Question 1: What factors have to be taken into account by a bank in considering

an application for an advance?

- External factors
- Internal factors and borrower
- Specific factors
Question 2: What is creditworthiness and how can it be determined?
- Creditworthiness means considering whether borrower is worthy of receiving
requested credit based on their financial capacity.
- It is determined by 5Cs (Character, Capacity, Capital, Collateral, Conditions).
As if lending insitutions feel that propestive borrower may be entitled or worthy
of receiving lower than requested credit, it will be adjusted suitably.
Question 3: Why do banks require a customer to contribute some of the capital
required for a project?
- Because the capital that is contributed on a project can be seen as an
investment, and this refers a motivation for a customer to make more profit
from that project. Therefore, the bank can ensure the capacity to repay loan of
the customer.
Question 4: Distinguish between a loan and an overdraft
- A loan is generally made in one lump sum and are repayable by installment
over a period of time.
- While an overdraft is a running account, which can go into debit and come back
into credit.
Question 5: What are the advantages of a framework for a credit and lending
decision-making?
- When the lender makes a loan, it is hard to know how their customer will
behave in the future, so the framework helps lender to make sound judgement
and reduce risks while granting a loan.
Question 6: What is a credit analysis? What are the various steps involved in a
credit analysis?
- Credit analysis is a method that bank evaluates the ability of individual or
household and business to honor its financial obligations, in order to make loan
decision.
 - Credit analysis consist of:
+ External factors include general law of the land, macroeconomic factors,
industry-specific factors.
+ Lending institution-specific factors: Lending policy of the institution,
loan budget, staff availability.
+ Borrower-specific factor
- There are 10 steps:
+ Step 1: Obtain prescribed loan application form duly completed and
signed by the prospective borrower.
+ Step 2: Obtain required documents and financial statements. This
includes basic documents of identity like borrower’s driving licence.
+ Step 3: Check the loan application form and attached documents for
internal consistency.
+ Step 4: If all the information has been received, preliminary decision
with regard to approval or otherwise of a loan would be made at this stage.
+ Step 5: Conduct detailed appraisal of technical, commercial, financial
and managerial aspects of the loan proposal.
+ Step 6: Assess the financial requirements of the borrower and the type of
facility to be approved.
+ Step 7: If the proposal is approved send a letter conveying the approval
to the borrower advising to execute documents before loan disbursal could be
made. Where the proposal is not approved, reasons for rejection need to be
recorded.
+ Step 8: Where the loan is approved it is important to ensure that all
required documents are executed before loan is disbursed to the borrower.
+ Step 9: Monitor the account periodically to ensure that it is running in
order.
+ Step 10: Where the loan account is not in order, a ‘hard core’ has
developed in the account
Question 7: What does structuring of advances mean?
- Structuring of advances involves three major aspects: obtaining security,
deciding on the debt covenants and pricing.
 + Security:
 Land and improvement to land
 Guarantees
 Equitable mortgage
 Bills of sale
 Crop lien or stock mortgage
+ Debt covenants:
 Fees and interest rates
 Security insurance
 Repayments and actions in case of default
 Stamp duty and government charges
+ Pricing
Question 8: What are the different types of borrowers?
- Personal borrower: minors, persons of unsound mind, insolvents, joint accounts
and husbans and wife.
- Business borrower: sole proprietorship, partnerships, companies.
- Special types of borrower: local authorities, club, literary societies and schools,
unincorporated associations, co-operatives.
Question 9: What is meant by credit culture? Why it is so important?
- Credit culture means the institutional priorities, traditions and philosophies that
suround credit or lending decisions. A cultural attitude towards credit risk
assessment is critical in any credit-granting organisation.
- It is so important because it exerts a strong influence on a bank’s lending and
credit risk management.
Question 10: ‘Lending is an art, not a science’ Do you agree with this statement?
- I agree with this statement for some reasons below.
+ Although making a loan based on a framework which ensures minimize
risk, it does not always follow that framework. Lending is more likely related to
pratice than stereotyped activity.
+ Furthermore, the banks’ customer is not one person, there are many
types of customers with different circumtances, so dealing with those ones is
not easy and the lender needs to handle differently. Even though, it is
impossible to predict how they behave someday.
+ Last but not least, when making a loan, banks have to take into account
personal experience working with customers, so on.