Consider the following statements: Statement-I: Syndicated lending spreads the risk of borrower default across multiple lenders. Statement-II: The syndicated loan can be a fixed amount/lump sum of funds, but cannot be a credit line. Which one of the following is correct in respect of the above statements?
- A.Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
- B.Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
- C.Statement-I is correct, but Statement-II is incorrect
- D.Statement-I is incorrect, but Statement-II is correct
Correct answer
Explanation
The correct answer is C, Statement-I is correct, but Statement-II is incorrect. A syndicate shares the default risk, and a syndicated facility can be either a term loan or a credit line.
In syndicated lending a group of banks or financial institutions jointly lends to one large borrower, such as a company building a power plant or an airport. One bank acts as the lead arranger and agent, but each lender carries only its own share, so no single bank is exposed to the whole loan if the borrower fails. The facility may be a fixed term loan paid out in one sum or in tranches, or a revolving credit line that the borrower draws on and repays as needed, or a mix of both.
A is wrong because Statement-II is false, so it cannot explain Statement-I. B is wrong for the same reason: Statement-II is not correct. D is wrong because Statement-I is a correct description of why lenders form syndicates.
Exam tip: syndicated loan = many lenders, one borrower, shared risk; it can be a term loan or a revolving credit line.
Practice Questions
View allWhat is/are the purpose/purposes of the 'Marginal Cost of Funds based Lending Rate (MCLR)' announced by RBI?
1. These guidelines help improve the transparency in the methodology followed by banks for determining the interest rates on advances.
2. These guidelines help ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.
Select the correct answer using the code given below.
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
Show answer
The RBI brought in MCLR to make banks' loan pricing more transparent and to give borrowers rates that are fair to both sides.
Read the full explanation →Consider the following statements in respect of the digital rupee:
1. It is a sovereign currency issued by the Reserve Bank of India (RBI) in alignment with its monetary policy.
2. It appears as a liability on the RBI's balance sheet.
3. It is insured against inflation by its very design.
4. It is freely convertible against commercial bank money and cash.
Which of the statements given above are correct?
- A.1 and 2 only
- B.1 and 3 only
- C.2 and 4 only
- D.1, 2 and 4
Show answer
The digital rupee is RBI-issued sovereign money, sits as a liability of the RBI like notes do, and can be exchanged one-to-one for cash and bank deposits.
Read the full explanation →With reference to the rule/rules imposed by the Reserve Bank of India while treating foreign banks, consider the following statements : 1. There is no minimum capital requirement for wholly owned banking subsidiaries in India. 2. For wholly owned banking subsidiaries in India, at least 50% of the board members should be Indian nationals. Which of the statements given above is/are correct ?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
Show answer
RBI does set a minimum capital for a foreign bank's wholly owned subsidiary, and it requires at least half the board to be Indian nationals.
Read the full explanation →With reference to digital payments, consider the following statements : 1. BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account. 2. While a chip-pin debit card has four factors of authentication, BHIM app has only two factors of authentication. Which of the statements given above is/are correct ?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
Show answer
BHIM can send money to anyone who has a UPI-linked bank account, but a chip-and-PIN debit card does not use four factors of authentication.
Read the full explanation →The term 'Core Banking Solutions' is sometimes seen in the news. Which of the following statements best describes/describe this term?
1. It is a networking of a bank's branches which enables customers to operate their accounts from any branch of the bank on its network regardless of where they open their accounts.
2. It is an effort to increase RBI's control over commercial banks through computerization.
3. It is a detailed procedure by which a bank with huge non-performing assets is taken over by another bank.
Select the correct answer using the code given below.
- A.1 only
- B.2 and 3 only
- C.1 and 3 only
- D.1, 2 and 3
Show answer
Core Banking Solutions (CBS) links all branches of a bank to one central system, so a customer can bank at any branch, not just the home branch.
Read the full explanation →