Provisions for Credit Facilities Quiz

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.

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.