Bank credit management

CAT

Question one

a) What are the Principles of sound lending? (5 Marks)

● Liquidity
● Purpose
● Profitability
● Security
● National interest

b) State and explain(five (5) different types of collateral used by banks to secure credit
facilities (10 marks)

● Real estate-The most common type of collateral used by borrowers is real

estate, such as one’s home or a parcel of land.
● Cash secured loan Cash is another common type of collateral because it
works very simply..
● Inventory financing- This involves inventory that serves as the collateral for
a loan.
● Invoice collateral Invoices are one of the types of collateral used by small
businesses, wherein invoices to customers of the business that are still
outstanding – unpaid – are used as collateral.

Question two

a) Discuss five (5) different Forms of advances? (5 Marks)[

● Cash credit,
● Overdraft,
● Loans,
● Demand loan vs term loan,
● Secured vs unsecured loan,
● Participation loan or consortium loan
 b) Explain in detail evaluating procedure of commercial loan requests (10 Marks)

o Initial Application: This process usually starts with a business owner

completing a 2-minute form online or talking to a member of our team
o Minimum Criteria: On receipt, we check that the business meets our minimum
criteria for turnover levels and the numbers of years trading.
o Documentation: If the business ticks the necessary boxes, we ask the business
owner to provide the most recent set of financial accounts, the last 6 months
bank statements, and the most recent tax clearance certificate – this is what we
call the Initial Information.
o Initial Analysis: The Initial Information is then input into our credit template.
o Scoring and Pricing the Credit Risk: The score is weighted heavily towards the
debt servicing ability of the business, which is measured using a combination of
standard credit scoring metrics such as the level of existing debt or financial
obligations laying claim to the cash flows of the business (either secured or
unsecured), but also a detailed analysis of the credit balances within the bank
account, other monthly creditor payments and monthly and seasonal cash
balances etc
o 3rd Party Checks: We will also use third-party resources to verify personal
information, the ownership structure of the business, the credit history and to
check for any previous judgements or liquidiations, which are also factored in to
the final score.
o Further Information: Credit team may request additional information (such as
an accountant’s reference, recent management accounts, copies of key
contracts etc.) and/or discuss queries from the initial analysis with the borrower,
their accountant or their financial advisor, so as to complete the credit template
and generate a final credit score.
o Credit Commitee: Depending on the final score or any other exceptional aspect
to the business, the loan application may be brought to the LF Credit
Committee. The credit committee meets daily to discuss any loan requests
which warrant additional discussion.
o Loan Offer: Following the final analysis, or the decision of the Credit Commitee
as required, if the application gets a sufficient score then a loan offer is made.
o Continuous Upgrading/management: the current credit template is the
seventh iteration of the original model used by Linked Finance in 2013, and it is
constantly being amended and upgraded due to macroeconomic factors and
changing market conditions.

Question three

The five Cs of credit is a system used by lenders to gauge the creditworthiness of potential

borrowers. The system weighs five characteristics of the borrower and conditions of the loan,
attempting to estimate the chance of default and, consequently, the risk of a financial loss for the
lender. State and explain the 5 Cs of Credit (10 marks)

a) Character
b)  Capacity/Cash flow 
c) Capital
d) Conditions
e) Collateral