Question

1. In talking about credit policy and the potential risk of a loan, we described liquidity, cashflow and collateral as all important elements in such an analysis. Which of these three is most important? Why?                 [5 pts]

1. We reviewed sample documents that banks use when evaluating the creditworthiness of a business borrower. Name two of them:    [5 pts]

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2. Approximately what percentage of loans are typically ‘past due’ payment? Stated differently, what percentage of loans a bank makes will ‘go bad’ on average?                          [5 pts]
   1. <1%
   2. Between 1% & 3%
   3. Between 3% & 5%
   4. >5%

3. Fee income has become increasingly important to banks’ profitability. Name 3 examples of fee income for banks:

Answer 1

1. Liquidity, cashflow and collateral are all important elements in credit policy. But for obtaining a secured loan from bank, the most important is collateral. For a bank collateral is the property that secures a loan or other debt which a bank can seize if the borrower fails to make proper payment for the loan. For a long term loan, the eqipment, plant and machinery or property can be used as a collateral and for short term loan accounts receivable and inventory can be used.

2.

• Know your customer i.e. KYC is one of the important documents, as it contains the PAN card of the company and the board of directors. And we all know that PAN Card is used for extracting CIBIL score which gives the detail of each loan taken by the company or individual.
• Financial statement which includes Balance sheet, Profit and loss statement and cash flow statement is the another important document. Financial statement helps to facilitate analysis which include ratio analysis such as activity ratio, liquidity ratio, solvency ratio, profitability ratio and valuation ratio.

3. Past due payment are loan payment which has not been made till its due date.Borrower has to pay late fee on loans which comes under past due payment. Between 1% and 3% of loans a bank makes will go bad on average.

4. For bank fee income is one of the important source of revenue. It is the revenue taken by the bank from account related charges to the customer. Three examples of fee income for banks are:

• Non- sufficient funds or insufficient funds in an account
• Overdraft charges i.e. when a user exceeds the with-drawl from available account balance
• Late fees which are charged for past due payment