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  1. In addition to rising delinquencies over the last few years would force lenders to be more cautious while underwriting loans. This would limit refinancing options, adversely affecting existing borrowers.
  2. But losses will be limited because these loans are secured and have relatively low loan-to-value ratios. 
  3. Rising interest rates will limit refinancing options and increase repayment amounts, increasing risks for asset backed securities (ABS) backed by LAP to SMEs.
  4. The ABS (asset backed securities) backed by LAP extended to SMEs have non-amortizing cash reserves, substantial excess spread and the possibility to extend the life of the loans and hence the life of the transactions.
  5. None can be inferred.
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1 Answers

Option 1 : In addition to rising delinquencies over the last few years would force lenders to be more cautious while underwriting loans. This would limit refinancing options, adversely affecting existing borrowers.

The correct answer is option 1, i.e. In addition to rising delinquencies over the last few years would force lenders to be more cautious while underwriting loans. This would limit refinancing options, adversely affecting existing borrowers.

Option 1 is the most appropriate inference that that be made based on the information provided. It captures all the important points like ‘rising delinquencies’, ‘effect of limit on the refinancing options thereby, affecting the customers’ are evident both from the given statement and the option choice.

Rest of the arguments can be rejected. Option (2) is very unpredictable and it cannot be said with surety about the loss limitation. Both options (3) and (4) can also be rejected as no idea of ABS (asset backed securities) is evident from the information provided in the given statement.

Thus, the most appropriate answer is option 1.
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