Borrower Risk Assessment Checklist

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What does the Principle of Tenor Matching emphasize?

Ensuring the borrower defaults on the loan

Providing long-term loans for short-term requirements

Offering short-term loans for long-term requirements

Matching the duration of the loan with the borrower's needs and cash flow availability (correct)

What is the significance of 'Pari-passu' in lending relationships?

It means unequal standing in Latin

It allows lenders to have different levels of priority based on their relationship with the borrower

It emphasizes the lender having a lesser position than other lending banks

It ensures equal priority among lending banks regarding security arrangements (correct)

Why should a short-term loan not be granted for a long-term requirement according to the text?

To reduce the chances of borrower defaulting (correct)

To ensure the borrower abuses the facility after the need is met

To match the borrower's needs and cash flow availability

To offer borrowers more flexibility

What is the recommended approach regarding security arrangements for loans according to the Principle of Pari-passu?

Ensuring all lending banks have equal priority or a pari-passu basis Signup and view all the answers

How does mismatching tenor and borrower's needs impact loan default risk?

Increases the chance of borrower default Signup and view all the answers

What disadvantage does a lender face if it has a lower priority according to 'Pari-passu'?

A disadvantage compared to other lending banks Signup and view all the answers

'Pari-passu' in Latin means:

'Equal standing' Signup and view all the answers

How can granting a long-term loan for a short-term requirement lead to abuse of facilities?

Can lead to misuse after the short-term need is met Signup and view all the answers

What information should a credit officer establish about a borrower's background?

Location and legal status of the borrower as a business organization Signup and view all the answers

Why is capturing details of the applicant important in a loan application proposal?

For verification and future legal purposes Signup and view all the answers

What represents heightened risk according to the text?

Applicants of dubious background or with insufficient information Signup and view all the answers

When should the credit risk process ideally not continue as per the text?

After obtaining key information about the borrower Signup and view all the answers

What is essential to know about related parties such as parent companies and subsidiaries?

Their relationship to the borrower and relevant details Signup and view all the answers

Why is it important to establish important information about shareholders and directors of a borrower?

To capture crucial details about important decision-makers Signup and view all the answers

What does capturing background information about a borrower help achieve in assessing credit risk?

Identifying identity, location, and legal status Signup and view all the answers

What does the text suggest should not continue beyond the point of establishing key information about the borrower?

The credit risk process Signup and view all the answers

What is a warning flag that an applicant may not be managing the business well?

Well-organized information Signup and view all the answers

What should a borrower convince the bank of in terms of seriousness about the business?

Capacity to meet debt-service obligations Signup and view all the answers

What role does collateral play in relation to a loan applicant?

Indication of commitment to the business Signup and view all the answers

Why is having insufficient collateral a concern for the lending bank?

It increases dependence on prospective cashflow Signup and view all the answers

Which factor does a loan officer need to determine regarding the borrower's commitment to its business?

Amount of control over the company Signup and view all the answers

What questions should a loan officer consider to determine a borrower's commitment?

Borrower's role as a key beneficiary and commitment to business Signup and view all the answers

Why must a borrower convince the bank of its seriousness about the business?

To show capacity for full loan repayment Signup and view all the answers

What does procuring collateral from a loan applicant indicate?

'Assets' securing the bank loan Signup and view all the answers

What factors must a credit officer consider when evaluating a loan application?

The potential impact of economic changes on the borrower's business Signup and view all the answers

Why is it important for credit officers to be aware of sector-specific nuances?

To better understand the borrower's business operations Signup and view all the answers

What role does workforce availability play in the palm oil industry's efficiency?

It is crucial for efficient operations Signup and view all the answers

Why should credit officers be informed about political swings and economic policy changes?

To assess the impact on the borrower's business sector Signup and view all the answers

Why is it crucial for credit officers to stay updated on current events?

To assess potential risks to borrowers Signup and view all the answers

What aspect of a company's management team is important during the credit risk evaluation process?

The board of directors' integrity and management team's performance track record Signup and view all the answers

How can a credit officer assess a borrower's sensitivity to macro events?

By evaluating the borrower's response to past economic crises Signup and view all the answers

In what way can a credit officer determine a borrower's ability to service a loan in case of negative changes?

By examining the borrower's cash flow projections Signup and view all the answers

What is the primary commercial activity of a commercial bank?

Providing loans Signup and view all the answers

What type of deposits do commercial banks utilize to provide loans?

Time and current account deposits Signup and view all the answers

Which of the following is NOT a key topic covered in the chapter?

Types of Bank Accounts Signup and view all the answers

What are students expected to be able to do during the exam according to the text?

Describe the constituents of the credit risk process cycle Signup and view all the answers

What is the purpose of the bank utilizing funds from depositors?

To provide loans Signup and view all the answers

What is illustrated in the credit process cycle?

Lending principles and risk assessment Signup and view all the answers

What is the scope of credit risk assessment mentioned in the chapter?

Assessment of credit risk Signup and view all the answers

Why do commercial banks provide loans to individuals, businesses, and government agencies?

To support economic activities and growth Signup and view all the answers