Credit Process Cycle Overview
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Questions and Answers

What is the primary purpose of loan monitoring in the credit process cycle?

  • To approve new loan applications
  • To ensure profitability and monitor repayment (correct)
  • To set interest rates for borrowers
  • To investigate fraud in lending

Which activity is NOT part of the loan monitoring process?

  • Monitoring loan repayment conduct
  • Assessing the bank's overall lending policy (correct)
  • Tracking compliance with pre-determined conditions
  • Conducting site visitations for verification

During which phase of the credit process cycle would a bank perform an interim review of a borrower's risk profile?

  • Administration (correct)
  • Settlement/Recovery
  • Approval
  • Origination

What is included in the conditions that must be tracked after loan draw down?

<p>Quarterly submission of financial accounts (B)</p> Signup and view all the answers

What is the first step in the credit process cycle?

<p>Origination (C)</p> Signup and view all the answers

What is the primary purpose of the credit policy in lending companies?

<p>To determine guidelines for lending decisions (A)</p> Signup and view all the answers

Which of the following is NOT part of the credit process cycle?

<p>Marketing (B)</p> Signup and view all the answers

Which regulation specifically addresses land charges and liens as collateral for bank loans?

<p>National Land Code Act 828 (A)</p> Signup and view all the answers

What critical activity takes place after loan origination in the credit process cycle?

<p>Approval (D)</p> Signup and view all the answers

Why is the credit process cycle crucial for lenders?

<p>It aids in borrower verification and credit evaluation (A)</p> Signup and view all the answers

Which of the following is part of the administration phase in the credit process cycle?

<p>Gathering borrower documentation (D)</p> Signup and view all the answers

Which of the following authorities issues regulations and guidelines that affect bank credit functions?

<p>Bank Negara Malaysia (A)</p> Signup and view all the answers

What does monitoring in the credit process cycle primarily focus on?

<p>Evaluating the performance of loans post-approval (A)</p> Signup and view all the answers

What type of lending process is typically used for a small amount of credit request with low probability of default?

<p>Credit scoring (B)</p> Signup and view all the answers

Which of the following best describes the higher information asymmetry in credit assessment?

<p>It demands manual assessment by a credit officer. (D)</p> Signup and view all the answers

Which factor is NOT included in the qualitative rating of the credit judgement process?

<p>Financial data analysis (B)</p> Signup and view all the answers

Which component is primarily associated with analyzing the financial data of a credit applicant?

<p>Financial rating (D)</p> Signup and view all the answers

What is indicated by a higher amount of credit request and a high probability of default?

<p>Judgement approach (A)</p> Signup and view all the answers

Which of the following is part of the 5Cs of Credit Analysis?

<p>Character (A)</p> Signup and view all the answers

According to the description, the rating process combines which two types of ratings?

<p>Financial and qualitative ratings (A)</p> Signup and view all the answers

For what type of businesses is credit judgement primarily applied?

<p>Medium and large SMEs (C)</p> Signup and view all the answers

What role do Credit Officers play in a bank's credit decision operation?

<p>Conduct economic analysis and provide recommendations. (A)</p> Signup and view all the answers

What is a key issue related to the bank-customer relationship in credit decision-making?

<p>Asymmetric information leading to uncertainty. (D)</p> Signup and view all the answers

What do Credit Managers typically do in the credit decision operation?

<p>Review credit files and make approval recommendations. (D)</p> Signup and view all the answers

Which committee is involved in the revision of credit application decisions?

<p>Credit Risk Committee. (A)</p> Signup and view all the answers

What does 'adverse selection' refer to in the context of bank credit decision-making?

<p>Higher risk due to information imbalance. (A)</p> Signup and view all the answers

What purpose does the internal credit audit serve in the banking process?

<p>To evaluate and ensure compliance within the bank. (B)</p> Signup and view all the answers

Which theory emphasizes the importance of stakeholder interests in banking?

<p>Stakeholder Theory. (C)</p> Signup and view all the answers

What element is crucial for banks when assessing SME loan applications?

<p>A combination of industry and financial analysis. (A)</p> Signup and view all the answers

What is one of the primary responsibilities of the Credit Analysis Department?

<p>Assessment and approval of facilities requested (B)</p> Signup and view all the answers

Which of the following best describes the first step in the bank lending decision process?

<p>Submission of application form and documents (D)</p> Signup and view all the answers

What role does the Compliance Department play in the lending process?

<p>Enforcing internal and external rules and regulations (D)</p> Signup and view all the answers

Which of the following is a crucial step after a borrower accepts a loan offer?

<p>Compliance with legal requirements and pre-disbursement conditions (A)</p> Signup and view all the answers

Which department is primarily responsible for recovery of credit facilities?

<p>Credit Rehabilitation &amp; Recovery Department (C)</p> Signup and view all the answers

What happens if a borrower declines the offer extended by the bank?

<p>The borrower can appeal against the facilities (D)</p> Signup and view all the answers

In the bank lending decision process, what is the role of the Appointed Solicitor?

<p>To perfect legal documentations (B)</p> Signup and view all the answers

What specific lending approach is highlighted in the provided content?

<p>Credit scoring only for small business financing (C)</p> Signup and view all the answers

What is the last step in the bank lending decision process?

<p>Monitoring of credit facilities (B)</p> Signup and view all the answers

Which department handles the submission and initial assessment of loan applications?

<p>Credit Analysis Department (C)</p> Signup and view all the answers

What is the primary issue lenders face due to information asymmetry in small firm lending?

<p>Moral hazard and adverse selection (D)</p> Signup and view all the answers

How does adverse selection affect lenders when evaluating loan applications?

<p>Bad credit risks are more likely to seek loans (C)</p> Signup and view all the answers

What is a consequence of moral hazard following the granting of a loan?

<p>Borrowers may engage in riskier activities (D)</p> Signup and view all the answers

Which process is key to reducing risks stemming from moral hazard and information asymmetry during lending?

<p>Implementation of in-house credit review formats (D)</p> Signup and view all the answers

What aspect of the credit proposal process supports final decision-making?

<p>Review by a credit risk committee (C)</p> Signup and view all the answers

What do banks typically use to formally assess a credit proposal?

<p>5Cs of credit analysis (D)</p> Signup and view all the answers

Which of the following is NOT a characteristic of information asymmetry in lending?

<p>There is complete transparency in loan applications (B)</p> Signup and view all the answers

What role do internal and external credit auditors play in the lending process?

<p>They audit credit files for compliance and accuracy (A)</p> Signup and view all the answers

Flashcards

External Laws & Regulations

Laws and regulations set by external organizations that govern the operations of banks, particularly in the context of credit lending.

Regulations, Guidelines, Notices, & Directions Issued by Bank Negara Malaysia

Guidelines and rules issued by Bank Negara Malaysia, the central bank of Malaysia, to regulate the credit functions of banks.

Financial Services Act 2013

A comprehensive law that governs financial services in Malaysia, including credit lending.

National Land Code Act 828

A law that outlines the procedures for managing land ownership, including the use of land as collateral for loans.

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Credit Policy

A document that sets out a bank's internal rules and policies for managing credit lending decisions.

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Credit Process Cycle

The step-by-step process involved in extending credit, from loan origination to final repayment.

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Origination

The initial stage of the credit process cycle, where potential borrowers submit applications for credit.

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Approval

The stage where banks assess loan applications, evaluate risks, and decide whether to approve or deny credit.

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Loan Monitoring

This stage involves actively overseeing and managing approved loans to ensure profitability and compliance with agreed terms.

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Antecedent Conditions

Tracking key milestones or conditions that were agreed to after the loan is drawn down (disbursed). This could include things like regular financial reports or the creation of a sinking fund.

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Interim or Annual Review

Periodic assessments of a borrower's financial health, business model, or compliance with loan terms. This could include reviewing financial statements or conducting site visits.

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Settlement/Recovery

The final stage of the credit process cycle where the bank recovers its loaned funds, either through successful repayment or through legal action in case of default.

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Lending Decision Framework

This involves understanding the entire process that banks use to make lending decisions, from evaluating a customer's creditworthiness to approving and managing loans.

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Credit Decision Operation

The process of evaluating a business's creditworthiness and determining whether to approve or reject a loan request.

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Economic & Financial Analysis

The analysis of a business's financial statements, industry trends, and economic conditions to assess its creditworthiness.

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Business & Financial Analysis

Evaluating a business's management team, organizational structure, and operational efficiency to assess its capabilities.

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Moral Hazard

The risk that a borrower has incomplete information about their own business and may make decisions based on incomplete knowledge, leading to potential financial difficulties.

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Adverse Selection

The risk that the bank does not have complete information about the borrower's business and may make lending decisions based on incomplete or inaccurate information.

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Asymmetric Information

The imbalance of knowledge between the bank (lender) and the business (borrower). The borrower has more information about their own business than the bank.

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Credit Risk Committee

A group of bank officers that evaluates and approves loan applications based on the risk assessment conducted by credit officers. They ensure compliance and mitigate risk.

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Credit Auditing

A system of checks and balances to ensure that the bank's lending processes are fair and transparent and comply with legal and regulatory requirements.

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Credit Scoring

A credit assessment method that uses a predefined scoring model to determine the creditworthiness of an applicant. It relies on objective financial data and statistical analysis.

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Credit Judgement

A credit assessment method that involves a subjective evaluation of an applicant's creditworthiness based on qualitative factors and expert judgment. It is often used for less standardized credit situations.

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The 5Cs of Credit Analysis

The 5Cs of Credit Analysis provide a framework for assessing an applicant's creditworthiness. They include: Character, Capacity, Capital, Collateral, and Conditions.

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Debt Service Capacity

The ability of a borrower to generate sufficient cash flow to repay their debt obligations.

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Financial Rating

The process of evaluating an applicant's financial information to assess their creditworthiness. It typically involves analyzing financial statements and key financial ratios.

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Qualitative Rating

The aspect of credit assessment that involves analyzing qualitative factors beyond financial data to assess an applicant's trustworthiness and ability to repay their loans.

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Base Rating

A combined assessment of both financial and qualitative factors used to determine an applicant's final credit rating.

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Individual Process (Credit Judgement)

A credit assessment method that is typically used for larger, more complex loans, such as corporate financing, where information asymmetry is higher.

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Bank Lending Decision Process

The process of evaluating a borrower's creditworthiness and deciding whether to approve a loan.

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Credit Risk Management Department

A department responsible for managing the bank's credit risk by assessing the financial health of borrowers.

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Credit Committee

A group of specialists who review and approve loan requests, ensuring they align with the bank's lending policies.

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Principles of Lending

A set of principles that guide the bank's lending decisions, ensuring loans are granted responsibly and prudently.

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Credit Analysis

The process of gathering and reviewing information about a borrower's financial situation, including their income, expenses, and credit history.

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Administration

The process of ensuring that all legal requirements and conditions are met before disbursing the loan to the borrower.

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Monitoring

The ongoing monitoring of the loan after it has been disbursed, to track the borrower's repayment performance and manage any potential credit risks.

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Credit Facilities Recovery

A systematic process for recovering unpaid loans, involving collection efforts and legal action if necessary.

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Information Asymmetry in Lending

The lender has less information about the borrower than the borrower has about themselves. This leads to uncertainty about borrower's true creditworthiness.

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Adverse Selection in Lending

The tendency for borrowers with higher credit risk (more likely to default) to be more eager to take out loans than borrowers with lower risk. This makes it harder for lenders to find good borrowers.

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Moral Hazard in Lending

The risk that a borrower will change their behavior after getting a loan, taking on actions that weren't originally discussed with the lender and increase the likelihood of default.

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5Cs of Credit Analysis

A method of assessing a borrower's creditworthiness by considering five key factors: character, capacity, capital, collateral, and conditions.

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Credit Analysis and Recommendation

A process where a bank reviews and analyzes a borrower's credit application to determine the loan's likelihood of success and whether to approve it.

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Internal Credit Audit

The process of reviewing credit files and loan activities to ensure compliance with policies and regulations.

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External Credit Audit

An external review of a bank's credit procedures and activities by an independent organization to assess their effectiveness and compliance.

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Study Notes

Foundations of Bank Lending - Chapter 1

  • Module Authors: Jasman Tuyon, PhD; Rapheedah Musneh, PhD; Siti Julea Supar; Nurziya Muzzawer.
  • Institution: Universiti Teknologi MARA, Sabah Branch, Kota Kinabalu Campus.
  • Course Code: FIN367

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 completing this chapter, students will be able to:
    • Define bank credit
    • Explain the importance of bank credit to the bank business
    • Understand the flow of the credit process cycle
    • Understand the major provisions of the Financial Services Act 2013 and BNM guidelines (affecting credit functions)
    • Explain ethics and governance in financial institutions

1.1.1 Introduction to Bank Credit

  • 1.1.1.1 Bank definition and scope of business
    • Legal definition from Central Bank of Malaysia Act 2009
    • Definition broadened to include entities operating payment systems or payment instruments.
    • Clarified definition from Financial Services Act 2013; defining "bank" and specific banking activities (e.g., accepting deposits, dealing with cheques, providing finance)
  • 1.1.1.2 Bank lending business
    • Financial Services Act 2013's definition of "provision of finance" (includes lending money, leasing, factoring, acquiring negotiable instruments & accepting liabilities of others)
    • Includes lending categories for large enterprises, SMEs, individuals, and small businesses

1.1.1.2 Bank lending business (cont.)

  • Five key areas of universal banking:
    • Wholesale/corporate banking (large enterprises)
    • Business/SME banking (medium-to-large SMEs)
    • Retail/consumer banking (individuals/small businesses)
    • Treasury (manage funding and liquidity needs)
    • Asset management (investments for customers)

1.1.1.2 Credit to SMEs

  • Credit to SMEs is a significant part of banks' overall credit portfolios.
  • Granting more loans to SMEs increases exposure to potential high credit risk which directly affects bank profitability.
  • Requires thorough credit analysis, effective risk management, and adherence to legal regulations to mitigate risks.

1.1.1.3 Bank operation is highly regulated

  • External regulations: Regulations, guidelines, notices or any directions issued by Bank Negara Malaysia, Financial Services Act 2013 & National Land Code Act 828.
  • Internal regulations: Bank credit policies and guidelines

1.1.2 The Credit Process Cycle

  • The operational flow of credit lending, from origination to full loan repayment.
  • 1.1.2.1 Origination; initial phase of the process
  • Key activities are: initiation of contact with customer, discussion of business requirements, and credit risk evaluation relative to Bank's criteria.
  • Important in verifying borrower information and conducting thorough credit risk profile analysis.
  • 1.1.2.2 Approval; credit evaluation
  • Evaluation considers financial & non-financial information.
  • Decision to approve, modify, or reject will be carried out according to criteria outlined in Bank's internal lending policies & relevant guidelines
  • 1.1.2.3 Administration; loan documentation & disbursement
  • Execution of the loan agreement, perfection of security, and loan disbursement based on the terms negotiated

1.1.2 The Credit Process Cycle (Cont.)

  • 1.1.2.4 Monitoring; ongoing tracking of loan performance post-disbursement
  • Monitoring of borrower’s adherence and continued financial and business viability.
  • Identify potential warning signals or red flags. Protect the Bank's interest and to mitigate losses
  • Loan monitoring covers facility usage; prompt repayment to ensure profitable banking activities.
  • 1.1.2.5 Settlement/Recovery; final stage of the process
  • Repayment & settlement of the overall loan amount upon maturity
  • Includes loan rescheduling/restructuring and recovery mechanisms in case of default.

1.1.3 Lending Decision Framework in Business Banking

  • 1.1.3.1 Lending process overview
  • Bank's Internal structure; credit risk management department and processes
  • Credit approval roles and responsibilities
  • 1.1.3.2 Lending approaches
  • Standard process (credit scoring) suitable for small businesses.
  • Manual judgment approach is suitable for larger SMEs and corporate financing. A Manual process often requires a detailed assessment of information and a lot more analysis
  • 1.1.3.3 Credit decision operation
  • Steps involved in credit decision process (application, analysis, approval, auditing).
  • Procedures used to manage information asymmetry and moral hazard considerations to mitigate potential risks that can impact profitability in credit granting.

1.1.3.3 Credit decision operation in business banking (Cont.)

  • Emphasis placed on the complexity involved in assessing SME credit applications.
  • Importance of information asymmetry (asymmetric information between the bank and the borrower).
  • Impact of moral hazard in terms of how a borrower may act in ways (take on more risk, pursue other avenues) that can negatively impact a bank’s interest.

1.1.3.3 Typical set-up of credit decision in business banking

  • The details of how each step in the lending process functions for SME business lending.
  • Credit applications, review, analysis using internal standards/guidelines, approval and final audit.

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Foundations of Bank Lending PDF

Description

This quiz explores the various phases and critical activities involved in the credit process cycle, including loan monitoring, interim reviews, and credit policy purposes. Test your knowledge about the regulations and key steps that lenders must follow to ensure effective credit management.

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