Banks Must Comply with NBE Statutory and Regulatory Limits on Large Exposures

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Addis Ababa, Ethiopia - The National Bank of Ethiopia (NBE) has emphasized the importance of banks establishing adequate procedures to monitor and control credit risks.

The NBE requires banks to recognize the necessity of establishing provisions for identified and expected losses in line with the bank’s directives on provisions and holding adequate capital to absorb unexpected losses. These considerations should factor into credit-granting decisions as well as the overall portfolio risk management process.

Provisions for Identified and Expected Losses

• Recognize the importance of establishing provisions for identified and expected losses
• Factor these considerations into credit-granting decisions and portfolio risk management processes

Credit Risk Mitigation Techniques

Banks can employ various techniques to mitigate credit risk, including:

• Collateral
• Guarantees

However, individual credits transactions should be entered into primarily on the strength of the borrower’s repayment capacity. Banks must also ensure that the value of collateral is not impaired by factors that have led to the diminished recoverability of the credit.

Credit Administration Policies

The NBE has emphasized the importance of effective credit administration policies, including:

• Regular monitoring of credit quality
• Timely classification of potential problem credits
• Development of comprehensive procedures for monitoring the condition of individual counterparties across various portfolios

Internal Risk Rating Systems

A well-structured internal risk rating system is a crucial tool in monitoring the quality of individual credits and the total portfolio. This system allows banks to:

• Differentiate the degree of credit risk in different credit exposures
• Determine overall characteristics of the credit portfolio and loan loss reserves more accurately

Stress Testing

The NBE has also emphasized the importance of stress testing as an essential element of sound credit risk management. Banks must consider what could potentially go wrong with individual credits and within various credit portfolios, and analyze this information in determining the adequacy of capital and provisions.

In light of these requirements, banks are advised to review their credit risk management practices and ensure compliance with NBE regulations on large exposures.