FN 306: LENDING ASSESSMENT AND MANAGEMENT REVIEW

QUESTIONS

TOPIC ONE: LENDING FUNCTION

1. Explain the concept of asymmetry of information and how it affects

lending decisions for banks. In an ideal scenario of perfect
information between borrowers and sellers, will banks thrive?
2. Explain the kind of information required from a borrower before a
loan decision is made? What is the source of the information? Can this
information been relied on?
3. Explain the concepts of moral hazards and adverse selection in the
lending context, how can their effect be minimized?
4. What are the negative consequences for a bank and the economy if
the lending function is not done properly (Explain using real life
examples).
5. How can economies of scale help explain the existence of financial
intermediaries?
6. Describe ways with which financial intermediaries lower transaction
cost.
7. The more collateral there is backing a loan, the less the lender has to
worry about adverse selection. Is this statement true, false or
uncertain? Explain your answer.
8. Explain the selling and management of risks functions as they are
applied in the lending process for banks. Is there a conflict between
these two functions? Explain
9. Briefly explain nine guiding principles that are used in the lending
process which are also known as canons of lending.
10. Explain characteristics of the credit market size in Tanzania.
11. Explain the factors that affect the growth of credit markets in
Tanzania.
12. Explain five key market infrastructure constraints related to the
credit markets in Tanzania.

TOPIC TWO: THE CREDIT PROCESS

1. Describe four restrictions that may force a bank to reject a loan
request regardless of the applicant’s efficacy.
2. What are the principal types of loans made by banks?
3. What factors influence growth of mix of loans held by financial
institutions?
 4. A lenders cost accounting system reveals that its losses on real estate
loans average 0.45 per cent of the loan volume and its operating
expenses from making these loans average 1.85 percent of the loan
volume. If the gross yield on real estate loans is currently 8.8 percent,
what is the lenders net yield on these loans?
5. Explain twelve items that a good credit policy must contain
6. Briefly explain the four generic steps of the lending process.
7. Explain differences between corporate lending and personal lending.
What are the advantages and disadvantages for a bank that choose to
deal with either corporate lending or personal lending?
8. What are the likely causes of loan defaults for customers? How does
loan default affect the banking industry and the community in
general?

9. What aspects are likely to result into non-performing assets from a

lender’s point of view? How can lenders reduce the occurrence of
non-performing assets? What guidelines direct banks on how to deal
with non-performing assets?
10. Explain the twin goals of lending and how they affect each
other.
11. Explain financing options available for a business startup? How
does is work?
12. Explain short term financing options available to corporate
customers.
13. Explain the concept of leveraged buyouts (LBO’s).

TOPIC THREE: ASSESSMENT OF LOAN PROPOSITION

1. What sources of information are available today that loan officers and
credit analysts can use in evaluating customers loan applications?
2. Describe the principal parts of a loan agreement
3. What is loan review? How should a loan review be conducted?
4. Describe warning signs to a bank that a problem loan may be
developing
5. What steps should a lender go through in trying to resolve a problem
loan situation?
6. Under which of the 5 C’s of credit does each of the following pieces of
information belong?
i. A bank discovers that there is already a lien against the fixed
assets of one of its customers asking for a loan.
ii. A corporation has asked for a loan which its lender normally
refuses to make
iii. John has excellent credit rating
 iv. Smith the manufacturing company has achieved higher earnings
each year for the past six years
v. A car dealership loan officer asks a prospective customer for a
driver’s license
vi. ABC bank is concerned about extending a loan to its customer
because a recession is predicted in the economy.
vii. Patrick needs an immediate cash loan, he has asked his brother
James to volunteer to cosign the note should the loan be approved.

7. From the description below please identify what type of loan is involved

(i) A loan is made to an automobile dealer to support shipment of new

cars
(ii) Credit granted for more than one year to support purchase of plant
and machinery
(iii) A group of investors wishes to take over a firm mainly through debt
(iv) Credit extended to support construction of a toll road
(v) Credit extended on the account of a business accounts receivables
(vi) A loan given to a big corporation by a consortium of lenders
(vii) A corporation ask for funds to be set aside for borrowing over
three years, it can borrow, repay and borrow again until the the term of
the loan expires.
8. Buttell Manufacturing has an outstanding USD 11 million with
Citicentre Bank for the current year. As required in the loan
agreement, Buttel reports selected data items to the bank each
month. Based on the following information, is there any indication of a
developing problem loan? What dimensions of Buttel performance
should Citicentre Bank be concerned?

Curre One Two Three Four

nt mont mont mont months
mont h ago hs hs ago
h ago ago
Cash Account 33 57 51 44 43
Projected sales 298 295 294 291 288
Stock price per 6.6 6.5 6.40 6.25 6.50
share( Monthly average)
Capital 32.8% 33.9% 34.6% 34.9% 35.7%
structure( Equity/debt
ratio
 Liquidity ratio(CA/CL) 1.1X 1.23X 1.35X 1.39X 1.25X
EBIT 15 14 13 11 13
ROA 3.32% 3.25% 2.98% 3.13% 3.11%
Sales revenues 290 289 290 289 287

9. ABC Corporation is seeking a renewal of its TZS 12 million credit line.

The Company reports the following financial data to your bank, Hot
Springs National Bank. The figures are in million of TZS.
2014 2015 2016 2017 Projectio
ns for
the Next
Year
Cost of Goods Sold 5.1 5.5 5.7 6.0 6.4
Selling and 8.0 8.2 8.3 8.6 8.9
Administrative
Expenses
Sales Revenues 7.9 8.4 8.8 9.5 9.9
Deprecation and 11.2 11.2 11.1 11.0 10.9
other non cash
expenses
Taxes paid in cash 4.4 4.6 4.9 4.1 3.6

Calculate the firms cashflows, What trends do you observe and what are
the implications of such trends in the company request to renew their
credit line?

10. SJK Traders pledged their business premises valued at shs 1.5 billion to
Mwananchi Bank for an overdraft facility to increase their business working
capital requirement. Mwananchi Bank provided an overdraft facility of shs 1
billion. The interest rate was Base Lending Rate (BLR) + 1.5% per annum.

The overdraft account of SJK Traders recorded the following

transactions:

Date Transaction Details Amount

(in millions of
shs)
 1 June Balance brought 500
2015 down
15 June Withdrawal 250
2015
30 June Balance brought 750
2015 forward
20 July Deposit 200
2015
31 July Balance brought 550
2015 forward

(i) Calculate the interest on the overdraft facility for the month of June if
the BLR was 6.5% per annum.
(ii) Assuming that the BLR increased from 6.5% per annum to 7.0% per
annum on 1 July, determine the interest payable on the overdraft facility
for the month of July.
(iii) Calculate the commitment fee for the month of July, assuming that
the commitment fee charged on the unutilized portion of the overdraft
facility was 1% per annum.

11. Suppose that RSM Publishing Company has approached your bank and
wants to borrow Tshs 250 million in working capital. The firm provides you
with the following balance sheet and income statement data .All figures are
in Millions Tshs

ASSETS LIABILITIES
Cash 50 Accounts 166
payables
Accounts 375 Accrued 37
receivables expenses
Inventory 510 Notes payable 75
Fixed Assets 925 Current 25
maturity of
long term debt
Total Assets 1860 Long term debt 475
Equity 1082
Total liabilities 1860
Selected Income Statement data

Sales 4622.8
Cost of goods sold 3504.1
Operating expenses 893
Purchases 3116

(a) What fraction of the firm’s current assets is being funded with long
term debt or equity? (5 marks)
(b)Assuming a 365 day year calculate the firm’s asset cash to cash cycle,
liability cash to cash cycle and days deficient. Using this information
estimate the firm’s working capital needs.(7 marks)
(c) What general concerns might you have regarding this loan request? (3
marks)

12. Suppose that you have generated estimates listed below from a profoma
analysis for a manufacturing company that has requested a 3 year term
loan. The loan is a Tshs 15 million term loan with equal annual principal
payments. Principal and interest are payable at the end of the year with
interest calculated against outstanding principal at a rate of prime plus 2
percent. Figures in Millions Tshs

Year Year 2 Year

1 3
Capital expenditure 2.5 1.25 7.5
Cash dividends 1.4 1.4 1.4
Cash flow from operations before interest 7.5 7.8 8
expense

(a) If prime averages 8 % each year will the firm’s cash flow from
operations before interest be sufficient to meet debt service
requirements and other mandatory expenditures?
(b)If prime averages 8%,9% and 10% over the three years
respectively will the cash flow be sufficient ?
13. .(a) Explain the meaning of “base rate” as applied by banks in pricing
loans. How is the base rate used to price loans of different category of
bank’s customers? (
 (b) The following information is provided about ABC Bank sources of
loanable funds and the rates the bank pays for using the funds

Curren
Loanable Market Rate Amou
t Rates
Debt nt
%
Money market deposit 16.8 4.50
accounts
Small time deposits (9 19.5 5.00
months)
Small time deposits (36- 21.3 6.80
months.)
Jumbo CDs 25.6 6.60
Federal funds purchased 5.3 5.15
Total 88.5

Target net interest 5%

margin

Maximum premium over 3%

base rate

Use the above information to calculate the bank base rate

14 The following information is provided about SJK Investments. The

company has approached your bank and requested to borrow 1.5 billion to
finance its working capital needs.
Income statement (Figures in millions)

Net sales 7,571

Cost of goods sold 5,089
Gross profit 2,482
Selling expenses 906
Management salaries 0
General & administrative
expenses 1,019
Research and
development expenses 0
Depreciation & 70
amortization
Other operating expenses 0
Total operating expenses 1,995
Operating profit 487
Interest on marketable
securities 0
Income on long term
investments 0
Interest expense - Bank
Notes 141
Interest expense - Term
notes + LTD 0
All other expenses 63
All other income 0
Total All Other Income
(Expenses) (204)
Profit before taxes 283
Income taxes 100
Extraordinary and other
income (exp.) 0
183
Dividends 0
183

Balance Sheet

Cash 141 Notes payable - bank 643

Marketable
securities 0 Accounts payable 836
Accounts
receivable 1,254 Accrued expenses 205
Inventory 1,160 Income tax payable 41
Current maturity - Term
Prepaid expenses 47 notes 0
Deferred tax asset 0 Current maturity - LTD 75
Other current
assets 0 Other current liabilities 0
1,80
Current assets 2,602 Current liabilities 0
Gross fixed assets 629 Deferred tax liability 0
Leasehold
improvements 198 Term notes 0
Less accumulated
dep. 206 Long-term debt (LTD) 450
Net fixed Other noncurrent
assets 621 liabilities 0
2,25
Total liabilities 0
Notes & contracts
receivable 0
Long-term
investments 0 Common stock - par 600
Intangible assets 40 Paid-in surplus 100
Other noncurrent
assets 0 Preferred stock 0
Treasury and other
Total Assets 3,263 equities 0
Retained earnings 313
1,01
Stockholder's equity 3
Total Liabilities 3,26
and Equity 3

Required
(i)Assess the liquidity position of SJK Investment
(ii)Determine the cash to cash cycle of SJK Investment
(iii) Based on the information that is provided would you recommend
the requested loan to SJK Investment?