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Questions and Answers
What is the primary concern of the lending bank in terms of risk?
What is the primary concern of the lending bank in terms of risk?
- Credit risk (correct)
- Business risk
- Liquidity risk
- Market risk
What is the primary purpose of assessing the sufficiency of shareholders' financial commitment?
What is the primary purpose of assessing the sufficiency of shareholders' financial commitment?
- To determine the borrower's commitment to the business (correct)
- To evaluate the business's growth potential
- To measure the borrower's ability to repay the loan
- To determine the borrower's creditworthiness
What is included in the measurement of shareholders' financial commitment?
What is included in the measurement of shareholders' financial commitment?
- Only subordinated loans provided by the owners
- Shareholders' funds, subordinated loans, and third-party collateral (correct)
- Only shareholders' funds in the business
- Only third-party collateral provided by the owners
Why is it important for a borrower to provide sufficient capital contribution?
Why is it important for a borrower to provide sufficient capital contribution?
What is a consequence of a borrower providing insufficient capital contribution?
What is a consequence of a borrower providing insufficient capital contribution?
What is the primary factor in determining a borrower's capacity to repay debt?
What is the primary factor in determining a borrower's capacity to repay debt?
What should the credit officer pay attention to when assessing a borrower's business or employment prospects?
What should the credit officer pay attention to when assessing a borrower's business or employment prospects?
Why is it important to assess a borrower's current and future business funding requirements?
Why is it important to assess a borrower's current and future business funding requirements?
What should be adjusted for when assessing an individual borrower's current income from various sources?
What should be adjusted for when assessing an individual borrower's current income from various sources?
Why is it necessary to determine the legal capacity of the borrower?
Why is it necessary to determine the legal capacity of the borrower?
What is a major consequence of a business organisation lacking expertise and failing to provide adequate training?
What is a major consequence of a business organisation lacking expertise and failing to provide adequate training?
What is an important component of a business that allows it to anticipate trends and changes in the marketplace?
What is an important component of a business that allows it to anticipate trends and changes in the marketplace?
What can be an indicator of a company's character during a credit risk assessment?
What can be an indicator of a company's character during a credit risk assessment?
What is the primary goal of a credit risk assessment framework?
What is the primary goal of a credit risk assessment framework?
What does a lack of vision in a business lead to?
What does a lack of vision in a business lead to?
What is the primary benefit of recognising new trends early and having strategic concepts in place?
What is the primary benefit of recognising new trends early and having strategic concepts in place?
What is a key aspect of assessing character in consumer lending?
What is a key aspect of assessing character in consumer lending?
What is the result of a business organisation failing to provide adequate training to its employees?
What is the result of a business organisation failing to provide adequate training to its employees?
Why is continuous learning and development of skills necessary in a business?
Why is continuous learning and development of skills necessary in a business?
What is the primary way to assess a company's capacity in a credit risk assessment?
What is the primary way to assess a company's capacity in a credit risk assessment?
What is the primary consideration for a lender when assessing a borrower's capacity?
What is the primary consideration for a lender when assessing a borrower's capacity?
What is not a key aspect of a borrower's character?
What is not a key aspect of a borrower's character?
Which of the following is a positive attribute of a borrower's character?
Which of the following is a positive attribute of a borrower's character?
What is the primary risk to a lender if a borrower exhibits poor character?
What is the primary risk to a lender if a borrower exhibits poor character?
What is the term used to describe the values and morals of an organisation's senior management?
What is the term used to describe the values and morals of an organisation's senior management?
What is the key aspect that the credit officer considers while evaluating the borrower's capacity to repay?
What is the key aspect that the credit officer considers while evaluating the borrower's capacity to repay?
What is the primary goal of the credit officer when evaluating a borrower's capacity to repay?
What is the primary goal of the credit officer when evaluating a borrower's capacity to repay?
What is the relationship between capacity to repay and positive behavioural attributes in a borrower?
What is the relationship between capacity to repay and positive behavioural attributes in a borrower?
How does the credit officer classify a borrower with a good payment habit and good capacity to repay?
How does the credit officer classify a borrower with a good payment habit and good capacity to repay?
What is the primary purpose of the 5Cs Framework in the context of credit risk assessment?
What is the primary purpose of the 5Cs Framework in the context of credit risk assessment?
What is a key factor to consider when assessing a borrower's character?
What is a key factor to consider when assessing a borrower's character?
According to the economic cycle, which phase has the highest risk to lenders?
According to the economic cycle, which phase has the highest risk to lenders?
What is an important consideration when assessing a borrower's capacity?
What is an important consideration when assessing a borrower's capacity?
Which of the following is an example of a business that may be protected from the fallout of a recession?
Which of the following is an example of a business that may be protected from the fallout of a recession?
What does the economic cycle refer to?
What does the economic cycle refer to?
What is a key consideration for a lender when assessing a borrower's capacity?
What is a key consideration for a lender when assessing a borrower's capacity?
Why might a lender consider a borrower high risk?
Why might a lender consider a borrower high risk?
What is a key factor that can affect a borrower's capacity to generate cashflow?
What is a key factor that can affect a borrower's capacity to generate cashflow?
Why is it important to identify products or services that are in perpetual demand?
Why is it important to identify products or services that are in perpetual demand?
What happens to a product when it reaches the sunset stage?
What happens to a product when it reaches the sunset stage?
Study Notes
Lending Responsibilities
- Lenders should only accept credit risk, not business risk, which is the borrower's responsibility.
- Borrowers must show adequate capital to cover permanent assets owned.
- Financial commitment by shareholders is assessed by the sufficiency of funds, including subordinated loans and collateral.
Consumer Lending Considerations
- Applicants must disclose backup repayment capacity for adverse situations.
- Credit analysis focuses on the relationship between applicant's assets and liabilities.
- Credit application forms are designed to gather relevant financial information.
Capital Contribution and Motivation
- Capital contribution signifies borrower commitment to the business.
- Insufficient initial capital raises the likelihood of the borrower abandoning obligations during crises.
Assessing Borrower Capacity
- Borrower's capacity to repay is linked to future income prospects, based on business forecasts and plans.
- Effective cash flow generation throughout the loan period is crucial.
- Consideration of tax liabilities and future funding needs affects cash availability for loan servicing.
Importance of Legal Capacity
- Borrower’s legal standing must be verified, particularly for foreigners or minors.
Business Risk Factors
- Continuous skill development is essential to remain competitive; obsolescence threatens business viability.
- Lack of vision can weaken market positioning and impede customer retention, increasing business risk.
Character Assessment in Lending
- Character applies to both individual and organizational borrowers, emphasizing values of integrity and responsibility.
- A borrower's past behavior influences perceived risk; positive traits such as honesty and prudence are desirable.
5Cs Credit Risk Assessment Framework
- Framework consists of Character, Condition, Capacity, Capital, and Collateral.
- Key characteristics include age, marital status, occupation, management style, and willingness to repay.
Economic Conditions and their Impact
- Economic cycles influence lending risks; some industries are more resilient during downturns.
- Specific phases of the economic cycle present varying risks, with phase A (recovery) showing potential for competition-induced profit decline.
Capacity for Cash Flow
- Borrower’s future cash flow capacity is vital for debt repayment assessment.
- Clear demonstration of cash generation capability significantly lowers perceived risk.
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Description
Learn about the 5Cs framework of credit assessment, including character, collateral, condition, capacity, and capital. Understand how to apply these factors to individual and organizational borrowers.
