Bank Mgt. 5th Ed, Chapter 11

Bank Mgt. 5th Ed, Chapter 11 - Chapter 11 Credit Selection...

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Credit Selection, Credit Selection, Underwriting, & Underwriting, & Portfolio Diversification Portfolio Diversification Chapter 11 Chapter 11
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Selection Risk Analysis Selection Risk Analysis Credit selection is the process of assessing risk of lending to a business or individual. Direct benefits of lending are interest & fees earned on the loan & possible deposit balances required as condition of the loan. Indirect benefit is relationship with borrower & demand for a variety of bank services. Must underwrite loans to control risks & provide benefits commensurate with risk. + Continued
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Selection Risk Analysis Continued Selection Risk Analysis Continued Essence of credit selection analysis can be captured in four basic credit factors: Intended use of loan funds Primary source of loan repayment Secondary sources of repayment +
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The Five “Cs” Of Credit The Five “Cs” Of Credit Character Character Capacity Capacity Cash Flow Cash Flow Collateral Collateral Conditions Conditions + +
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Primary factor of good loan is honesty & goodwill of borrowers. Dishonest borrowers can often get credit through misrepresentation. Loan officers may be fooled by elaborate schemes to defraud the bank. Intelligence, personal discipline, & managerial skills are helpful for borrowers. +
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Use of Loan Funds Use of Loan Funds Some may think use of loan funds is unimportant to lender. True use and need for funds helps determine whether loan request is Some uses are not acceptable for banks to make loans. +
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Primary Source of Repayment Primary Source of Repayment Credit analyst must have accounting & finance skills to determine ability of the borrower’s ability to repay loan from cash flow. Sources of repayment other than cash flows
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This note was uploaded on 09/30/2010 for the course FIN 468 taught by Professor Bexley during the Fall '10 term at Sam Houston State University.

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Bank Mgt. 5th Ed, Chapter 11 - Chapter 11 Credit Selection...

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