Credit Risk Assessment Framework: Collateral

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What is the primary concern with using an old car, a painting, or a disused building as collateral for a loan?

The asset may appreciate in value over time
The asset may lose its sentimental value
The asset may not provide sufficient pressure on the borrower (correct)
The asset may be difficult to liquidate

What is a key factor in assessing the value of collateral?

The borrower's credit history
The potential marketability of the collateral in the near future (correct)
The lender's reputation
The borrower's income

What is an example of a deterioration of collateral?

A piece of property declared unfit for occupation (correct)
A guarantor gaining income generating capacity
A piece of property increasing in value
A lender's reputation improving

Why is it essential for a lending bank to monitor collateral value?

To prevent deterioration of collateral value (A) Signup and view all the answers

What is a characteristic of a strategic block of shares with voting rights in a family company as collateral?

It is a key asset that can influence the borrower's behaviour (B) Signup and view all the answers

What is the purpose of assessing the transferability of ownership of collateral?

To ensure the collateral is easily transferable (A) Signup and view all the answers

What is the primary purpose of collateral in lending?

To provide an additional layer of protection against potential loss (D) Signup and view all the answers

Why do lenders prefer to structure loans that do not require collateral?

Because such loans are safer and do not require additional protection (C) Signup and view all the answers

What is the 'first way out' for a lender?

The borrower's business cash flow (A) Signup and view all the answers

What is the characteristic of an ideal collateral?

It must be of value to the borrower (A) Signup and view all the answers

Why do lenders seek additional support in the form of collateral?

Because they want to reduce the risk of default (B) Signup and view all the answers

What happens to a good loan with adequate security if the borrower's circumstances change in the future?

It becomes a bad loan (B) Signup and view all the answers

What is the primary expectation of the bank from borrowers in terms of character?

Adherence to traditional values of integrity and responsibility (D) Signup and view all the answers

What is the consequence of a borrower's record of poor behaviour and/or lack of responsibility?

Raised risk to the lending bank (D) Signup and view all the answers

Which of the following attributes is considered equally important as traditional values in assessing the character of the individual borrower?

Discreetness (A) Signup and view all the answers

What is the primary aspect of a borrower's character that is assessed in consumer lending?

Integrity, sense of responsibility, and behaviour (B) Signup and view all the answers

What is the relationship between the character of a company and its senior management?

Well-run companies typify the character and moral strength of its senior management (B) Signup and view all the answers

How does the bank apply the concept of character in credit assessment?

To both individual borrowers and organisations (D) Signup and view all the answers