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Tutorial Chapter 4 Part 2

Banking institutions must have well-defined credit granting criteria that establish eligibility requirements, qualifying amounts, and terms and conditions for credit. When appraising credit, banks should consider the purpose and source of repayment, the borrower's integrity and reputation, and their risk profile. Post-mortem reviews of significant credit cases examine approval guidelines compliance, borrower assessment, problem identification timeliness, documentation adequacy, and credit condition effectiveness. Stress testing should identify economic downturn scenarios and their potential effects on credit exposures to assess the bank's resilience. Key factors for credit approval include purpose and source of repayment, borrower integrity, risk profile, repayment history and capacity, and forward-looking repayment analyses. Credit limit management should set risk

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52 views2 pages

Tutorial Chapter 4 Part 2

Banking institutions must have well-defined credit granting criteria that establish eligibility requirements, qualifying amounts, and terms and conditions for credit. When appraising credit, banks should consider the purpose and source of repayment, the borrower's integrity and reputation, and their risk profile. Post-mortem reviews of significant credit cases examine approval guidelines compliance, borrower assessment, problem identification timeliness, documentation adequacy, and credit condition effectiveness. Stress testing should identify economic downturn scenarios and their potential effects on credit exposures to assess the bank's resilience. Key factors for credit approval include purpose and source of repayment, borrower integrity, risk profile, repayment history and capacity, and forward-looking repayment analyses. Credit limit management should set risk

Uploaded by

Aliza Nazar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Tutorial Chapter 4 Part 2

1. Define credit granting criteria .


Banking institutions must operate under sound, well-defined credit-granting criteria.
These should set out the qualifying criteria for the eligibility of credit and the amount
qualified for the types of credit to be given and the terms and conditions to be applied
on the credits granted.

2. Identify three factors of credit appraisal requirement for reporting and


documentation .
● the purpose of the credit and source of repayment.
● the integrity and reputation of the borrower.
● the current risk profile including the nature and aggregate amounts of exposure
of the borrower and its sensitivity to economic and market developments.

3. Discuss five components in post-mortem review used by banks as it commonly


carried out on significant cases .
● compare the credit’s terms and characteristics with lending guidelines.
● reassess the borrower’s condition at the time of approval
● assess the timeliness of problem identification
● assess documentation adequacy and
● assess the effectiveness of credit conditions imposed.

4. Discuss two areas the bank should examine during stress analysis .

Stress testing should include identifying possible events or future changes in economic
conditions that have unfavorable effects on the banking institution’s credit exposures
and assessing the banking institution’s ability to withstand such effects. Three areas
the banking institution should examine are firstly, economic or industry downturns
especially toward a business and economy. Next, Market-risk events are the possibility
we will experience losses due COVID 19 pandemic. In addition, liquidity conditions refer
to when we are able to get a loan from the market.

5. Credit approvals should be made in accordance with the bank’s written guidelines
and granted by appropriate levels of management. Determine five (5) factors to be
considered and documented in approving credits.
● the purpose of the credit and source of repayment.
● the integrity and reputation of the borrower.
● the current risk profile including the nature and aggregate amounts of
exposure of the borrower and its sensitivity to economic and market
developments.
● the borrower’s repayment history and current capacity to repay, based on
historical financial trends and cash flow projections.
For retail-based loans, historical financial trends and cash flow projections may
not be practically feasible.
● a forward-looking analysis of the capacity to repay based on various scenarios, in
particular, on likely downside scenarios.
The appropriateness of the term structure of credit to be given based on the
borrower’s cash flow profile.

6. List the essential components of the credit limit risk management process. (5m)
● set boundaries for organizational risk-taking.
● be consistent with the institution’s overall risk measurement approach.
● be applied on a bank-wide basis where credit risks also arise in other activities of
the banking institution.
● permit management to control exposures and to monitor actual risk taking
against predetermined tolerances, as set by the Board or committee that
oversees credit risk management.
● Ensure that exposures which exceed certain predetermined levels receive
prompt management attention.

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