Principle of Lending

DP03

Principles of Lending

12 OCTOBER 2005

1.

Time allowed

: Three (3) hours

2.

Total number of questions

: Four (4) questions

3.

Number of questions to be answered

: All four (4) questions

4.

Show details of workings where appropriate. Silent, non-programmable calculators may be

used.

5.

Begin each answer to a new question on a fresh page.

6.

Answer all questions in English.

7.

Blank pages are provided at the end of the question paper for rough work.

ANSWER ALL FOUR (4) QUESTIONS

1.

Outline and explain the principles of good lending.

(b)

2.

(a)

[15]

List and briefly explain the 5Cs of credit.

[15]

(Total:30 marks)

Bank lending management and theory is largely based on an understanding of the risk-return principle.

Discuss, with examples, the risk-return principle.

3.

(Total:20 marks)

In the activities of bank lending, lenders look towards collateral as a second-way out for loan repayment.

In the case of quoted shares as collateral, special characteristics apply as opposed to landed properties

as collateral.

In relation to quoted shares as collateral, answer the following questions:

(a)

What does market value of quoted shares mean and where can such values be obtained?

[5]

(b)

What is the margin of advance? Illustrate your answer with a simple calculation.

[5]

(c)

Should the value of collateral fall below the agreed margin, the lender will request the borrower

to top-up the margin.

Explain what the above statement means and how a top-up could be effected.

[5]

(d)

(a)

Explain the process of a loan review and state its objectives.

(b)

4.

What are five credit requirements when accepting shares as collateral?

[10]

(Total:25 marks)

List five “red flags” that are symptoms of a weakening credit for each of the following areas:

[10]

(i)

[5]

(ii)

Business operations

[5]

(iii)

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