Which statement about the Financial Indicator Covenant is true?

The Financial Indicator Covenant is a key component in loan agreements that serves to monitor specific financial metrics of the borrower. This is crucial for lenders as it allows them to assess the ongoing financial health and performance of the borrower throughout the life of the loan. By establishing specific financial indicators, lenders can identify potential risks and ensure that the borrower adheres to the terms of the loan, protecting the interests of both parties. This proactive approach enables lenders to intervene early if a borrower's financial situation begins to deteriorate, potentially averting default.

The focus on monitoring specific financial metrics is essential in the context of commercial banking, where understanding a borrower's financial trajectory can significantly impact lending decisions and risk management practices.