Financial Institutions Urged to Implement Robust Credit Risk Management Guidelines

In a move aimed at ensuring the stability of the financial sector, regulatory bodies have issued guidelines for credit risk management, emphasizing the need for institutions to assess borrowers thoroughly and implement robust monitoring mechanisms.

Key Criteria for Assessing Borrowers

The guidelines require financial institutions to consider several key criteria when assessing borrowers, including:

• Purpose and source of repayment
• Current risk profile
• Repayment history
• Proposed terms of credit exposure
• Expertise
• Type and value of collateral
• Reputation
• Whether the borrower is a connected party or part of a group of connected parties

Risk Mitigation Measures

Institutions are advised to utilize appropriate risk mitigation measures, such as:

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

Effective Credit Approval Procedures

The guidelines emphasize the importance of effective credit approval procedures, which should:

• Identify relevant approval authorities and accountabilities in accordance with the institution’s credit risk policy
• Evaluate credit applications from connected parties to ensure transactions are carried out on an arm’s length basis and terms of contracts are no more favorable than those offered to other parties

Documentation and Evaluation

The documentation required for credit approvals should be evaluated by a qualified officer or analyst to ensure compliance with the institution’s written policies. This includes:

• Complex and large transactions, which require specialized expertise
• Ongoing administration of the credit portfolio is also critical, according to the guidelines.

Ongoing Administration and Monitoring

Financial institutions must ensure that their credit administration function is adequate, including:

• Controls over “back office” procedures
• Documentation
• Segregation of duties
• Borrower compliance monitoring
• Secure storage of credit files

Proper Disbursement Procedures and Notification

The guidelines also stress the importance of proper disbursement procedures, notification to borrowers or arrangers, and verification of terms and conditions.

Comprehensive System for Monitoring and Assessing Credit Risk

A comprehensive system for monitoring and assessing credit risk must be developed and implemented, including:

• Use of management information systems (MIS)
• Internal and external risk ratings
• Stress testing

Conclusion

Effective implementation of these guidelines will ensure that financial institutions have a thorough understanding of the current financial condition of borrowers, early detection of default, and effective management of credit risk.