Credit and Lending (Business, Retail, Agriculture)
Credit questions test appraisal discipline rather than product names. You must identify the repayment source, structure the facility, price risk, document security, and monitor after disbursement. Business lending turns on cash flow and the working-capital cycle; retail lending on verified income and debt-to-income; agriculture on seasonality, crop or livestock budgets, land tenure, insurance, and group or collateral guarantees.
Core rules and concepts
- Apply the five Cs: character, capacity, capital, collateral, and conditions. Collateral is a fallback, never the primary repayment source.
- For business loans, use a credit monitoring arrangement: projected cash flow, DSCR, stock and debtor ageing, and sensitivity to price or demand shocks.
- For retail loans, verify income independently and cap total debt service against stable income. Check the credit bureau and existing obligations.
- For agriculture, align instalments with harvest or sale cycles, not arbitrary monthly dates. Confirm irrigation, insurance, and market access.
- Classify loans by overdue ageing and provide accordingly; restructure only when viability is established, not to hide arrears.
Worked example
A borrower seeks a term loan with an annual instalment of NPR 700,000. Existing debt service is NPR 300,000, and projected net cash flow is NPR 1,200,000. DSCR = 1,200,000 ÷ (700,000 + 300,000) = 1.20. If the bank’s minimum is 1.25, the proposal fails by 0.05. Options: reduce the loan, extend tenor to lower the instalment, or require a credible cash-flow improvement. Do not approve merely because collateral covers the loan.
Traps
Double-counting income, overfinancing, ignoring seasonality, accepting unregistered land as clean security, missing insurance, and “evergreening” a weak loan through repeated renewal.