Unit 1: Principles of Lending (Part 1)

Question 1

In normal economic circumstances, what is the primary source of revenue for a bank?

Answer 1

Lending

Question 2

How does lending help identify opportunities for banks to generate further revenue from additional sources?

Answer 2

Example: through the process of assisting a customer with a mortgage, further needs can be identified, and additional products and services offered to meet those needs. This achieves greater customer loyalty and revenue streams.

Question 3

What three things must be considered any time some one approaches the bank for a loan (which is applicable to any lending situation)?

Answer 3

1. Amount, purpose, and term.
2. Person applying.
3. Persons’ ability to repay the loan.

Question 4

What are the 4Cs of credit?

Answer 4

1. Character
2. Capacity
3. Collateral
4. Capital

Question 5

The 4CS of Credit are Character, Capacity, Collateral, and Capital. What three things must be considered for Character?

Answer 5

1. Integrity (expected honesty and actions)
2. Proof of Identity (KYC, etc)
3. Characteristics (might be demonstrable through credit history or credit score)

Question 6

The 4CS of Credit are Character, Capacity, Collateral, and Capital. What three things must be considered for Capacity?

Answer 6

1. Age and whether this impacts term.
2. Employability, business, experience to sustainably generate an income.
3. Credit history.

Question 7

The 4CS of Credit are Character, Capacity, Collateral, and Capital. What are some forms of collateral?

Answer 7

1. Real estate
2. Vehicles and equipment
3. Investments (e.g., shares)
4. Personal/third-party guarantees

Question 8

How does the amount of capital (deposit or equity provided by the customer) indicate their commitment to the purpose of a loan?

Answer 8

Example: Personal loan - if seeking a loan for a car, and the person has traded-in or sold their car, they have demonstrated commitment to the purpose of the loan.

Example: Home loan - generally, the more the customer has committed towards the home, the more commitment they show, and the less risk it is to the financial institution.

Question 9

Besides the 4Cs, what are 4 other sources of information that should be analysed to help reach a lending decision?

Answer 9

1. Relationship status (couples generally have a better chance of repaying)
2. Dependents
3. Employment
4. Previous connections with the bank

Question 10

What is the calculation for net worth?

Answer 10

Assets minus Liabilities = Net Worth

Question 11

What are three core sources of bank lending income?

Answer 11

1. Application fees
2. Fees charged for the loan
3. Interest charged on the loan

Question 12

What are three kinds of fees that may be applicable throughout the life of the customer’s loan?

Answer 12

1. Application fees
2. Upfront fees
3. Ongoing fees

Question 13

How does risk factor into interest fees a bank may charge for lending?

Answer 13

Banks compare risk to return - the more risk involved for the bank, the higher the interest rate that will be charged.

Question 14

Why does a customer offering suitable and adequate security reduce the rate of interest charged?

Answer 14

Because it reduces the bank’s risk

Question 15

What is one way to remember the 4Cs of credit?

Answer 15

Col Character CaCa

Col = Collateral
Character = Character
Ca = Capital
Ca = Capacity