In models that are based on loan loss ratios, a that is found to be less than one for a particular loan sector indicates that

Question $7$ options:

$1)$

the loans in that sector will soon be downgraded soon.

$2)$

the FI should increase its concentration in that loan sector due to the high rates of return.

$3)$

the loan losses in that sector are systematically lower relative to total loan losses.

$4)$

the FI should decrease its exposure to that sector because losses are higher than the rest of the portfolio

$5)$

the calculation is in error because is restricted to be greater than one.