CAMPARI Credit Risk Assessment Quiz & Flashcards

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Questions and Answers

What is a major factor in a borrower's ability to repay a loan?

Professional status and license requirements

Reputation and previous legal actions

Income earning capacity and employment stability (correct)

Past records of credit history

Why do lenders seldom grant 100% financing?

To increase the loan applicant's credit score

To reduce the loan applicant's credit score

To ensure the borrower takes some risk and shows financial commitment (correct)

To ensure the lender takes all the risk

What is a consequence of poor management or a change in government licensing requirements and regulations?

Increased loan instalments

Decreased cashflow and loan repayment ability (correct)

Increased cashflow and loan repayment ability

No impact on cashflow and loan repayment ability

What is an example of a factor affecting a borrower's character?

Reputation, previous and/or impending legal actions Signup and view all the answers

Why may a borrower's loan repayment ability be deemed low?

Due to a lack of skills, serious illness, old age or some stigma Signup and view all the answers

What is a factor in examining an individual's character?

Stability and duration of employment or business Signup and view all the answers

Why do persons of high social status sometimes refuse to pay their loan instalments?

Due to their social influence Signup and view all the answers

What is a key aspect of the margin of loan advanced?

The percentage of financing that the lender is willing to extend Signup and view all the answers

What is the primary purpose of the CAMPARI model in consumer lending?

To evaluate the creditworthiness of individuals Signup and view all the answers

Which component of the CAMPARI model assesses the borrower's ability to repay the loan?

Ability Signup and view all the answers

What is the main challenge in assessing a borrower's character?

Measuring their attitude and sense of responsibility Signup and view all the answers

What is the acronym CAMPARI an abbreviation for?

Character, Amount, Margin, Insurance, Ability, Repayment Signup and view all the answers

What is the primary focus of the Consumer Lending Framework?

Assessing consumer loan applications Signup and view all the answers

What is the main objective of the CAMPARI credit risk assessment framework?

To evaluate the creditworthiness of loan applicants Signup and view all the answers

What is the role of the lending bank in the CAMPARI model?

To provide credit decision support criteria Signup and view all the answers

What is the relevance of the CAMPARI model in consumer lending?

It is an alternative to the 5C framework Signup and view all the answers

What is the primary consideration in determining the amount of financing?

Borrower's need and capacity to repay Signup and view all the answers

What is the purpose of evaluating the repayment structure of a loan?

To meet the borrower's needs and debt servicing ability Signup and view all the answers

What is the significance of insurance in asset-based financing?

To ensure the security maintains its value Signup and view all the answers

Why is it necessary to evaluate the borrower's request for a loan amount greater than the requirements listed?

To determine the purpose of the loan Signup and view all the answers

What is the principle of proportionate stake holding in financing?

The borrower shows commitment towards the loan Signup and view all the answers

What is the primary consideration in structuring the repayment of a loan?

Borrower's debt servicing ability Signup and view all the answers

Why is it necessary to ensure the security is maintained in a good state in asset-based financing?

To maintain the collateral value Signup and view all the answers

What is the purpose of evaluating the repayment amount and frequency in loan structuring?

To meet the borrower's needs and debt servicing ability Signup and view all the answers

What is the primary consideration when evaluating insurance risk coverage?

The type of risk being insured against Signup and view all the answers

What is the primary benefit of the CAMPARI model for consumer loan assessment?

It ensures a portfolio of quality consumer loans Signup and view all the answers

What is the primary difference between the 5C framework and the CAMPARI model?

The CAMPARI model is less complex than the 5C framework Signup and view all the answers

What is the primary consideration when evaluating the loan repayment structure of a consumer loan?

The debt servicing capacity of the borrower Signup and view all the answers

What is the primary benefit of asset-based financing?

It provides a more secure form of financing Signup and view all the answers

What is the primary role of the credit officer in the CAMPARI model?

To evaluate each element of the CAMPARI model to satisfaction Signup and view all the answers

What is the primary consideration when evaluating the debt servicing capacity of a borrower?

The borrower's income and expenses Signup and view all the answers

What is the consequence of a high margin of advance?

It increases the borrower's propensity to 'walk away' from the loan obligation. Signup and view all the answers

Why do lenders grant lower loan amounts to high-risk borrowers?

To reduce the lender's risk and increase the borrower's commitment. Signup and view all the answers

What is the primary factor in determining the agreed margin of financing?

The overall credit risk profile of the borrower. Signup and view all the answers

What type of loan is considered productive?

A loan that generates income. Signup and view all the answers

What is the purpose of a loan, according to the bank's principles?

To acquire a family home or purchase an asset. Signup and view all the answers

What mitigates the speculative element in asset acquisition in consumer lending?

The borrower's individual earning capacity. Signup and view all the answers

What is an example of a speculative loan?

A loan to purchase a large tract of land for future agricultural business. Signup and view all the answers

What is the bank's criteria for approving a loan?

The loan is for a good cause and is productive. Signup and view all the answers

Study Notes

Loan Repayment Factors

A borrower's ability to repay a loan is primarily influenced by their income stability and employment history.
Lenders typically avoid granting 100% financing to minimize risk exposure and ensure borrower investment in the asset.
Poor management or changes in government regulations can lead to financial losses and operational difficulties for businesses.

Borrower Character Assessment

An example of a factor affecting a borrower's character includes their credit history and past repayment behavior.
Low loan repayment ability may arise from insufficient income, high existing debt, or unstable employment.
Factors in examining an individual's character include personal reputation and reliability in fulfilling commitments.

Individuals with high social status may refuse to pay loan installments due to a sense of entitlement or differing perceptions of debt responsibility.

CAMPARI Model Insight

The margin of loan advanced is crucial, as it determines the lender's risk in relation to the borrower's equity in the financed asset.
The CAMPARI model primarily serves to assess creditworthiness in consumer lending.
The component assessing a borrower's ability to repay within the CAMPARI model is termed "Ability."

Assessing Borrower Character

A principal challenge in assessing borrower character is obtaining reliable information that reflects true intentions and past behaviors.
CAMPARI stands for Character, Ability, Margin, Purpose, Amount, Repayment, and Insurance.

Consumer Lending Framework

The primary focus of the Consumer Lending Framework is to ensure responsible and sustainable lending practices.
The main objective of the CAMPARI credit risk assessment framework is to evaluate the overall risk associated with lending to a particular borrower.

Role of Lending Bank

The lending bank in the CAMPARI model is responsible for proper evaluation and risk management when extending credit.

Loan Structuring and Assessment

Determining the amount of financing considers the borrower's needs, risk level, and the asset's value.
Evaluating repayment structure helps ensure that loan terms are manageable for the borrower, reducing default risk.
The significance of insurance in asset-based financing lies in protecting the lender's investment against losses.

Loan Amount Evaluation

Necessity arises in evaluating requests for loan amounts exceeding listed requirements to prevent over-leveraging or unnecessary risk.

Financing Stake Holding

The principle of proportionate stake holding emphasizes that borrowers should have a meaningful investment in the financed asset.

Securing Assets

Maintaining security in good condition is critical in asset-based financing to preserve value and minimize lender risk.

Repayment Assessment

Evaluating repayment amounts and frequency is essential for establishing feasible loan terms aligned with the borrower’s financial capacity.

Insurance Risk Coverage

Primary consideration when evaluating insurance risk coverage includes the adequacy of protection relative to the asset financed.

CAMPARI Model Benefits

Benefits of the CAMPARI model include a structured approach for assessing borrower credit risk effectively.

5C and CAMPARI Differences

The 5C framework differs from the CAMPARI model primarily in terminology and specific focus areas for assessment.

Consumer Loan Repayment Structure

When evaluating loan repayment structure, ensure terms align with the borrower's income and financial obligations.

Asset-Based Financing Benefits

The primary benefit of asset-based financing is securing loans against tangible assets, reducing risk for lenders.

Credit Officer Responsibility

The credit officer’s role in the CAMPARI model involves evaluating borrower applications and assessing overall creditworthiness.

Debt Servicing Capacity

Evaluating a borrower’s debt servicing capacity focuses on income adequacy to cover all debts, including new loan payments.

Margin of Advance Consequence

A high margin of advance can increase lender risk due to potential borrower over-leverage and asset devaluation.

High-Risk Borrowers

Lenders grant lower loan amounts to high-risk borrowers to mitigate the potential for default.

Financing Margin Determinants

The primary factor in determining the agreed margin of financing is the borrower’s creditworthiness and the assessed risk level.

Productive Loans

Loans considered productive typically finance assets that generate income or value addition.

Loan Purpose Principles

According to bank principles, the purpose of a loan should align with legitimate economic activities and investments.

Speculative Loans

The speculative element in consumer lending is mitigated by thorough assessment and proper risk management.

Speculative Loan Example

An example of a speculative loan could involve investments in volatile stock markets or high-risk business ventures.

Loan Approval Criteria

The bank's criteria for approving a loan include the borrower's credit history, income stability, loan purpose, and asset valuation.

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Description

Learn how to apply the CAMPARI credit risk assessment tool to evaluate consumer loan related creditworthiness. This chapter covers the key topics of credit risk assessment.

Chapter 6: CAMPARI Credit Risk Assessment Framework

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