Q1. [1] straightforward exam-ready
[mcq] Salma wants to take a loan from a bank but the bank insists she provide 'collateral'. Which of the following would be accepted as collateral by the bank?
(A) Her educational certificates
(B) Her agricultural land with proper ownership documents
(C) Her monthly wages
(D) Her personal guarantee
- A The interest rate charged on a loan
- B An asset owned by the borrower used as a guarantee to the lender
- C The amount of loan sanctioned by a bank
- D A certificate issued by the RBI to banks
Generated by claude-sonnet-4-6 · 2026-06-26 13:22 · grounding rag
Model Answer
(B) Her agricultural land with proper ownership documents
The correct definition of collateral is: B — An asset owned by the borrower used as a guarantee to the lender.
Explanation
- The textbook states collateral is "an asset that the borrower owns (such as land, building, vehicle, livestock, deposits with banks) and uses as a guarantee to a lender until the loan is repaid."
- Agricultural land with ownership documents qualifies as a tangible, verifiable asset — exactly what banks accept.
- Educational certificates, monthly wages, and personal guarantees are not tangible assets the bank can seize and sell if the borrower defaults, so they are not accepted as collateral.
- Always link collateral to the idea that the lender must be able to sell the asset to recover the loan if needed.