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</p> Signup and view all the answers

    What is the first step in the credit process cycle?

    <p>Origination</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</p> Signup and view all the answers

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

    <p>Marketing</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</p> Signup and view all the answers

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

    <p>Approval</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</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</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</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</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</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.</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</p> Signup and view all the answers

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

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

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

    <p>Character</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</p> Signup and view all the answers

    For what type of businesses is credit judgement primarily applied?

    <p>Medium and large SMEs</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.</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.</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.</p> Signup and view all the answers

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

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

    Which theory emphasizes the importance of stakeholder interests in banking?

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

    Which department is primarily responsible for recovery of credit facilities?

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

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

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

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

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

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

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

    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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