Credit Risk Assessment: 5Cs Framework
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Questions and Answers

What primary attributes does a credit officer seek in a potential borrower?

  • Positive behavioural attributes and good credit history
  • Capacity to repay and positive behavioural attributes (correct)
  • Capital and collateral
  • Capacity to repay and good payment habits

    • What does the 5Cs Framework provide to credit officers?

  • A checklist for identifying potential borrowers
  • A sufficient basis to decide on a loan
  • Key characteristics to consider in a potential borrower (correct)
  • A formula for calculating credit risk

    • What is the relationship between the 5Cs Framework and the credit risk assessment?

  • The 5Cs Framework is a necessary consideration for credit risk assessment (correct)
  • The 5Cs Framework is a substitute for credit risk assessment
  • The 5Cs Framework is a sufficient condition for credit approval
  • The 5Cs Framework is unrelated to credit risk assessment

    • What aspect of a borrower's profile does Character represent in the 5Cs Framework?

    <p>Positive behavioural attributes</p> Signup and view all the answers

    What is the purpose of the matrix shown in Figure 5.1?

    <p>To describe the different types of borrowers in the market</p> Signup and view all the answers

    What is a major concern for lending banks regarding borrowers?

    <p>The borrower's ability to meet loan service obligations</p> Signup and view all the answers

    Which of the following borrowers may have a poor debt repayment capacity?

    <p>Borrowers with negative attitudes towards debt repayment</p> Signup and view all the answers

    Why do lenders need to assess a borrower's character?

    <p>To gauge their willingness to repay debt</p> Signup and view all the answers

    What can change over time to impact a borrower's financial standing?

    <p>Their risk profile</p> Signup and view all the answers

    Which of the following is NOT a characteristic of a borrower with a poor debt repayment capacity?

    <p>Impressive business performance track record</p> Signup and view all the answers

    What is the primary focus of the 5Cs Framework in evaluating business credit risk?

    <p>A borrower's attitude and willingness to repay debt</p> Signup and view all the answers

    Why do lenders need to assess a borrower's credit risk?

    <p>To identify potential risks and mitigate them</p> Signup and view all the answers

    What is the primary expectation of a borrower's character by the bank?

    <p>To possess traditional values of integrity and responsibility</p> Signup and view all the answers

    What is considered equally important as traditional values in assessing the character of the individual borrower?

    <p>Being discreet, genuine, honest and prudent</p> Signup and view all the answers

    What can impact a borrower's debt service capacity?

    <p>Changes in their financial standing</p> Signup and view all the answers

    In the context of consumer lending, what does the character of the individual borrower refer to?

    <p>Integrity, sense of responsibility and behaviour</p> Signup and view all the answers

    Which of the following is a characteristic of a borrower with a negative attitude towards debt repayment?

    <p>Shirking debt repayment obligations</p> Signup and view all the answers

    What is the relationship between a borrower's character and their credit risk?

    <p>A borrower's character is one aspect of their credit risk</p> Signup and view all the answers

    In the assessment of character, what is a red flag for the lending bank?

    <p>A borrower's record of poor behaviour and/or lack of responsibility</p> Signup and view all the answers

    How do the characteristics of a well-run company relate to the character of its senior management?

    <p>They typify the character and moral strength</p> Signup and view all the answers

    What is the character of a business borrower a review of?

    <p>The management team as a whole and its relationship with the controlling parties</p> Signup and view all the answers

    What is known as organisational discipline and trustworthiness in a business?

    <p>Corporate Governance</p> Signup and view all the answers

    What is a key aspect of a business's corporate character?

    <p>The management team's trustworthiness and discipline</p> Signup and view all the answers

    Why is it important to assess the character of a borrower?

    <p>To assess the borrower's expertise and vision</p> Signup and view all the answers

    What aspect of a borrower's character does their management lifestyle reflect?

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

    What can arise within an organisation due to different levels of supporting managers?

    <p>Conflicts of interest and power struggles</p> Signup and view all the answers

    Which of the following borrower attributes is associated with a lower likelihood of default?

    <p>Prudent management style</p> Signup and view all the answers

    What is an important consideration in assessing a borrower's character?

    <p>All of the above</p> Signup and view all the answers

    Which aspect of a borrower's character is reflected in their willingness to repay?

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

    What does a borrower's marital status indicate about their likelihood of default?

    <p>They are less likely to default</p> Signup and view all the answers

    What trait is a credit officer likely to assess when examining a loan applicant's character?

    <p>Moral obligation to repay debt</p> Signup and view all the answers

    What is the primary aim of assessing a loan applicant's character?

    <p>To establish creditworthiness</p> Signup and view all the answers

    In evaluating a loan applicant's character, what aspect is a credit officer likely to prioritize?

    <p>Personal values and integrity</p> Signup and view all the answers

    What does a credit officer aim to uncover when assessing a loan applicant's character?

    <p>Trustworthiness and reliability</p> Signup and view all the answers

    Which of the following is NOT a key aspect of a loan applicant's character?

    <p>Industry expertise</p> Signup and view all the answers

    What is a key indicator of a company's character in the industry?

    <p>Its track record and reputation in the industry</p> Signup and view all the answers

    Why is character assessment more personal in consumer lending?

    <p>Because it involves individual borrowers</p> Signup and view all the answers

    What can a credit officer do to assess a company's character?

    <p>Hold personal interviews with the CEO</p> Signup and view all the answers

    Why is it important for a company to have a strong character?

    <p>To stay competitive in the modern marketplace</p> Signup and view all the answers

    What can a lender learn from previous experiences with a borrower?

    <p>The borrower's character</p> Signup and view all the answers

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