Principles of Lending Quiz - Credit Risk Assessment
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Questions and Answers

What is primarily evaluated in credit risk assessment?

  • Customer service ratings
  • Loan repayment history
  • Market trends
  • Key lending principles (correct)

Which of the following models is specifically mentioned for credit risk assessment?

  • SWOT Analysis
  • 5Cs Model (correct)
  • PEST Analysis
  • Porter's Five Forces

Which aspect is important for understanding credit information acquisition?

  • Marketing strategies
  • Credit information verification (correct)
  • Interest rate trends
  • Customer loyalty programs

What aspect is crucial to include in loan documentation?

<p>Loan agreement details (C)</p> Signup and view all the answers

Which framework is mentioned in the context of credit evaluation?

<p>CAMPARI Model (C)</p> Signup and view all the answers

What does the acronym CAMPARI stand for in credit analysis principles?

<p>Character, Ability, Margin, Purpose, Amount, Repayment, Insurance (C)</p> Signup and view all the answers

What is the primary function of the Credit Committee in the lending process?

<p>To evaluate and approve loan applications (A)</p> Signup and view all the answers

Which of the following is NOT a step in the bank process of lending?

<p>Issuance of credit cards (C)</p> Signup and view all the answers

What is the main purpose of the credit analysis department?

<p>To assess credit information and risks (D)</p> Signup and view all the answers

Which process involves the verification of credit information?

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

What is an essential factor assessed in the principles of lending?

<p>5Cs (C)</p> Signup and view all the answers

In the context of lending, what does the term 'origination' refer to?

<p>The submission of loan applications (D)</p> Signup and view all the answers

What information is primarily required during the submission phase of a loan application?

<p>Credit score and income statements (A)</p> Signup and view all the answers

What is typically involved in the process before a borrower accepts a loan offer?

<p>Borrower must comply with legal documentation and pre-disbursement conditions (A)</p> Signup and view all the answers

Which department is primarily responsible for monitoring credit facilities?

<p>Credit Rehabilitation &amp; Recovery Department (D)</p> Signup and view all the answers

What action is taken if a borrower declines an offer?

<p>The borrower can appeal against the offer or facilities (D)</p> Signup and view all the answers

What is a probable consequence of compliance with internal and external regulations in lending?

<p>Increased likelihood of loan disbursement (A)</p> Signup and view all the answers

Who is responsible for the perfection of legal documentations in the lending process?

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

What is indicated by the term 'Credit Rehabilitation & Recovery' in lending?

<p>The management of both monitoring and recovery of credit facilities (D)</p> Signup and view all the answers

Which statement best represents the principle of lending?

<p>Every extension of credit facilities involves risk (A)</p> Signup and view all the answers

What is a significant requirement for the disbursement of credit facilities?

<p>Fulfillment of legal documentation and pre-disbursement conditions (D)</p> Signup and view all the answers

What is a key element in the Principle of Risk Taking that Credit Officers must adopt?

<p>Credit culture for effective risk management (D)</p> Signup and view all the answers

Which principle emphasizes the importance of credit quality during lending?

<p>Principle of Prioritizing the Quality of Credit (C)</p> Signup and view all the answers

Which of the following is a result of implementing a strong credit culture?

<p>Confidence among stakeholders (C)</p> Signup and view all the answers

What does the Principle of Appropriate Tenure of Financing focus on?

<p>Ensuring loan duration aligns with repayment capacity (D)</p> Signup and view all the answers

The Principle of Risk Diversification encourages lenders to:

<p>Spread risk across different assets or borrowers (A)</p> Signup and view all the answers

Which principle discourages irresponsible lending practices?

<p>Principle of Good Governance (A)</p> Signup and view all the answers

Which principle involves assessing the risks associated with lending?

<p>Principle of Risk Taking (C)</p> Signup and view all the answers

What role does a credit officer play in managing credit risk according to the lending principles?

<p>Ensuring compliance with credit principles (C)</p> Signup and view all the answers

What is the total loss for a lender when a loan defaults, considering both the loan principal and interest losses?

<p>RM1.1 million (B)</p> Signup and view all the answers

How much new credit does a lender need to extend to cover RM1 million in loan losses if the average loan size is RM1 million with a 2% interest spread?

<p>RM55 million (B)</p> Signup and view all the answers

What risk does over-concentration in a lending portfolio primarily mitigate?

<p>Credit risk (C)</p> Signup and view all the answers

What requirement was imposed by Bank Negara Malaysia to limit risk concentration in financial institutions?

<p>Single Counter Party Exposure restriction (D)</p> Signup and view all the answers

Why is the capital commitment of a business owner important in credit risk evaluation?

<p>It impacts the likelihood of loan default (D)</p> Signup and view all the answers

What is the consequence of a borrower having a low financial commitment towards their debts?

<p>Higher likelihood of loan default (D)</p> Signup and view all the answers

What is the primary purpose of maintaining a diversified lending portfolio?

<p>To mitigate concentration risk (B)</p> Signup and view all the answers

Which of the following best describes the risk for lenders during economic adverse times?

<p>Higher chances of borrower default (D)</p> Signup and view all the answers

Flashcards

Principles of Lending

Lenders use these principles to make informed decisions about who to lend money to and how much to lend.

The 5Cs Model

The 5Cs model is a framework for evaluating a borrower's creditworthiness. The 5Cs include: Character, Capacity, Capital, Collateral, and Conditions.

The CAMPARI Model

The CAMPARI model is another framework for evaluating a borrower's creditworthiness. The CAMPARI model includes: Character, Ability, Margin, Purpose, Amount, Repayment, Insurance, and Security.

Credit Information and Verification

This involves collecting and verifying information about the borrower (e.g., financial statements, credit reports) to assess their creditworthiness.

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Loan and Securities Documentation

This includes the loan agreement, which outlines the terms of the loan, and security documents, which guarantee repayment (e.g., mortgage, lien on assets).

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Loan Origination

The initial stage of the loan process where a potential borrower submits an application and supporting documentation.

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Credit Analysis

A comprehensive evaluation of a borrower's creditworthiness. It involves analyzing the borrower's financial history, income, and credit score.

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The Five Cs of Credit

A set of five key factors used in credit analysis to evaluate a borrower's creditworthiness: Character, Capacity, Capital, Collateral, Conditions.

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CAMPARI

An acronym that stands for Capital, Asset, Management, Profitability, Administration, Risk, Interest Rate, and Legal.

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Credit Approval

A formal assessment and approval of the requested loan based on the results of the credit analysis and the bank's lending policy.

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Letter of Offer

A written document confirming a bank's willingness to provide a loan to a borrower. It details the terms and conditions of the loan.

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Credit Risk Management Department

The department within a bank responsible for assessing the creditworthiness of potential borrowers.

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Perfection of Legal Documentations

The process of ensuring that all required legal documents are properly executed and filed to secure the loan.

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Disbursement of Credit Facilities

The stage where the loan is formally disbursed to the borrower, and the lender begins monitoring the loan's performance.

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Administration Department

The department tasked with managing the loan's administration, including document processing, disbursement, and ongoing monitoring.

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Credit Facilities Monitoring

The process of evaluating and monitoring the borrower's performance, ensuring they are meeting the loan's terms and conditions.

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Credit Rehabilitation & Recovery Department

The department responsible for handling situations where borrowers experience financial difficulties and may require restructuring or recovery strategies.

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Credit Department

The department responsible for assessing loan applications, making credit decisions, and managing the overall credit risk.

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Loan and Securities Administration

The process of managing the loan after it has been disbursed, including monitoring repayment, collecting interest, and managing any potential defaults.

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Risk Involved in Lending

The inherent uncertainty involved in any lending decision, reflecting the possibility of the borrower not repaying the loan as agreed.

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Loan default

When a loan defaults, it means the borrower can't repay, resulting in a complete loss for the lender.

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Total loan loss

The amount the lender loses when a loan defaults, including the principal (original amount borrowed) and interest.

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Loan recovery

The ability of a lender to recover the loan amount in case of default. It's the chance they get their money back.

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Loan impairment

The extent to which a loan's value has decreased due to the borrower's inability to repay.

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Risk diversification

Spreading loans across different borrowers, industries, and market segments to reduce risk. It's the opposite of putting all your eggs in one basket.

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Financial and capital commitment

The amount of money the borrower has invested in their company or business. This shows their commitment to success.

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Concentration risk

The risk associated with a single borrower, industry, or market segment.

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Single Counterparty Exposure restriction

A rule imposed by Bank Negara Malaysia limiting the amount of exposure a financial institution can have to a single borrower or group.

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Credit Principles in Lending

A credit officer must understand and apply core lending principles to make informed credit decisions and manage risk effectively.

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Principle of Risk Taking

This principle recognizes that lending inherently involves risk. Credit officers need to identify, assess, and mitigate potential risks to protect the lender's interests.

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Prioritizing Quality of Credit

This principle emphasizes the importance of choosing borrowers with a strong credit history, sound financial performance, and the ability to repay their loans.

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Principle of Proportionate Stake

A bank's lending decisions should be guided by the principle of proportionate stake, ensuring that the bank's exposure to risk is aligned with the potential return from the loan.

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Principle of Risk Diversification

This principle emphasizes the importance of diversifying loan portfolios across different industries, borrowers, and geographies to reduce concentration risk.

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Principle of Appropriate Tenure of Financing

This principle highlights the need for appropriate loan terms, specifically the duration for which the loan is offered, to align with the nature of the borrower's business and the purpose of the loan.

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Principle of Purposeful and Productive Lending

This principle stresses the significance of lending for productive purposes that contribute to economic growth and development, rather than speculative ventures.

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Principle of Pari-Passu

This principle underscores the need for loans to be structured and managed in a way that ensures fair treatment to all creditors, avoiding any preference for certain lenders over others.

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Study Notes

Module Authors

  • Jasman Tuyon, PhD
  • Rapheedah Musneh, PhD
  • Siti Julea Supar
  • Nurziya Muzzawer
  • Faculty of Business and Management
  • Universiti Teknologi MARA, Sabah Branch, Kota Kinabalu Campus

Chapter's Outline

  • Principles of Lending
    • 9 Principles
  • Credit Evaluation Framework
    • The 5Cs Model
    • The CAMPARI Model
  • Credit Information and Verification
  • Loan and Securities Documentation
    • Loan Agreement
    • Property Security
    • Other Security
    • Guarantee and Indemnity

Learning Objectives

  • Apply key lending principle in credit risk assessment
  • Use 5Cs and CAMPARI framework in credit risk assessment
  • Understand the credit information acquisition and verification
  • Describe the loan agreement and security documentations

Principles of Lending (Sub-topic 2.1)

  • Every extension of credit involves risk
  • Credit Officers must understand and apply fundamental credit principles for sound judgment and risk management

Principles of Lending (Cont.)

  • Principle of Risk Taking
  • Principle of Risk Diversification
  • Principle of Prioritizing the Quality of Credit
  • Principle of Proportionate Stake
  • Principle of Pari-Passu
  • Principle of Protection
  • Principle of Control
  • Principle of Risk
  • Principle of Appropriate Tenure of Financing
  • Principle of Purposeful and Productive Lending

Recap: Bank Process Insights

  • The bank process includes origination, approval, administration and monitoring/recovery.
  • Different departments are involved in each phase, starting with marketing/sales identifying potential borrowers, through credit analysis and assessment, to credit committee approval, credit administration, recovery, and bank compliance.
  • Loan and securities documentation is an important part of the administration process.

Credit Evaluation Framework (Sub-topic 2.2)

  • In credit risk assessment, lenders identify potential borrowers with positive attitude, responsibility, and willingness to honour obligations.
  • Popular credit analysis approaches for SMEs include the 5Cs Model and the CAMPARI Model.
  • These models are often used complementarily by banks in business lending.

The 5Cs Model

  • Character
  • Capacity
  • Capital
  • Collateral
  • Condition

The CAMPARI Model

  • Character
  • Ability to repay
  • Margin of finance
  • Purpose
  • Amount
  • Repayment terms
  • Insurance

Credit Information and Verification (Sub-topic 2.3)

  • Company documents (credit information)
  • Third Party record/opinions (verification)
  • Warning signals

Warning Signals (in Business lending)

  • Qualified audit reports
  • Recent change of company's auditors
  • Frequent change of office and warehousing arrangements
  • Court notice of litigation against the loan applicant or borrowers
  • Non-filing
  • Warning indicators on credit reports (i.e. CTOS, CCRIS)

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Business Credit Essentials Chapter 2 PDF

Description

Test your understanding of the principles of lending and credit risk assessment. This quiz covers key topics such as the 5Cs and CAMPARI models, credit information verification, and loan documentation. Enhance your skills in evaluating credit risk and managing loans effectively.

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