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Credit And Collection > Lesson 1 > Flashcards

Lesson 1 Flashcards

1
Q

Means someone is willing to loan you money called principal in exchange for your promise to repay it, usually with interest

A

Credit

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2
Q

The amount you pay to use someone else’s money

A

Interest

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3
Q

Lets you buy something like car or college tuition without having to pay for it all at one time

A

Main advantage of using credit

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4
Q

Common types of credit

A
  1. Credit card
  2. Installment loan
  3. Student loan
  4. Mortgage
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5
Q

The biggest part of the price is _____, so it definitely pays to shop around

A

Interest rate

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6
Q

Key credit feature to compare among credit offers is the_____, which tells you the cost of the loan per year as a percentage of the amount borrowed.

A

Annual percentage rate

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7
Q

A yearly charge you pay for the privilege of using credit

A

Annual fee

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8
Q

The maximum amount of credit a lender will extend to a customer

A

Credit limit

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9
Q

Represents the actual dollar cost of using credit to maintain a balance

A

Finance charge

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10
Q

Charge for setting up the loan

A

Origination fee

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11
Q

Length of time you have to pay off the loan

A

Loan term

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12
Q

Length of time you have before you start accumulating interest

A

Grace period

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13
Q

fee for spending more than your
credit limit.

A

Over-the-limit-fee

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14
Q

penalty for making your payment after
the due date.

A

Late fee

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15
Q

easier and safer to have a credit
card than carry around a large amount of cash.

A

Convenience

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16
Q

you always have a way to pay for
emergency expenses like if your car breaks down

A

Emergencies

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17
Q

buying items with a credit card can
make it easier to get a refund if there’s a problem
with an item you purchased.

A

Protection

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18
Q

makes it easier to
get more credit when you need it later.

A

Opportunity to Build Credit

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19
Q

credit allows you to buy
and use an expensive item, such as a car or
house, while you’re paying for it instead of
postponing your purchase until you have enough
saved.

A

Quicker Gratification

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20
Q

can take advantage of a reduced
interest rate for a limited time, or even deals to buy
now and make no payments until next year.

A

Special Offers

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21
Q

offer bonus points such as frequent flyer miles or cash rebates for every dollar you
spend.

A

Bonuses

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22
Q

automatically makes the item more expensive than if you had just paid for it with cash.

A

Interest

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23
Q

use credit to live beyond your means
buying items you simply can’t afford.

A

Overspending

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24
Q

– the amounts you borrow add up to what you
owe to lenders. Lenders have legal claims against your
future income should you not be able to repay a debt.

A

Debt

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25
Q

when someone uses your personal
information without your permission to commit fraud
or other crimes.

A

Identity Theft

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26
Q

an asset of value that lenders can take from
you if you don’t repay the loan as promised.

A

Collateral

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26
Q

lenders will want to know if you have items they
can sell to repay the loan.

A

capital

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27
Q

are you trustworthy? They measure that by
looking at your credit record-paying bills on time shows
them that you are responsible with your finances.

A

character

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27
Q

a pattern of rising income and steady
employment gives lenders more confidence in offering you
credit.

A

capacity

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28
Q

“The power or ability to obtain goods or services in
exchange for a promise to pay for them later”

A

Credit

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29
Q

type of credit used to finance the construction and operation of certain projects

A

investment credit

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30
Q

used to finance the production and marketing of agricultural products

A

agricultural credit

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31
Q

loans extended to the government whether national, provincial, or municipal level

A

public credit

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32
Q

even ______ resort to borrowings when expected revenues fall short

A

local government

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33
Q

Three ways consumers can finance their
purchases

A

a. Draw on their savings
b. Use present earning
c. Borrow against expected future income

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33
Q

SOURCES OF CREDIT INFORMATION

A

Interview with the Applicant
* History and growth of the Applicant’s business
* Nature of the products and services handled
* Sources of raw materials or stocks of merchandise
* Competitive position of the business
* Plans for the future
* Lender’s own record
* Credit Rating Agencies
* Financial Statement

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33
Q

WHAT ARE THE BASIS OF CREDIT?

A
  1. Character
  2. Capacity
  3. Capital
  4. Condition
  5. Collateral
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34
Q
  • an arrangement to receive cash, goods,
    or services now and pay later for them in the
    future
  • an advance (or loan) of money with
    which to purchase goods and services
  • advance of goods & services in
    exchange for a promise to pay at a later date
A

credit

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35
Q

Is the use of credit for personal needs, by individuals
and families
* Credit granted to an individual especially to finance
the purchase of consumer goods or for personal
expenses
* Increase the current purchasing power but reducing
future purchasing power. Overall, it reduced the
purchasing power as finance charge are paid for the
credit service
- Have period of maturity, installment amount,
repayment period and frequency of payment
* The installment amount maybe fixed or varied
depending on type of credit
* The difference in rate of finance charge or maturity
period affected the amount of finance charge and
monthly installment
* To reduce wastage of money, examine the finance
charge & maturity period

A

CONSUMER CREDIT:

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36
Q

included all related costs -
interest, processing fee

A

finance charge

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37
Q

To reduce wastage of money, examine

A

finance
charge & maturity period

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38
Q

Alternative for Consumer Credit

A
  • Not buying
  • Buy later when there is enough money
  • Use saving for purchasing
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39
Q

interest & processing fee charged
directly by the seller

A

Finance charge

40
Q

paying the
finance charges used-up some money that could be used
for other expenses, thus limiting the expenses for other
items

A

Reduce purchasing power in the future

41
Q

have a payment schedule that
restricted the monthly use of money for other expenses

A

Less flexibility

42
Q

in the case of hire-purchase of electrical
goods or car, it may be repossessed by the seller.

A

High risk

43
Q

r the ability to
use credit

A

credit standing

43
Q

incurred whenever an individual makes
use of his credit standing

A

debt

44
Q

One-time loan repaid in
equal payment in a specified period of time.
* Used for specific purpose & involves a specific
amount
* Mortgage loan (property - house, land, building)
automobile loan (hire-purchase), installment loan
for purchasing furniture & appliances (hire
purchase)
* There is a contract or agreement
May require down-payment or trade-in; the
balance repaid in equal weekly or monthly
payments over a period of time
* Seller holds title to the merchandise until
completion of payment

A

CLOSED-END CREDIT

45
Q

number of
payments, payment amount, cost of credit

A

repayment terms

45
Q

Continuous loan & billed
periodically for at least partial payment
* Bank credit card, departmental store credit card,
overdraft bank

A

OPEN-END CREDIT

46
Q

maximum amount of credit made available
to you

A

(credit limit)

47
Q

credit granted is deposited in
current account

A

Overdraft bank

48
Q

Used by consumers to purchase spend & services
directly from sellers using revolving credit (open-end
credit), installment contract or service credit
* Credit of the buyer is accepted by the seller who
agrees to wait for future payment; seller extend the credit
to buyer to facilitate purchase

A

RETAIL CREDIT

49
Q

Allows consumers to purchase a variety of items
using credit up to a predetermined amount. Seller issued
specific credit card to buyer that can be used to buy items
from the issuer.
* Monthly statement is sent to customer that lists
previous purchases & amounts due
* Can pay the entire outstanding balance up to 25
days grace period without finance charges
* Can pay a minimum payment but outstanding
balance will be charged with interest in the next bill

A

REVOLVING CREDIT

50
Q

To purchase a large item & pay in a series of fixed
& regular payments over a long period of time
* A single contract for each item purchased finance
charges & provisions for nonpayment specifically outlined
in the agreement
* Hire-purchase of electrical goods & furniture

A

RETAIL INSTALLMENT CREDIT (CLOSED-END)

50
Q

Service provider agree to wait for payment from
customer
* Doctors, plumbers who offer services & utilities
(telephone, electricity) provider will send a bill later for the
payment

A

SERVICE CREDIT

51
Q

A series of fixed, regular payments are made to
repay funds over a period of time
* Required to provide evidence of income &
financial security
* Personal loan, hire-purchase car

A

INSTALLMENT LOAN

52
Q

A borrower obtain fund from a lender in exchange
for an agreement to repay fund later, with interest charges
* Lender provides cash that will be used by
borrower

A

CASH CREDIT

53
Q

Usually short-term loan
* Funds are given for a year or less with the
agreement to repay it in one payment at the end of the
period
* E.g. Loan from pawnbrokers

A

. SINGLE PAYMENT LOAN

54
Q

Revolving credit where a borrower pay purchases
using credit card
* Can be used for a variety of purchases
* Master card, visa card
May pay full amount each month without charges
* May pay minimum payment, with the finance
charges collected in the following month’s bill

A

GENERAL PURPOSE CREDIT CARD

55
Q

shows specific
charges, purchases, cash advances, payment

A

Itemized monthly statement

56
Q

defined as the potential that a bank
borrower or counterparty fail to meet its obligations in
accordance with agreed terms.

A

Credit risk

56
Q

Funds being extended to borrower with a loan that
uses real property as security or collateral for the loan
* To purchase or improve a home
* Interest on this loan can be deducted from taxable
income

A

REAL ESTATE CREDIT

57
Q

Maximizing Bank’s Risk-adjusted Return
Keeping the overall credit risk exposure within
acceptable level.

A

Objective of Credit Risk

58
Q

Regulators require banks to keep capital reflecting
the credit risk as per Basel II.

A

provision of Capital for Credit Risk

59
Q

Internal Process by the bank itself -
External agencies
* On the basis of rating risk-weight, as given by the
RBI, need to be factored with the loan amount for
estimation of RWAs.

A

Rating Agency

59
Q

As per RBI’s guidelines all credit with minimum
disbursement of ____lakh need to be rated.

A

Rs.2

60
Q

(Loan Amount - Market value of Collateral) * RW

A

Risk Weighted Assets

61
Q

As per the Basel-II Norms:

A

Expected Losses = PD * EAD*LGD

61
Q

No. of Firms default in each rating
category / Total firms in that rating
category

A

Annual Probability of Default:

61
Q

likelihood that a
particular category of loan would not be re-paid
over a specified time horizon.

A

probability of default

62
Q

PD = Weighted average annual rating in
each category over the

A

Average Probability of Default

63
Q

This original measure was developed in ____ by
Edward Altman, whose Z-Score is available in various
forms.

A

1968

63
Q

came as a response to the need
for identifying the financial health of any business based
on observable accounting and market ratios.

A

Altman’s Z-Score

64
Q

Refers to your honesty and willingness to pay a
debt when it is due.
* If you have a history of paying bills on time,
creditors believe that you are a good credit risk.

A

characters

65
Q

Refers to a person’s ability to pay a debt when it is
due.
* The lender or seller must decide if you have
enough income to pay your bills.
* If your income is too small or unsteady, granting
your credit may not be wise.

A

capacity

66
Q

businesses
or individuals who are able and willing to provide
information about your creditworthiness.

A

credit references

66
Q

____ is the value of the borrower’s possessions.
* It includes the money and property you own.
* Your capital may include a car is paid for and a
house on which a large amount has been paid.

A

capital

67
Q

indicates that you understand
the type of credit and that information you have
provided is true.

A

signature

68
Q

is a
company that gathers information on credit users

A

credit bureau

68
Q

You need to fill out the credit application

A

correctly, accurately, honestly

69
Q

a form on which you provide
information needed by a lender to make a
decision about granting credit.

A
70
Q

show the debts you owe, how
often you use credit, and whenever you pay your
debts on time.

A

credit report

71
Q

four letters to keep in mind when
signing any legal form

A

KWYS- KEEP WHAT YOU SIGNING

72
Q

record of the transaction completed
burring the billing period.

A

SOA

73
Q

Keeping accurate records will help you avoid
credit record problems.

A

accuracy of records

74
Q

The federal trade commission reports the credit
card fraud is a major problem
* Each month you should check the accuracy of
your statement by comparing it with your copies of
sales slips.

A

avoiding fraud

75
Q

Assessment of borrower capacity to repay the
loan.
* Assessment of borrower’s ability to bring in profits
from operations.
* Assessment of project viability.
* Assessment of managerial strength.
* Assessment of capital adequacy.

A

credit evaluation

75
Q

______t reports the credit
card fraud is a major problem

A

he federal trade commission

76
Q

Appraisal before Loan Sanction
Project worthiness
Cash earning capacity
Ability to pay back loan
* Appraisal during Loan Servicing
Loan documentation
Supervision of loan performance
Follow up of cash flows

A

borrower evaluation

76
Q

Credit Report
Internal rating through banker’s policy measures
External rating from credit rating agencies
* Loan proposal risk evaluation
Historical financial data
Project performance
Working capital position
* Loan proposal risk evaluation
Loan collateral value
Market report
Reports from firm’s auditors
Tax assessment report
Confidential report from other bankers or industry
* Risk evaluation through rating methods

A

risk evaluation of loan

77
Q

Before sanction of loan
Industry report
Firm analysis
Bank policy
* After sanction of loan
Documentation of loan policy
Follow up of financial performance
Loan transaction value utilization follow up
Physical field level inspection of collaterals
pledged by the borrower
Review of periodical statements submitted by the
borrower

A

tasks for loan evaluation

78
Q

do not have an
asset or group of assets as security for the loan.
- high risk

A

unsecured loans and advances

79
Q

are approved by
banks based on the security of assets held by the
business.
- can use the value of assets pledged
as security by disposal if the loan obligations of the
borrower are not met.
low risk

A

secured loans and advances

80
Q

Adequate for projects with good credit standing
and low competition
Professionally managed firms
Large conglomerates
Business firm with subsidiaries

A

primary security

80
Q

Pledge - Hypothecation - Mortgage

A

impersonal security

81
Q
  • Promissory note - Acceptance and endorsement of bill of exchange - Documentation giving the right to the banker to legally
    exercise the security in case of default
A

personal security

82
Q

additional assets such as raw
materials or finished goods that are secured for the loans
and advances
- may take the form of secured or
unsecured guarantee
- may take the form of deposits to title
documents held by the borrower

A

collateral

83
Q

Market position turning negative.
* New entrants in the market.
* Change in the manufacturing technique.
* Revision in the terms of banks and other
borrowers due to changes in market interest rates.
* Change in borrower repayment capacity due to
increased costs or reduced sales level.

A

revision of risk status of loans

84
Q

Willingness to repay by the borrower
* Intention to repay as per agreement conditions
* Voluntary supply of requisite documents
* Ability of the borrower to meet the banker at times
of critical need
* Information on Borrowers
* Maintain a track record of consistent debt
servicing
* Borrower’s ability to manage contingent events
such as market downturn
* Ability of borrower to document usage of
approvals and apply the loans for the purpose for which
loan sanction has been made
* Ability of the borrower to make use of market
opportunities

A

additional prerequisites of loan sanction

85
Q

Guarantee by the borrower to hand over the assets
that have been given as collateral to the bank

A

Collateral security

86
Q

Financial Analysis through ratios
Profitability ratios
Turnover ratios
Liquidity ratios
Leverage ratio
Market performance ratios
* Cash flows
Operational cash flows
Investment cash flows
Financial cash flows
* Projections of future
Projects
Business reports
Analyst reports
* Surveillance
Physical verification of securities
Audit of loan performance

A

loan evalutaion method

87
Q

Integrity
* Honesty
* Resourcefulness
* Reliability
* Management competency
* Managerial and staff expertise
* Experience of managers holding top positions
* Performance of related enterprises or sister
concerns
* Qualitative evaluation of securities provided as
guarantor
* Due diligence report on credit proposal
* Governance reports

A

qualitative evaluation

88
Q

Information on Borrowers
* Fair Practice Code
* Business Practices
* Lender’s Liability

A

know your customer (KYC) NORMS

89
Q

Several stages of credit sanction.
* Credit sanction through a hierarchy level in banks.
* Several personnel simultaneously reviewing a
proposal.
* Industry competence and knowledge level of loan
officers.
* Integration of credit department with the overall
functioning of the bank.
* Change in officers in charge of sanction of loan
and those that are involved with the follow up of the loan.

A

hindrance in credit evaluation

Credit And Collection (1 decks)

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