Credit Risk Management Practice Exam

Which of the following is a qualitative technique in credit risk evaluation?

1. Ratio analysis of financial statements

2. Market trend analysis

3. Face-to-face borrower interviews

4. Statistical modeling of loan performance

The correct answer is: Face-to-face borrower interviews

In credit risk evaluation, qualitative techniques are used to assess non-numerical factors that can influence a borrower's creditworthiness. Face-to-face borrower interviews serve this purpose effectively. Through these interviews, lenders can gather insights into the borrower’s character, intentions, circumstances, and overall reliability which are not typically captured in numerical data. The subjective analysis obtained from these personal interactions allows lenders to form a more comprehensive understanding of the borrower beyond what financial metrics can reveal. The other options focus on quantitative analysis. Ratio analysis of financial statements involves evaluating numerical data to assess financial health, while market trend analysis examines market data to identify patterns that could affect a borrower's repayment ability. Statistical modeling of loan performance relies on historical data to predict future behavior, emphasizing a quantitative approach rather than qualitative insights. In contrast, the qualitative nature of face-to-face interviews highlights the interpersonal and subjective elements of credit risk assessment.