Ch 13: Problem Loan Management

What is the definition of a problem loan?

• A loan repaid on time

• A loan with missed payments exceeding 90 days

• A loan with early repayments

• A loan with high interest rates

Which phase of the business cycle is typically associated with asset inflation?

• Recovery

• Boom

• Downturn

• Recession

What is the primary aim of a bank when dealing with problem loans?

• Increase interest rates

• Minimize losses to the bank

• Liquidate all assets

• Increase borrowing limits

What is dynamic provisioning?

• A process to estimate debt provisions throughout the cycle

• Writing off bad debts entirely

• Charging additional interest on problem loans

• Selling problem loans to third parties

What is the likely outcome if a loan enters severe financial distress?

• Temporary cash flow adjustment

• Economic worth of the borrower is less than the loan

• Restructuring of the loan

• Increased investment in the borrower's assets

What is a specific provision in problem loan management?

• Provisions charged to all loans in general

• Provisions for a loan known to have a risk of default

• Writing off all bad debts from balance sheets

• A regulatory fine imposed on lenders

Why is monitoring loans in large financial institutions challenging?

• Loans are always profitable

• Monitoring costs increase with complexity

• Borrowers do not require monitoring

• Regulatory bodies handle all monitoring

What is the common cause of mild financial distress in companies?

• Rapid growth requiring additional investments

• High profitability with delayed payments

• Over-reliance on government subsidies

• Low customer base

When should a debt be written off as bad debt?

• When there is a slight delay in repayment

• When all security has been liquidated and no other cash sources exist

• When the borrower requests more time for repayment

• When the loan is fully paid

What are the two principles for managing problem loans?

• Focus on penalties and sell off borrower assets

• Minimize bank losses and compare loan worth with borrower worth

• Increase loan amounts and extend repayment periods

• Rely on government bailouts and restructure all loans