Common MBA Finance Interview questions | Vol I. Corporate Banking

From the beginning of MBA, a common question that plagues everyone is, “How to prepare for placements?” While there are many options available to improve your CV, cracking an interview can be slightly tricky, especially for finance roles.

The only way to be fully prepared for a technical interview is to prepare for the most common MBA finance interview questions for different roles and understand the basis of the questioning.

Collated from a number of interviews, given below are a few of the most common technical interview questions that can help you prepare for campus placements:-

Corporate Banking technical interview questions

While recruiting for corporate banking roles, recruiters usually look for candidates with a general awareness of corporate banking products. Most of the common MBA finance interview questions for corporate banking roles revolve around the basics of these products. Some typical questions are as follows:

Q. 1. What are the typical Corporate Banking Products that you would offer a client?

As a relationship manager at a corporate bank, the following products, and services to corporations:

  1. Debt products like working capital loans, CAPEX loans, project finance, term loans, bridge loans, real estate exposure, rural & MSME loans.
  2. Liability products like current accounts, fixed deposits, and salary accounts.
  3. International trade products and services (letter of credits, bank guarantees, trade finance products, factoring, etc.)
  4. Treasury products like forward contracts, swaps, options, and combinations of these.
  5. Project finance and debt syndication services

Q. 2. How is the Working Capital loan amount determined?

The Working Capital loan amount is determined based on 3 methods-

  1. Turnover Method – Turnover Method calculates Working capital of a company based on the company’s turnover and it is used by companies having a turnover up to Rs. 200 lakh.
  2. Cash Budget Method – Cash Budget method calculates Working capital based on projected monthly cash flows estimated by the borrower and approved by the bank. It is more commonly used for Agriculture funding.
  3. Maximum Permissible Bank Finance Method – MPBF method calculates working capital based on Total Current Assets and Other Current Liabilities. It is used by banks.

Q. 3. What would be the most critical ratio for a lender?

While there are many financial ratios that may be calculated and evaluated, three of the most important ratios in a commercial loan transaction are:

  1.  Debt-to-Cash Flow Ratio (typically called the Leverage Ratio) – Total number of years of cash flow it will take for the borrower to repay the entire debt.
  2. Debt Service Coverage Ratio – This measures the company’s ability to service its current debts by comparing its net income with its total debt service obligations.
  3. Quick Ratio – Liquidity ratio that measures the ability of a company to pay its current liabilities when they come due with only quick assets. Quick assets are current assets that can be converted to cash in the short-term, typically within 90 days.

Q. 4. Explain Debt Syndication. What are its benefits for a lender?

When a corporation requires an amount that is too large and outside the scope of the lender’s risk-exposure, a group of lenders is involved in funding the loan. Thus, multiple lenders form a syndicate to provide the borrower with the requested capital.

The participants in a syndicate are the arranging bank (the one that organizes the funding), the agent (who serves as a link between the borrower and the lenders and performs only administrative duties), the trustee (the one who holds the borrower’s assets on behalf of the lenders), and the participating banks (those who come together to lend the required amount)

The main advantage of debt syndication for lenders is that it allows them to limit their exposure and risk. It also helps increase the profitability to banks as the costs to the banks are relatively lower.

Q. 5. How would you finance a project? How is project finance different from regular lending?

Project finance is used to finance a large industrial project in a sequential process. The whole amount is not invested upfront but provided in parts for each phase of the project.

Usually, there are a number of equity investors who invest in the project as sponsors and typically these loans are non-recourse loans (secured loan) which are given against project property. The loans are usually paid completely from the project cash flow.

differences between project finance and regular lending

*For MBA students aspiring to finance jobs, careers in project finance are also highly aspirational and less competitive.

Q. 6. How does the Balance Sheet of an NBFC differ from that of a bank?

The major difference between the balance sheet of an NBFC and that of a bank is with respect to Demand Deposits.

Demand deposits will not appear in the Balance sheet of NBFC as they cannot accept these deposits. Demand Deposits will appear on the liabilities side of a bank’s balance sheet.

Secondly, the balance sheet format for banks is decided by the RBI while the balance sheet format for an NBFC is as per the Companies Act, 2013.

* This one of the typical MBA finance interview questions that are asked for retail banking roles too.

Q. 7. What are the lending constraints for an NBFC as compared to a bank?

NBFC’s do not have access to demand deposits and have a higher cost of funding compared to banks. Due to the higher cost of funding, their lending rates are higher compared to banks. This is one of the largest lending constraints for NBFCs.

Since NBFC’s cannot lend to corporations due to their higher lending rates, they lend to MSME and other small enterprises which have higher risk assets and their chances of default is higher.

Q. 8. What is Debt Service Coverage Ratio (DSCR) and give the breakup of the formula?

The Debt-Service Coverage ratio (DSCR) is a measurement of the cash flow available to pay current debt obligations. The ratio states net operating income as a multiple of debt obligations due within one year, including interest, principal, sinking-fund, and lease payments.

The ratio basically reflects the ability to service debt given a particular level of income.

The formula for DSCR is as follows:

DSCR= Net Operating Income/ Total Debt Service

Where:
Net Operating Income=Revenue−COE
COE = Certain operating expenses
Total Debt Service=Current debt obligations

Net operating income is a company’s revenue, minus its operating expenses, not including taxes and interest payments. It is often considered the equivalent of earnings before interest and tax (EBIT).

Q. 9. What is Interest Coverage Ratio?

The Interest Coverage Ratio is a debt and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. The Interest Coverage Ratio is also called “times interest earned.” Lenders, investors, and creditors often use this formula to determine a company’s riskiness relative to its current debt or for future borrowing.

The interest coverage ratio may be calculated by dividing a company’s earnings before interest and taxes (EBIT) during a given period by the company’s interest payments due within the same period.

The formula is as follows:

Interest Coverage Ratio = EBIT / Interest Expense

Q. 10. What factors does one look at during credit analysis?

During credit analysis, analysts look at the five Cs. These are as follows:

  1. Character: Analysts often look at the background, experience level, market opinion, and various other factors to determine the character of the entity and their trustworthiness to repay the loan.
  2. Capacity: This considers your level of cash flow and measures your ability to repay your debt obligations.
  3. Capital: The debt and capital of the borrower are used to measure leverage. The more equity possessed, the lower the leverage, the better it is.
  4. Collateral: The business and personal assets that can be pledged to back the loan.
  5. Conditions: This describes the terms under which the loan is sanctioned, the purpose of the loan, the market condition, and industry health, etc. to ensure the feasibility of the loan.

*Another one of MBA finance interview questions that are quite common in retail banking and risk management interviews.

Q. 11. What is the meaning of Deferred Tax?

Deferred tax liability is a tax that is assessed or is due for the current period but has not yet been paid. The deferral comes from the difference in timing between when the tax is accrued and when the tax is paid.

A deferred tax liability records the fact the company will, in the future, pay more income tax because of a transaction that took place during the current period, such as an installment sale receivable.

These were a few MBA finance interview questions with brief answers that can help you prepare for campus placements for corporate banking roles.

Detailed insights into Corporate Banking products and answers to all the above questions are covered in the FLIP Corporate Banking, RM, & Credit Analysis program.

In the next volume, common interview questions for Treasury and Capital Market roles will be covered.

Common MBA finance interview questions | Vol. I – Corporate Banking

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