Financial Risk Assessment Quiz
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Questions and Answers

A company consistently requests extensions on the maturity dates of its trade bills. What might this indicate about the company's financial situation?

  • The company is strategically delaying payments to take advantage of favorable exchange rates.
  • The company may have tight cash flow or an inappropriate funding structure due to financing tenure not matching the operating cycle. (correct)
  • The company has a well-managed cash flow, allowing it to optimize payment schedules.
  • The company is experiencing rapid growth and needs more time to manage its expanding operations.

    • What does a claim against a Bank Guarantee issued on behalf of a borrower typically indicate?

  • The borrower has breached a contract obligation and is unable to pay a creditor on time. (correct)
  • The beneficiary is seeking clarification on contract details.
  • The borrower is renegotiating contract terms for better rates.
  • The borrower is proactively managing its liabilities.

    • Why is a significant change of external auditor or accounting policies a potential warning sign?

  • It could indicate an attempt to disguise actual financial performance, raising the risk of qualified accounts. (correct)
  • It demonstrates the borrower's commitment to transparency and regulatory compliance.
  • It could be a strategy to improve the accuracy and reliability of financial reporting.
  • It indicates the borrower's proactive approach to corporate governance.

    • What risk is indicated by a substantial fluctuation in sales and profitability?

    <p>Risk of overtrading and unstable cash flow generation. (A)</p> Signup and view all the answers

    A large increase in stocks and trade receivables may reflect which of the following risks?

    <p>Risk of stocks obsolescence, change in valuation method and rising bad debts position that may affect the borrower's cash flow and debts servicing ability. (A)</p> Signup and view all the answers

    Which scenario would MOST likely prompt a lender to consider loan rehabilitation?

    <p>A borrower experiencing temporary cash flow issues with a strong potential for recovery. (A)</p> Signup and view all the answers

    An increase in credit inquiries for a borrower may indicate what situation?

    <p>The borrower is seeking additional financing due to potential creditworthiness concerns. (B)</p> Signup and view all the answers

    What is the PRIMARY difference between a 'watch list' loan and a 'special mention' loan?

    <p>A watch list loan exhibits weaknesses and may become impaired in the future, while a special mention loan has already defaulted but isn't yet classified as impaired. (C)</p> Signup and view all the answers

    A lender is considering loan rescheduling for a struggling borrower. What aspect of the loan agreement is MOST likely to be adjusted?

    <p>The final maturity date of the loan. (C)</p> Signup and view all the answers

    Which event impacting a borrower's business would be considered external information that could signal potential threats?

    <p>A newly imposed restrictive industry quota affecting the borrower's market access. (D)</p> Signup and view all the answers

    Which activity is part of loan monitoring and account management after loan disbursement?

    <p>Reviewing the appropriateness of the banking facility's structure based on the borrower's facility utilization. (C)</p> Signup and view all the answers

    Why is annual credit review important in loan monitoring?

    <p>To determine the acceptability of the borrower's credit risk profile. (C)</p> Signup and view all the answers

    How does reviewing industry and market developments benefit loan monitoring?

    <p>It provides insights into factors that could affect the borrower’s business viability. (C)</p> Signup and view all the answers

    What is the primary purpose of collateral review during loan monitoring?

    <p>To reassess the adequacy and quality of the security and credit support. (C)</p> Signup and view all the answers

    Why is the compliance of lending covenants important in loan account management?

    <p>It serves as a warning signal for potential issues with the borrower's management and corporate governance. (B)</p> Signup and view all the answers

    What aspect of a borrower's business is assessed through a review of historical audited financials and financial forecasts?

    <p>The borrower's future cash flow generation and debt servicing ability. (D)</p> Signup and view all the answers

    What does a legal documentation review primarily aim to achieve regarding loan security?

    <p>To ensure the bank's legal enforcement right over security remains intact. (C)</p> Signup and view all the answers

    In the context of loan account management, what does reassessing the adequacy of existing security arrangements involve?

    <p>Evaluating if the current security sufficiently covers the outstanding loan amount considering changes in market value or borrower's financial health. (C)</p> Signup and view all the answers

    Which action represents providing additional credit support during loan restructuring?

    <p>Subordinating shareholder advances to the lending bank's claim. (A)</p> Signup and view all the answers

    During the loan restructuring process, what is the primary reason a borrower may need additional funding?

    <p>To cover operational cash flow deficits during the initial stages of restructuring. (C)</p> Signup and view all the answers

    In a loan recovery process, what is the first step a lender typically undertakes when a borrower fails to meet the restructured terms?

    <p>Commence loan recall through a legal notice of demand. (D)</p> Signup and view all the answers

    When proceeds from the sale of a legally charged property are insufficient to cover the outstanding loan balance, what action can a lender take?

    <p>The lender can write off the remaining amount or initiate civil proceedings. (B)</p> Signup and view all the answers

    What is the implication of subordinating shareholder's advances to the lending bank when the bank provides a new loan?

    <p>The lending bank's claim on assets takes precedence over shareholders' advances. (B)</p> Signup and view all the answers

    What is the primary reason a lender should conduct periodic site visits to a borrower's place of business?

    <p>To understand the borrower's business, identify financing opportunities, and verify assets. (B)</p> Signup and view all the answers

    Which of the following is a key warning sign a lender might detect during a site visit to a borrower's premises?

    <p>Poor quality and condition of equipment, excessive stock holding, and high executive turnover. (A)</p> Signup and view all the answers

    Why is it essential for a lender to stay informed about the latest developments and regulations affecting a borrower's business and industry?

    <p>To proactively manage risks associated with the borrower's business environment and ensure compliance. (C)</p> Signup and view all the answers

    In what scenario might a lender be most concerned about insolvency risk based on high financial gearing?

    <p>During an industry or economic downturn, potentially leading to an inability to meet debt obligations. (C)</p> Signup and view all the answers

    What does maintaining a 'close rapport and two way communication' achieve in account management?

    <p>It fosters a collaborative environment for early risk detection and proactive problem-solving. (B)</p> Signup and view all the answers

    How can a high turnover of key executives and/or low staff morale impact a borrower's business?

    <p>It can negatively affect productivity and efficiency, leading to operational inefficiencies. (A)</p> Signup and view all the answers

    Why would a lender view a borrower's decision to diversify into a new business without expertise as a potential warning sign?

    <p>It may dilute core business resources and expose the borrower to risks in an unfamiliar industry. (D)</p> Signup and view all the answers

    What risk is increased when a business has Poor maintenance of physical plant and machinery, and inefficient inventory control

    <p>Disruptions to production and a drain on the business's cash flow. (A)</p> Signup and view all the answers

    In a foreclosure proceeding, which action initiates the process of selling a property via public auction through the courts or land office?

    <p>Applying for an order for sale from the High Court or Land Office. (D)</p> Signup and view all the answers

    What immediate financial obligation does the successful purchaser at a property auction have, and within what timeframe must the remaining balance be settled?

    <p>A 10% deposit of the reserve price, with the balance due within 120 days. (D)</p> Signup and view all the answers

    Under a Loan Agreement Cum Assignment (LACA), what mechanism empowers a bank to sell a property via public auction or private treaty?

    <p>The power of attorney granted in the LACA document. (A)</p> Signup and view all the answers

    When a bank acts on a debenture with fixed and floating charges, what action does it take to initiate the sale of the property to settle the outstanding loan?

    <p>Crystallizes the floating charge and appoints a receiver. (A)</p> Signup and view all the answers

    Besides public auction and private treaty, what other legal actions can a bank take to enforce a court judgment against a borrower?

    <p>Bankruptcy Order, Writ of Seizure, Prohibiting order, Garnishing Funds, Judgement debtors summon, Winding up petition. (D)</p> Signup and view all the answers

    Flashcards

    Loan Monitoring

    The process of overseeing a borrower's financial health after loan disbursement to identify risks and opportunities.

    Account Management

    Ongoing management of a borrower's account, including loan monitoring and financial reviews to ensure risk control.

    Annual Credit Review

    Yearly assessment of a borrower's credit risk profile and financial statements to gauge performance and risk.

    Collateral Review

    An evaluation of the adequacy and quality of assets pledged as security for the loan.

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    Legal Documentation Review

    Assessment of the legal agreements to validate enforceability and compliance with loan conditions.

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    Lending Covenants

    Agreements or conditions set in a loan contract that must be fulfilled by the borrower to avoid default.

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    Financial Condition Assessment

    Analysis of a borrower's financial statements to evaluate cash flow and debt servicing ability.

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    Warning Signals in Credit Risk

    Indicators of potential problems with a borrower's financial health, usually derived from non-compliance with covenants.

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    Extension of maturity dates

    Request to lengthen the time for a financial obligation to be repaid, often indicating cash flow issues.

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    Breach of contract

    Failure to fulfill the obligations set in a contract, indicated when claims are made against bank guarantees.

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    Change of auditor

    Switching auditors can suggest attempts to hide financial difficulties or mismanagement.

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    Fluctuation in sales

    Large changes in sales and profitability, indicating risks of overtrading and unstable cash flow.

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    Increase in stocks and receivables

    A rise in inventory and accounts receivable, posing risks of obsolescence and bad debts.

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    Loan Restructuring

    Modifying the terms of a loan to accommodate borrowers' financial situation.

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    Subordination of Shareholders' Advances

    Shareholder loans become secondary to bank loans during restructuring.

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    Additional Funding in Restructuring

    Need for more capital to cover cash flow deficits during restructuring.

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    Loan Recovery Process

    Steps taken by a lender to reclaim unpaid loans, starting with legal recall.

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    Recovering Outstanding Loans

    Lender can pursue legal action if loan proceeds are insufficient to settle debts.

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    Credit Enquiries

    High numbers of trade or credit enquiries signal concerns about a borrower's creditworthiness.

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    Commercial Disputes

    Legal conflicts that may incur significant compensation affecting borrower’s financial health.

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    Loan Rehabilitation

    Support actions such as rescheduling or restructuring loans for borrowers struggling temporarily.

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    Watch List

    Loans identified as at risk of being downgraded to impaired status soon due to weaknesses.

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    Loan Rescheduling

    An agreement allowing a borrower more time to repay, modifying existing loan terms.

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    Financial Gearing

    The ratio of a company's debt to its equity, indicating financial leverage.

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    Insolvency Risk

    The possibility that a company cannot meet its financial obligations as they come due.

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    Site Visitation

    A scheduled visit to a borrower's business premises to assess operations and resources.

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    Warning Signals

    Indicators that may suggest financial distress or mismanagement in a business.

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    High Turnover of Key Executives

    Frequent changes in leadership that can impact company stability and morale.

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    Poor Business Planning

    Lack of effective strategies and foresight that can harm business performance.

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    Idle Production Capacity

    When a company's production resources are not being utilized efficiently.

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    Diversifying Business

    Expanding into different business areas that may lack expertise or focus.

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    Foreclosure Proceedings

    Legal process to sell property due to unpaid loans via auction.

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    Order for Sale

    Court-issued permission to sell property to settle debts.

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    Auction Sale Process

    Selling property to the highest bidder after a public announcement.

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    Chargee Bank

    Financial institution holding the loan, entitled to the sale proceeds.

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    Power of Attorney (LACA)

    Legal authorization in LACA allowing banks to sell secured properties.

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    Study Notes

    Managing Bank Credit Portfolio

    • Loan monitoring and account management commence after loan disbursement, stage 4 of the credit process cycle.
    • Loan monitoring is part of account relationship management, identifying business opportunities and potential risks. Early warning signals may require bank intervention.
    • Portfolio management and loan monitoring involve:
      • Monitoring banking facility utilization and borrower account conduct.
      • Assessing borrower financial performance, reviewing financial statements, and conducting site visits.
      • Reviewing industry and market developments impacting borrower viability.

    Loan Account Management

    • Annual account reviews are integral to account management, involving historical financials and forecasts to evaluate future cash flow and debt servicing ability.
    • Other review areas include:
      • Compliance with lending covenants.
      • Industry outlook where borrower operates.
      • Facility structure appropriateness.
      • Adequacy of existing security arrangements.
      • Validity and enforceability of security documentation.
    • Non-compliance with lending covenants indicates management incompetence and poor corporate governance. Gearing and dividend ratios are common covenants ensuring shareholder commitment and cash flow for loan repayment.
    • Breaches can signify inadequate shareholder commitment, risk of insolvency or poor cash management.

    Loan Monitoring

    • Loan monitoring identifies business opportunities, and early warning signals requiring bank intervention.
    • Early detection of warning signals allows lenders to take corrective action before total credit default occurs.
    • Loan classification:
      • Watch List: for loans showing weaknesses, with potential for downgrade to impaired within 12 months.
      • Special Mention: for loans defaulted, but not yet classified as impaired.

    Scope of Portfolio Management and Loan Monitoring

    • Monitoring utilization of banking facilities.
    • Reviewing borrower's financial statements and forecast.
    • Conducting site visitation to borrower's premises.
    • Monitoring external industry/market development, and external information.

    Monitoring of Banking Facilities Utilization

    • Credit Officers monitor borrower payment records and utilization trends.
    • Early detection of warning signals (e.g., trade bill rollovers, kite flying activities) allows for preemptive measures to prevent loan defaults.
    • Monitoring can improve account profitability by encouraging borrowers to transact more through the bank.
    • Understanding borrower transaction trends helps structure facilities according to their needs.

    Warning Signals (from Bank's Current Accounts)

    • Frequent exceeding of credit limits indicates cash flow problems.
    • Dormant overdrafts with limited activity indicate a potential drop in sales or mismatched financing.
    • Frequent cheque returns signal increasing bad debts and tight customer liquidity.
    • Unusual deposit/withdrawals possibly indicate major asset transactions.
    • Frequent repayment arrears (over 90 days) indicate weak debt servicing and tight liquidity.

    Review of Borrower's Audited Financial, Management Account & Financial Forecast

    • Historical financial data provides insight into management competence in financial resource management.
    • Borrower-provided financial forecasts must be realistic, providing accurate cash flow and repayment capacity outlooks.
    • Management accounts compare actual to forecast performance showing whether financial targets are met.
    • Warning signals include changes in external auditors, substantial shifts in sales and profitability, large increases in stocks or receivables, or rising borrowings, which could signal financial trouble in an industry downturn.

    Site Visitation to Borrower's Premises

    • Frequent contact with borrowers is key to effective account management.
    • Site visits allow for better understanding of borrower's business operations, identification of financing opportunities, verification of assets, and early detection of problems.
    • Key observation areas include machine/equipment quality, stock levels, production efficiency, and personnel turnover, as potential warning signs.

    Monitoring External Industry & Market Development and External Information

    • Lenders need to stay informed about industry trends, regulations, disputes, litigations, and mergers/acquisitions affecting borrowers.
    • High trade/credit inquiries indicate creditor concerns about borrowing, hinting at additional financing needs.
    • Commercial disputes, particularly litigations, may significantly impact borrower financial viability, requiring lender awareness.

    Loan Rehabilitation

    • For loans under watchlist or special mention, loan rehabilitation is an option when borrower's business and cashflows are temporarily affected, potentially recovering.
      • Re-scheduling of loan payments may be undertaken.
      • Restructuring may involve new agreements and security changes, new funding, or other alternative security.

    Loan Rescheduling

    • An exercise where the bank provides forbearance for non-performing borrowers seeking more time to improve cashflow and business conditions.
    • Conditions for rescheduling include temporary delays in cash flow with verifiable causes.
    • Rescheduling does not require changes to existing security or loan terms.
      • Options include extending the loan's term or changing repayment schedule, interest, or payment amounts temporarily.

    Loan Restructuring

    • Restructuring alters existing loan conditions. Restructuring is only pursued if significant loan losses may occur via recovery.
    • May entail new or supplementary loan agreements, new security arrangements, or additional funding.

    Loan Recovery

    • If restructuring or rescheduling fails to resolve issues, loan recovery is the last resort.
    • Recovery starts with a legal notice.
    • Legal proceedings follow to enforce rights over existing collateral and secure proceeds from the sale of assets to settle loan balances.
    • Different approaches exist depending on the type of collateral.

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    Managing Bank Credit Portfolio PDF

    Description

    Test your understanding of various financial indicators and their implications on a company's financial health. This quiz covers aspects such as trade bills, bank guarantees, auditor changes, and loan classifications. Assess your knowledge on financial risks associated with businesses.

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