5Cs of Credit Quiz & CAMPRI Model Flashcards

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Questions and Answers

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?

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?

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?

To demonstrate the borrower's commitment to the business Signup and view all the answers

What is a consequence of a borrower providing insufficient capital contribution?

The borrower is more likely to default on the loan Signup and view all the answers

What is the primary factor in determining a borrower's capacity to repay debt?

Their potential future business or employment prospects Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

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. Signup and view all the answers

What is an important component of a business that allows it to anticipate trends and changes in the marketplace?

Vision Signup and view all the answers

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 Signup and view all the answers

What is the primary goal of a credit risk assessment framework?

To evaluate the borrower's character and capacity Signup and view all the answers

What does a lack of vision in a business lead to?

A weaker participant in the marketplace Signup and view all the answers

What is the primary benefit of recognising new trends early and having strategic concepts in place?

It decreases the business risk Signup and view all the answers

What is a key aspect of assessing character in consumer lending?

It is a personal process Signup and view all the answers

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 Signup and view all the answers

Why is continuous learning and development of skills necessary in a business?

To stay competitive in the marketplace Signup and view all the answers

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 Signup and view all the answers

What is the primary consideration for a lender when assessing a borrower's capacity?

The borrower's ability to repay the loan Signup and view all the answers

What is not a key aspect of a borrower's character?

Credit score Signup and view all the answers

Which of the following is a positive attribute of a borrower's character?

Discretion Signup and view all the answers

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 Signup and view all the answers

What is the term used to describe the values and morals of an organisation's senior management?

Moral strength Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

What is the relationship between capacity to repay and positive behavioural attributes in a borrower?

They are directly proportional Signup and view all the answers

How does the credit officer classify a borrower with a good payment habit and good capacity to repay?

Box A in Figure 5.1 Signup and view all the answers

What is the primary purpose of the 5Cs Framework in the context of credit risk assessment?

To provide a comprehensive credit risk assessment Signup and view all the answers

What is a key factor to consider when assessing a borrower's character?

Integrity Signup and view all the answers

According to the economic cycle, which phase has the highest risk to lenders?

Phase C Signup and view all the answers

What is an important consideration when assessing a borrower's capacity?

Occupation and marital status Signup and view all the answers

Which of the following is an example of a business that may be protected from the fallout of a recession?

Rice milling Signup and view all the answers

What does the economic cycle refer to?

The external environment when the request for credit facilities is made Signup and view all the answers

What is a key consideration for a lender when assessing a borrower's capacity?

The borrower's ability to generate sufficient cashflow Signup and view all the answers

Why might a lender consider a borrower high risk?

If the borrower is unable to clearly show sufficient capacity to generate cashflow Signup and view all the answers

What is a key factor that can affect a borrower's capacity to generate cashflow?

The regulatory environment Signup and view all the answers

Why is it important to identify products or services that are in perpetual demand?

Because they can provide a stable source of cashflow Signup and view all the answers

What happens to a product when it reaches the sunset stage?

It experiences declining profit margins Signup and view all the answers

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.

Credit Risk Assessment: 5Cs Framework

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