CBI Exam Notes: Chapter 3 - Bank Lending Principles and Practice, Exams of Banking Law and Practice

Download CBI Exam Notes: Chapter 3 - Bank Lending Principles and Practice and more Exams Banking Law and Practice in PDF only on Docsity! CBI Exam Notes: Chapter 3- Principles and Practice of Bank Lending Questions And Answers What is lending? - The Answer Is Lending can be defined as the giving of an asset with the expectation that an equivalent value will be returned at a future point of time. How are loans treated in financial statements? - The Answer Is A loan is an asset for the lender (creditor) and a liability for the borrower (debtor) In regards to loans, what is the principal? - The Answer Is The principal is the amount of the loan What are the different types of interest for loans? - The Answer Is - fixed interest: where rates are fixed for a specified period of time - variable interest: where rates vary in relation to a particular benchmark rate e.g. bank rate - capped interest: where rates can fluctuate but are subject to a specified ceiling, or cap. - simple interest: where interest is determined by multiplying the principal by the rate by the number of time periods - compound interest: where interest is charged on the principal amount plus whatever interest has already been incurred. CBI Exam Notes: Chapter 3- Principles and Practice of Bank Lending Questions And Answers What is bank rate? - The Answer Is Bank Rate is the interest rate at which a nation's central bank lends money to domestic banks, often in the form of very short-term loans. How can the bank rate be used to impact the economy? - The Answer Is Lower bank rates can help to expand the economy by lowering the cost of funds for borrowers, and higher bank rates help to rein in the economy when inflation is higher than desired. What is the standard variable rate (SVR)? - The Answer Is The standard rate of interest that lenders use, and is the rate to which a borrower is usually automatically switched when any fixed or initial offer rate period expires. In the UK it varies with bank rate and tends to be a few percentage points higher than bank rate. What is the annual equivalent rate (AER) and effective annual rate (EAR)? - The Answer Is AER is for savings and current accounts in credit, and the EAR is for borrowing and overdrafts. CBI Exam Notes: Chapter 3- Principles and Practice of Bank Lending Questions And Answers For business customers, commercial mortgages are also covered Asset financing (a type of lending that givers businesses access to business assets e.g. machinery) has its own set of standards What does each section of the standards for lending practice contain? - The Answer Is - a customer outcome - an overall statement of how a firm intends to achieve this outcome - a detailed set of standards that demonstrate this approach What are the 6 main areas the standards for lending practice covers for personal customers? - The Answer Is - financial promotions and communications - product sale - account maintenance and servicing - money management - financial difficulty - consumer vulnerability CBI Exam Notes: Chapter 3- Principles and Practice of Bank Lending Questions And Answers What are the 8 main areas the standards for lending practice covers for business customers? - The Answer Is - product information - product sale - declined applications - product execution - credit monitoring - financial difficulty - portfolio management - vulnerability What business customers do the standards for lending practice apply to? - The Answer Is At the point of lendng: - an annual turnover up to £25m (was £6.5m up to November 2019) in its last financial year - does not have a complex ownership structure (e.g. business with overseas, multiple, or layered ownership structures) What are the stages of the loan life cycle? - The Answer Is 1. marketing, attraction and conversion CBI Exam Notes: Chapter 3- Principles and Practice of Bank Lending Questions And Answers 2. appraisal, decision and agreement 3. servicing, monitoring and controlling 4. repayment, renewal, recovery How do the banks mitigate the risks involved with lending? - The Answer Is The key to mitigating risk is gathering as much information about the borrower and the lending proposition as possible. To do this, they follow the principles of lending which provide lenders with a framework to use when evaluating an application for credit and gathering the information required to make a lending decision. What are the mnemonic principles of lending and their components? - The Answer Is - 3 Cs character, capability, capital - 4 Cs character, capability, capital, connection - CAMPARI character, ability, means, purpose, amount, repayment, insurance CBI Exam Notes: Chapter 3- Principles and Practice of Bank Lending Questions And Answers What is a FICO score? - The Answer Is FICO uses big data and mathematical algorithms to predict consumer behaviour. One of its products is the FICO Score, the standard measure of consumer credit risk in the US. scores are calculated using many different pieces of information in the credit report. What are the 5 categories used to calculate a FICO score? - The Answer Is 1. Payment history (35%) 2. Amounts owed (30%) 3. Length of credit history (15%) 4. New credit (10%) 5. Credit mix (10%) What is a security in regards to a loan? - The Answer Is A secondary source of repayment which would be called upon were the primary source to fail. The purpose of security is to protect the lender if things go wrong. CBI Exam Notes: Chapter 3- Principles and Practice of Bank Lending Questions And Answers What are the main types of security? - The Answer Is - Land - Properties built on the land - Life assurance policies - Stock and shares - Guarantor What are the attributes of a good security? - The Answer Is One way of evaluating the effectiveness of an asset as security is known as the 'MAST test' - Marketability: how easy it is to sell the asset - Ascertainability of value: how easy it is to value accurately - Simplicity of title: how easily ownership can be proved - Transferability of title: how easy it is for the bank to gain ownership so that it can sell the asset What are the benefits of lending to society? - The Answer Is - drives economic growth through the credit creation process - leads to more efficient allocation and utilisation of resources in the economy - stimulates higher levels of saving CBI Exam Notes: Chapter 3- Principles and Practice of Bank Lending Questions And Answers - makes money available to support socially and environmentally sustainable economic activities - makes funds available at low costs to disadvantaged sections of society What are the negative effects of lending to the economy? - The Answer Is - irresponsible lending can encourage irresponsible borrowing - can accentuate social inequalities due to high risk borrowers having higher interest rates Practice Question 1: According to the standards for lending practice, what is the best outcome for personal customers in financial difficulty? - The Answer Is Customers in financial difficulty, or in the early stages of the collections process, will receive appropriate support and fair treatment, across the different communication channels offered, in order to help them deal with their debts in the most suitable way. Practice Question 2: Describe what working responsibly with customers means as stated in the UN Principles for Responsible Banking -