WEEK 3 - CREDIT RISK

Question 1

is when a lender lends money to a borrower but may not be paid
back.

Answer 1

Credit Risk?

Question 2

Credit risk management is a multi-step process, but it can broadly be split into two main
categories. They are:

Answer 2

1. Measurement
2. Mitigation

Question 2

are extended to borrowers based on the business or the individual’s ability to service future payment obligations (of principal and interest).

Answer 2

Loans

Question 3

is an ongoing assessment process that protects your business against late or non-payments and improves your financial health.

Answer 3

Credit risk management

Question 4

help to maintain cash flow and elevate the efficiency of your business.

Answer 4

Credit risk management best practices

Question 5

Crucial factors to consider for credit assessment and scoring

Answer 5

1. Financial health
2. Payment history
3. Business stability
4. Industry risks
5. Business news

Question 6

Six most efficient credit risk management best practices

Answer 6

1. Provide online application forms
2. Analyze and predict credit risk
3. Real-time credit risk monitoring
4. Establish and follow a credit policy
5. Use clear communication for payment terms and conditions
6. Leverage automation for fast and accurate credit risk management

Question 7

5 C’s of Credit

Answer 7

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

Question 8

describes company management’s reputation and credibility; also extends to company ownership if it’s a private corporation.

Answer 8

Character

Question 9

speaks to a borrower’s ability to take on and service debt obligations. For both retail and
commercial borrowers, various debt service and coverage ratios are used to measure a borrower’s
capacity.

Answer 9

Capacity

Question 10

is often characterized as a borrower’s “wealth” or overall financial strength. Lenders will
seek to understand the proportion of debt and equity that support the borrower’s asset base.

Answer 10

Capital

Question 11

is a very important part of structuring loans to mitigate credit risk.

Answer 11

Collateral

Question 12

refer to the purpose of the credit, extrinsic circumstances, and other forces in the external environment that may create risks or opportunities for a borrower.

Answer 12

Conditions

Question 13

is a measurement of a person or business entity’s ability to repay a financial obligation based on income and past repayment histories. Usually expressed as a credit score, banks and lenders use a credit rating as one of the factors to determine whether to lend money.

Answer 13

Credit rating

Question 14

help the market to effectively and efficiently evaluate and assess credit risk, price debt securities, benchmark issues and create a robust secondary market for those issues.

Answer 14

Credit rating

Question 15

is an assessment of the creditworthiness of individuals and corporations. It is based
upon the history of borrowing and repayment as well as the availability of assets and extent of
liabilities.

Answer 15

Credit rating

Question 16

indicates a high risk of defaulting on a loan and thus, leads to high-interest rates or the refusal of a loan by the creditor.

Answer 16

poor credit rating

Question 17

will directly address the need for reliable credit information concerning the credit standing and track record of borrowers.

Answer 17

Credit Information System

Question 18

Credit Information System created the _____________, whose primary purpose is to receive
and consolidate basic data on the credit history and financial condition of borrowers.

Answer 18

Credit Information Corporation

Question 19

The primary function of a credit registry (Credit Infomation Corporation): to monitor __________ by every
individual and financial institution with credit facilities.

Answer 19

loan transactions