Foundations of Bank Lending - Chapter 1
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Questions and Answers

What does the term 'bank credit' primarily refer to?

  • The provision of financial services provided by banks.
  • The process of defining loan terms for customers.
  • The system of interest rates set by central banks.
  • The provision of finance including loans and guarantees. (correct)

Which of the following is NOT a component of the bank lending business as defined by the Financial Services Act 2013?

  • Leasing business
  • Acceptance of liabilities
  • Factoring business
  • Investment in stocks (correct)

What is one of the major regulations affecting bank credit functions in Malaysia?

  • National Monetary Policy Act
  • Commercial Banking Guidelines
  • Central Bank Licensing Act
  • Financial Services Act 2013 (correct)

Which of these statements best describes the importance of bank credit to banking businesses?

<p>It facilitates the generation of revenue through interest. (C)</p> Signup and view all the answers

Which of the following is a key aspect of the credit process cycle?

<p>Assessment of creditworthiness of applicants. (D)</p> Signup and view all the answers

What is the primary purpose of the Basel Framework?

<p>To set global standards for the prudential regulation of banks. (A)</p> Signup and view all the answers

The Basel Framework primarily regulates which aspect of bank operations?

<p>International banking standards and practices. (B)</p> Signup and view all the answers

What is a consequence of bank operations being highly regulated?

<p>Improved customer trust and security. (D)</p> Signup and view all the answers

Which regulation is NOT classified as an external regulation?

<p>Bank Credit Policy and Guidelines (B)</p> Signup and view all the answers

During the origination phase of the credit process cycle, lenders are primarily focused on:

<p>Evaluating credit risk in relation to acceptance criteria. (D)</p> Signup and view all the answers

Which of the following best describes the lending decision framework in business banking?

<p>It evaluates the potential risk and profitability of loans. (A)</p> Signup and view all the answers

What does RAAC stand for in the lending process?

<p>Risk Asset Acceptance Criteria (B)</p> Signup and view all the answers

Which factor is generally NOT considered in the RAAC for individual or consumer lending?

<p>Company's net worth (B)</p> Signup and view all the answers

What type of information is primarily reviewed during the approval stage of the credit process?

<p>Borrower's repayment ability based on financial and non-financial data (D)</p> Signup and view all the answers

What is one of the responsibilities of the Bank's credit officer during the credit evaluation process?

<p>To recommend a quality credit proposition with acceptable credit risk (D)</p> Signup and view all the answers

The concept of stakeholder theory in regulations primarily emphasizes:

<p>Balancing the interests of all stakeholders involved. (D)</p> Signup and view all the answers

What does the loan disbursement department ensure before releasing the loan?

<p>All approved terms and conditions are complied with and legal documentation is perfected (B)</p> Signup and view all the answers

Which of the following represents the possible outcomes of a credit proposition review?

<p>Outright reject due to poor credit history (B)</p> Signup and view all the answers

The primary objective of internal regulations like Bank Credit Policy is to:

<p>Guide staff in making informed lending decisions. (A)</p> Signup and view all the answers

Who is responsible for handling the execution and perfection of loan agreements?

<p>The legal documentation department or solicitors (A)</p> Signup and view all the answers

Which stage involves monitoring the borrower's compliance with repayment obligations?

<p>Monitoring (D)</p> Signup and view all the answers

What role does the Bank's Credit Approval Committee play in the loan process?

<p>They exercise discretionary approval authority over loan propositions (D)</p> Signup and view all the answers

What does the Letter of Offer (LO) include?

<p>All approved facility terms and conditions (B)</p> Signup and view all the answers

What is the purpose of involving an independent unit for loan disbursement?

<p>To minimize the risk of conflict of interest and fraud (A)</p> Signup and view all the answers

What is the primary purpose of monitoring facility utilization?

<p>To generate profitability for the bank (A)</p> Signup and view all the answers

Which of the following is NOT a part of loan monitoring?

<p>Collecting credit score data (B)</p> Signup and view all the answers

What actions can be taken during the interim or annual review of a borrower’s account?

<p>Modify loan terms based on operating cycle (A)</p> Signup and view all the answers

What is a crucial action a lender must take if a borrower cannot meet loan repayment?

<p>Undertake loan rehabilitation (A)</p> Signup and view all the answers

What could indicate a potential warning signal in loan repayment?

<p>Delayed payments or missed deadlines (C)</p> Signup and view all the answers

What is the last resort for a lender when dealing with a non-performing loan?

<p>Loan recovery via legal proceedings (B)</p> Signup and view all the answers

Why is proactive loan account management essential for lenders?

<p>To identify potential warning signals early (A)</p> Signup and view all the answers

What should site visitations verify regarding a borrower?

<p>The business's operational visibility and management competency (D)</p> Signup and view all the answers

Flashcards

External Regulations

Rules and standards set by external bodies like Bank Negara Malaysia, Financial Services Act 2013, and National Land Code Act 828.

Internal Regulations

Internal guidelines and policies enforced by a lender, such as their Bank Credit Policy.

Basel Framework

A comprehensive set of standards for bank supervision created by the Basel Committee on Banking Supervision.

Origination

The initial stage of lending where the lender approaches potential borrowers, discusses their needs, and assesses their creditworthiness.

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Credit Evaluation / Credit Risk Analysis

The process of evaluating the borrower's creditworthiness based on their financial and non-financial information, including their ability to repay.

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Risk Assets Acceptance Criteria (RAAC)

A set of criteria used to determine if a borrower meets the lender's minimum requirements for lending.

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Shareholder Theory

The theory that suggests a company's primary responsibility is to maximize shareholder value.

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Stakeholder Theory

The theory that suggests a company has responsibilities to various stakeholders, including shareholders, employees, customers, and society.

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What is a bank?

A financial institution that is licensed to carry on banking business or investment banking business.

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What is bank lending?

The process of lending money to borrowers by banks, also known as bank loans or credit facilities.

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What is the Financial Services Act (FSA) 2013?

Regulation that governs the financial services industry in Malaysia.

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What is the Basel Framework?

An international agreement that sets standards for bank capital adequacy, supervision, and risk management.

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What is the credit decision process?

The process of making a lending decision based on a borrower's creditworthiness, financial strength, and ability to repay.

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What is the Central Bank of Malaysia Act 2009?

The law that regulates the Central Bank of Malaysia and its functions, including financial institutions.

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What is ethics in financial institutions?

The principle of providing financial services in a way that is ethical and responsible, including fair treatment of customers, transparency, and accountability.

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What is corporate governance in financial institutions?

The framework of rules, practices, and processes that govern a company's operations and dealings with its stakeholders.

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Credit Evaluation

The process where the bank evaluates a borrower's creditworthiness to determine the risk of lending them money.

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5Cs of Credit

Key factors used in credit evaluation to assess a borrower's creditworthiness, including character, capacity, capital, collateral, conditions, and risk.

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Credit Approval

The process of reviewing and deciding on a loan proposal, involving an assessment of risk and potential return for the bank.

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Letter of Offer (LO)

The formal document issued by the bank to the borrower outlining the approved loan terms, conditions, and interest rates.

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Loan Administration

The legal and administrative processes involved after loan approval, including loan documentation, security agreements, and loan disbursement.

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Loan Monitoring

The ongoing process of tracking a loan account and ensuring the borrower meets all repayment obligations and utilizes the loan effectively.

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Loan Disbursement Department

The department responsible for handling loan disbursement and ensuring all required documentation and conditions are met before funds are released to the borrower.

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Perfection of Loan Agreement and Security Agreement

The process of legally securing the loan by attaching assets or property as collateral, ensuring the bank can recover funds if the borrower defaults.

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Loan monitoring - Facility utilization

Ensuring the bank is regularly checking if loans are being used to generate profit for the bank.

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Loan monitoring - Repayment

The bank regularly assesses if borrowers are paying back their loans on time and looks for any signs that they might struggle to do so.

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Loan monitoring - Interim review

This involves the bank reviewing the borrower's financial situation, business needs, and the possibility of changing the loan terms.

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Loan settlement

The process when a borrower pays back their loan in full at the end of the loan term.

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Loan rehabilitation

Steps taken by the bank to help a borrower who is struggling to repay their loan. This can involve adjusted repayment schedules or loan restructuring.

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Loan recovery

When a borrower cannot repay their loan, the bank takes legal action and may sell the borrower's assets to recover the money owed.

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Loan repayment warning signals

Warning signals or red flags that suggest a borrower may have trouble repaying their loan.

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Pre-emptive action

Steps the bank takes to protect its interests and lower the risk of losing money on a loan.

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Study Notes

Foundations of Bank Lending - Chapter 1

  • Module authors are Jasman Tuyon, PhD; Rapheedah Musneh, PhD; Siti Julea Supar; and Nurziya Muzzawer, from the Faculty of Business and Management, Universiti Teknologi MARA, Sabah Branch, Kota Kinabalu Campus.
  • The learning objectives upon completing this chapter are to define bank credit; clarify its importance to the bank's business; understand the credit process cycle; understand the provisions of the Financial Services Act 2013 and BNM guidelines affecting credit; and explain ethics and governance in financial institutions.
  • The chapter outlines include fundamental principles of bank credit, rules and regulations governing bank credit in Malaysia, and ethics and corporate governance in bank credit.

1.1 Fundamental Principles of Bank Credit

  • 1.1.1 Introduction to Bank Credit:

    • Bank definition and scope of business: Banks are financial institutions regulated under the Central Bank of Malaysia Act 2009 (Act 701) and the Financial Services Act 2013 (Act 139), with "banking business" defined as accepting deposits, processing payments, and providing financing (includes lending, leasing, factoring, purchasing instruments, and accepting liabilities).
    • Bank lending business is highly regulated.

  • 1.1.1.1 Bank Lending Business (cont.):

    • The types of banking operations typically include: wholesale and corporate banking, business/SME banking, retail and consumer banking, treasury, and asset management.

  • 1.1.1.2 Bank Lending Business (cont.):

    • Financial services include lending of money, leasing, factoring, purchasing negotiable instruments, and accepting liabilities.

  • 1.1.1.3 Bank Operation is Highly Regulated:

    • External regulations (e.g., regulations, guidelines, notices, Bank Negara Malaysia directions, Financial Services Act 2013, National Land Code Act 828) and internal policies and guidelines play a critical role in managing the bank's operations and managing risks.
    • The Basel Framework provides global standards for banking supervision.

  • 1.1.2 The Credit Process Cycle:

    • The credit process cycle covers origination, approval, administration, monitoring, and settlement/recovery.
    • Origination involves initial contact, requirement discussion, and assessment of creditworthiness.
    • Approval involves credit risk evaluation using relevant tools like 5Cs and adhering to internal credit policies.
    • Administration involves documentation, execution, and security agreements.
    • Monitoring tracks repayments, detects potential issues, and proactively manages risk.
    • Settlement/recovery handles loan repayment, or if needed, recovery procedures like rescheduling or repossession.

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Description

This quiz covers Chapter 1 of the Foundations of Bank Lending, focusing on the fundamental principles of bank credit. Learn about the credit process cycle, the significance of bank credit, and the ethical guidelines governing financial institutions in Malaysia. After completing this chapter, you will understand the regulations affecting bank credit and the importance of governance in the banking sector.

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