39 Questions
Which element in the 5Cs Framework refers to the potential borrower's payment habits?
Character
What does box A in Figure 5.1 represent about a borrower?
Good payment habits and good ability to repay
In credit risk assessment, what is 'Condition' in the 5Cs Framework most likely referring to?
External economic conditions affecting borrower
Which of the following is NOT one of the 5Cs Framework elements?
Curiosity
What should the credit officer follow to propose the appropriate credit risk management strategy?
The 5Cs Framework
During Phase B, what indicates the boom conditions in the economy?
Excess demand rapidly building up
What key characteristic does 'Capital' in the 5Cs Framework refer to?
Borrower's financial reserves
'Certificate in Credit - The 5Cs Credit Risk Assessment Framework' details how many elements that credit officers should consider?
5
What is a characteristic of Phase C in the economic cycle?
Panic selling of assets
In which phase do surviving businesses focus on 'housekeeping'?
Phase D
'Collateral' in the 5Cs Framework is most closely related to which aspect of credit assessment?
'Ability'
What industry is mentioned as being more susceptible to the effects of a recession?
Construction
What kind of economic environment do companies and investors with cash positions capitalize on during Phase D?
Weak market
Which industry is likely to have a more challenging time securing loans during a recession?
Construction
What typically happens in the construction industry during an economic recession?
Abandoned projects and severe unemployment
What is a common outcome among weak competitors during Phase D of the economic cycle?
Liquidation and closure
What is the significance of 'character' in credit assessment?
It includes attributes like integrity, responsibility, honesty, and discretion.
Why does a borrower's lack of responsibility pose a risk to the lending bank?
It indicates the borrower's potential to default on obligations.
How does the character of a well-run company typically reflect in credit assessment?
It indicates strong moral values of senior management.
What values are expected from borrowers to possess in the context of character assessment?
Integrity and responsibility.
How does a borrower's record of poor behavior affect credit risk?
It raises credit risk.
Why are traditional values like integrity and responsibility important in credit assessment?
Because they help in assessing character and reliability.
In what way do positive attributes like being genuine and honest influence credit assessment?
They raise the risk to the lending bank.
What does a borrower's lack of prudent behavior indicate in credit assessment?
A higher risk to the lending bank
What type of traits does a credit officer hope to uncover when assessing the character of a loan applicant?
Ethical behavior and trustworthiness
How can a loan be justified when loan repayment arises from uncertain future cash flows?
By conducting a thorough risk assessment
Do you agree with the statement that 'Capital reflects commitment'? Explain.
Partially agree, capital is one aspect of commitment
How does collateral serve the purpose of protecting a loan?
By securing an asset that can be used as repayment in case of default
Why is cash flow considered a component of capacity in the 5C Framework?
To evaluate the borrower's ongoing ability to generate income
What distinguishes the product life cycle from the economic cycle in the context of making effective loans?
Product life cycle involves market introduction, growth, maturity, decline; economic cycle involves boom, recession, recovery phases
In what way is collateral considered a safe source of loan repayment?
Collateral reduces the risk for lenders by offering an asset as security against default
What is a key reason why lenders are likely to avoid lending to the construction sector in a recessionary environment?
Uncertainty about when the environment will stabilize and recover.
What is a potential risk of lending at the decline stage of an industry's life cycle?
Higher risk of impaired loans.
What characterizes the growth stage of an industry's life cycle?
Viable industry showing signs of growth and strong profits.
Which products are likely to be considered 'sunset products' according to the text?
Greeting cards and facsimile machines.
Why are businesses likely to spend significant amounts on new investments and product promotion during the pioneering development phase?
To reduce risks associated with new ventures.
In a recession, why do rice milling and food-processing businesses recover faster compared to the construction sector?
Due to uncertainty in the construction sector's stability.
What happens to sustainability of sales revenue, cash flows, and profitability as an industry life cycle reaches its sunset phase?
They become at risk.
What is a common outcome for businesses that participate early in sunrise industries according to the text?
Large payoffs and rewards.
Test your knowledge on economic boom and panic phases, including the characteristics of Phase B and Phase C. Learn about consumer behavior, investor sentiment, central bank signals, and the effects on the economy.
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