Credit and Lending Management
Core concepts
Credit management spans the credit lifecycle: origination, assessment, approval, documentation, disbursement, monitoring, and workout. Candidates must know the 5 Cs of credit (character, capacity, capital, collateral, conditions), cash-flow vs asset-based lending, credit scoring, covenants, and loan-loss provisioning (expected credit loss concepts). Understand credit risk mitigation, concentration risk, and the difference between default and delinquency.
Traps in questions
- Collateral is not repayment: it is a secondary source. Primary repayment is cash flow. Stems that imply collateral makes a weak borrower safe are wrong.
- Capacity vs capital: capacity is ability to service debt from income; capital is the borrower's own cushion.
- Covenants: affirmative covenants require action; negative covenants restrict action; financial covenants set ratios. Do not confuse them.
- Provisioning vs write-off: a provision is an accounting estimate; a write-off removes the asset.
- Concentration: exposure to one borrower, sector, or geography can breach limits even when each loan looks sound.
Worked example / rule of thumb
Rule of thumb: "Lend on cash flow, secure on collateral, monitor on covenants." Example: A firm seeks a loan with strong property collateral but volatile operating cash flow. The correct analysis prioritises debt-service coverage: if projected free cash flow covers scheduled principal and interest only 0.9 times, the loan fails on capacity regardless of collateral value. The examiner wants the capacity conclusion, not the collateral comfort.
Exam discipline
When a stem gives ratios, compute the debt-service coverage ratio (cash available for debt service divided by scheduled debt service). A ratio below 1.0 signals inability to service from operations. State the primary repayment source before discussing mitigation.