40 Questions
What is the primary concern of the lending bank in terms of risk?
Credit risk
What is the primary purpose of assessing the sufficiency of shareholders' financial commitment?
To determine the borrower's commitment to the business
What is included in the measurement of shareholders' financial commitment?
Shareholders' funds, subordinated loans, and third-party collateral
Why is it important for a borrower to provide sufficient capital contribution?
To demonstrate the borrower's commitment to the business
What is a consequence of a borrower providing insufficient capital contribution?
The borrower is more likely to default on the loan
What is the primary factor in determining a borrower's capacity to repay debt?
Their potential future business or employment prospects
What should the credit officer pay attention to when assessing a borrower's business or employment prospects?
The borrower's potential cash flow generation during the loan period
Why is it important to assess a borrower's current and future business funding requirements?
To determine the amount of cash available to service loans
What should be adjusted for when assessing an individual borrower's current income from various sources?
Their living expenses, income tax deductions and other current loan commitments
Why is it necessary to determine the legal capacity of the borrower?
To determine if they are legally able to enter into a loan agreement
What is a major consequence of a business organisation lacking expertise and failing to provide adequate training?
It poses a business risk, which must be taken into consideration as a risk to the loan.
What is an important component of a business that allows it to anticipate trends and changes in the marketplace?
Vision
What can be an indicator of a company's character during a credit risk assessment?
The company's track record and reputation in the industry
What is the primary goal of a credit risk assessment framework?
To evaluate the borrower's character and capacity
What does a lack of vision in a business lead to?
A weaker participant in the marketplace
What is the primary benefit of recognising new trends early and having strategic concepts in place?
It decreases the business risk
What is a key aspect of assessing character in consumer lending?
It is a personal process
What is the result of a business organisation failing to provide adequate training to its employees?
It poses a business risk, which must be taken into consideration
Why is continuous learning and development of skills necessary in a business?
To stay competitive in the marketplace
What is the primary way to assess a company's capacity in a credit risk assessment?
By evaluating the company's ability to generate cash flows
What is the primary consideration for a lender when assessing a borrower's capacity?
The borrower's ability to repay the loan
What is not a key aspect of a borrower's character?
Credit score
Which of the following is a positive attribute of a borrower's character?
Discretion
What is the primary risk to a lender if a borrower exhibits poor character?
The lender may not recover the full amount of the loan
What is the term used to describe the values and morals of an organisation's senior management?
Moral strength
What is the key aspect that the credit officer considers while evaluating the borrower's capacity to repay?
The borrower's ability to generate sufficient cash flow
What is the primary goal of the credit officer when evaluating a borrower's capacity to repay?
To assess the borrower's ability to service the loan
What is the relationship between capacity to repay and positive behavioural attributes in a borrower?
They are directly proportional
How does the credit officer classify a borrower with a good payment habit and good capacity to repay?
Box A in Figure 5.1
What is the primary purpose of the 5Cs Framework in the context of credit risk assessment?
To provide a comprehensive credit risk assessment
What is a key factor to consider when assessing a borrower's character?
Integrity
According to the economic cycle, which phase has the highest risk to lenders?
Phase C
What is an important consideration when assessing a borrower's capacity?
Occupation and marital status
Which of the following is an example of a business that may be protected from the fallout of a recession?
Rice milling
What does the economic cycle refer to?
The external environment when the request for credit facilities is made
What is a key consideration for a lender when assessing a borrower's capacity?
The borrower's ability to generate sufficient cashflow
Why might a lender consider a borrower high risk?
If the borrower is unable to clearly show sufficient capacity to generate cashflow
What is a key factor that can affect a borrower's capacity to generate cashflow?
The regulatory environment
Why is it important to identify products or services that are in perpetual demand?
Because they can provide a stable source of cashflow
What happens to a product when it reaches the sunset stage?
It experiences declining profit margins
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.
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