Credit Risk Management Guidelines Issued by Regulatory Body

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In an effort to enhance credit risk management practices among financial institutions, the regulatory body has issued new guidelines outlining the minimum criteria for assessing borrowers and managing credit exposures.

Key Factors in Borrower Evaluation

• The purpose of the credit exposure
• The borrower’s current risk profile
• Repayment history
• Proposed terms of the credit
• Expertise of the borrower
• Type and value of collateral
• Reputation of the borrower
• Whether the borrower is a connected party or part of a group

Risk Mitigation Measures

• Insurance coverage
• Requiring additional collateral
• Applying more robust criteria to borrowers with high loan-to-value ratios
• Considering applying margins or haircuts to security depending on its liquidity

Credit Approval Procedures

• Identifying relevant approval authorities and accountabilities
• Ensuring a separation of duties between persons with approval authority and customer relationship authority
• Monitoring credit applications from connected parties to ensure transactions are carried out in accordance with the institution’s written policy

Adequate Documentation and Evaluation

• Ensuring that all extensions of credit exposures to connected parties are done on an arm’s length basis
• Ensuring that terms of contracts are no more favorable than those offered to other parties or individuals
• Evaluating by qualified officers or analysts

Ongoing Credit Administration

• Effective administration of the credit portfolio is essential
• Controls over “back office” procedures must be adequate
• Documentation must be complete and compliant with approved terms and conditions
• Segregation of duties must be adequate
• Monitoring borrowers’ compliance with conditions of approval
• Identifying early signs of default
• Maintaining credit files with all relevant information and approvals

Disbursement and Monitoring

• Upon approval of credit exposures, financial institutions must notify borrowers or arrangers in writing and request acknowledgment or verification
• Store records for easy retrieval
• The disbursement of funds should not proceed until appropriate verification is obtained

Comprehensive Monitoring System

• Financial institutions must develop and implement a comprehensive system to monitor and assess credit risk involved in exposures to individual borrowers or counterparties, as well as at the portfolio level
• This system should include:
  • Utilization of management information systems (MIS)
  • Internal and external risk ratings
  • Stress testing

Conclusion

The guidelines aim to promote a more robust credit risk management framework among financial institutions, ultimately contributing to a safer and more stable financial system.