INSTITUTE OF BANKERS IN MALAWI

DIPLOMA IN BANKING EXAMINATION

SUBJECT: CREDIT RISK ASSESSMENT 1 (IOBM – D204)

Date: Monday, 31st October 2011

Time Allocated: 3 hours (13:30 – 16:30 pm)

INSTRUCTIONS TO CANDIDATES

1 This paper consists of TWO Sections, A and B.

2 Section A consists of 4 questions, each question carries 15 marks.

Answer ALL questions.

3 Section B consists of 4 questions, each question carries 20 marks. Answer ANY

TWO questions.

4 You will be allowed 10 minutes to go through the paper before the start of the
examination, you may write on this paper but not in the answer book.

5 Begin each answer on a new page.

6 Please write your examination number on each answer book used. Answer
sheets without examination numbers will not be marked.

7 DO NOT open this question paper until instructed to do so.

SECTION A (60 MARKS)

Answer ALL questions from this section.

QUESTION 1

Kamadya Apa is one of the fast rising employees of Maungu Bank Limited. From a
humble beginning of a messenger, he is now a Credit Analyst of the bank based at the
service centre where you are the Manager.

During his first week, Kamadya Apa comes to your office with a credit application from
Zonse Mzachabechabe Limited, a reputable company in tea production in the country.
Included in Zonse Mzachabechabe Limited’s credit application are Auditors Report,
Directors Report, Cash Flow, Income Statements and Balance Sheet.

Kamadya Apa admits to you that despite his private studies in accounting and banking,
he is at a loss and would like your assistance in handling the included documents.

(a) Advise him on the difference between a Qualified and Unqualified Auditors
Report. (4 marks)

(b) Briefly explain to him the relevance of the auditors report to the banker.
(6 marks)
(c) Explain to him any five limitations in the Financial Statements that he as a
banker must be aware of. (5 marks)
(Total 15 marks)

QUESTION 2

(a) Most banks in the world use the ‘Liquidity, Profitability and Safety’ principle when
dealing with loan applications. Briefly explain how the principle works. (7 marks)

(b) CAMPARI is a mnemonic universally recognized and commonly used in

assessing loan applications. Briefly explain its meaning. (8 marks)
(Total 15 marks)

QUESTION 3

(a) There is an irony in success implying that if it comes too fast it can be a
disaster for a business.

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 Required:

(i) What is overtrading? (3 marks)

(ii) Mention two ways of which overtrading can be avoided. (4 marks)

(b) The potential financial failure of a business and use of different combinations
of ratios to forecast the possible financial success or failure have been the topic
of research for quiet some time. One of the difficulties when doing this type of
forecast is to determine the cut-off point or margins to distinguish between
financial failures and success. Nevertheless, the most common models used for
forecasting financial failures are ALTMAN’S Z FORMULA and DE LA REY’S
MODEL.

Required:

Briefly explain two advantages and two limitations of these Financial Forecasting
Models. (8 marks)
(Total 15 marks)

QUESTION 4

Working Capital is a critical success factor to any business and it must be managed
properly.

Required:

(a) Mention five sources of Working Capital. (5 marks)

(b) Briefly explain the criteria that determine the ideal level of Working Capital in
business. (10
marks)
(Total 15 marks)

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SECTION B (40 MARKS)

Answer ANY TWO questions from this section.

QUESTION 5

When doing a financial analysis, it is important to take into consideration all factors
including Off-Balance Sheet Financing and Contingent Liabilities because their impact is
as significant as is of the other common financial factors.

Required:

(a) Briefly explain what is meant by Off-Balance Sheet Financing and Contingent
Liabilities. (10 marks)

(b) What could be their impact on Financial Analysis? (10 marks)

(Total 20
marks)

QUESTION 6

Your boss, who has never been good at figures, approaches you with a set of accounts
for one of your bank’s customers. The boss asks you to calculate ratios that will be
helpful in assessing the credit. You are later to make a presentation on the proposal that
has been presented.

Required:

(a) List five major categories of ratios that are most applicable for going credit risk
assessment. (5 marks)

(b) Under each major ratio category above, provide its meaning and interpretation.
(10 marks)
(c) Provide one relevant ratio under each major category above and show how it is
calculated. (5 marks)
(Total 20 marks)

QUESTION 7

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Diagrammatical representation of Type of Financing.

Kwacha

SHORT TERM FINANCING

CURRENT ASSETS

LONG TERM FINANCING

FIXED ASSETS

Time

Required:

(a) What type of asset financing is depicted above? (1 mark)

(b) (i) Briefly explain how it works. (3 marks)

(ii) What are its advantages and disadvantages? (6 marks)
(c) Mention the other two types of financing and briefly explain how they work.
(10 marks)
(Total 20 marks)

QUESTION 8

Briefly explain four guidelines that help bankers in interpreting Cash - Flow Budgets

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logically. (20 marks)
(Total 20 marks)

END OF EXAMINATION PAPER

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