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?

To mitigate risks and protect customers and the financial system Signup and view all the answers

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

To ensure transparency and accountability Signup and view all the answers

What role does asset management play in banks?

Investing funds on behalf of customers Signup and view all the answers

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

It exposes the bank to higher credit risk. Signup and view all the answers

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

Mitigating credit risk through proper analysis Signup and view all the answers

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

Higher loan losses and reduced net profit. Signup and view all the answers

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

An internal credit analysis process. Signup and view all the answers

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

Age and minimum loan amount Signup and view all the answers

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

A combination of financial and non-financial information Signup and view all the answers

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

To recommend a quality credit proposition with acceptable credit risk Signup and view all the answers

What does the Letter of Offer (LO) incorporate?

All approved facility terms and conditions Signup and view all the answers

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

It will be outright rejected 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?

The bank's legal documentation department Signup and view all the answers

What principle guides the credit evaluation process?

The principles of lending Signup and view all the answers

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

They have discretionary authority to approve or decline loans Signup and view all the answers

What is the main purpose of the credit process cycle?

To ensure loan origination and full repayment Signup and view all the answers

Which phase involves discussing business requirements with the customer?

Origination Signup and view all the answers

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

It sets the acceptance criteria for lending Signup and view all the answers

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

Bank Negara Malaysia Signup and view all the answers

During which phase are borrowers verified and their credit evaluated?

Approval Signup and view all the answers

What is NOT a phase in the credit process cycle?

Underwriting Signup and view all the answers

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

Essential data for loan decisions Signup and view all the answers

Which of the following best describes the monitoring phase?

Tracking borrower repayment behavior Signup and view all the answers

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

Lending of money, leasing business, and factoring business Signup and view all the answers

Which area of universal banking typically serves large enterprises?

Wholesale and corporate banking Signup and view all the answers

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

Accepting deposits, paying cheques, and providing finance 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?

Any individual running a retail store Signup and view all the answers

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

Retail and consumer banking Signup and view all the answers

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

Allowing businesses to use equipment without purchasing it outright Signup and view all the answers

The Treasury in universal banking is primarily responsible for what?

Managing the bank’s funding and liquidity needs Signup and view all the answers

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

Insurance products Signup and view all the answers

What is the primary function of the loan disbursement department?

To handle the release of loans while ensuring compliance with terms Signup and view all the answers

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

Make final decisions on loan applications Signup and view all the answers

What does loan monitoring help to identify?

Potential warning signals or red flags in repayment Signup and view all the answers

Which action is NOT part of proactive loan account management?

Wait for the loan to default before actioning Signup and view all the answers

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

To ensure good enforceability over the collateral Signup and view all the answers

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

Take pre-emptive action to protect bank interests Signup and view all the answers

How often should a credit officer review the borrowing account?

At least once a year Signup and view all the answers

What is a primary goal of loan monitoring?

To ensure the borrower generates profitability for the bank Signup and view all the answers

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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Description

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.