Skip to content

CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Non Fund Based

Which of the following is the main reason a bank looks at the external credit rating of a borrower while fixing non-fund based limits?

Banks use an external credit rating as an independent opinion of the borrower's creditworthiness. It helps in deciding the size of the non-fund based limit, the margin to be taken and the commission charged. It is neither a guarantee against default nor a buy or sell recommendation.

  1. AThe rating guarantees that the borrower will never default on its obligations
  2. BThe rating is a recommendation to buy or sell the borrower's securities
  3. CThe rating gives an independent opinion on the borrower's creditworthiness, which helps the bank decide the limit size, margin and pricing of the commissionCorrect
  4. DThe rating replaces the need for any security or margin from the borrower

Explanation

A rating is an opinion on relative credit risk and not a guarantee or an investment recommendation. Banks use it for decisions on limit, margin and pricing. It does not remove the need for security, which is why the last option is wrong.

Did you get it right without looking?

One question tells you little. A timed set on Raising of Funds - Non Fund Based shows your real accuracy, how long you take and where you lose marks.

Practise Raising of Funds - Non Fund BasedFree diagnostic mock

More Raising of Funds - Non Fund Based questions