Certificate in Credit Principles of Lending

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Questions and Answers

What is implied when a borrower has been granted trade finance facilities on an unsecured basis by all its lenders?

  • All lenders are on a pari-passu basis (correct)
  • The borrower is likely to default on the loan
  • The borrower is not required to provide any collateral
  • All lenders have a priority claim on a specific asset

What should other lenders not insist on if one of the SE lenders provides a term loan secured by a factory building?

  • That the factory building be shared proportionately to maintain the pari-passu status (correct)
  • That the loan be repaid immediately
  • That the interest rate be increased
  • That the borrower provides additional collateral

What is the basis of any credit decision?

  • Loan facility structure
  • Credit analysis (correct)
  • Credit risk assessment
  • Repayment prospects

What would result if the information about the loan applicant and its business activities is out of date or incomplete?

<p>A flawed judgment of the repayment prospects (C)</p> Signup and view all the answers

What is one of the goals of completing a credit analysis?

<p>To evaluate the borrower's cash flow projection (B)</p> Signup and view all the answers

What is a credit risk analysis exercise?

<p>An objective appraisal of the borrower (B)</p> Signup and view all the answers

What is the purpose of identifying and quantifying business risks in credit analysis?

<p>To evaluate the borrower's creditworthiness (A)</p> Signup and view all the answers

What is recommended based on the perceived financing needs and risks in credit analysis?

<p>A suitable structure of loan facility (B)</p> Signup and view all the answers

What is the primary purpose of obtaining a comprehensive description of the business organisation and its activities?

<p>To provide an overview of the applicant's business, products and/or services (C)</p> Signup and view all the answers

What type of information should be included in the application to provide a better understanding of the borrower's business?

<p>Information on senior people managing the business, including their experience and expertise (B)</p> Signup and view all the answers

What is the benefit of obtaining industry-wide statistical information?

<p>To make well-informed judgments about the loan application (D)</p> Signup and view all the answers

What is the purpose of the organisational chart in the application?

<p>To identify the key roles in the business (C)</p> Signup and view all the answers

What can credit officers obtain through company visits and meetings with the borrower's senior officers?

<p>Information on the borrower's business management processes (A)</p> Signup and view all the answers

What can on-the-ground observation of the company premises contribute to?

<p>A better understanding of the borrower's business (B)</p> Signup and view all the answers

What is the primary focus of the assessment file?

<p>The borrower's business, products and/or services (B)</p> Signup and view all the answers

What is the purpose of understanding the external operating environment of the borrower's business?

<p>To make well-informed judgments about the loan application (D)</p> Signup and view all the answers

Why is it necessary for the lending bank to regularly monitor the value and performance of the borrower's collateral?

<p>To prevent the value of the secured asset from dropping below a certain percentage (C)</p> Signup and view all the answers

What is the primary reason for separating the processes of credit risk analysis and loan disbursement?

<p>To prevent a conflict of interest (D)</p> Signup and view all the answers

What is a potential consequence of not monitoring the value of collateral over time?

<p>The lending bank may be exposed to higher credit risk (D)</p> Signup and view all the answers

What is the main purpose of verifying collateral values using reports, certificates, and invoices?

<p>To assess the market value of the collateral (C)</p> Signup and view all the answers

What is the primary goal of risk diversification in a bank?

<p>To minimize credit risk exposure (B)</p> Signup and view all the answers

What is a potential impact of natural disasters on collateral values?

<p>A decrease in collateral values (A)</p> Signup and view all the answers

Why is it essential to regularly review the value of collateral in a lending arrangement?

<p>To identify potential risks associated with the collateral (D)</p> Signup and view all the answers

What is the primary purpose of loan structuring?

<p>To match the loan terms with the borrower's needs (A)</p> Signup and view all the answers

What happens if the repayment risk is high?

<p>The loan can be declined or modified (C)</p> Signup and view all the answers

What is the primary concern of the credit officer when assessing a loan application?

<p>The applicant's potential cash flow (B)</p> Signup and view all the answers

What happens after the credit officer obtains a credit decision?

<p>The credit officer structures the proposed credit facilities (D)</p> Signup and view all the answers

Where is the Credit Authority normally based?

<p>SE (Credit Risk Management) (B)</p> Signup and view all the answers

What document is sent to the applicant after the loan application is approved?

<p>Letter of facilities offer (D)</p> Signup and view all the answers

What happens to the loan agreement and security documentation?

<p>They are prepared for the applicant to execute and return (B)</p> Signup and view all the answers

What is the purpose of stamping the documentation?

<p>To make it legally binding (C)</p> Signup and view all the answers

What happens to the documentation after execution?

<p>It is registered with relevant government agencies (D)</p> Signup and view all the answers

What is the main challenge in credit decision making?

<p>Making a decision with incomplete and uncertain information (A)</p> Signup and view all the answers

Why is it difficult to obtain accurate information about borrowers?

<p>Because borrowers intentionally withhold information (C)</p> Signup and view all the answers

What is the importance of current information in credit risk assessment?

<p>It is important because it becomes outdated quickly (B)</p> Signup and view all the answers

What is a key skill required of credit officers when gathering information?

<p>The ability to discern relevant information from various sources (D)</p> Signup and view all the answers

What is the purpose of external credit reports in credit risk assessment?

<p>To provide additional information for credit risk assessment (B)</p> Signup and view all the answers

Why is it important for credit officers to gather information from various sources?

<p>Because no single source provides complete information (C)</p> Signup and view all the answers

What is a challenge in obtaining accurate information in a competitive market environment?

<p>Information becomes outdated quickly (C)</p> Signup and view all the answers

What is the importance of the lender's database in credit risk assessment?

<p>It is an important source of information (C)</p> Signup and view all the answers

What is the primary concern of credit officers when assessing loan applications?

<p>Identifying risks that can cause the credit to be vulnerable (B)</p> Signup and view all the answers

What is the purpose of identifying risks associated with the loan?

<p>To manage the risks effectively and mitigate them (B)</p> Signup and view all the answers

What is the result of inadequate risk identification and mitigation?

<p>The loan is rejected (C)</p> Signup and view all the answers

What is the role of risk identification in the credit cycle?

<p>It is an intermediate step in the credit cycle (B)</p> Signup and view all the answers

Why is it necessary for credit officers to be able to identify risks that can cause the credit to be vulnerable?

<p>To ensure effective, non-defaulting loans (A)</p> Signup and view all the answers

What is the primary reason for a lender to ensure a thorough credit risk analysis process?

<p>To reduce the risk of loan default (B)</p> Signup and view all the answers

What is the primary goal of effective loan monitoring?

<p>To identify potential problems early for prompt remedial action (C)</p> Signup and view all the answers

What is the primary benefit of following key lending principles?

<p>To minimize the risk of loan default (C)</p> Signup and view all the answers

What is the consequence of not ensuring thorough credit risk analysis?

<p>The lender may have to write off part of the loan (C)</p> Signup and view all the answers

What is the purpose of key lending principles in the discipline of lending?

<p>To guide lenders in making informed decisions (B)</p> Signup and view all the answers

What is the primary commercial activity of a commercial bank?

<p>Providing loans to individuals, businesses, and government agencies (D)</p> Signup and view all the answers

What is the primary purpose of credit analysis?

<p>To assess the creditworthiness of a borrower (D)</p> Signup and view all the answers

What is the primary goal of loan structuring?

<p>To optimize the lender's risk-return profile (A)</p> Signup and view all the answers

What is the primary benefit of obtaining industry-wide statistical information in credit analysis?

<p>To improve the accuracy of credit risk assessment (D)</p> Signup and view all the answers

What is the primary purpose of verifying collateral values using reports, certificates, and invoices?

<p>To ensure the collateral's value is sufficient to cover the loan amount (C)</p> Signup and view all the answers

What is the main rationale behind the Principle of Tenor Matching?

<p>To match the loan duration with the borrower's cash flow and needs (B)</p> Signup and view all the answers

What is implied by the Principle of Pari-passu?

<p>The borrower has equal standing with all lenders (D)</p> Signup and view all the answers

What happens when a short-term loan is given for a long-term requirement?

<p>The prospects of the borrower defaulting increases (B)</p> Signup and view all the answers

Why is it essential to consider the type of borrowing when deciding on pari-passu basis with other lenders?

<p>To determine the appropriate security arrangements (C)</p> Signup and view all the answers

What is the risk associated with providing a long-term loan for a short-term requirement?

<p>Abuse of the loan facility after the need has been met (D)</p> Signup and view all the answers

What is the primary purpose of a lending institution?

<p>To generate a profit by channeling depositors' funds into loans in a controlled manner (B)</p> Signup and view all the answers

What is the consequence of impaired loans on a lending institution?

<p>Adverse impact on both profitability and liquidity (D)</p> Signup and view all the answers

What is the role of credit officers in the lending process?

<p>To minimize risk by making informed decisions based on complete information (B)</p> Signup and view all the answers

What is the primary goal of a lending institution's risk management strategy?

<p>To minimize risk while maintaining profitability (B)</p> Signup and view all the answers

What is the worst-case scenario if a lending institution fails to manage risk effectively?

<p>The institution may collapse or require intervention from regulatory authorities (C)</p> Signup and view all the answers

What is the primary purpose of imposing covenants in unsecured project lending?

<p>To ensure cash flow from the project is available to repay the loan (D)</p> Signup and view all the answers

What is the main objective of the principle of control in lending?

<p>To ensure that the borrower uses the loan for its intended purpose (C)</p> Signup and view all the answers

Why is it essential to structure the loan facility to enable the credit officer to monitor the use of loan proceeds?

<p>To prevent the borrower from using the loan for unintended purposes (C)</p> Signup and view all the answers

What is the consequence of deviating from the original intended purpose of the loan?

<p>It is a warning signal to the lender (B)</p> Signup and view all the answers

What is the benefit of structuring the loan facility to enable control over the potential sources of funds for loan repayment?

<p>It ensures that funds are not diverted, jeopardizing loan repayment (A)</p> Signup and view all the answers

Which principle of lending is violated when a bank decides to lend a substantial sum to a new start-up with no proven track record or collateral?

<p>Principle of Protection (B)</p> Signup and view all the answers

What is the main objective of the Principle of Proportionate Stakeholding in credit risk analysis?

<p>To ensure the borrower has a sufficient stake in the business (C)</p> Signup and view all the answers

Which principle of lending is violated when a borrower hides the fact that they already have credit facilities with another bank?

<p>Principle of Transparency (A)</p> Signup and view all the answers

What is the primary concern of the Principle of Protection in credit and lending?

<p>To ensure the lender's risk is minimized (B)</p> Signup and view all the answers

Which scenario violates the Principle of Diversification?

<p>70% of a bank's loan portfolio is in a single client's name (C)</p> Signup and view all the answers

What is the relevance of the Principle of Proportionate Stakeholding in credit risk analysis?

<p>It ensures the borrower has a sufficient stake in the business (A)</p> Signup and view all the answers

Which principle of lending is violated when a credit officer does not monitor the loan after it has been disbursed?

<p>Principle of Monitoring (A)</p> Signup and view all the answers

What is the main issue with a bank's loan portfolio being concentrated in a single client?

<p>The bank's risk is concentrated (D)</p> Signup and view all the answers

Which principle of lending is violated when a bank lends to a borrower without a thorough credit risk analysis?

<p>Principle of Protection (A)</p> Signup and view all the answers

What is the primary benefit of following the principles of lending?

<p>To minimize the lender's risk (B)</p> Signup and view all the answers

What is the primary objective of a lender in ensuring that each loan undergoes a thorough credit risk analysis process?

<p>To minimize potential losses and ensure prompt recovery of the loan (A)</p> Signup and view all the answers

What is the primary consequence of inadequate risk identification and mitigation in lending?

<p>Loan default and potential loss (C)</p> Signup and view all the answers

What is the primary purpose of the key lending principles in the discipline of lending?

<p>To guide lenders in making informed credit decisions (D)</p> Signup and view all the answers

What is the primary reason why a lender may undertake the sale of assets held as security against the loan?

<p>To recover the outstanding balance if the borrower encounters problems (C)</p> Signup and view all the answers

What is the primary focus of effective loan monitoring in lending?

<p>Identifying potential problems early for prompt remedial action (B)</p> Signup and view all the answers

What is the primary goal of identifying risks associated with the loan in credit risk management?

<p>To identify vulnerabilities and mitigate or control them (A)</p> Signup and view all the answers

What is the consequence of not adequately mitigating and controlling identified risks in a loan application?

<p>The loan application may have to be turned down (A)</p> Signup and view all the answers

What is the relationship between risk identification and risk management in credit lending?

<p>Risk identification is an intermediate step in risk management (C)</p> Signup and view all the answers

What is the primary function of a commercial bank in relation to lending?

<p>To utilise deposits to provide loans to individuals, businesses, and government agencies (A)</p> Signup and view all the answers

Why is it essential to manage risks effectively in credit lending?

<p>To manage risks effectively, not eliminate them (A)</p> Signup and view all the answers

What is the key objective of credit risk assessment in lending?

<p>To evaluate the creditworthiness of a borrower (D)</p> Signup and view all the answers

What is the primary goal of the credit process cycle?

<p>To manage the credit risk process cycle effectively (A)</p> Signup and view all the answers

What is the role of credit officers in risk management in credit lending?

<p>To identify risks and mitigate or control them (D)</p> Signup and view all the answers

What is the primary source of funds for a commercial bank to provide loans?

<p>Deposits from savers (A)</p> Signup and view all the answers

What is the primary commercial activity of a commercial bank?

<p>Providing loans to borrowers (B)</p> Signup and view all the answers

What is the primary purpose of the Principle of Tenor Matching?

<p>To match the duration of the loan with the borrower's needs and cash flow availability (C)</p> Signup and view all the answers

What is the consequence of violating the Principle of Pari-passu in lending?

<p>The lending bank may have a lesser or disadvantaged position (C)</p> Signup and view all the answers

What is the primary concern when a short-term loan is given for a long-term requirement?

<p>The borrower may default on the loan (A)</p> Signup and view all the answers

What is the primary benefit of structuring the loan facility according to the Principle of Tenor Matching?

<p>It matches the duration of the loan with the borrower's needs and cash flow availability (D)</p> Signup and view all the answers

What is implied by the Principle of Pari-passu in lending?

<p>The lending bank has an equal priority or standing with other lenders (A)</p> Signup and view all the answers

What is the primary objective of a lending institution's controlled lending process?

<p>To minimize the risk of default and ensure sufficient funds for depositors (A)</p> Signup and view all the answers

What is the consequence of a lending institution's failure to manage risk effectively?

<p>The institution's collapse or intervention by regulatory authorities (A)</p> Signup and view all the answers

What is the role of credit officers in the lending process?

<p>To identify and minimize the risk of default through thorough credit risk analysis (B)</p> Signup and view all the answers

What is the primary benefit of a lending institution's ability to channel depositors' funds into loans in a controlled manner?

<p>To ensure the risk of default is minimal and sufficient funds are available for depositors (D)</p> Signup and view all the answers

What is the primary purpose of structuring a loan facility to enable control over the potential sources of funds for loan repayment?

<p>To prevent diversion of funds, which may jeopardize loan repayment (B)</p> Signup and view all the answers

What is the consequence of a business using a loan for unintended purposes?

<p>The prospects of repaying the loan are hurt (B)</p> Signup and view all the answers

What is the impact of impaired loans on a lending institution?

<p>A decrease in its profitability and liquidity (B)</p> Signup and view all the answers

Why is it essential to ensure that the loan proceeds are used for the original purpose?

<p>To reduce the lender's risk (B)</p> Signup and view all the answers

What is the primary goal of the Principle of Control in lending?

<p>To enable the lender to monitor the loan's usage (D)</p> Signup and view all the answers

What is the result of deviating from the original intended purpose of the loan?

<p>It is regarded as a warning signal (B)</p> Signup and view all the answers

Which principle of lending is violated when a bank decides to lend a substantial sum to a new start-up with no proven track record or collateral?

<p>Principle of Protection (B)</p> Signup and view all the answers

What is the primary goal of a lender in ensuring the Principle of Protection?

<p>To ensure the borrower's repayment ability (D)</p> Signup and view all the answers

What is the relevance of the Principle of Proportionate Stakeholding in credit risk analysis?

<p>To ensure the lender's risk is proportionate to the borrower's stake (B)</p> Signup and view all the answers

What happens when a bank's loan portfolio is concentrated in a single client?

<p>The bank's risk is concentrated (B)</p> Signup and view all the answers

What is the consequence of a borrower hiding the fact that they already have credit facilities with another bank?

<p>The lender's risk is increased (B)</p> Signup and view all the answers

What is the primary purpose of credit risk analysis?

<p>To assess the borrower's repayment ability (C)</p> Signup and view all the answers

What is the consequence of not monitoring the value of collateral over time?

<p>The collateral value decreases (C)</p> Signup and view all the answers

What is the primary benefit of following the Principle of Tenor Matching?

<p>To reduce the lender's risk (A)</p> Signup and view all the answers

What is the main issue with a bank's loan portfolio being concentrated in a single client?

<p>The bank's risk is concentrated (D)</p> Signup and view all the answers

What is the primary goal of loan structuring?

<p>To reduce the lender's risk (A)</p> Signup and view all the answers

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