income in the process.
 Payment services: Banks facilitate various payment services
like cheque clearances, electronic fund transfers (EFTs), and
online banking, enabling smooth financial transactions.
 Cash management services: Commercial banks offer cash
management services like cash collection and disbursement
for businesses.
 Investment products: Some banks offer investment
products like mutual funds and bonds, allowing customers to
invest their savings.

Q23 Explain NSDL & its functions

 NSDL (National Securities Depository Limited):

 Function: NSDL is a depository in India that holds securities

(like shares and bonds) in electronic form instead of physical
certificates.
 Services:
o Dematerialization and rematerialization of securities.
o Account management for investors holding securities
in electronic form.
o Settlement of trades executed on stock exchanges.
o Provides a safe and efficient way to hold and trade
securities.

Q24 Identify the objectives of Mutual Funds.

Objectives of Mutual Funds (Q24)

Objectives of Mutual Funds:

 Diversification: Mutual funds offer investors the benefit of

diversification by investing in a basket of securities, reducing
individual company risk.
 Professional management: Investment decisions are made
by experienced fund managers, allowing investors to benefit
from their expertise and market knowledge.
 Affordability: Mutual funds allow individuals to invest in a
diversified portfolio even with a small amount of money,
making them accessible to a broader range of investors.
 Liquidity: Most mutual funds are open-ended, allowing
investors to redeem their units at the prevailing Net Asset
Value (NAV) on most business days.
 Potential for capital appreciation: By investing in a
diversified portfolio, mutual funds offer the potential for capital
appreciation over the long term.

Q25 Explain the role of IRDA in Indian Financial System.

RDA (Insurance Regulatory and Development Authority):

  Function: The primary function of IRDA is to regulate and
promote the orderly growth of the insurance industry in India.
 Activities:
o Protects policyholder interests.
o Promotes fair competition among insurance
companies.
o Regulates insurance products, pricing, and solvency of
insurance companies.
o Promotes financial literacy and awareness about
insurance products.

Q26 What is co-operative banking? Briefly explain its functions and drawbacks.

Co-operative Banking:

 Definition: A financial system based on the principles of

mutual ownership and democratic control by its members.
 Functions:
o Provides banking services to its members, focusing on
rural areas and underserved communities.
o Mobilizes savings from members through deposits.
o Offers loans to members at competitive interest rates.
o Promotes thrift and self-help among members.
 Drawbacks:
o Limited reach compared to commercial banks.
o May face challenges in attracting and retaining
professional staff.
o Potential for inefficiencies due to democratic decision-
making processes.

Q27 What are Regional Rural Banks? Explain the features and bring out its
drawbacks

Regional Rural Banks (RRBs):

Features:

 Established: Created by the Government of India and

sponsored by commercial banks to specifically cater to the
financial needs of rural areas.
 Function: Provide banking and financial services like
deposits, loans, remittance services, and more, focusing on
rural communities.
  Focus: Primarily serve small and marginal
farmers, agricultural laborers, small entrepreneurs, and
artisans in rural areas.
 Ownership: Owned by the Government of India
(50%), sponsoring commercial banks (35%), and state
governments (15%).

Drawbacks:

 Limited capital base: RRBs often face challenges due to a

limited capital base, hindering their ability to expand their
reach and offer competitive products and services.
 Operational inefficiencies: They may struggle with
operational inefficiencies due to factors like lack of skilled
personnel and proper infrastructure in rural areas.
 High transaction costs: Operating in rural areas can lead to
higher transaction costs for RRBs, potentially impacting their
profitability and ability to offer lower interest rates to
borrowers.
 Political interference: Concerns exist about potential
political interference in the functioning of RRBs,

Q28 Write a short note on Dormant Account.

Dormant Account:

A bank account is considered dormant if there are no transactions

(deposits, withdrawals, or inquiries) for a specific period, as defined
by the bank (typically 1 year or more). Dormant accounts can be
savings or current accounts.

Implications:

 Limited access: The account holder cannot access the funds

in the dormant account until it is revived.
 Charges: Banks may levy dormancy charges on such
accounts.
 Transferred to authorities: After a certain period of inactivity
(as per regulations), the bank may transfer the balance in the
dormant account to unclaimed deposit accounts maintained
with the Reserve Bank of India (RBI).

Revival Process:

Account holders can revive dormant accounts by contacting their

bank and completing necessary formalities, which may involve
providing identification documents and making a minimum deposit.
Q29 Explain the features of Retail Banking

Features of Retail Banking:

 Focus: Caters to the individual financial needs of consumers.

 Products and services: Offers a wide range of products and
services, including:
o Savings accounts, current accounts, and fixed
deposits.
o Loans (personal loans, home loans, car loans, etc.).
o Debit cards, credit cards, and other payment
instruments.
o Online banking and mobile banking services.
o Wealth management and investment products for
individual investors.
 Convenience: Provides convenient access to banking
services through various channels, like branch networks,
ATMs, online banking platforms, and mobile apps.
 Customer service: Emphasizes customer service and
building long-term relationships with individual customers.

Q30 Describe the special relationship between banker and customer.

The relationship between a bank and its customer is unique and

carries certain special characteristics:

 Fiduciary relationship: The bank acts as a fiduciary to its

customers, meaning it has a legal and ethical obligation to act
in the best interests of its customers and avoid conflicts of
interest.
 Confidentiality: Banks are obligated to maintain the
confidentiality of customer information and transactions,
except in specific circumstances mandated by law.
 Care and skill: Banks are expected to exercise due care and
skill in managing customer accounts and providing services.
 Good faith: Both the bank and the customer are expected to
act in good faith and deal with each other honestly and fairly.

Level C. Difficult Questions (10 marks each)

Q31 What are the advantages and disadvantages of housing finance?
 Advantages:

 Makes homeownership attainable: Allows individuals to

purchase a house even if they cannot afford the entire cost
upfront.
 Spreads out the cost: Enables individuals to pay for the
house over a longer period through affordable monthly
installments.
 Potential tax benefits: Depending on the location and loan
type, tax deductions might be available on interest payments
and principal amount.
 Appreciation potential: The property value might increase
over time, offering potential gains on investment.
 Sense of accomplishment: Owning a home can bring a
sense of security and stability, fulfilling a long-term goal.

Disadvantages:

 Debt burden: Housing loans can be a significant financial

commitment, putting a strain on the borrower's budget for an
extended period.
 Risk of default: Failing to make loan payments can lead to
foreclosure and loss of the property.
 Interest costs: The total amount paid over the loan term can
be significantly higher than the original loan amount due to
accumulated interest.
 Maintenance costs: Homeownership comes with ongoing
expenses for maintenance, repairs, and property taxes.
 Market fluctuations:

Q32 Discuss the various schemes of housing loans.

Housing Loan Schemes (Q32)

Several housing loan schemes in India cater to different needs and
circumstances:

 Subsidy schemes: Government-sponsored schemes like

Pradhan Mantri Awas Yojana (PMAY) offer interest rate
subsidies, making housing loans more affordable for low and
middle-income groups.
  Women-centric schemes: Specific schemes like PMAY-
CLSS provide additional benefits and lower interest rates for
women borrowers.
 Rural housing schemes: Schemes like PMAY-Grameen
address the housing needs of rural populations with flexible
repayment options.
 Long-term loans: Schemes offering extended loan terms,
typically up to 30 years, can make monthly payments more
manageable.
 Balance transfer schemes: These schemes allow borrowers
to transfer their existing housing loan to another lender with
potentially better interest rates and terms.

Q33 Explain different functions of SEBI with reference to the IPO

SEBI Functions and IPOs (Q33)

The Securities and Exchange Board of India (SEBI) plays a crucial
role in regulating the Indian primary market, including initial public
offerings (IPOs). Here are some of its key functions related to IPOs:

 Issuance of guidelines: SEBI establishes guidelines for

companies seeking to raise capital through IPOs, ensuring
transparency and investor protection.
 Prospectus review: SEBI reviews the company's
prospectus, which contains detailed information about the
company's financials, business plan, and risk factors.
 Investor protection: SEBI implements regulations to protect
investors from unfair practices and ensures accurate and
timely disclosure of information by companies.
 Market development: SEBI works to develop and improve
the primary market by streamlining processes and promoting
investor participation.
 Regulation of intermediaries: SEBI regulates intermediaries
like investment bankers and underwriters involved in the IPO
process, ensuring ethical conduct and adherence to
regulations.

Q34 Explain different functions of SEBI with reference to the Mutual fund.

SEBI also plays a vital role in regulating the Indian mutual fund
industry, aiming to protect investors and promote the orderly growth
of the sector. Here are some of its key functions:
  Registration and regulation: SEBI registers and regulates
mutual fund houses and their schemes, ensuring compliance
with regulations and investor protection norms.
 Investor protection: SEBI implements various measures to
safeguard investor interests, including promoting
transparency, disclosure of risks and fees, and grievance
redressal mechanisms.
 Monitoring and surveillance: SEBI monitors the activities of
mutual funds and intermediaries to identify and address any
potential irregularities or misconduct.
 Investor education: SEBI promotes financial literacy and
investor education initiatives to empower individuals to make
informed investment decisions in mutual funds.
 Regulatory framework: SEBI develops and enforces a
regulatory framework that fosters a fair, efficient, and
transparent mutual fund industry.

Q35 Explain about NABARD & its objectives

The National Bank for Agriculture and Rural Development

(NABARD) is a financial institution established to provide credit and
other financial services to the rural sector in India. Its primary
objectives include:

 Providing credit facilities: NABARD provides refinance to

commercial banks, cooperative banks, and regional rural
banks, enabling them to extend credit to agriculture, allied
activities, and rural development projects.
 Promoting rural development: NABARD promotes the
development of rural infrastructure, such as irrigation,
electrification, and marketing facilities.
 Supporting institutions: NABARD supports and strengthens
rural financial institutions, including cooperative banks and
regional rural banks.
 Promoting self-employment: NABARD promotes self-
employment and income generation activities in rural areas,
particularly for marginalized communities.
 Supervising and regulating: NABARD supervises and
regulates cooperative banks and regional rural banks to
ensure their

CASE STUDY
Q36 When bank provide the different types of financial assistant to an industry,
it has to consider various points and pre advance activities. Discuss how
bank perform those activities in the following area:
1) Financing the loan to purchase machineries
2) Financing for working capital
3)What are the financial indicator bank is analysing, how it is performed?

Pre-loan activities for different types of

financial assistance:
Banks consider various factors and conduct specific activities before
providing different types of financial assistance to an industry. Here's
how they approach each scenario:

1. Financing Loan for Machinery Purchase:

 Project appraisal: The bank thoroughly evaluates the project

proposal, including the purpose, cost of machinery, expected
benefits, and repayment plan.
 Technical feasibility: The bank may engage external experts
to assess the technical aspects of the project and the
suitability of the chosen machinery.
 Market feasibility: The bank analyzes market demand for the
products the machinery will help produce, ensuring sufficient
demand to generate the necessary revenue for loan
repayment.
 Financial viability: The bank assesses the borrower's
financial health, including past performance, projected cash
flow, and ability to repay the loan with interest.
 Collateral evaluation: The bank may require collateral in the
form of land, buildings, or other assets to secure the loan in
case of default.

2. Financing for Working Capital:

 Working capital assessment: The bank analyzes the

company's working capital cycle, considering raw material
purchase, inventory management, production time, and
customer credit periods.
 Inventory management: The bank assesses the company's
inventory management practices to ensure efficient use of
working capital and minimize the risk of obsolete or excess
inventory.
 Debtor management: The bank evaluates the company's
credit control policies and practices to ensure timely collection
of payments from customers and avoid excessive
 receivables.
 Financial projections: The bank requires the company to
provide financial projections demonstrating their ability to
generate sufficient cash flow to cover operating expenses and
loan repayments.

3. Financial Indicator Analysis:

Banks analyze various financial indicators to assess the borrower's

creditworthiness and project viability. Here are some common
examples:

 Profitability ratios: These ratios measure the company's

ability to generate profits, such as net profit margin, return on
equity (ROE), and return on assets (ROA).
 Liquidity ratios: These ratios assess the company's ability to
meet its short-term obligations, such as current ratio and
quick ratio.
 Solvency ratios: These ratios measure the company's long-
term financial health and ability to meet its debt obligations,
such as debt-to-equity ratio and interest coverage ratio.
 Efficiency ratios: These ratios assess the company's
efficiency in using its resources, such as inventory turnover
ratio and receivable turnover ratio.

Performing the Analysis:

Banks employ various methods to analyze these financial indicators:

 Trend analysis: Comparing the ratios over time to identify

any positive or negative trends in the company's financial
performance.
 Benchmarking: Comparing the ratios with industry averages
or competitors to understand the company's relative position
within the industry.
 Ratio analysis: Analyzing the relationship between different
ratios to gain a deeper understanding of the company's
financial health and risk profile.

By considering these pre-loan activities and analyzing various

financial indicators, banks aim to make informed lending decisions
that mitigate risk and ensure a successful loan experience for both
the bank and the borrowing industry.