Provisions for Credit Facilities Quiz

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Questions and Answers

What is the main reason for making provisions for non-performing credit facilities?

To attract more customers

To reflect the bank's asset management capability (correct)

To boost the bank's credit rating

To increase profit margins

When should interest overdue for more than 90 days be recognized?

On Cash Basis only (correct)

On an accrual basis

Immediately

On a monthly basis

What percentage of the outstanding balance is the specific provision for Doubtful Credit Facilities?

25%

100%

75%

50% (correct)

How does making provisions affect the value of assets?

Reduces the value of assets Signup and view all the answers

What is the calculation basis for general provisions?

2% of net assets without specific provisions Signup and view all the answers

What factors affect liquidity according to the text?

Quality of assets, quality of earnings, and earnings retention Signup and view all the answers

Which measure is NOT included in CBN liquidity measures as per the text?

Loan to Deposit Ratio Signup and view all the answers

What does Sensitivity to Market Risk measure, based on the text?

Changes in equity prices Signup and view all the answers

What does the calculation for Gap involve according to the text?

RSA – RSL Signup and view all the answers

Which factor is NOT mentioned as affecting Sensitivity to Market Risk?

Volatile profitability Signup and view all the answers

In the context of liquidity, what are the effects of poor liquidity as per the text?

Reduced profitability or increased losses Signup and view all the answers

What defines a credit as performing according to the text?

Principal and interest payment up to date Signup and view all the answers

In the context of non-performing credit, which condition would classify a credit as non-performing?

Interest payment equal to 90 days interest has been capitalized Signup and view all the answers

How is provision for non-performing facilities determined according to the text?

Based on the extent of deterioration of the credits Signup and view all the answers

What is the rationale behind making provisions for performing credits according to the text?

Performing credits may harbor some risk of losses Signup and view all the answers

When would a credit be classified as sub-standard?

When interest payment is overdue for 60 days Signup and view all the answers

What effect does harmonizing provisioning for assets have according to the text?

Facilitates timely recognition of assets quality deterioration Signup and view all the answers

Study Notes

Provisioning for Non-Performing Credit Facilities

The main reason for making provisions for non-performing credit facilities is to ensure that financial institutions set aside a portion of their profits to cover possible losses from defaulting borrowers.

Recognition of Interest Overdue

Interest overdue for more than 90 days should be recognized as a non-performing credit.

Provision for Doubtful Credit Facilities

A specific provision of 20-50% of the outstanding balance is made for Doubtful Credit Facilities.

Effect of Provisioning on Asset Value

Making provisions reduces the value of assets, as it sets aside a portion of profits to cover potential losses.

Calculation Basis for General Provisions

General provisions are calculated based on the total amount of risk assets.

Factors Affecting Liquidity

Factors that affect liquidity include cash flow projections, loan-to-deposit ratio, and reserve requirements.
Other factors include the quality of loan portfolios, concentration of funding, and market risk.

CBN Liquidity Measures

The measure NOT included in CBN liquidity measures is profitability.

Sensitivity to Market Risk

Sensitivity to Market Risk measures the potential loss or gain in earnings or capital due to changes in market conditions such as interest rates, foreign exchange rates, and commodity prices.

Gap Calculation

The Gap calculation involves comparing the maturity of assets and liabilities to determine the exposure to interest rate risk.

Factors Affecting Sensitivity to Market Risk

Factors that affect Sensitivity to Market Risk include changes in interest rates, foreign exchange rates, and commodity prices.
The factor NOT mentioned as affecting Sensitivity to Market Risk is profitability.

Effects of Poor Liquidity

Poor liquidity can lead to difficulties in meeting short-term obligations, reduced financial stability, and increased reliance on costly funding sources.

Performing Credits

A credit is defined as performing if it is current and there is no indication of non-payment.

Non-Performing Credits

A credit is classified as non-performing if the borrower is unable to make interest or principal payments as agreed.

Provision for Non-Performing Facilities

The provision for non-performing facilities is determined based on the estimated loss or impairment of the credit facility.

Rationale for Provisioning for Performing Credits

The rationale behind making provisions for performing credits is to anticipate potential losses from defaults in the future.

Sub-Standard Credits

A credit is classified as sub-standard if the borrower is experiencing financial difficulties and there is a high risk of default.

Harmonizing Provisioning for Assets

Harmonizing provisioning for assets ensures that financial institutions have a consistent approach to setting aside provisions for potential losses, leading to increased transparency and financial stability.

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Description

Test your knowledge on provisions for credit facilities including specific provisions for sub-standard, doubtful, and lost credit facilities. Understand when to recognize interest and principal repayments on a cash basis. Explore the calculation of general provisions based on net assets.