Bank Credit Function and Ethics
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Questions and Answers

What is a primary goal of understanding the flow of the credit process cycle?

  • To streamline bank operations and enhance efficiency (correct)
  • To limit credit availability to clients
  • To maximize profit without restrictions
  • To reduce the number of loan applicants

Which regulation is specifically mentioned as impacting the bank credit function?

  • Companies Act 2016
  • Capital Markets and Services Act
  • Financial Services Act 2013 (correct)
  • Banking Act 1987

What is the definition of bank credit?

  • Loans issued to individuals without collateral
  • Government-funded loans exclusively
  • Financial support provided by banks to various sectors (correct)
  • Investment funds managed by external firms

Why is the bank lending business considered highly regulated?

<p>To mitigate risks and protect customers and the financial system (C)</p> Signup and view all the answers

What is one of the ethics-related objectives in financial institutions?

<p>To ensure transparency and accountability (A)</p> Signup and view all the answers

What role does asset management play in banks?

<p>Investing funds on behalf of customers (D)</p> Signup and view all the answers

How does granting more loans to SMEs potentially affect a bank?

<p>It exposes the bank to higher credit risk. (A)</p> Signup and view all the answers

What is a key focus of SME credit analysis in banks?

<p>Mitigating credit risk through proper analysis (A)</p> Signup and view all the answers

What is likely to occur if a bank's credit risk impacts its profitability?

<p>Higher loan losses and reduced net profit. (A)</p> Signup and view all the answers

Which component is essential for the bank lending business to operate effectively?

<p>An internal credit analysis process. (B)</p> Signup and view all the answers

Which factors can influence the RAAC for individual or consumer lending?

<p>Age and minimum loan amount (C)</p> Signup and view all the answers

What primarily determines a borrower's repayment ability during credit evaluation?

<p>A combination of financial and non-financial information (B)</p> Signup and view all the answers

What is the responsibility of the Bank's credit officer in the credit process?

<p>To recommend a quality credit proposition with acceptable credit risk (B)</p> Signup and view all the answers

What does the Letter of Offer (LO) incorporate?

<p>All approved facility terms and conditions (B)</p> Signup and view all the answers

What happens to a loan proposal if it has poor bankable credit?

<p>It will be outright rejected (A)</p> Signup and view all the answers

Who handles the execution and perfection of the loan and security agreement after the Letter of Offer is accepted?

<p>The bank's legal documentation department (A)</p> Signup and view all the answers

What principle guides the credit evaluation process?

<p>The principles of lending (D)</p> Signup and view all the answers

What role does the Credit Approval Committee play in the lending process?

<p>They have discretionary authority to approve or decline loans (B)</p> Signup and view all the answers

What is the main purpose of the credit process cycle?

<p>To ensure loan origination and full repayment (D)</p> Signup and view all the answers

Which phase involves discussing business requirements with the customer?

<p>Origination (B)</p> Signup and view all the answers

What role does the RAAC play in the credit process cycle?

<p>It sets the acceptance criteria for lending (B)</p> Signup and view all the answers

Which regulatory body’s guidelines must be considered during the origination phase?

<p>Bank Negara Malaysia (C)</p> Signup and view all the answers

During which phase are borrowers verified and their credit evaluated?

<p>Approval (D)</p> Signup and view all the answers

What is NOT a phase in the credit process cycle?

<p>Underwriting (A)</p> Signup and view all the answers

What is a key outcome of the credit process cycle for lenders?

<p>Essential data for loan decisions (B)</p> Signup and view all the answers

Which of the following best describes the monitoring phase?

<p>Tracking borrower repayment behavior (B)</p> Signup and view all the answers

What does 'provision of finance' include in bank lending business?

<p>Lending of money, leasing business, and factoring business (D)</p> Signup and view all the answers

Which area of universal banking typically serves large enterprises?

<p>Wholesale and corporate banking (B)</p> Signup and view all the answers

According to the Financial Services Act 2013, what constitutes banking business?

<p>Accepting deposits, paying cheques, and providing finance (C)</p> Signup and view all the answers

Which of the following is NOT included in the definition of a bank under the Financial Services Act 2013?

<p>Any individual running a retail store (B)</p> Signup and view all the answers

What type of banking primarily focuses on individuals and small businesses?

<p>Retail and consumer banking (A)</p> Signup and view all the answers

Which of the following services is associated with the leasing business in bank lending?

<p>Allowing businesses to use equipment without purchasing it outright (A)</p> Signup and view all the answers

The Treasury in universal banking is primarily responsible for what?

<p>Managing the bank’s funding and liquidity needs (D)</p> Signup and view all the answers

Which instrument is NOT part of the 'provision of finance' as defined in bank lending?

<p>Insurance products (A)</p> Signup and view all the answers

What is the primary function of the loan disbursement department?

<p>To handle the release of loans while ensuring compliance with terms (D)</p> Signup and view all the answers

Which of the following is NOT a responsibility of the credit officer in loan monitoring?

<p>Make final decisions on loan applications (D)</p> Signup and view all the answers

What does loan monitoring help to identify?

<p>Potential warning signals or red flags in repayment (C)</p> Signup and view all the answers

Which action is NOT part of proactive loan account management?

<p>Wait for the loan to default before actioning (B)</p> Signup and view all the answers

Why is it essential to ensure the legal documentation is perfected before loan disbursement?

<p>To ensure good enforceability over the collateral (A)</p> Signup and view all the answers

What should the lender do if they identify a potential red flag in loan repayment?

<p>Take pre-emptive action to protect bank interests (A)</p> Signup and view all the answers

How often should a credit officer review the borrowing account?

<p>At least once a year (C)</p> Signup and view all the answers

What is a primary goal of loan monitoring?

<p>To ensure the borrower generates profitability for the bank (D)</p> Signup and view all the answers

Flashcards

What is bank credit?

Bank credit refers to the lending of money by a bank to individuals, businesses, or governments. This is a core function of banks and crucial for economic growth.

What is the main business of a bank?

Banks are primarily focused on managing financial transactions, providing loans, and facilitating financial services. Their primary goal is to generate profit by lending money at a higher interest rate than they borrow it.

What are the steps in the bank credit process cycle?

The process of bank lending involves several stages: 1. The initiation of a credit request. 2. Assessment of the borrower's creditworthiness. 3. Approval or rejection of the loan. 4. Disbursement of the funds. 5. Monitoring of the loan repayment. 6. Potential collection efforts if repayment is missed.

How do banks evaluate a company for loan eligibility?

In business banking, banks evaluate a company's financial health, management expertise, business model, and future potential before deciding whether to lend money. This is crucial to ensure the loan is repaid and minimize risk for the bank.

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What are some important regulations for banks in Malaysia?

The Financial Services Act of 2013 and Bank Negara Malaysia's (BNM) guidelines play a significant role in regulating the banking system. They ensure responsible lending practices, protect consumers, and maintain financial stability.

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What is the significance of SME credit in banking?

Credit extended to small and medium-sized enterprises (SMEs) is a significant part of a bank's portfolio, contributing greatly to its overall lending activity.

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How does SME credit impact a bank's risk?

When a bank lends more money to SMEs, it faces greater risk. This means there is a higher chance that borrowers might not repay their loans on time or at all.

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What steps do banks take to manage the credit risk from SME loans?

To minimize the risk associated with SME lending, banks need to carefully assess the creditworthiness of potential borrowers using internal processes, policies, and regulations.

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How does credit risk affect a bank's profitability?

The bank's profitability is directly affected by its credit risk. If a bank has high credit risk, it might face increased loan losses, which reduces its net profit.

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What is involved in SME credit analysis?

A comprehensive analysis of an SME's financial situation, business model, and management quality is essential for evaluating their creditworthiness.

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Financial Institution (Malaysian Definition)

A financial institution carrying on a financial business regulated by the Bank of Malaysia, including those managing payment systems and issuing payment instruments.

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Bank (Malaysian Definition)

A financial institution licensed to conduct banking and/or investment banking business as defined by the Financial Services Act 2013.

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What is Banking Business?

The primary function of a bank includes accepting deposits, processing cheques, and providing finance to various entities.

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Provision of Finance

The umbrella term for lending activities, encompassing money lending, leasing, factoring, purchasing financial instruments, and guaranteeing liabilities.

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Lending of Money

The act of providing money for a specific period, often with interest charged.

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Wholesale & Corporate Banking

The area of banking that focuses on providing financial services to large enterprises (public firms).

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Business/SME Banking

The area of banking that focuses on providing financial services to medium and large-sized private firms.

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Retail & Consumer Banking

The area of banking that focuses on providing financial services to individuals and small businesses.

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What happens during the approval stage of the credit process?

The approval stage in the credit process cycle involves a thorough evaluation of the borrower's financial and non-financial information to determine their ability to repay the loan.

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What tools are used for credit evaluation?

Credit officers use the 5Cs of credit, qualitative analysis, and quantitative financial analysis to evaluate a borrower's creditworthiness.

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What is the credit officer's role in the approval process?

Credit officers recommend a credit proposition based on the borrower's ability to repay the loan and the bank's risk tolerance.

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Who makes the final decision on a loan application?

The Credit Approval Committee or Bank's Board of Directors (BOD) makes the final decision to approve, modify, or decline a loan based on the credit officer's recommendation.

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What is the Letter of Offer (LO) in the credit process?

The Letter of Offer (LO) summarizes the approved loan terms and conditions, and it is presented to the borrower for acceptance.

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What happens during the administration stage of the credit process?

The administration stage involves the execution and perfection of legal loan documentation and security agreements between the borrower and the lender.

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When does the loan disbursement take place?

The loan disbursement occurs after the borrower accepts the Letter of Offer and the legal documentation is finalized.

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Who may handle legal documentation for complex loans?

The Bank's panel of solicitors may be involved in handling complex loan documentation and security arrangements.

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What is the credit process cycle?

The Credit Process Cycle is a structured method for managing loans from the initial request through repayment. It involves several stages, each with a specific purpose, to ensure responsible lending and effective risk management.

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What is the Origination stage in the credit process cycle?

The origination phase is the initial stage of the credit process cycle. This phase focuses on building a relationship with the potential borrower, understanding their needs, and assessing their creditworthiness for loan approval.

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What is the Approval stage in the credit process cycle?

The Approval stage in the credit process cycle involves a meticulous assessment of the borrower's creditworthiness. It includes evaluating the borrower's financial history, income, debt levels, and overall ability to repay the loan. Based on the evaluation, a decision is made whether to approve or deny the loan request.

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What is the Administration stage in the credit process cycle?

The Administration stage in the credit process cycle encompasses the practical aspects of managing the loan once approved. It includes tasks such as: Documenting the loan agreement, Disbursing the loan funds, Managing the loan account, and Monitoring the repayment schedule.

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What is the Monitoring stage in the credit process cycle?

The Monitoring stage in the credit process cycle involves tracking the borrower's repayment performance and identifying any potential risks or deviations from the agreed-upon repayment plan. This stage allows for proactive interventions and adjustments to maintain loan stability and minimize the risk of default.

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What is the Settlement/Recovery stage in the credit process cycle?

The Settlement/Recovery stage in the credit process cycle addresses the final stages of the loan. It involves: Ensuring complete repayment by the borrower, Handling any potential delinquencies or defaults, Implementing recovery strategies for unpaid loans, and Ultimately closing the loan account.

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How are the principlesof lending applied in the credit process cycle?

The Credit Process Cycle utilizes principles of lending to assess the borrower's creditworthiness. It's important to remember that these principles are essential for responsible lending decisions, ensuring that the loan is both approved and repaid successfully.

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What are the external regulations that apply to the credit process cycle?

Bank Negara Malaysia (BNM) guidelines and the Financial Services Act 2013 regulate banking practices in Malaysia. These regulations ensure responsible lending practices, protect consumers, and maintain financial stability within the banking sector.

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Loan Monitoring

The step in the credit process where a lender makes sure the borrower uses the loan for its intended purpose and repays on time. This involves checking financial statements, monitoring loan utilization, and identifying potential warning signals or red flags.

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Warning Signals/Red Flags

Factors that indicate a borrower might have trouble repaying their loan, such as declining sales, late payments, or changes in their financial situation. These can signal a potential risk to the lender.

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Post-Drawn Down Terms and Conditions

Events that happen after a loan is disbursed. This includes things like installing a sinking fund, submitting quarterly financial reports, or getting certified progress billings.

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Loan Disbursement Department

A dedicated department within a bank that independently manages the disbursement of loans. They ensure all agreements are followed before the loan is released.

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Loan Account Review

The process of reviewing a borrower's credit risk profile, financing needs, and assessing the potential need to restructure or modify a loan. This is usually done at least once a year.

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Site Visitation

Regular visits to a borrower's premises to assess their business operations, management capability, and the viability of the business. This helps the lender understand the borrower's ability to repay the loan.

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Proactive Loan Management and Monitoring

A proactive approach to managing loans by closely monitoring the borrower's financial condition and performance, identifying any warning signals or red flags early, and taking necessary steps to protect the bank's interests.

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Loan Restructuring/Modification

The process of making changes to the terms of a loan, involving modifying the repayment schedule, changing the loan amount, renewing the loan, or winding down the loan. This is usually done to align with the borrower's changing financial situation.

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Study Notes

Foundations of Bank Lending - Chapter 1

  • Module authors include Jasman Tuyon, PhD, Rapheedah Musneh, PhD, Siti Julea Supar, and Nurziya Muzzawer, from the Faculty of Business and Management, Universiti Teknologi MARA, Sabah Branch, Kota Kinabalu Campus.

Chapter Outline

  • 1.1 Fundamental Principles of Bank Credit:

    • 1.1.1 Introduction to Bank Credit
    • 1.1.2 The Credit Process Cycle
    • 1.1.3 Lending Decision Framework in Business Banking
  • 1.2 Rules and Regulations Governing Bank Credit in Malaysia:

  • 1.3 Ethics and Corporate Governance in Bank Credit:

Learning Objectives

  • Upon completion of this chapter, students should be able to:
    • Define bank credit.
    • Clarify the importance of bank credit to the bank business.
    • Understand the flow of the credit process cycle.
    • Understand major provisions of the Financial Services Act 2013 and Bank Negara Malaysia (BNM) guidelines affecting credit function.
    • Explain ethics and governance in financial institutions.

1.1.1 Introduction to Bank Credit

  • 1.1.1.1 Bank definition and scope of business
  • 1.1.1.2 Bank lending business
  • 1.1.1.3 Bank operation is highly regulated

1.1.1.1 Bank definition and scope of business

  • Bank of Malaysia Act 2009 (Act 701): "financial institution" means a person carrying on a financial business regulated under the laws enforced by the Bank, and includes a person operating a payment system or issuing a payment instrument.
  • Financial Services Act 2013 (FSA 2013): "bank" refers to a business licensed under this Act, excluding certain types of banking or investment banking businesses.
  • Banking business includes accepting deposits, paying/collecting cheques, and providing finance (e.g., lending money, leasing, factoring, purchasing negotiable instruments).

1.1.1.2 Bank Lending Business

  • Financial Services Act 2013 defines "provision of finance" to include lending money, leasing, factoring, purchasing negotiable instruments (like bills of exchange, promissory notes, certificates of deposit, debentures), and accepting/guaranteeing liabilities.

1.1.1.3 Bank Operation is Highly Regulated

  • Bank operations are heavily regulated at both international (Basel Framework) and domestic (e.g., Bank Negara Malaysia regulations, Financial Services Act 2013, and National Land Code Act 828) levels.

1.1.2 The Credit Process Cycle

  • This outlines the operational flow of credit lending, from loan origination to repayment.
  • Sub-topics within this section are:
    • 1.1.2.1 Origination
    • 1.1.2.2 Approval
    • 1.1.2.3 Administration
    • 1.1.2.4 Monitoring
    • 1.1.2.5 Settlement/Recovery

1.1.2.1 Origination

  • The "marketing phase" of credit process, initiating contact with customers, discussing business requirements, and evaluating credit risk.
  • It's conducted using internal lending policies and external regulations (such as Bank Negara Malaysia guidelines and Financial Services Act 2013, for example) and adhering to acceptance criteria.
  • The credit officer identifies target customer groups and sets Risk Assets Acceptance Criteria (RAAC).

1.1.2.2 Approval

  • This stage involves evaluating credit applications based on available financial details (audited statements, forecasts) and non-financial data (borrowing history, litigation, and business background).
  • Using tools like 5Cs basic credit factors, qualitative assessment, and quantitative financial analysis.
  • Decision involves approving, modifying, or declining the loan with accompanying stipulations (or referral to higher authority).
  • The Letter of Offer (LO) is issued outlining the approved facility details after a credit officer makes a recommendation.

1.1.2.3 Administration

  • This stage involves preparing and executing loan agreements and security for borrowers and lenders.
  • Using appropriate legal documentation or engaging with a panel of solicitors.
  • An independent unit handles loan disbursement to minimize conflict of interest.
  • It ensures that all conditions for loan disbursement are met and that legal documents are perfected.

1.1.2.4 Monitoring

  • Post-disbursement activities for monitoring borrower's adherence to loan obligations.
  • Includes managing profitability, detecting warning signs, and making proactive adjustments to avoid defaults.
  • Monitoring also includes reviewing borrower's financial accounts, visiting, and ensuring adherence to agreement conditions.

1.1.2.5 Settlement/Recovery

  • The final phase: loan repayment and settlement.
  • If loans are not paid, the lender can proceed to loan rehabilitation, rescheduling, or restructuring.
  • The lender can resort to the legal process for loan recovery if necessary, using collateral as security.

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This quiz explores various aspects of the bank credit process cycle, including definitions and regulations affecting bank lending. It also addresses the importance of ethics in financial institutions and the critical role of asset management. Test your knowledge about the responsibilities of credit officers and the impact of lending decisions on profitability.

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