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Credit Portfolio Management

Effective management of a credit portfolio is crucial for banks to mitigate risks and maximize returns. In this section, we will outline the guidelines for managing a bank’s credit portfolio.

Establishing Credit Policies

The bank’s internal policies should define the volume of credit exposures, risk management standards, and investment policies to maintain assets and off-balance-sheet items.

Classification of Credits

Loans are classified into five categories based on their risk level:

Credit Classification Criteria

Preferred Credit

• Secured by collateral that is fast and easy to liquidate.
• Collateral includes valuable metals, fixed deposits, government securities, guarantees from the government or OECD countries.

Good (Standard) Credit

• Completely supported by the borrower’s payment ability and financial situation.
• Loans are covered by signed guarantees and must be current and performing according to their terms.

Medium Credit

• A potential problem due to a customer’s weak financial position, requiring management attention.
• Includes credits 90 days or less past due.

Sub-Standard Credit

• Past-due for principal and/or interest payments.
• Losses are expected if management does not take action.
• Includes unpaid credits 90 days or more but less than 180 days past due, as well as other specific criteria.

Bad (Doubtful) Credit

• Displays the same attributes as Sub-Standard Credit, with a high probability of complete collection being doubtful.
• Includes credits 180 days or more but less than 365 days past due and two-time extensions or re-scheduling.

Additional Requirements

1. Precautionary Requirements: Banks should continuously review, evaluate, and classify granted credits to ensure they meet these categories.
2. Information System: An information system is necessary to manage the credit portfolio, generate reports, and assess whether the credit portfolio meets needs and adheres to bank credit policy.

By following these guidelines, banks can effectively manage their credit portfolios and minimize risks while maximizing returns.