Lending

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Stage 2
Lending, Product,
Risk
ot.com& Risk Managment
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Operation
7 years PAST PAPERS
from Summer 2006
to Summer 2013
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Summer 2006
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IBP-the knowledge Institute
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Lending Operations and Risk Management - Stage-II
Q.1
Please write the alphabate of selected choice in the answer column:

i.
ii.
(17)
(Answer)
Which of the following is a type of credit risk:

A) Systemic risk
B) Foreign exchange risk
C) Concentration risk
D) Liquidity risk
Credit off-take is _____________ correlated with the growth in Gross
Domestic Product (GDP) of a country.
A) Indirectly
B) Directly
C) Inversely
D) Not
In addition to creating provision against bad debts, banks are also
required to create General Provision against __________ credit portfolio.
A) Corporate
B) Commercial
C) SME
D) Consumer
The leverage ratio prescribed under Prudential Regulation R-5 is:
A) Long term debt / Equity
B) Long term debt / Equity
= 80 / 20
= 60 / 40
C) Total debt / Equity
D) Long term debt / Equity
= 80 / 20
= 60 / 40
If a loan of Rs 100 is extended against a certain collateral with 30%
margin, the value of the collateral must be around:
A) Rs 70
B) Rs 100
C) Rs 130
D) Rs 143
A credit officer has to ensure that the aggregate fund based and non-fund
based facilities availed by a borrower do not exceed ________ times of
his/her equity.
A) 4
B) 8
C) 10
D) No limit
Under exceptional circumstances the minimum acceptable current ratio
for all corporate and commercial loans is:
A) 0.75 : 1.0
B) 1.00 : 1.0
C) 1.50 : 1.0
D) 2.00 : 1.0
Only the _________ can ratify any deviation to the credit policy:
A)
Board of Directors
B) Credit Committee
C)
Head of Credit Department
D) Credit Officer
All the following are types of credit risk except:
A) Default risk
B) Interest rate risk
C) Concentration risk
D) Collateral risk
The lender keeps the possession in case of the following security:
A) Pledge
B) Hypothecation
C) Mortgage
D) None of the above
Following are funded facilties/except:
A)
Lends money for manufacturing exportable goods.
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iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
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xi.
B)
Lends money to expand the manufacturing capability for a long term.
C)
D)
Lends money for meeting short-term gaps in working capital.

Undertakes on behalf of the customer to pay to a third party
incase of customers failure to meet its financial commitment.
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xii.
xiii.
A contingent facility is the one, where

A)
Financial facilities are allowed or committed for Import and
export of goods.
B)
Customer may or may not incur any liability to the bank.
C)
Letter of Credit established at Sight.
D)
Funds are extended for exploration of natural resource.
Weighted average cost of deposits is equal to :
A)
Total mark up paid Divided by Total outstanding deposits
B)
Total mark up paid Divided by Average deposits.
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C)
xiv.
Deposits with State Bank of Pakistan divided by countrys population.
D)
None of the above
Under floating rate of mark up:
A)
There is no way that a customer can have one known rate for the
entire term of the loan.
B)
The concept is to fix a rate based on benchmark rate of the same
tenor as that of the term of the loan.
C)
A benchmark rate for a term longer than the loan cannot be
applied.
D)
A customer can choose a short-term benchmark rate for a longterm loan.
Borrowers who opts to fix the mark up rate for a financing facility of 5
year should choose one of the following:
Three year KIBOR
(B)
SBP Discount rate
(C)
5 year PIB
(D)
10 Year PIB
(E)
None of the above
Base rate is:
A)
The rate at which major banks lend and borrow from each other
at zero risk of default.
B)
A risk free rate.
C)
Rate announced by Government
D)
A rate that is applicable to all borrowers in a same category
before taking into account the special transaction costs and risk
premium.
E)
None of the above.
Lending rate may be defined as:
A)
Base rate plus default risk premium.
B)
Base rate minus discounts for risks premium.
C)
Base rate + default premium + the desired spread.
D)
Banks cost of Fund + intermediation costs + risk associated with
the counter Party
E)
None of the above.
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xv.
xvi.
xvii.
Q.2
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State True or False in the answer column. Give brief reason for your selection at
the space provided below the question:
(13)
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(Answer)
i.
Clean financing means unsecured financing.
ii.
Higher credit rating implies higher credit risk.
iii.
A counterparty is a party to whom a bank does not have any on- and
off-balance sheet exposure or a potential credit exposure.
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iv.
v.
vi.
vii.
viii.
ix.
From the perspective of credit portfolio risk management the Advances

to Deposit ratio should not be more than 0.80.
When interest rates in the economy are rising the income of a bank
increases if it is maintaining a negative gap (i.e., rate sensitive liabilities
are more than rate sensitive assets).
Net Advances are equal to Gross Advances minus the amount of
Provision to be created.
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When a bank issues a Guarantee it means that the bank as guarantor

undertakes to pay only when the principal debtor defaults.
Open-ended guarantee means a guarantee that has a specific claim
lodgment date.
A bank creates a negative pledge by inserting a clause in the fixed
charge agreement prohibiting the creation of a floating charge in favour
of another bank without the banks consent.
x.
The price of a loan should compensate for the risk taken.
xi.
In pledge the possession & title of goods is transferred to the Bank.
xii.
In hypothecation, both title and possession rests with the borrower.
xiii.
Creation of Equitable mortgage can be created by depositing certified

true copy of the title documents.
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Q.3
What do the following commonly used abbreviations stand for?

(A) KIBOR
Q.4
(B) CIB
(C) SME
(D) FSV
(05)
(E) LMM
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Differentiate between a fixed and floating charge.
(05)
Q.5 Case Study

(10)
You have been hired as Head of Credit Department of a commercial bank. The Balance Sheet
of the bank is as follow:
(Rs in Million)
Assets
Amount
Liabilities & Equity
Amount
Cash
500
Borrowings
1,500
Investments
12,000
Deposits
34,500
Advances
25,000
Other Liabilities
550
Other Assets
2,500
Paid-up Capital
2,000
General Reserves
250
Accumulated Profit/(Loss)
500
Revaluation Reserves
- Investments
200
- Fixed Assets
500
Net Assets
3,450
Represented by:
Total
40,000
Total
40,000
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You have been assigned the task of recommending the credit risk limits of the bank. Relying
on Prudential Regulations for Corporate/Commercial Banking R-1 and R-2 how would you
calculate the following lending limits:
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a) Per-party exposure limit

Total Per-party limit =
of which:
Fund based limit
=
Non-Fund based
=
b) Per Group exposure limit
Total Group limit
of which:
Fund based limit
Non-Fund based
=
=
=
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c) Portfolio limit for aggregate non-fund based facilities.
Q.6
What is meant by Early Warning Signals (EWS)? Mention the parameters to be

considered as EWS. What corrective action, if any, should be taken by the
management when they appear?
(10)
Q.7
You have been hired as Credit Analyst by ABC Bank Ltd. The head of Credit
Department has assigned you the responsibility to assign ratings to different
corporate customers. What quantitative and qualitative factors would you
consider while assigning ratings to these borrowers?
(10)
Q.8
Why should the cash flow take front seat while appraising a loan proposal as
compared to Collateral? What are the critical factors that the analyst must
consider to ensure that the cash flow analysis becomes the sound basis for
decision-making?
(10)
Q.9
How should the working capital financing requirements of a business be

determined? How much of these financing needs should be financed by the
bank? Discuss with reference to a manufacturing concern. How does the under
or over assessment of financing needs affect the business?
(10)
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Q.10 How can bad loan be avoided? If it becomes bad despite all precautions, what are
the options available for its management for minimizing the loss to the bank? (10)
-.-.-.-.-
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Winter 2006
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ibpnextgen.blog
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Lending Operations and Risk Management - Stage-II

ISQ Examination (Winter-2006)
Q.1
(25)
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(Answer)
When the value of collateral is adjusted for its maturity, enforceability and
price volatility, the process is called ____________.
i
A) Securitization
B) Collateralization
C) Haircut
D) Prudence
E) None of the above
After a certain point, any further increase in interest rate __________ the
expected return to lenders.
ii
A) enhances
B) reduces
C) affects
D) does not affect
When Statutory Liquidity Requirement (SLR) of a bank increases its
capacity to extend credit ____________.
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iii
iv
A) increases
B) decreases
C) stabilizes
D) has no impact
For credits against pledge of shares of blue chip companies a credit risk
manager has to ensure that a minimum margin of _______ is always
maintained.
A) 0%
B) 20%
C) 30%
D) 100%
In Pakistan all banks are required to create a general reserve equal to at
least ______% of their secured consumer credit portfolio.
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A) 1.0
B) 1.5
C) 10.0
D) 15.0
The Credit-to-GDP (Gross Domestic Product) ratio in the economy of
Pakistan is around:
vi
A) 5%
B) 25%
C) 55%
D) 100%
__________ sector is the largest recipient of credit in Pakistan.
vii A) Agriculture
B) Consumer
C) Corporate
D) SME
During the financial year ending June-06 the credit off-take in the economy
of Pakistan was around Rs. __________ Billion against the target of Rs 330
viii Billion in the Annual Credit Plan.
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A) 250
B) 350
ix
C) 500
D) 2500
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______________ is a clause in the floating charge whereby a company

promises not to charge its assets elsewhere without the prior approval of the
bank.
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x
A) ordinary pledge
B) negative pledge
C) floating pledge
D) collateralization
The method of funding acquisition of a physical asset where the repayment
of the exposure is dependent upon the cash flows generated by that specific
asset is called __________ Finance.
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A) Project
B) Object
C) Commodity
D) Running
The diversification of a credit portfolio means that the portfolio should
ideally be divided into different economic sectors having __________
correlation.
xi
A) perfect B) high
C) equal D) low
Credit risk is most closely described by:
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xii A) actual accounting loss B) potential accounting loss

C) economic loss D) Loss of reputation
Stocks of the company is __________
xiii A) Hypothecated B) Mortgaged C) Pledged

D) A&C E) None of the above
Floor rate is:
xiv A) Cap rate B) Base Rate C) Floating Rate
C) Minimum agreed rate E) None of the above
Land and Building of the company is __________
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xv A) Hypothecated B) Mortgaged C) Pledged

D) B&C E) None of the above
Against the borrowers equity of Rs.10 M the Borrower is entitle for Nonfunded exposure of :
xvi
A) Rs.100M B) Rs.60M C) Rs.80M
D) Rs.40M.00 E) None of the above
Against the Running finance Limit of Rs.10.00 Million against 40% margin
, what should be the minimum value of stock to draw down Rs.10.00
xvii Million:
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A) Rs 180M B) Rs 150M C) Rs 167M

D) Rs 140M E) None of the above
Where Trade Bills(Import/Export or Inland Bills) are not paid/ adjusted
within 180 days of the due date. This will be classified under which of the
xviii following categories:
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A) OAEM B) Substandard C) Doubtful

D) Loss E) None of the above
If the accommodation is secured against liquid securities, the minimum
acceptable current ratio for all corporate and commercial loans is:
xix
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A) 0.75 : 1.0 B) 1.00 : 1.0 C) 1.50 : 1.0

D) Regulation not applicable. E) None of the above
Where mark-up/interest or principal is overdue by 90days or more from the
due date. This will be classified under:
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xx
A) OAEM B) Substandard C) Doubtful

D) Loss E) None of the above
Charge will not be registered in case of the following security:
xxi A) Pledge B) Hypothecation

C) Equitable Mortgage D) Defence Saving Certificate
It is mandatory to get the Personal Guarantees of the borrowers/ Directors
in the Following except:
A) A & B company with Assets size of 10M & sales of 200M
xxii B) M & C company with Assets size of 40M and Sales of 150M
C) A & N company with Assets size of 50M and Sales of 310M.
D) X & Y company with Assets size of 51m and above
Fund Based Clean financing Limit to a SME concern is allowed upto:
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xxiii A) One Hundred Thousand B) Five hundred thousand

C) One Million D) Two Million
Clean Fund Based facilities can be utilized for the following except:
A) Purchase of 2nd hand Vehicle
xxiv B) Repayment of Credit Card bills
C) Advance school fees
D) Subscription of shares
Bank Spread is a :
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A) Difference between Cost of funds & Income derived from these funds
xxv B) Difference between Deposit and Advances
C) Provisioning charged on Non-Performing Loans
D) Difference between mark-up rate and deposit rate.
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Q.2
State True or False in the answer column. Give brief reason for your selection at the space
provided below the question:
(25)
(Answer)
i
The risk that failure of a large bank would lead to collapse of the
entire banking system is called Systemic Risk.
ii
Net advances are equal to gross advances plus provisioning held.
iii
The price of a bond (or a secondary market loan) is directly related to

its yield.
iv
A fixed charge covers all the assets of a company.
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A mortgage is a type of loan that is collateralized with a specific

piece of real estate, either residential or commercial.
vi
The cash flow from investments is the key to determine the ability to
repay a loan because it is directly related to the economic decisions.
vii
One can fairly assume that rating of an instrument is directly related

to its default rate.
viii
Running Finance is a type of credit facility that is extended by a bank

to its customers for a period of 01 year.
ix
A revocable letter of credit can neither be cancelled nor amended

without prior consent of the beneficiary.
It is easier to calculate credit risk in loans and advances as compared

to fixed income securities.
xi
With increasing sophistication and dependence upon technology

operational risk becomes more important than credit risk.
xii
Liquidity risk reflects an enterprises inability in raising funds to

meet its commitment.
xiii
Mark-up interest earned minus mark-up interest expensed is equal to

net profit.
xiv
The equitable mortgage and mortgage by deposit of title deeds is the

same security.
xv
Interest rate risk arises where the value of financial instruments

fluctuate due to changes in market price.
xvi
Advances are banks liabilities and deposits are banks assets.
xvii
Set-off means adjusting a debit balance in one account against a

credit balance of the group companies.
xviii
Credit risk represents the accounting loss that would be recognized at

the reporting date if counter parties failed to perform as contracted.
xix
Accommodation granted against a guarantee unsupported by

collateral security is an unsecured advance.
xx
Subordinated Loan means a secured loan extended to the borrower by

its sponsors.
xxi
xxii
xxiii
Frequency of mark up recovery impacts the effective rate of mark up

Frequency of mark up recovery impacts the effective rate of mark up
In hypothecation, both title and possession rests with the borrower.
xxiv
Equitable mortgage can be created by depositing certified true copy

of the title documents.
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It is imperative for the scheduled commercial banks to have

minimum capital adequacy of 8 % even if there is a significant
difference in their risk profile.
xxv
Q.3

i.
ii.
iii.
iv.
v.
(05)
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BMR :___________________________________________
LIBOR :___________________________________________
NPL
: __________________________________________
REIT :___________________________________________
SBLC :___________________________________________
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CD Textile is banking with four Banks. These banks have granted different
financing facilities against 1st parri-passu Charge. Now the company applies to 5th
Q.4 (A) Banks for some facilities. 5th Bank is asking for PariPassu charge.
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What are its implications for other Banks? (03)

Q.4 (B) What are the implications of raise in CRR & SLR on Credit Pricing? (04)
Q.4 (C)
Mention the repercussions of financing fixed Assets of a manufacturing concern

with the short term borrowings and also suggest the corrective measures? (05)
Q.5
What do you understand by loan review? When should this exercise be undertaken
and mention at least 5 basic factors that you will consider while loan review? (05)
Q.6
What is a problem loan? What measures would you suggest to manage the existing
portfolio of problem loans and to stem their flow in future? (10)
Q.7
You have been deputed to Gwadar branch of ABC bank as Credit Manager. A local
entrepreneur comes to you for financing. What information would you obtain
directly from him/her or from other sources? Why would you require such
information? (10)
Case study (08)
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QUOTE
DEALING WITH DIRECTORS, MAJOR SHARE-HOLDERS
AND EMPLOYEES OF THE BANKS / DFIs
Banks / DFIs shall not take any exposure on any of their directors or to individuals,
firms or companies in which they or any of their directors, either directly in the
borrowing entity or in any of its group companies, hold key management positions,
or are interested as partner, director or guarantor, as the case may be, their Chief
Executives and shareholders holding 5% or more of the share capital of the bank /
DFI, including their spouses, parents, and children or to firms and companies in
which they are interested as partners, directors or shareholders holding 5% or more
of the share capital of that concern, without the approval of the majority of the
directors of that bank / DFI excluding the director concerned. The facilities to the
persons mentioned above shall be extended at market terms and conditions and be
dealt with at arm length basis.
UNQUOTE
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Q.8
A company XYZ is an old and valued client of the bank availing financial facilities
both funded and unfunded from the bank for the past many years recently on of the
directors of xyz company is appointed on the board of directors of the bank. XYZ
Company is planning expansion of its facilities and requires additional funding
.The company also requested the bank to allow relaxation in repayment of existing
loans by one year and reduce the rate of mark on the existing facilities by .25%.
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(A) Advise the bank if it can extend following facilities keeping the provision of
above quoted regulations. Substantiate your answer with reasoning.
1. Additional financing facilities?
2. Provide relaxation in repayment of loan?
3. Provide relaxation in Mark up rate?
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(B) What would be your advice to the bank if the director was also holding 5%
shares of the bank?
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Summer 2007
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ibpnextgen.blog
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Lending Operations & Risk Management - Stage-II

ISQ Examination (Summer-2007)
Q.1
ibpnextgen.b
Please write the alphabate of selected choice in the answer column: (25)
The credit conditions are usually most stringent in the ___________ phase of an economic cycle.
i
A) Recovery
B) Boom C)
Recession
Which of the following is a type of credit risk?
ii
iii
D)
Depression
E)
None of the above
A)
liquidity risk
B)
interest rate risk
C)
settlement risk
D)
operational risk
E)
None of the above
The real interest rate (lending rate) earned by a lender is equal to nominal interest rate ___________
prevailing inflation rate.
A) plus B) minus C) which is the same as D) Divide E) None of the above
When the government borrowing increases, the overall interest rates in the economy increase thus
leading to rise in cost of credit for the private sector. This phenomenon is called _______________.
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iv
A) Crowding-in B) Crowding-out C) Creeping-in D) Creeping-out E) None of the

above
The Annual Credit Plan of Pakistan envisages a credit growth of ____________ during the financial year
ending June 2007.
vi
A) Rs 100 billion B) Rs 240 billion C) Rs 390 billion D) Rs 500 billion E) None of the above
According to the SBP the highest percentage growth in any sector of Pakistans economy at 96.8% was
observed in the ____________ sector during the financial year 2006. Therefore, financing for capacity
expansion is justified.
vii
A) Fertilizer B) Cement C) Commerce & Trade D) Personal loans E) None of the above
During the financial year 2006 the credit off-take to consumer financing increased by around _________
as compared to much high growth in the preceding year.
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A)
24%
B)
42%
C)
100%
D)
200%
E)
None of the above
Presently, the maximum tenor of Karachi InterBank Offered Rate (KIBOR) is _________.
viii
A) 6 months
B) 1 year
C) 3 years
D) 10 years
One of the following is NOT a type of market risk:
ix
A) interest rate risk B) commodity price risk

C) foreign exchange risk
D) country risk
Credit risk is the risk of ___________ loss from the failure of a counterparty to fulfill its contractual
obligations.
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x
A)
accounting
B) economic
C) financial
D) Event
The process of parceling out the total risk to various asset classes is called risk __________.
xi
xii
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A) balancing
B) rebalancing
C) budgeting
D) None of the above
According to the Basel Accord each bank is required to maintain capital at least __________ of its risk
weighted assets.
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A) 5%
B) 8%
C) 50%
D) 80%
Credit spread is _____________ correlated with economic growth.
xiii
A) not at all
B) positively
C) marginally
D) Negatively
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A loan becomes non-performing when it is overdue by _______ days(s).

xiv
A) 01
B) 07
C) 90
D) 365
All of the following can be accomplished through the use of credit derivative except:
xv
A)
Leveraging the credit risk
B)
Reduction of credit concentration risk
C)
Investing in corporate loans
D)
Preventing bankruptcy of a loan counterparty
E)
None of the above
Under the scenario of declining interest rates in an economy the net interest income of a bank
_____________ when its rate-sensitive assets are more than rate-sensitive liabilities.
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xvi
xvii
A)
increases
B)
decreases
C)
remains same
D)
can take any direction
E)
None of the above
By the end of year 2006 (CY-06) the total number of loan accounts was around _______ per 1,000
people in Pakistan.
A) 06
B) 30
C) 60
D) 300
The loans categorized under micro-financing have usually maximum per-exposure limit of Rupees
xviii ________________.
A) 10,000.00
B) 100,000.00
C) 500,000.00
D) 1,000,000.00
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The credit exposure includes current exposure as well as _______ exposure.

xix
xx
A) risk
B) potential
C) risk-free
D) no other
Portfolio _______________ occurs when the risk assets portfolio is perfectly hedged against the value of
liabilities.
A) immunization
B) multiplication
C) matching
D) none of the above
The credit rating of an obligor is ____________ related to his/her probability of default.

xxi
A) exponentially
B) directly
C) inversely
D) not at all
The liquidity position of the banking system is usually ________ when the interest rates are low.
xxii
A) low
B) high
C) not measurable
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D)
none of the above
The process to measure the changes in the value of a credit portfolio for shocks of various degrees to
different independent risk factors is called ________________.
xxiii
xxiv
A)
Risk rating
B) Back testing
C) Credit Value-at-Risk (CVaR)
D)
Stress testing
The maximum debt-equity ratio allowed in case of seasonal financing to borrowers, for a maximum
period of six months, can be:
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A) 40:60
B) 60:40
C) 80:20
D) 89:11
Assuming all borrowers have same credit rating and belong to the same economic sector, which loan
among the following is most risky?
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xxv
A)
C)
E)
Clean loan of Rs 0.5 million

Rs 1.0 million with 60% recovery rate
None of the above
B) Rs 0.5 million with 40% recovery rate

D) Rs 1.0 million with 80% recovery rate
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State True or False in the answer column. Give brief reason for your selection at the space
provided below the question: (10)
Q.2
The expected credit loss that represents an average credit loss must be measured and factored in credit
pricing.
The recovery rates (of bad loans) tend to be higher when the economy is in recession phase.
A realizable security cannot be easily sold to adjust for overdue loan.
Under pledge, both the title and possession of security rest with the borrower.
In case a borrower is not willing to repay the loan it is an example of market risk.
i
ii
iii
iv
v
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Credit default swap provides insurance coverage to the counterparty and hence it acts as an effective
hedging tool for credit risk management.
Duration of a loan portfolio is measured to assess its credit risk.
vi
vii
viii
A Credit Analyst should recommend a loan when its internal rate of return (IRR) is below the hurdle
rate.
ix
When a bank approves credit limit to a borrower and the borrower avails the loan partially yet the undrawn loan commitment is on-balance sheet activity of the bank.
The Forced Sale Value (FSV) is that amount which would be recovered in all cases in case the borrower
defaults.
Q.3 (A)
i
ii
iii
iv
v
Q.3 (B)
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What do the following commonly used abbreviations stand for? (05)

FCEF
SPV
TFC
MBS
CFS
The Value-at-Risk (VaR) is increasingly becoming a common measure for risk. What is meant
by VaR? (05)
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Q.3 (C)
What are the Investment Type of Non-Interest Bearing Modes of Financing. Give the salient
features of each finance. (05)
Q.4
Prudent credit risk management warrants that the flow of non-performing loans (NPLs) should
be minimized so that the bank earns maximum profitability and maximizes stakeholders value.
What measures would you recommend in this regard? (10)
Q.5
What is consumer financing? What are the various products that fall under this type of
financing? Why would you recommend (or not recommend) your bank to diversify into this
type of financing? (10)
ibpnextgen.blog
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Q.6
What is an Internal Risk rating systems what are its prerequisites and uses elaborate? (10)
Q.7
What is the rationale for loan loss provisioning does it cover expected or unexpected losses?
How does credit risk mitigation affect the provisioning? Please Explain. (10)
Q.8
ibpnextgen.b
State Bank of Pakistan vide its circular letter of March 26, 2007 provided revised definition of
the Sub-Ordinated Loan, which is reproduced hereunder: (10)
Subordinated Loan means an unsecured loan, extended to the borrower for a minimum original
maturity period of 5 years, subordinate to the claim of the bank / DFI taking exposure on the
borrower, and documented by a formal sub-ordination agreement between provider of the loan and
the bank / DFI. The loan shall be disclosed in the annual audited financial statements of the borrower
as subordinated loan.
Prepare an internal note explaining the above definition through on example.
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Winter 2007
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com
ot.Operations
n.blogspLending
& Risk Management Stage-II
Q.1
ibpnextgen.b
(30)
(Answer)
The capital adequacy requirement implies that for every loan of

Rs 100/- the bank is required to hold capital on an average at _____.
1
A)
D)
Re 1/Rs 100/-
B)
E)
Rs 8/C) Rs 80/None of the above
The maximum tenor for payment under Sight Letter of Credit is

_________ days.
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2
A)
C)
E)
0
180
None of the above
B)
D)
30
365
When the GDP growth is tapering off in an economy the credit offtake __________.
3
A)
C)
increases
Has no impact at all
B)
D)
Sub-prime mortgages are primarily:
A)
B)
C)
D)
decreases
None of the above
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Exposure against all prime borrowers

Exposure against low risk mortgage borrowers
Exposure against high risk mortgage borrowers
None of the above
If a loan is classified as Doubtful it requires ______% of its

outstanding principal (less eligible collateral) as provisioning.
5
A)
C)
E)
20%
50%
None of the above
B)
D)
25%
100%
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In order to measure Probability of Default (PD), as envisaged under

Basel-II, a bank requires at least __________ rating grade(s) for
performing loans.
A)
C)
E)
1
7
None of the above
B)
D)
5
20
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During the Financial Year (FY) 07 the private sector credit off-take
was Rupees __________ billion, which was 11% lower than the
previous year.
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A)
C)
E)
550
250
None of the above
B)
D)
350
150
The minimum capital requirement against market-risk weighted

assets (RWAmarket) is _____.
8
A)
C)
E)
0%
12.5%
None of the above
B)
D)
8%
100%
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If a loan is guaranteed by government and the borrower is concerned

with profit only thereby compromising on risk, the phenomenon is
called __________.
9
A)
C)
Information Asymmetry
Irrationality
B)
D)
Moral Hazard
None of the above
The risk weight assigned to a portfolio of retail loan is __________

risk weight assigned to housing loan of equal amount.
10
A)
C)
E)
Equal to
Greater than
None of the above
B)
D)
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Less than
Not comparable to
Currently the discount rate, that is the rate at which the central bank
(SBP) lends to commercial banks, is ________.
11
A)
C)
E)
0%
8%
None of the above
B)
D)
5%
10%
Loan loss coverage takes place when;
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12
A)
B)
C)
D)
E)
The loan is covered by tangible security

The loan is not covered by tangibly security
The loan is fully backed by another loan
The loan is fully provided
None of the above
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The analysis of credit off-take in Pakistan shows that the largest
recipient of credits is ____________ segment.
13
A)
C)
Consumer
Corporate
B)
D)
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SME
None of the above
In Pakistan the credit penetration ratio (defined as number of

borrowers to total population size of the country) is around:
14
A)
C)
E)
1%
7%
None of the above
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B)
D)
3%
20%
Mortgage is defined in:
15
A)
C)
E)
Contract Act
Transfer of Property Act
None of the above
B) Sales of Goods Act

D) Company Act
Guarantee is defined in:

16
A)
C)
E)
Stamp Act
Contract Act
None of the above
B)
D)
Subordinated Loan can be raised by:

17
A)
C)
Any firm
A Public Limited Co.
B)
D)
Transfer of Property Act

Sales of Goods Act
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A private Limited Co.
None of the above
Indorsee of a Railway receipt can file suit for damages
18
A)
B)
C)
D)
E)
Mere as indorsee
Since has similar rights as that of negotiable instruments
Only if he is also owner of good
Can not file suite at all
None of the above
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Markup agreement executed by borrower and lender is based on the

concept of
19
A)
C)
E)
musharika
interest
None of the above
B)
D)
modaraba
morabaha
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Contingent liability includes
20
A)
C)
D)
Letter of Credit
Under Writing
None of the above
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B)
D)
Letter of Guarantee
All of the above
Total clean exposure of a bank shall not exceed its equity

21
A)
C)
E)
Two times
One time
None of the above
B)
D)
Three times
Four times
A commercial paper is
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22
A)
B)
C)
D)
A commercial document
A commercial invoice
An instrument to borrower
None of the above
Maximum per party non-funded limit against banks equity is:

23
A)
C)
E)
10%
20%
None of the above
B)
D)
15%
30%
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Aggregate exposure of a bank in contingent liability shall not exceed

24
A)
C)
E)
4 times of its equity

None of the above
B)
D)

While considering a loan request of a Private Limited Company the

bank
25
A)
B)
C)
D)
Demands personal guarantee of all directors

Demands personal guarantee of majority of the directors
Bank has discretion to demand or not to
None of the above
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In SME maximum per party clean exposure can be
26
A) One million
C) Three million
B) Two million
D) Four million
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SBP required a debt equity ratio of
27
A)
D)
60:40
None of the above
B)
80:20
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C) 1:1
In response to a loan request from a default the bank
28
A)
B)
C)
D)
Can not allow further loan

Allow only non fund facility
Allow both fund and non-fund based facilities subject to
recording reasons
None of the above
A restructured/rescheduled loan can be de-classified
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29
A)
B)
C)
D)
E)
Right after restructuring

After the grace period
After one year of the grace
After stipulated period without any over dues
None of the above
Packing finance is allowed against
30
Q.2
(A)
1
2
3
4
5
6
7
8
9
10
A)
B)
C)
D)
E)
Personal guarantee
Against an export letter of credit
Against firm order for export
Both against (A) and (B)
None of the above
ibpnextgen.bl
UCP
LTFF
REIT
MFI
REPO
TFC
SUKUK
PTC
BOND
GDR
(05)
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Q.2
B)
What is unexpected loss?

unexpected losses?
How does a bank protect itself against

(05)
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Q.3
It is commonly said that banking is all about pricing the relationship. What factors/
variables would you consider while pricing loan? Use these factors for pricing a Rs
100 million loan to Ahmed Baksh & Co., a private limited company?
(10)
Q.4
The management of your bank has suddenly realized that Non Performing
Loans (NPLs) of the bank have increased tremendously over the past few
months, especially since the interest rates have risen. You have been assigned
the task of reducing the NPLs. How would you proceed?
(10)
Q.5
Discuss why cashflow-based lending should be preferred over collateral-backed

lending.
(10)
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Q.6
FATR quite often is allowed to importer / buyer of merchandise. Name the

major document taken exclusively in FATR. Critically examine the essential
features and attributes of the document.
(10)
Q.7
Under present rate regime credit is available to customers both on floating rate
and fixed rate. Discuss basis of determining both the rates for borrower and also
risks and return for borrowers as well as lender in the above.
(10)
Q.8
What are essential differences between Long Term Finance and Working
Capital Finance, keeping in view of banks risk and return trade off.
(10)
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Summer 2008
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gspoOPERATIONS
n.bloLENDING
& RISK MANAGEMENT Stage-II
ibpnextgen.b

Q.1
Q.2
Q.3
(21)
State True or False in the answer column. Give brief reason for your selection at
the space provided below the question:
(05)
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(05)
Q.4
(A)
What do you understand by Fixed and Floating Charge?
(01)
Q.4
(B)
Give four key characteristics of a good security?
(02)
Q.4
(C)
Define forced sale value?
(01)
Q.4
(D)
Define subordinated loans?
(01)
Q.4
(E)
Please write the definition of prime customers for credit cards in the light
of prudential regulations and please also confirm whether those criteria
must be approved by the Board of Directors of the bank, or not.
(02)
Q.4
(F)
Five Cs of Credit Worthiness
Q.5
What is meant by Classification of a loan? What are the different categories of

classification? What is the difference between time-based and subjective
classification? Which one would you prefer and why?
(10)
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(02)
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Q.6
The Governor State Bank of Pakistan has recently advised commercial banks
that they should extend more lending to Small and Medium Enterprises (SMEs)
sector. On the other hand the Prudential Regulations for SME Financing require
the banks to have credit programs in order to penetrate into SME Financing.
How would you proceed?
(10)
ibpnextgen.blog
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Q.7
Over the past five (5) years, banks in Pakistan have been involved in aggressive
Credit Marketing, particularly in consumer finance. Now, they are faced with a
dilemma. Demands for increasing returns to depositors, given the backdrop of a
down-turn in current economic indicators, require the banks to undertake a
strategic change in their operational philosophy. Briefly give your own views on
the subject.
(10)
ibpnextgen.b
Q.8
Why are Charge Documents obtained from Borrowing Customers? Explain the
banks purpose for obtaining the various documents pertaining to loans and overdrafts and specify where each of those documents is registered and why.
(10)
Q.9
What do you understand by lending against pledge? What is the

liquidating pledged assets, if so required by the bank.
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process of
(10)
Q.10 A balance sheet analysis alone may not be sufficient to depict the actual financial
position of any company. What are the hidden aspects that may be integral in
assessing a companys financials and how can a bank mitigate the financial risks
associated with such elements.
(10)
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Winter 2008
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com
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LENDING OPERATIONS & RISK MANAGEMENT STAGE-II
ISQ EXAMINATION (WINTER) 2008
Q.1
ibpnextgen.b
Please write the alphabet of the selected choice in the answer column:
(25)
(Answer)
A bridging loan from the bankers point of view is often:
A)
Simple, profitable, and self-liquidating
B)
Profitable, self liquidating, but needs registration
C)
Simple, profitable, but is usually payable in the long run
D)
All of the above
E)
None of the above
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Q.2
(A)
State True or False in the answer column. Give brief reason for your
selection at the space provided below the question:
(08)
(Answer)
Usance bill of exchange is payable on demand
Q.2
(B)
ibpnextgen.bl
What do the following abbreviations in vogue in banks/DFIs/NBFCs stand

for:
(04)
CAMEL
BMR
NAV
GDR
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Q.2
(C)
Fill in the blanks:
(07)
i.
A mortgage of immovable property by depositing title deeds with the

bank is called __________________________________________.
ibpnextgen.blog
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Q.3 Renox Corporation has approached your bank for financing requirements.
You have examined the companys financial statements and extracted data as
follows:
(05)
ibpnextgen.b
Asset
Amount
(Rs)
Cash
Accounts Receivable
Inventory
Current Assets
80
700
500
1,280
Fixed Assets
1,220
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Total Assets
2,500
(Rs in 000)
Amount (Rs)
Liability and Equity

Accounts Pay
Accrued Expenses
Notes Pay bank
Current Maturity of Long
Term Debt
Total Current Liability
Long Term Debt
Equity
Total Liability & Equity
400
80
450
50
980
550
970
2,500
Selected Income Statement Data:

Net Sales
Cost of Goods Sold
Operating Expenses
Purchases
Average Day Sales
Average COGS
Average Days Exp
9,125
6,100
2,550
6,430
25.00
16.71
17.62
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Required:
Assuming a 365-day year, calculate the working capital needs of the company.
Q.4
What specific documents should a banker obtain in the following cases:

i.
ii.
iii.
iv.
(04)
Finance against pledge of Term Deposits to a sole proprietorship.

Short-Term demand Finance to a partnership against equitable mortgage
of house
Running Finance against pledge of stock to a public limited company
Running Finance against hypothecation of stock of private limited
company
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Q.5
(A)
Discuss Life Insurance Policy as a security for advances. What

precautions should a banker take in accepting it as a security?
(04)
Q.5
(B)
What aspects will receive your particular attention when conducting

post-sanction inspection of term loan facility granted to a limited
company?
(05)
ibpnextgen.blog
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Q.6
(A)
What important points should be covered in an interview with a

prospective borrower to assess his credit worthiness.
(05)
Q.6
(B)
Explain the conceptual difference between interest based financing and

markup based financing, with suitable examples of short term and long
term financing.
(05)
Q.7
(A)
What are the short term and long term products for financing imports.
Explain the methodology and securities obtained for the above
products.
(05)
Q.7
(B)
Define and illustrate corporate guarantee and cross corporate

guarantee. How you will evaluate acceptability of the both in lending
operation.
(05)
ibpnextgen.b
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Q.8
Briefly discuss:
A)
There pillars of the Basel-II accord
B)
Concept of enterprise risk management
C)
Off balance sheet financing / commitments
(06)
Q.9
Briefly Explain:
A)
Assignments of proceeds / funds
B)
Letter of negative lien
C)
Operation risk in electronic access to customers
(06)
ibpnextgen.bl
Q.10 Lenders while lending against securities, create charge on assets of the
borrower. Explain the following charge with examples and the process of
creation of charge.
(06)
A)
B)
C)
First Charge
Second Charge
Parri Passue Charge
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Summer 2009
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ibpnextgen.blog
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Q.1
Q.2
Q.3
ibpnextgen.b
Please write the alphabet of selected choice in the answer column:

State True or False in the answer column.
(25)
(06)
You have received a request for loan from Fair Deal Corporation. It has
reported the following for 2008:
(10)
Accounts receivable Jan 1
Accounts receivable Dec 31
Inventory Jan 1
Inventory Dec 31
Net credit sales
Cost of Goods sold
Rs 100,000
Rs 150,000
Rs 40,000
Rs 55,000
Rs 800,000
Rs 450,000
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Compute:
A)
Accounts receivable turnover
B)
Collection period
C)
Inventory turnover
D)
Age of inventory
E)
Operating cycle
ibpnextgen.bl
Q.4
Briefly discuss what guidelines would you follow in the matter of classification of
your banks SME portfolio?
(10)
Q.5
If basic precautions are taken at the stage of sanction and disbursement, a lot of
difficulties pertaining to recovery can be avoided. Discuss.
(10)
Q.6
What are the advantages and disadvantages of accepting stock exchange

securities for advancing loans to customers? What precautions would you as a
banker take in such cases?
(10)
Q.7
What are the principal advantages to a bank of using a credit-scoring system to

evaluate a loan application? Are there any significant disadvantages to a credit
rating scoring?
(10)
Q.8
What are the parts of a typical loan agreement executed between the banker and
the borrower?
(10)
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Q.9
Read the following case and give reply to required questions:
ibpnextgen.b
M/s Impex opened an irrevocable Documentary Credit to import 1000 Electric

Generators at C&F price of US$ 300/- each at 25% margin. Issuing bank
received the documents for US$ 30,100/- including all charges of Negotiating
Bank etc and lodged in PAD for Rs 19 million having adjusted margin.
M/s Impex approached bank for FIM facility. Bank approved FIM for 90 days
@ 20% rate of markup per annum. The bank arranged delivery of the goods
and placed it in the warehouse of the Muqaddam. Bank created FIM adding 1%
flat markup and handling charges, 10% Taxes, 1% wharfage on C&F price.
Bank insured the goods with appropriate clauses costing 2% on 110% of FIM
amount, also was debited to outstanding FIM. FIM was created on 20th August,
2008.
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The customer approached for Delivery Order for 100 generators on 30th August,
2008. Muqaddam rental is Rs 10/- per generator per day.
Required:
A)
B)
C)
Total amount debited to FIM

Landed cost per generator
Amount payable by the importer for Delivery Order of 100 generators
(03)
(03)
(03)
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Winter 2009
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t.
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ibpnextgen.b
Q.1
Q.2
State True or False in the answer column. Give brief reason for your selection
at the space provided below the question:
Q.3
Fill in the blanks:
Q.4
How would you determine whether a person desirous of opening an

account would be a desirable customer? Why is preliminary investigation
necessary.
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Q.5
What should a good written loan policy of a bank contains?
Q.6
Briefly describe various risks that a bank faces.
Q.7
Loan review is not a luxury but a necessity for sound bank lending
program. Explain.
Q.8
Briefly describe the steps involved in sale of mortgaged property by a

bank.
Q.9
Explain why collateral alone does not justify extending credit.
ibpnextgen.bl
Q.10 Here under is a case on Trade Finance which you are required to critically
examine.
THE CASE
A corporate client had multimillion credit line largely Trade Finance. The
biggest chunk of the line was for 180 days Acceptance Credit. Security there
against was 10% cash margin plus hypothecation of goods imported plus
mortgage of vacant land with doubtful valuation. At maturity of the bill
acceptance were converted in part or in full to 90 days Trust Loan. (As an
internal auditor you have to consider).
Required:
Critically evaluate the facility in terms of:
A)
Merit of the Credit Line, particularly of Acceptance Credit
with reference to security.
B)
Legal Flow in conversion to TR
C)
Motive behind conversion of TR
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Summer 2010
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LENDING OPERATIONS AND RISK MANAGEMENT
STAGE-II
ibpnextgen.b

Q.1
Q.2
Q.3
Answer the following questions:

A)
Can the bank issue open-ended guarantees ?
B)
What is the Rule in Claytons Case?
C)
Can exporters in Pakistan borrow in foreign currency?
D)
Can an Islamic banking branch of a commercial bank take

independent exposure upto 35% of its equity, as is admissible in
case of full-fledged Islamic bank?
E)
Can a bank extend credit facilities against lien on COIs/deposits

maintained with NBFIs?
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Q.4
Suppose that a borrower needs Rs 80,000. A bank gives the borrower a choice
of two pricing schemes. The first is a Rs 100,000 loan with 20 percent
compensating balance requirements priced at 10 percent. The second is an
Rs 80,000 loan with no balance requirements priced at 12.5 percent.
A)
B)
C)
ibpnextgen.bl
Calculate the effective cost to the borrower of each alternative.

Assume that the bank must hold 12 percent required reserves against
customer deposits, calculate the effective return to the bank of each
alternative.
Which pricing scheme is preferred for the bank?
Q.5
What are the warning signals of problem loans that can be picked up from
careful and consistent reading of a borrowers financial statements?
Q.6
Explain what precautions a prudent banker would take in the opening and
operation of account of a Public Limited Company.
Q.7
Bright Textiles Ltd have been sanctioned a limit of Rs 500,000 at your branch
against hypothecation of liquid assets including (i) stocks, (ii) stock-in-process
and (iii) book debts. State with reasons how drawings should be regulated and
controlled.
Q.8
Banks must operate under a sound credit granting process. Explain what
factors should be considered in developing such a system.
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Winter 2010
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ibpnextgen.blog
ot.com
n.blogspTHE
INSTITUTE OF BANKERS PAKISTAN
ibpnextgen.b
Q.1
Q.2
Q.3
Fill in the blanks:
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Q.4
Q.5
Q.6
A)
Why does the State Bank of Pakistan require the banks to classify their
loans?
B)
What are the different categories of classification?
C)
Differentiate between time-based and subjective classifications. Which

one would you prefer for your bank?
A)
What are the characteristics of consumer loans?
B)
Explain how you would evaluate consumer loan applications.
A)
What is meant by pledge of goods?
B)
Explain how you would safeguard interest of the bank when extending
loan facilities against pledge of goods.
ibpnextgen.bl
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Q.7
Diamond Industries Limited has approached your bank for a working capital
loan, and has submitted the following financial data:
ibpnextgen.b
ASSETS
Cash
Accounts Receivable
Inventory
Fixed Assets
Rs 50,000
Rs 375,000
Rs 510,000
Rs 925,000
--------------Rs 1,860,000
Total Assets
LIABILITIES & EQUITY

Accounts Payable
Accrued Expenses
Notes Payable
Current Maturity of Long Term Debt
Long Term Debt
Equity
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Total Equity & Liabilities
Sales
Cost of Goods Sold
Operating Expenses
Purchases
Rs 4,622,800
Rs 3,504,100
Rs 893,000
Rs 3,116,000
Rs 166,000
Rs 37,000
Rs
75,000
Rs 25,000
Rs 475,000
Rs 1,082,000
--------------Rs 1,860,000
ibpnextgen.bl
Required:
A)
What fraction of the firms assets is being funded with long-term debt or
equity?
B)
Assuming a 365-day year, calculate the firms asset cash-to-cash
cycle, liability cash-to-cash cycle, and days deficiency.
C)
Estimate the firms working capital needs.
Show your working on the Answer Sheet.
Q.8
Discount rate is determined from time to time by State Bank of Pakistan. How
does it affect pricing of assets and liabilities of banks.
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Q.9
What are the merits and demerits of the following high and low ratios:
A)
B)
C)
D)
Current Ratio
Quick Ratio
Inventory Turnover
Debit Equity Ratio
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Summer 2011
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ibpnextgen.blog
comOF BANKERS PAKISTAN

ot.INSTITUTE
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Q.1
Q.2
A)
B)

Fill in the blanks:
Q.3
A)
B)
What do you understand by Loan Review function in a bank?

Explain the scope and functions of Loan Review.
Q.4
A)
B)
What do you understand by classification of a loan?

What are the different categories of loan classification?
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Q.5
Q.6
A)
What is the difference between time-based and subjective loan

classification?
B)
Which one would you prefer?
A)
Discuss why a prudent banker would prefer cash flow-based lending over
collateral-backed lending.
Prepare a credit risk management module for implementation in a
recently incorporated commercial bank.
B)
Q.7
Rembo Corporation has applied for a loan from your bank and has submitted
the following information for the year ended December. 2010:
Accounts receivable, January 1
Rs 100,000
Accounts receivable, December 31
Rs 150,000
Inventory, January 1
Rs 40,000
Inventory, December 31
Rs 55,000
Net credit sales
Rs 800,000
Cost of goods sold
Rs 450,000
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Compute:
A)
B)
C)
D)
E)
Q.8
Accounts receivable turnover

Collection period
Inventory turnover
Age of inventory
Operating cycle
According to SBPs GUIDELINES ON RISK MANAGEMENT, Risk

Management is a discipline at the core of every financial institution and
encompasses all the activities that affect its risk profile. Discuss and
explain.
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Winter 2011
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m
o
c
t.
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THE INSTITUTE OF BANKERS PAKISTAN
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Lending: Products, Operations & Risk Management Stage-II
Section-I
Multiple Choice Questions

Number of Questions: 30
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Marks: 45
Allotted Time: 60 minutes

Section-II
Constructed Response Questions
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Number of Questions: 9
Marks: 55
Allotted Time: 120 minutes

Q.31 A)
What is Cash-flow based lending and its significance?
Q.31 B)
Differentiate between Cash-flow based lending and Asset-based

lending?
Q.32 A)
Describe TWO common Non-fund based facilities.
Q.32 B)
Describe THREE common Fund-based facilities, available to

importers in Pakistan.
Q.33 A)
Describe the Objective and Subjective classification of NPL?
Q.33 B)
Provide at least THREE circumstances when a subjective

classification will be desirable.
Q.34 A)
Define a collateral?
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Q.34 B)
What are different types of collateral?
Q.34 C)
What are the attributes of good collateral?
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Q.35 As per State Bank of Pakistans quarterly performance review of the

banking system of the December 2010, gross NPLs to loan ratio has
increased from 7.6% in CY07 to 14.7% in CY10. Do you think a
disciplined and prudent lending culture will help control the NPLs?
Support your answer with at least FOUR policy options to reduce the
default ratio of lending portfolio.
Q.36 Discuss any FIVE qualities of the security that should be observed by a
banker while granting advances on the basis of securities offered by the
customers.
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Q.37 Specify any FIVE points of distinction between the pledge of goods and
hypothecation of goods.
Q.38 A)
Why risk management is important for financial institution and

describe its benefits.
Q.38 B)
Discuss the key components of Risk Management Framework for

the financial institutes.
Q.39 Which factors would you like to consider in making lending decisions
and why?
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Summer 2012
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Lending Products, Operations & Risk Management Stage-II

Q.
A)
Define open-ended and close-ended guarantees.
Q.
B)
State the features of a bank guarantee.
Q.
A)
Explain the advantages and disadvantages of fixed rate lending for

i. Lenders.
ii. Borrowers.
Q.
B)
What is meant by interest rate risk?
Q.
A)
What are the benefits of maintaining a due-date diary for obtaining

periodic documents from the borrower?
Q.
B)
How is facility monitoring system applied on regular accounts?

State any THREE ways.
Q.
A)
Write any TWO similarities of restructuring and rescheduling of an

NPL account.
Q.
B)
Write any THREE differences between restructuring

rescheduling of Non-Performance Loan (NPL) account.
Q.
A)
What is the purpose of a banks credit policy?
Q.
B)
List any FOUR components and explain any TWO.
Q.
When a bank decides to lend to a customer, the decision has an impact

not only on the customer but others around him as well. Explain the
impact that is created when a bank lends to a
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A.
B.
and
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Corporate Customer.
Individual Customer.
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Q.
You are a Relationship Manager at a medium commercial bank. M/s

Faisal & Co. a private limited company engaged in towel manufacturing
and export business approaches you for establishing pre-shipment lines
for Rs.300.0 million. As a security, the customer is offering charge over
current and fixed assets of the company.
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List the specific documents required.

A.
At the time of approval
B.
After approval and before disbursement
Q.
A)
From the following data, evaluate the trend of financial ratios of

Progressive Textiles Limited, a prospective borrower, to arrive at a
decision. Provide justification for your decision to lend or not to
M/s Progressive Textiles Ltd.
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Financial ratios of the Progressive Textiles Limited

2011
2012
2013
Current ratio
1.19
1.25
1.2
Acid-test ratio
0.43
46
0.4
Average collection period
18
22
27
Inventory turnover
7.5
5.5
Total debt/equity
1.38
1.4
1.61
Long term debt/total capitalization
0.33
0.32
0.32
Gross profit margin
0.2
0.163
0.132
0.075
0.047
0.026
Total asset turnover
2.8
2.76
2.24
Return on assets
0.21
0.13
0.06
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Net profit margin
Q.
B)
Suppose that your decision is in negative but the bank decides to

lend anyway, how will it mitigate the risk?
Q.
What is a well diversified risk portfolio? Elaborate the importance of a

well diversified risk portfolio.
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Winter 2012
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ISQ Examination - Winter- 2012

Lending: Products, Operations & Risk Management - Stage- II
Q.
Q.
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a.
Define cash flow based lending and security based lending.
b.
What is the key difference between the two?
a.
Differentiate between lien on assets and charge on assets.
b.
Write one similarity between lien on assets and charge on assets?
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Q.
Q.
a.
State the benefits of provisioning of Loan Loss Reserve.
b.
What are the determinants and provisioning requirements, as given

under SBP guidelines for classification and provisioning of loan assets?
a.
What is debt burden?
b.
Why would creditors prefer a low debt burden ratio?
c.
State advantages and disadvantages of a high debt burden

for a borrower.
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Q.
List any FIVE reasons why businesses borrow money.
Q.
Lending money to borrowers amounts to exposing the bank to risks inherent in

borrowers business.
Describe the FIVE key components which banks assess to understand the risk
of a credit.
Q.
List any FIVE areas covered by a facility monitoring system.
Q.
Describe the monitoring mechanism for the following collaterals:
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a.
b.
c.
Hypothecation
Pledge
Shares
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Q.
You are a loan processing officer at bank X. M/s Saleem Brothers have
approached your bank for a packing finance limit of Rs.2 million. The firm has
a stitching unit on rental premises which is used to execute business orders.
Currently they have a long term loan of Rs.1 million from the bank, availed for
purchase of machinery.
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During the discussion, they disclosed that they have received a very lucrative
export order from a well established company in Belgium. The export order is
revolving in nature with shipments of $ 200,000 per quarter. The new
machinery added by them in 2010 can cater to the new order along with their
normal operations.
The Balance Sheet of Saleem Brothers for the last two years is as under. A
summarized income statement for the last two years is also given below:
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Liabilities
2010
2009
Assets
Accounts Payable
324,000
145,600
Cash
Notes Payable
720,000
200,000
Short Term Inv.
Accruals
284,960
136,000
Accounts Receivable
Current Liabilities
1,328,960
481,600
Long Term Debt
1,000,000
323,432
557,632
663,768
2,886,592
1,468,800
2010
2009
7,282
9,000
20,000
48,600
632,160
351,200
Inventories
1,287,360
715,200
Current Assets
1,946,802
1,124,000
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939,790
344,800
Total Assets
2,886,592
1,468,800
2010
2009
Sales
5,834,400
3,432,000
Cost of Goods Sold
4,980,000
2,864,000
17,440
209,100
Interest Expenses
176,000
62,500
Net Income after tax
(95,136)
87,960
Equity
Total Liabilities &
Owners Equity
Income Statement
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EBIT
Net Fixed Assets
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The financing facility will be used for purchase of stocks to meet the export
orders. They are willing to undertake that all export documents will be routed
through your Bank. The primary security will be stocks under hypothecation
arrangement backed by equitable mortgage of the house of one of the
partners located in Defence House Society. The house, as per their disclosure,
has an estimated worth of Rs. 7 million.
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Required :
a.
i.
ii.
iii.
b.
Calculate TWO ratios for each category below:

Operating ratios
Leverage ratios
Profitability
Based on the ratios calculated above, analyze the companys credit
worthiness.
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c.
Will you lend to them? Why or why not? Provide detailed reasons for
your choice.
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Summer 2013
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ISQ Examination - Summer-2013

Lending: Products, Operations and Risk Management - Stage- II
Q.
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The following information is extracted from the latest audited Balance Sheet of
Bank X:
Surplus/Deficit on Revaluation Reserve (Fixed Assets)
Paid up capital
Reserves
Un-appropriated profit
Rs.400 million (Cr.)

Rs.2,000 million
Rs.1,700 million
Rs.500 million
Note: The exposure should be calculated on the basis of prevailing limits.

Assume that all other terms and conditions are conducive.
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With the help of the above information, compute the following:

A.
Total equity of the bank
B.
Per party exposure limit
C.
Group exposure limit which Bank X can allocate to a client, or a single/

group.
Q.
A.
Discuss the difference between primary security and secondary

security.
Q.
B.
List at least THREE secondary securities against working capital

finance, specifying the risks associated with each type of security.
Q.
A.
Discuss the SBP regulation concerning write off of loans.
Q.
B.
Q.
A.
What is the Prudential Regulation stipulation for reversal of provision

when cash recovery is made from a delinquent borrower?
Define the following:
I.
II.
III.
IV.
V.
VI.
VII.
Hypothecation
Mortgage
Lien
Floating charge
Pledge agreement
Guarantee
Trust Receipt
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Q.
B.
Which of the above is the most secure form of collateral? Please

provide TWO reasons for your answer.
Q.
A trading house has approached your bank for a working capital finance of
Rs.15 million. To scrutinize their finance requirements on the basis of cash
flows, the prospective borrower was asked to furnish selected information
based on projected sales and expenses for the coming year. The trading
house has furnished the following data:
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Revenue
i)
Projected sales (credit) for next year:

1st quarter
2nd quarter
3rd quarter
4th quarter
Rs. 50 million
Rs. 60 million
Rs. 80 million
Rs.100 million
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ii)
Credit sales collection pattern:

a.
b.
25% of each quarter sale would be collected during the same

quarter.
75% of the balance in the following quarter.
Disbursements
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i)
Cost of goods sold would be 75% of the amount of sales.

a.
50 % of the cost of goods sold would be paid in the same quarter
b.
the remaining 50% in the following quarter.
ii)
Operating expenses :
1st quarter
2nd quarter
3rd quarter
4th quarter
iii)
Rs.10 million
Rs.12 million
Rs. 8 million
Rs.10 million
Level of minimum cash balance to be maintained Rs.500,000 during

each quarter.
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iv)
Required:
A.
No injection or withdrawal of funds by the owners/proprietor during the

year.
Prepare projected cash flows of the entity showing receipt and
disbursement of funds during each quarter and the shortfall for each
quarter separately.
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B.
If the banks policy permits financing to the extent of 50% of the total
funds needed during the year, what amount of finance can be extended
to the client. Adjustment to the extent of 10% plus minus is admissible.
Amount of finance offered to the client may be rounded up in millions.
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Q.
Waheed Brother has been in the towel manufacturing business since the last
20 years. Your bank has a satisfactory working relationship with them on the
trade side for the last 5 years. You have been pursuing them to take a loan
from your bank and the company has finally agreed and has sent you the
following financial statement:
Waheed Brothers
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Assets
Cash & Cash Equivalents
Accounts receivable
Inventory
Operating Fixed Assets
Other Assets
(PKR million)
4,000
7,000
5,000
18,000
5,000
Total Assets
39,000
Liabilities & Stockholder's Equity

Accounts payable
Notes payable
Bonds payable
Capital
Retained Earnings
Total Liabilities & Stockholder's Equity
4,000
7,000
13,000
11,000
4,000
39,000
Sales
Cost of Goods Sold
Gross Margin
60,000
41,800
18,200
Operating Expenses
Selling Expenses
Administrative expenses
Interest expenses
Income Tax
Total Operating expenses
9,000
4,000
2,000
1,800
16,800
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Net Income
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1,400
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A.
What are your observations on the operating cycle of Waheed

Brothers? Please calculate at least 3 ratios in support of your answer.
B.
What are your observations on the profitability of the business? Please

calculate at least 2 ratios in support of your answer.
C.
What are your observations on the gearing and liquidity of the

company? Please calculate at least 2 ratios in support of your answer.
D.
Based solely on the above analysis, would you lend to Waheed

Brothers? If yes, please detail the terms. If no, why not?
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Q.
You are a credit analyst at Janoobi Bank and you receive an approved credit
memo from your Departmental Head with a note saying, Please process the
loan after building appropriate loan covenants/terms.
You read the credit memo, the salient features of which are:
The company is a tyre manufacturer and has been in business for the last
7 years but is a new customer for the bank.
The company has recently expanded its capacity and is now looking to
export to East African countries apart from sales to Europe.
The company allows a dividend of PKR 25 million from business every year
but has not done so in 2012.
Market check of the customer has not been documented.
Financial snapshot is as under:
Liabilities
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2012
2011
Assets
Accounts Payable
324,000
145,600
Cash
Notes Payable
720,000
200,000
Short Term Inv.
Accruals
284,960
136,000
Accounts Receivable
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Current Liabilities
Long Term Debt

Equity
Total Liabilities &

Owners Equity
1,328,960
481,600
1,000,000
323,432
557,632
663,768
2,886,592
1,468,800
2012
2011
7,282
9,000
20,000
48,600
632,160
351,200
Inventories
1,287,360
715,200
Current Assets
1,946,802
1,124,000
939,790
344,800
2,886,592
1,468,800
Net Fixed Assets
Total Assets
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Income Statement
2012
2011
Sales
5,834,400
3,432,000
Cost of Goods Sold
4,980,000
2,864,000
17,440
209,100
Interest Expenses
176,000
62,500
Net Income after tax
(95,136)
87,960
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EBIT
Based on the information provided, you are not comfortable with allowing them credit.
A.
Highlight FIVE potential causes of concern.
B.
Make the loan covenants to mitigate the causes highlighted above.
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IBP-the knowledge Institute

Lending Operations and Risk Management - Stage-II

Please write the alphabate of selected choice in the answer column:

Which of the following is a type of credit risk:

Lends money to expand the manufacturing capability for a long term.

Lends money for meeting short-term gaps in working capital.

IBP-the knowledge Institute

A contingent facility is the one, where

Deposits with State Bank of Pakistan divided by countrys population.

Clean financing means unsecured financing.

Higher credit rating implies higher credit risk.

IBP-the knowledge Institute

From the perspective of credit portfolio risk management the Advances

When a bank issues a Guarantee it means that the bank as guarantor

The price of a loan should compensate for the risk taken.

In pledge the possession & title of goods is transferred to the Bank.

In hypothecation, both title and possession rests with the borrower.

Creation of Equitable mortgage can be created by depositing certified

What do the following commonly used abbreviations stand for?

Differentiate between a fixed and floating charge.

Q.5 Case Study

IBP-the knowledge Institute

a) Per-party exposure limit

c) Portfolio limit for aggregate non-fund based facilities.

What is meant by Early Warning Signals (EWS)? Mention the parameters to be

How should the working capital financing requirements of a business be

Lending Operations and Risk Management - Stage-II

Please write the alphabate of selected choice in the answer column:

______________ is a clause in the floating charge whereby a company

xii A) actual accounting loss B) potential accounting loss

xiii A) Hypothecated B) Mortgaged C) Pledged

xv A) Hypothecated B) Mortgaged C) Pledged

A) Rs 180M B) Rs 150M C) Rs 167M

A) OAEM B) Substandard C) Doubtful

A) 0.75 : 1.0 B) 1.00 : 1.0 C) 1.50 : 1.0

A) OAEM B) Substandard C) Doubtful

xxi A) Pledge B) Hypothecation

xxiii A) One Hundred Thousand B) Five hundred thousand

Net advances are equal to gross advances plus provisioning held.

The price of a bond (or a secondary market loan) is directly related to

A fixed charge covers all the assets of a company.

A mortgage is a type of loan that is collateralized with a specific

One can fairly assume that rating of an instrument is directly related

Running Finance is a type of credit facility that is extended by a bank

A revocable letter of credit can neither be cancelled nor amended

It is easier to calculate credit risk in loans and advances as compared

With increasing sophistication and dependence upon technology

Liquidity risk reflects an enterprises inability in raising funds to

Mark-up interest earned minus mark-up interest expensed is equal to

The equitable mortgage and mortgage by deposit of title deeds is the

Interest rate risk arises where the value of financial instruments

Advances are banks liabilities and deposits are banks assets.

Set-off means adjusting a debit balance in one account against a

Credit risk represents the accounting loss that would be recognized at

Accommodation granted against a guarantee unsupported by

Subordinated Loan means a secured loan extended to the borrower by

Frequency of mark up recovery impacts the effective rate of mark up

Equitable mortgage can be created by depositing certified true copy

It is imperative for the scheduled commercial banks to have

What do the following commonly used abbreviations stand for?

What are its implications for other Banks? (03)

Mention the repercussions of financing fixed Assets of a manufacturing concern