Lending Principles

DP03

Principles of Lending

11 OCTOBER 2000

1. 2. 3. 4. 5. 6.

Time allowed Total number of questions Number of questions to be answered

: Three (3) hours : Four (4) questions : All four (4) questions

Show details of workings where appropriate. Silent, non-programmable calculators may be used. Begin each answer to a new question on a fresh page. Answer all questions in English.

ANSWER ALL FOUR (4) QUESTIONS

1. In every lending decision, credit officers refer to a principle of lending known as the 5 Cs of credit. (a) (b) What is the relevance of this principle in a loan evaluation process? Explain with details, the 5 Cs of credit. [5] [15] (Total:20 marks)

2.

Explain, using a diagram, the four stages of a loan-life cycle. Your answer should also include the purpose and functions at each stage. (Total:25 marks) Loans default eventually leads to non-performing loans (NPLs). NPLs erode into the profitability of banks as well as endanger their shareholders’ funds. To this end, banks have set up Risk Management Departments to monitor credit quality and to take early preventive actions to control NPLs. One of the methodologies of monitoring credit quality is to be able to identify early warning signals, commonly known as red flags, or the symptoms of a weakening credit. Identify and describe examples of red flags in the following three categories: (a) (b) (c) Account operations Business operations Environment [8] [9] [8] (Total:25 marks)

3.

4.

(a)

Asia Paper Bag Sdn Bhd has since 1990 operated as a manufacturer of plastic carrier bags supplying them on a contract-manufacturing basis to well-known supermarket chains, fast-food outlets, pharmacies and department stores. Lately, Asia Paper Bag Sdn Bhd exports customised plastic carrier bags to Marks n Spencer and Boots Pharmacy in the United Kingdom. During the Asian financial crisis, Asia Paper Bag Sdn Bhd had difficulties in meeting its term loan repayment, and had to restructure the...