MIDLANDS STATE UNIVERSITY

FACULTY OF COMMERCE

BANKING AND FINANCE DEPARTMENT

BANK LENDING AND CREDIT RISK MANAGEMENT

CODE: BF 405

SESSIONAL EXAMINATIONS

OCTOBER-NOVEMBER 2013

DURATION: 3 HOURS

INSTRUCTIONS

1. There are five(5) QUESTIONS

2. Question 1 is compulsory
3. Apart from question 1, answer other three (3)
QUESTIONS
4. Each Question carries 25 marks.

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 QUESTION ONE (Compulsory)
JJ (Pvt) Ltd is a fruit juice manufacturer in Harare. The firm's latest abridged financial statements
are as follows:

JJ (Pvt) Ltd
Statement of Comprehensive Income as at 30 December 2012

2011 2012
($ 000) ($ 000)

Sales (Credit sales account for 50%) 82 000 112 000

Cost of Sales 60 000 80 000
Selling, general & admin expenses 3 000 5 000
PBIT 22 000 27 000
Interest paid 6 400 5 800
PBT 15 600 21 200
Taxation 4 680 6 360
NPAT 10 920 14 840

JJ (Pvt) Ltd
Statement of Financial Position as at 30 December 2012

2011 2012
($ 000) ($ 000)

Equity & Liabilities

Shareholders equity 100 000 110 000
Share capital 60 000 60 000
Retained earnings 40 000 50 000
Liabilities 92 000 90 500
Long-term liabilities 80 000 75 000
Overdraft 0 0
Accounts payable 12 000 15 500
Total Equity & Liabilities 192 000 200 500
Assets
Non-current assets 132 400 118 500
Current assets 59 600 82 000
Inventory 52 500 73 000
Accounts receivable 3 500 6 500
Cash 3 600 2 500
Total Assets 192 000 200 500

Required:
(a) Evaluate the liquidity, profitability, and asset management for JJ (Pvt) Ltd. Your analysis must

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include the calculation of relevant ratios for both periods and interpretations of the ratios used.
[16 marks]

(b) Apart from the financial analysis, describe any other three (3) approaches that an account
relationship manager can you use to analyse credit risk. [9 marks]
[TOTAL 25 marks]

QUESTION TWO

Clearly explain in detail the three (3) functions underlying the credit process. [25 marks]
[TOTAL 25 marks]

QUESTION THREE
Explain the following terms associated with credit risk;

(a) Commitment fees [5 marks]

(b) Credit culture [5 marks]
(c) Securitisation [5 marks]
(d) Credit policy [5 marks]
(e) Prudential guidelines [5 marks]

[TOTAL 25 marks]

QUESTION FOUR

(a) Outline and explain the main considerations when taking securities in lending. [12 marks]
(b) Evaluate factors that should be considered in loan pricing. [13 marks]
[TOTAL 25 marks]

QUESTION FIVE

There was gradual deterioration in asset quality in most commercial banks in Zimbabwe after
the adoption of the multiple currency exchange rate regime. In this regard,
(a) Using illustrative examples, describe the fundamental causes of non-performing loans
during the given period. [15 marks]

(b) Make recommendations on how credit risk can be minimised when lending. [10 marks]

[TOTAL 25 marks]

END OF PAPER

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