Loot!
Montster's loot is generated at the moment of spawn, in monster's constructor. What you may find interesting is that monsters have a virtual equipment with slots, just like players. When items are generated they're put in corresponding slots and may have an effect on the monster, e.g. by rising its armor. In old Tibia it was quite noticable when hunting warlocks with traps (for invisibility removal trick). Trap item has constant damage of 30, but affected by armor. Armorless warlock usually would take damage, while warlock with blue robe or golden armor would block it most of the time. That way one could deduce whether it was going to drop any armor piece. However, it only worked when certain armor piece was placed in its right slot. If e.g. black knight carries both knight and plate armors, only one of those will work, because the other one would be placed in hand or arrow slot (due to armor slot being already used). You can tell which item was on which slot by checking the order in monster's body - it's exactly the same as for dead players, and go as following: arrow slot, ring, boots, legs, right hand, left hand, armor, container, amulet, helmet.
Some items though are always placed in a bag, which is only generated when needed (not counting bags and other contaiers that are added to the loot list - those always drop empty and take hands/arrow slot). Those items are weapons, shields and everything that expires or wears out. So weapons/shields will NOT rise monster's attack/def abilities, because they're carried in a bag, not inventory. Bag is also generated for items that can normally be placed in inventory, but all possible slots are taken. E.g. if demon drops 4 stacks of gold and no other items - 3 of them would be in eq, using both hands and arrow slot, and the 4th stack would go to the bag (no more slots to put gold pile in). To sum it up, some items can drop both in a body or a bag, while others only in a bag.
Items can be put in a bag up to its capacity (8 items), if more are generated - they will be skipped due to lack of slots, and simply not added to the loot.
All the pictures, except for the one with my nick, come from various old .rec files recorded on youtube.
That's pretty much it, I hope that gives some clarification for those who were confused. Players are of course free to make their proposals on tweaking the game, but it should always be done with a knowledge of how things actually work, so it won't be based on wrong asumptions.