New Upcoming Legal Jobs Free Workshop March 11 at 5 PM. Register here

    Question

    Which of the following factors DO NOT attribute to

    increase the credit risk of a bank?
    A High LTV ratio Correct Answer Incorrect Answer
    B Weak credit policy Correct Answer Incorrect Answer
    C High exposure to single territory Correct Answer Incorrect Answer
    D Crystallization of contingent liabilities Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    High LTV ratio means high loan as compared to the value of the asset financed. In such a case the collateral value is insufficient or offers very little margin of safety for the bank in case of default by the borrower Weak credit policy can lead to poor credit appraisal and inadequate follow-ups leading to higher risk of default Higher exposure to single territory increase the geographical risk like the one witnessed by Microfinance institutions when all MFI loans in Andhra Pradesh turned bad and MFIs concentrated in that state suffered huge non-recoveries. Crystallisation of contingent liabilities poses liquidity risk to the banks.

    Practice Next

    Relevant for Exams: