Interview Questions

Disclaimer: I have answered these questions to the best of my understanding. Use your discretion in reading and analyzing the answers.

Q. What will be the GDP growth of India 5 years down the line ?

Ans. 

3years back the growth rate was 9% and the inflation was 6%. We were at the peak of boom cycle. Now growth rate is sliding and inflation is soaring. I think next 3 years we will remain in the recessionary cycle. Then in the next 2 years  (ie in the 4^th and 5^th year from now) we will be on the upward slope towards a growth cycle, so we might clock a growth rate of around 8%.

Q. How is inflation linked to growth rate?

Ans.

 Inflation is usually seen in a growing economy. As the prospects for growth seem attractive investments flow in the economy and market. Consumption and demand for goods increases, pushing the price upwards, fueling inflation. This is in short the boom cycle.

On witnessing the high octane growth in the market, investors become overly optimistic and invest aggressively. Result is creation of overcapacity that supersedes demand ( Eg. you can’t open a steel plant of incremental capacity, so you invest in a new plant of full capacity, creating excess capacity). You try to export your products and cut back on production capacity. Investors become vary of the future economic prospects and pull out their money. Consequently prices of real estate also fall down. We might also see some layoff and voila we have the recessionary cycle. Normally in such scenario inflation cools down.

Q. What will you look for before giving loan to a firm?

Ans.  We can follow the 4C approach.

Company :-  Try to know as much about the Economy, Industry and company. How is the economy, growth rate, interest rate, inflation?  These factors decided whether one should be aggressive or cautious. Try to know about the industry and sector in which the company is operating. Is the sector growing or matured. Is the sector facing problems eg. the power sector right now in India. Is the sector sunrise sector eg healthcare , education (in which we might have special focus, priority lending).  Has the bank reached lending limit to the sector (concentration risk). Try to know about the company, business model, profitability, past performance, infrastructure, and management quality. But remember past performance is not measure of future prospects. Rigorously check the management guidance on future performance and if they hold water even without the optimistic scenario. Question things, apply what if.

Covenant – Negative covenants – board cannot give dividends if it does not have enough money for paying back loan and interest. Positive covenants – Company have to go for regular disclosers and inventory / accounts auditing.

Character – Research on the past of the promoters. Have they ever defaulted on the loan.  Are they ethical. Do they have policies in place for corporate governance.

Collateral – What can the company give as collateral for the loan. Do they have fixed assets like land etc. Is the promoter deep pocketed? What is the depreciation rate and resale value of plant and machinery? Collateral is generally the last option bank opts for. Any loan where installment is not being paid for last 3 months becomes Non Performing Asset, and then it becomes bad debt. Bank will also try for restructuring before going for liquidation if at all.

Q. What is the difference in giving a loan to service industry and manufacturing industry.

Ans.

Service Industry – For telecom industry, debt is quite high. They have high capital expenditure cost. We need to see the debt service coverage ratio. Inventory is less, activity turnover ratio might not be that useful. Telecom have higher portion of prepaid cards. So they will have extra cash always and may need less or no working capital.

IT sector is also high capital expenditure. Lot of money goes into R&D and working capital requirement is less. Establish companies like Infy, TCS have zero or minimum debt. High capital cost means, operative leverage (delta EBIT/ delta Sales) is more. So EBIT is highly susceptible to drop is sales. Telecom has high financial leverage ie a lot of debt, so they are very sensitive to change in interest rates.

Manufacturing industry

We have to take care of operating cycle and inventory levels in manufacturing (activity ratios). We have to balance current assets and current liabilities (so current ratio). We need cash to pay bills (cash ratio). We have to check the balance sheet is not stretched beyond capacity (solvency ratio, D/E ratio, interest coverage ratio, debt service coverage ratio etc).

Q. What is the difference in asset and liability products?

Ans.

Assets products are one that are sold to companies and recorded as assets with bank. They include loans – short term working capital loans (Cash Credit), long term working capital ( Working capital demand loan), capital expenditure loans etc.

Liability products are offered to cash rich companies. Banks accept deposits from these companies and recorded them in their books as liability. Eg. Certificate of deposits, salary accounts etc.