120 Questions
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
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
What is the basis of any credit decision?
Credit analysis
What would result if the information about the loan applicant and its business activities is out of date or incomplete?
A flawed judgment of the repayment prospects
What is one of the goals of completing a credit analysis?
To evaluate the borrower's cash flow projection
What is a credit risk analysis exercise?
An objective appraisal of the borrower
What is the purpose of identifying and quantifying business risks in credit analysis?
To evaluate the borrower's creditworthiness
What is recommended based on the perceived financing needs and risks in credit analysis?
A suitable structure of loan facility
What is the primary purpose of obtaining a comprehensive description of the business organisation and its activities?
To provide an overview of the applicant's business, products and/or services
What type of information should be included in the application to provide a better understanding of the borrower's business?
Information on senior people managing the business, including their experience and expertise
What is the benefit of obtaining industry-wide statistical information?
To make well-informed judgments about the loan application
What is the purpose of the organisational chart in the application?
To identify the key roles in the business
What can credit officers obtain through company visits and meetings with the borrower's senior officers?
Information on the borrower's business management processes
What can on-the-ground observation of the company premises contribute to?
A better understanding of the borrower's business
What is the primary focus of the assessment file?
The borrower's business, products and/or services
What is the purpose of understanding the external operating environment of the borrower's business?
To make well-informed judgments about the loan application
Why is it necessary for the lending bank to regularly monitor the value and performance of the borrower's collateral?
To prevent the value of the secured asset from dropping below a certain percentage
What is the primary reason for separating the processes of credit risk analysis and loan disbursement?
To prevent a conflict of interest
What is a potential consequence of not monitoring the value of collateral over time?
The lending bank may be exposed to higher credit risk
What is the main purpose of verifying collateral values using reports, certificates, and invoices?
To assess the market value of the collateral
What is the primary goal of risk diversification in a bank?
To minimize credit risk exposure
What is a potential impact of natural disasters on collateral values?
A decrease in collateral values
Why is it essential to regularly review the value of collateral in a lending arrangement?
To identify potential risks associated with the collateral
What is the primary purpose of loan structuring?
To match the loan terms with the borrower's needs
What happens if the repayment risk is high?
The loan can be declined or modified
What is the primary concern of the credit officer when assessing a loan application?
The applicant's potential cash flow
What happens after the credit officer obtains a credit decision?
The credit officer structures the proposed credit facilities
Where is the Credit Authority normally based?
SE (Credit Risk Management)
What document is sent to the applicant after the loan application is approved?
Letter of facilities offer
What happens to the loan agreement and security documentation?
They are prepared for the applicant to execute and return
What is the purpose of stamping the documentation?
To make it legally binding
What happens to the documentation after execution?
It is registered with relevant government agencies
What is the main challenge in credit decision making?
Making a decision with incomplete and uncertain information
Why is it difficult to obtain accurate information about borrowers?
Because borrowers intentionally withhold information
What is the importance of current information in credit risk assessment?
It is important because it becomes outdated quickly
What is a key skill required of credit officers when gathering information?
The ability to discern relevant information from various sources
What is the purpose of external credit reports in credit risk assessment?
To provide additional information for credit risk assessment
Why is it important for credit officers to gather information from various sources?
Because no single source provides complete information
What is a challenge in obtaining accurate information in a competitive market environment?
Information becomes outdated quickly
What is the importance of the lender's database in credit risk assessment?
It is an important source of information
What is the primary concern of credit officers when assessing loan applications?
Identifying risks that can cause the credit to be vulnerable
What is the purpose of identifying risks associated with the loan?
To manage the risks effectively and mitigate them
What is the result of inadequate risk identification and mitigation?
The loan is rejected
What is the role of risk identification in the credit cycle?
It is an intermediate step in the credit cycle
Why is it necessary for credit officers to be able to identify risks that can cause the credit to be vulnerable?
To ensure effective, non-defaulting loans
What is the primary reason for a lender to ensure a thorough credit risk analysis process?
To reduce the risk of loan default
What is the primary goal of effective loan monitoring?
To identify potential problems early for prompt remedial action
What is the primary benefit of following key lending principles?
To minimize the risk of loan default
What is the consequence of not ensuring thorough credit risk analysis?
The lender may have to write off part of the loan
What is the purpose of key lending principles in the discipline of lending?
To guide lenders in making informed decisions
What is the primary commercial activity of a commercial bank?
Providing loans to individuals, businesses, and government agencies
What is the primary purpose of credit analysis?
To assess the creditworthiness of a borrower
What is the primary goal of loan structuring?
To optimize the lender's risk-return profile
What is the primary benefit of obtaining industry-wide statistical information in credit analysis?
To improve the accuracy of credit risk assessment
What is the primary purpose of verifying collateral values using reports, certificates, and invoices?
To ensure the collateral's value is sufficient to cover the loan amount
What is the main rationale behind the Principle of Tenor Matching?
To match the loan duration with the borrower's cash flow and needs
What is implied by the Principle of Pari-passu?
The borrower has equal standing with all lenders
What happens when a short-term loan is given for a long-term requirement?
The prospects of the borrower defaulting increases
Why is it essential to consider the type of borrowing when deciding on pari-passu basis with other lenders?
To determine the appropriate security arrangements
What is the risk associated with providing a long-term loan for a short-term requirement?
Abuse of the loan facility after the need has been met
What is the primary purpose of a lending institution?
To generate a profit by channeling depositors' funds into loans in a controlled manner
What is the consequence of impaired loans on a lending institution?
Adverse impact on both profitability and liquidity
What is the role of credit officers in the lending process?
To minimize risk by making informed decisions based on complete information
What is the primary goal of a lending institution's risk management strategy?
To minimize risk while maintaining profitability
What is the worst-case scenario if a lending institution fails to manage risk effectively?
The institution may collapse or require intervention from regulatory authorities
What is the primary purpose of imposing covenants in unsecured project lending?
To ensure cash flow from the project is available to repay the loan
What is the main objective of the principle of control in lending?
To ensure that the borrower uses the loan for its intended purpose
Why is it essential to structure the loan facility to enable the credit officer to monitor the use of loan proceeds?
To prevent the borrower from using the loan for unintended purposes
What is the consequence of deviating from the original intended purpose of the loan?
It is a warning signal to the lender
What is the benefit of structuring the loan facility to enable control over the potential sources of funds for loan repayment?
It ensures that funds are not diverted, jeopardizing loan repayment
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?
Principle of Protection
What is the main objective of the Principle of Proportionate Stakeholding in credit risk analysis?
To ensure the borrower has a sufficient stake in the business
Which principle of lending is violated when a borrower hides the fact that they already have credit facilities with another bank?
Principle of Transparency
What is the primary concern of the Principle of Protection in credit and lending?
To ensure the lender's risk is minimized
Which scenario violates the Principle of Diversification?
70% of a bank's loan portfolio is in a single client's name
What is the relevance of the Principle of Proportionate Stakeholding in credit risk analysis?
It ensures the borrower has a sufficient stake in the business
Which principle of lending is violated when a credit officer does not monitor the loan after it has been disbursed?
Principle of Monitoring
What is the main issue with a bank's loan portfolio being concentrated in a single client?
The bank's risk is concentrated
Which principle of lending is violated when a bank lends to a borrower without a thorough credit risk analysis?
Principle of Protection
What is the primary benefit of following the principles of lending?
To minimize the lender's risk
What is the primary objective of a lender in ensuring that each loan undergoes a thorough credit risk analysis process?
To minimize potential losses and ensure prompt recovery of the loan
What is the primary consequence of inadequate risk identification and mitigation in lending?
Loan default and potential loss
What is the primary purpose of the key lending principles in the discipline of lending?
To guide lenders in making informed credit decisions
What is the primary reason why a lender may undertake the sale of assets held as security against the loan?
To recover the outstanding balance if the borrower encounters problems
What is the primary focus of effective loan monitoring in lending?
Identifying potential problems early for prompt remedial action
What is the primary goal of identifying risks associated with the loan in credit risk management?
To identify vulnerabilities and mitigate or control them
What is the consequence of not adequately mitigating and controlling identified risks in a loan application?
The loan application may have to be turned down
What is the relationship between risk identification and risk management in credit lending?
Risk identification is an intermediate step in risk management
What is the primary function of a commercial bank in relation to lending?
To utilise deposits to provide loans to individuals, businesses, and government agencies
Why is it essential to manage risks effectively in credit lending?
To manage risks effectively, not eliminate them
What is the key objective of credit risk assessment in lending?
To evaluate the creditworthiness of a borrower
What is the primary goal of the credit process cycle?
To manage the credit risk process cycle effectively
What is the role of credit officers in risk management in credit lending?
To identify risks and mitigate or control them
What is the primary source of funds for a commercial bank to provide loans?
Deposits from savers
What is the primary commercial activity of a commercial bank?
Providing loans to borrowers
What is the primary purpose of the Principle of Tenor Matching?
To match the duration of the loan with the borrower's needs and cash flow availability
What is the consequence of violating the Principle of Pari-passu in lending?
The lending bank may have a lesser or disadvantaged position
What is the primary concern when a short-term loan is given for a long-term requirement?
The borrower may default on the loan
What is the primary benefit of structuring the loan facility according to the Principle of Tenor Matching?
It matches the duration of the loan with the borrower's needs and cash flow availability
What is implied by the Principle of Pari-passu in lending?
The lending bank has an equal priority or standing with other lenders
What is the primary objective of a lending institution's controlled lending process?
To minimize the risk of default and ensure sufficient funds for depositors
What is the consequence of a lending institution's failure to manage risk effectively?
The institution's collapse or intervention by regulatory authorities
What is the role of credit officers in the lending process?
To identify and minimize the risk of default through thorough credit risk analysis
What is the primary benefit of a lending institution's ability to channel depositors' funds into loans in a controlled manner?
To ensure the risk of default is minimal and sufficient funds are available for depositors
What is the primary purpose of structuring a loan facility to enable control over the potential sources of funds for loan repayment?
To prevent diversion of funds, which may jeopardize loan repayment
What is the consequence of a business using a loan for unintended purposes?
The prospects of repaying the loan are hurt
What is the impact of impaired loans on a lending institution?
A decrease in its profitability and liquidity
Why is it essential to ensure that the loan proceeds are used for the original purpose?
To reduce the lender's risk
What is the primary goal of the Principle of Control in lending?
To enable the lender to monitor the loan's usage
What is the result of deviating from the original intended purpose of the loan?
It is regarded as a warning signal
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?
Principle of Protection
What is the primary goal of a lender in ensuring the Principle of Protection?
To ensure the borrower's repayment ability
What is the relevance of the Principle of Proportionate Stakeholding in credit risk analysis?
To ensure the lender's risk is proportionate to the borrower's stake
What happens when a bank's loan portfolio is concentrated in a single client?
The bank's risk is concentrated
What is the consequence of a borrower hiding the fact that they already have credit facilities with another bank?
The lender's risk is increased
What is the primary purpose of credit risk analysis?
To assess the borrower's repayment ability
What is the consequence of not monitoring the value of collateral over time?
The collateral value decreases
What is the primary benefit of following the Principle of Tenor Matching?
To reduce the lender's risk
What is the main issue with a bank's loan portfolio being concentrated in a single client?
The bank's risk is concentrated
What is the primary goal of loan structuring?
To reduce the lender's risk
Learn about the credit principles of lending, including repayment risk assessment and loan structuring. Understand how credit officers evaluate applicants and design credit facilities to mitigate risks.
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