BAO3404 TUTORIAL GUIDE

TUTORIAL 2
Q1. What factors have to be taken into account by a bank in considering an application for an
advance?

Q.2. What is creditworthiness and how can it be determined?

Q3. Why do banks require a customer to contribute some of the capital required for a project?

Q4. Distinguish between a loan and an overdraft.

Q.5. What are the advantages of a framework for credit and lending decision-making?

Q6. What is credit analysis? What are the various steps involved in credit analysis?

Q7. What does structuring of advances mean?

Q8. What are the different types of borrowers?

Q 9. What is meant by credit culture? Why is it so important?

Q 10. ‘Lending is an art not a science’. Do you agree with this statement?

TUTORIAL 3
Q1. What is statistical credit scoring? How does it differ from judgemental methods?
Q2. Does the adoption of credit scoring add value to a financial institution? What potential
exists for an adverse outcome?
Q3. Credit scoring methods have mushroomed in recent years. What are 3 applications of the
differing methods? How do they add value to the financial institution?
Q4. Why is logistic regression the most common technique in generating a credit scorecard?
Q5. How many variables are used in a typical scorecard? Why aren’t more explanatory
variables used?
Q6. Credit scoring developed in response to the need of financial institutions to be able to
process an ever-growing number of applications with ever-decreasing resources. Discuss this
development.
Q7. What are the 2 broad categories of credit scoring? How do they relate to each other? Are
they mutually exclusive and do they create tension within the credit assessment structure?
Q8. Discuss the applicability of table 3.1 in the decision-making process for implementing a
culture of credit scoring within an organisation. Compare and contrast judgemental and
statistical methods.
Q9. Review the methods of statistical credit scoring and then discuss the applicability by
ranking them for the analysis of credit risk.
Q10. How would you implement a systems approach to the management of credit risk within
a financial institution without alienating the client base?
Q11. Define credit risk.
Q12. What are expert systems? Outline the problems with relying on expert systems.
Q13. What is the basis of using market-based risk premiums? Why does credit risk analysis
not use them more regularly?
Q14. How has the development of statistical tools help credit analysts? Explain why these
tools cannot be the sole basis for decision making.
Q15. Explain the basis of discriminant analysis for credit analysis, and compare it with hybrid
systems of analysis.

TUTORIAL 4
Q1. What is consumer lending? What are its various types?

Q2. What factors have led to rapid growth of consumer credit in Australia?

Q3. What are credit-scoring models?

Q4. What are the important provisions of the Uniform Consumer Credit Code?

Q5. Changing demographics in Australia are expected to have substantial effects on a bank’s
consumer credit programs. Outline the changes taking place in demographics in Australia and
how these may have an impact on consumer credit programmes.

Q6. What are the three main principles applied to corporate lending proposals?

Q7. The five Cs is one method of structuring a loan approval process. What fundamental
piece of information does it ignore or fail to highlight?

Q8. What are the three components of a corporate loan?

Q9. Do you think that an understanding of the three components noted in question 3 would
allow for a correct segmentation of loan duties and functions within a financial institution?

Q10. In recommending approval of a loan, how does a loan officer reconcile the needs of the
borrower with the bank’s objective of making a profit?

Q11. Discuss the veracity and value of the lending cycle.

Q12. An evaluation of the worth of the three ways out of a loan may lead to a modification of
the loan approval process. What changes may occur? What additional information may be
needed?

Q13. Attempt to overlay the five Cs and PARSER on the formalised lending cycle shown in
figure 8.1.

Q14. Refer to the lending products listed in this chapter to meet the needs of corporates. Are
any of them practical to offer as a replacement for a large corporate’s interaction in the direct
market?

Q15. Should a loan officer be involved in the cross-selling of various institutional products or
should this be the function of other parties employed by the financial institution? In your
discussion, define and develop what is meant by a ‘full relationship with the client’

TUTORIAL 5
Q1. Distinguish between ‘hard’ and ‘soft’ information about a small business. Give seven
different examples of soft information about a small business. If you had to choose, would
you prefer to use hard or soft information in making a lending decision to a small business.

Q2. Go to the website for Fair Isaac (http://www.fairisaac.com). What information can you
find on the role that Fair Isaac plays in developing credit scoring models for small business
lending applications.

Q3. The National Australia Bank’s ‘Business information form’ at

www.national.com.au/Business_Solutions/0,1194,00.html specifically requests the
submission of a cashflow budget. Why do you think the National Australia Bank places so
much emphasis on a cashflow budget in assessing a loan to a small business?

Q4. Explain in your own words what you understand by the phrase ‘asymmetric information
problems’. Choose a large business that you know something about and comment on the
information asymmetries that may arise for a lender to this business. Choose a small business
that you know something about and comment on the information asymmetries that may arise
for a lender to this business. Do you think information asymmetries are more or less
pronounced with large businesses?

Q5. Read the two articles in the ‘Industry insight’ on page 277. Comment on whether you
find the argument of the Australian Bankers’ Association convincing. Overall, do you think
that the banks’ small business fees are unfair?

Q6. How do you think circumstances would change if a bank moved from using a
relationship lending model to a credit scoring model?
Q7. Explain whether you feel it is an advantage to be classified as a ‘small proprietary
company’ under the Corporate Simplification Act 1995. What impact do you think being a
small proprietary company would have on a lender’s attitude to you?

TUTORIAL 7
Q1. Explain the difference between pre-payment and open account payment.
Q2. What is country risk analysis?
Q3. What points are taken into consideration by rating agencies when assessing country risk?
Q4. What are the principles of international lending?
Q5. Explain the differences between the following instruments: documentary letters of credit;
back-to-back credit; and red clause credit
Q6. What is LIBOR?
Q7. Why is LIBOR important in international lending?
Q8. What are the contents of a typical documentary credit?
Q9. Distinguish between pre-shipment and post-shipment credit.
Q10. Explain the importance of UCP600.

TUTORIAL 8
Q1. What are the various legal aspects that a lending officer must take into account before a
consumer loan is approved?

Q2. What are the important provisions of the Uniform Consumer Credit Code?

Q3. Does the code provide for criminal penalties on lending officers?

Q4. What is unconscionable conduct? How is it different from deceptive conduct?

Q5. Who administers the Trade Practices Act 1974 in Australia? What are the important
provisions of this Act that a lending officer should consider?

Q6. ‘Banker’s lien is a general lien’. Do you agree with this statement? How does banker’s
lien help the banker in recovering dues?

Q7. What legislation enacted by the Commonwealth Government seeks to prohibit

discrimination?

Q8. Explain the salient features of the Australian Banking Industry Ombudsman’s role.
Q9. Does the Australian Securities and Investment Commission have any role in protecting
consumers in credit transactions?

Q10. What important points should a lending officer bear in mind for consumer lending?

ALSO REFER TO WEEK 8 TUTORIAL EXAMPLE

TUTORIAL 9
Q1. Outline the problems of traditional lending methods and possible solutions. Are there
any problems with the solutions?

Q2. Compare and contrast the approach of the Z score model and the KMV expected default
frequency model.

Q3. Under what circumstances does KMV’s expected default frequency model not work
correctly?

Q4. Explain the limitations of the concept of the risk-adjusted return on capital.

Q5. What financial basis does Altman use to construct his portfolio management model?
Why does he use constraints in maximising the return on the portfolio?

Q6. Explain the circumstances in which you would use securitisation and the circumstances
in which you would use credit derivatives.

Q7. Is securitisation a credit risk management tool?

Q8. If a protection seller under credit derivatives is assuming the risk of a loan, why does the
protection seller not just provide the loan?

TUTORIAL 10
Q1. Explain how the capital adequacy guidelines deal with the regulator’ s concern for credit
risk.

Q2. Discuss the shortcomings of the current capital adequacy guidelines.

Q3. How do the proposed capital adequacy guidelines deal with the shortcomings that you
noted in question 3?

Q4. Referring to the Westpac financial statement again, what difficulties do you encounter if
you need to calculate capital adequacy under the new guidelines?

Q5. Should all financial institutions be able to use internal ratings?

Q6. What would be the difficulty in identifying large exposures?

Q7. Discuss the advantages and disadvantages of concentrated credit portfolios.

Q8. From a regulatory point of view, what are problems with securitisation as a credit risk
tool?

Q9. Credit derivatives are an effective credit risk tool. Why are the regulators concerned
about them?

Q10. Consider which sections of a regional bank's lending portfolio are riskier than those of
a major bank's lending portfolio. Then, assess what you consider to be an appropriate capital
adequacy provision for regional banks. You should consider the difficulty of distinguishing
between regional banks and major banks.

Q11. What are the difficulties with using credit rating agencies in the due regulatory
process?

TUTORIAL 11
Q1. Why are problem loans an issue?

Q2. Explain the difference between accounting, regulatory and internal provisioning policies.

Q3. Why are some parts of the business cycle identified with increased numbers of problem
loans?

Q4. Compare and contrast dynamic provisioning and other methods of assessing
provisioning.

Q5. Discuss the advantages and disadvantages of dynamic provisioning.

Q6. Explain how to distinguish between the various forms of financial distress.

Q7. Would the timing of the business cycle influence the management of the business cycle?

Q8. Ifi Corporation has two loans outstanding. One loan is to Certain Bank for $400, while a
senior bond holder is owed $150. Ifi Corporation wants to put itself into liquidation and
default on its loans. The liquidation value is $160. The management of Ifi Corporation has
special qualities that would result in a pay-off of $420 with a probability of 0.8, otherwise
zero. For the management to continue, it would have to be paid $10. Carefully outline the
options available to Certain Bank.

Q9. In the case of a syndicated loan, there are often senior and junior debt providers. Where a
borrower defaults under this arrangement, the senior debt providers would be assumed to be
relatively well protected. Under what circumstances does this not occur? What steps should
be taken to protect senior debt providers?

Q10. What steps would you take if a borrower breached a covenant, leading it to technical
default? Your answer should highlight the contract issues.