BOI Credit Officer common mistakes
BOI Credit Officer · Understand the traps and how to avoid them.
Computing DSCR by dividing EBITDA by total debt service including principal, but pulling the principal figure from the current portion of long-term debt on the balance sheet rather than the actual scheduled amortisation for the coming twelve months, so the ratio is wrong whenever there are bullet repayments, refinancing, or off-balance-sheet obligations maturing in the period.
Candidates default to the balance sheet because it is one number and easy to grab, and they do not rebuild the debt service schedule from the loan agreement or note disclosures. Under exam time pressure they skip the schedule reconstruction step entirely.
What to do instead
Before computing any coverage ratio, write out a twelve-month debt service table: interest per the P&L or note, scheduled principal per the amortisation clause, and any balloon or refinancing falling due. Reconcile the total to the cash flow statement's financing section. Practise this on three synthetic term sheets until the schedule-first habit is automatic.
Treating reported profit as cash available for debt service without adjusting for non-cash items and working capital movements, and without normalising for one-off items such as asset revaluation gains, insurance proceeds, or related-party management fees.
Candidates conflate accrual profit with cash generation and are unfamiliar with the standard normalisation checklist. Examiners deliberately plant a revaluation gain or a non-recurring item to test whether the candidate strips it out.
What to do instead
Build a fixed normalisation bridge every time: net profit, add back depreciation and amortisation and interest, subtract equity-accounted income and revaluation gains, adjust for owner's compensation above market, then apply the working capital movement from the cash flow statement. Memorise the bridge order so it is reproducible under pressure.
Assigning a risk rating by anchoring on the internal grade the borrower already carries or on the agency rating quoted in the file, then writing narrative justification that merely restates the grade instead of deriving it from the scorecard factors.
Anchoring bias plus the belief that a rating is a label to be copied rather than an output to be computed. Candidates also fear that a derived grade differing from the existing one means they have made an error.
What to do instead
Rate blind: cover the existing grade, score each factor from the financials and qualitative evidence, compute the weighted score, and only then compare to the prior grade. If they differ, write the migration rationale explicitly. In practice, do this on five files where you know the answer and check your derivation.
Structuring a facility with a tenor, grace period, or amortisation profile that does not match the borrower's cash conversion cycle or project completion timeline, for example a three-year bullet for a borrower whose inventory and receivable cycle is nine months and whose only exit is refinancing.
Candidates focus on the amount and the rate because those are the numbers in the question, and treat tenor as a formality. They also fail to link the repayment source to the asset being financed.
What to do instead
For every structure, state the primary repayment source and its timing before choosing tenor. Match tenor to asset life for term loans, to the cycle for working capital lines, and build in a grace period equal to the construction or ramp-up period plus a cushion. Write one sentence justifying each structural term against a cash flow fact.
Pricing a loan by quoting a spread over the base rate without building the expected loss and capital charge, and without checking whether the resulting risk-adjusted return clears the hurdle rate after fees, cost of funds, and operating cost.
Candidates equate pricing with the margin line and forget that a wide spread on a high-PD borrower can still destroy value. They also omit the fee amortisation and the funding cost of the undrawn commitment.
What to do instead
Use a fixed template: cost of funds plus operating cost plus expected loss (PD times LGD times EAD) plus capital charge (capital allocated times target return on capital) plus a competitive margin. Compute RAROC and compare to the hurdle. Do this for a low-risk and a high-risk borrower side by side so the intuition sticks.
Monitoring a borrower by reading only the annual financial statements and the repayment record, ignoring behavioural and account-conduct signals such as persistent excesses over limit, slowing deposit turnover, a shift from salary credits to cash deposits, or sudden use of a previously dormant overdraft.
Candidates treat monitoring as periodic financial review and do not know that conduct data is often the earliest signal. Account-level data is also less familiar than a P&L, so it gets skipped.
What to do instead
Maintain a standing early-warning checklist split into financial, conduct, and qualitative buckets, and review conduct data monthly rather than at annual review. Practise reading a twelve-month account turnover series and naming what changed and why it matters.
Classifying a non-performing loan and then immediately recommending a single remedy such as legal action or one-time restructuring, without first assessing the borrower's sustainable debt capacity, the recovery value of each security, and the relative net present value of the available options.
Candidates jump to the remedy that sounds decisive and are unaware that a forced sale or litigation often recovers less than a negotiated restructuring. They also skip the recovery waterfall and the time value of money.
What to do instead
For every problem loan, produce a short options table: restructure, refinance, enforcement, or sale, each with estimated recovery, timeline, cost, and NPV. Rank by NPV net of cost, not by speed or severity. Ground the sustainable debt capacity in a downside cash flow, and state the recovery waterfall security by security.
Confusing the regulatory classification and provisioning rules with the accounting impairment model, for example applying the regulatory past-due bucket mechanically to the expected credit loss calculation, or assuming a restructured account automatically returns to standard status after one payment.
Two overlapping frameworks with similar vocabulary. Candidates learn one and apply it to the other, and they do not track the cure period and upgrade conditions that govern restructured exposures.
What to do instead
Keep a two-column reference card: one column for the prudential classification and provisioning requirements, one for the accounting impairment stages and triggers. Note explicitly where they diverge, including the treatment of restructured and forbearance accounts and the cure period before upgrade. Rehearse with a case where the two frameworks give different numbers.
Ignoring the treasury and liquidity dimension of a lending decision, such as the funding mismatch created by a long-tenor fixed-rate loan funded by short-term deposits, or the undrawn commitment's drain on the liquidity coverage position.
Candidates treat credit and treasury as separate subjects and do not see the loan as a balance sheet position with funding and liquidity consequences. The exam often embeds this in a structuring or pricing question.
What to do instead
For each proposed facility, add a treasury note: funding source and repricing mismatch, interest rate risk if fixed, and the liquidity cost of undrawn limits. Learn the standard liquidity ratio mechanics and apply them to a facility that doubles the undrawn commitment book.
Reading the financial statements without reconciling the tax line to the statutory rate and deferred tax position, so that a low effective tax rate from a one-off exemption, a prior-year adjustment, or an unrecognised deferred tax asset is taken as sustainable earnings.
Candidates take the tax charge as given and do not compute the effective rate or read the deferred tax note. They also miss the cash tax versus book tax difference that affects debt service.
What to do instead
Always compute the effective tax rate, compare to statutory, and explain the gap from the reconciliation note. Separate recurring from one-off tax effects, and use cash tax paid from the cash flow statement for debt service, not the P&L charge. Do this on two sets of accounts with a known reconciliation.