Explanation:
Approving a large loan to a new business without thorough assessment of the business plan and market viability is a significant credit risk factor. Proper due diligence and credit analysis are crucial, especially for new businesses with no established track record. Failing to thoroughly assess these factors exposes the bank to a high risk of default, representing a potential weakness in the bank's lending practices.
A is incorrect because adjusting interest rates based on base rate increases is a standard practice reflecting market conditions, not a weakness in the credit granting process.
C is incorrect because granting a small personal loan to a longstanding customer, while presenting some risk due to fluctuating income, is a common practice in relationship banking and poses a relatively lower risk compared to a large commercial loan without due diligence.
D is incorrect because tightening lending criteria is a risk mitigation strategy, not a significant risk factor or weakness in lending practices.
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Q.5948 During a routine audit of loan portfolios at a regional bank, the internal risk assessment team is evaluating the risk factors involved in credit decisions. The team aims to identify and address potential weaknesses in the bank's lending practices. Which of the following situations most accurately represents a significant risk factor in the bank's credit granting process?
A
A borrower with a good credit history is offered a loan with a slightly higher interest rate due to the bank's recent increase in base rates.
B
The bank approves a large loan to a new business without thoroughly assessing the business plan and market viability.
C
A long-term customer with a fluctuating income history is granted a small personal loan based on their longstanding relationship with the bank.
D
The bank decides to tighten its lending criteria, leading to a slight decrease in the number of approved mortgage loans.
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