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</p> Signup and view all the answers

    Which framework is mentioned in the context of credit evaluation?

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

    What is the main purpose of the credit analysis department?

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

    Which process involves the verification of credit information?

    <p>Approval</p> Signup and view all the answers

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

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

    Which department is primarily responsible for monitoring credit facilities?

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

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

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

    Which statement best represents the principle of lending?

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

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

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

    The Principle of Risk Diversification encourages lenders to:

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

    Which principle discourages irresponsible lending practices?

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

    Which principle involves assessing the risks associated with lending?

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

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

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

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

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

    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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    Related Documents

    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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