CHAPTER 4 ADMINISTRATION OF LOAN

1. properly evaluate new business opportunities; and

2. Typical credit process

2.1. Credit recovery

2.2. Business origination

2.2.1. Credit origination

2.2.2. Credit appraisal and review

2.2.3. Credit approval

2.3. Credit controls, review and analysis

2.3.1. Internal controls and audit

2.3.2. Independent credit review and audit

2.3.3. Portfolio review and trend analysis

2.3.4. Credit policy and process review

2.4. Credit administration and monitoring

2.4.1. Documentation and security

2.4.2. Disbursement and receipts

3. Availability of Competent Personnel These personnel should:

3.1. 1. have a complete understanding of the risks associated with the banking institution’s credit activities

3.2. 2. be able to understand the relevant factors and market conditions;

3.3. 3. report the risk profile of the banking institution’s credit portfolio to the appropriate lines of authority for information or consideration.

4. Maintenance of adequate policies and procedures

4.1. Policies and procedures that are properly developed and implemented will enable the banking institution to:

4.1.1. maintain sound credit-granting standards;

4.1.2. monitor and control credit risk;

4.1.3. identify and administer problem credits.

5. Availability of Effective Management Information System

5.1. The management information system should enable the banking institution to:

5.2. maintain a database for research and use of analytical techniques.

5.3. report exposures;

5.4. track quality and account performance; and

5.5. maintain limits.

6. Collateral policy

6.1. In assessing the acceptability of collateral, banking institutions should take into consideration the following: • the value of the collateral; • the ease of disposal of the collateral, namely its marketability (e.g. for securities, whether it is actively traded, over-the-counter, or closely held); and • the aggregate size of the particular collateral that the banking institution holds.

7. The primary components of a sound credit risk management process are: - a comprehensive risk measurement and evaluation approach; - a detailed structure of limits, guidelines and other parameters used to govern risk taking; - a sound, well-defined credit-granting criteria; - a strong management information system for controlling, monitoring and reporting risks; - an effective problem credit management process.

8. CREDIT-GRANTING CRITERIA

8.1. Banking institutions must operate under sound, well-defined credit-granting criteria. These should set out the qualifying criteria for: • the eligibility of credit and the amount qualified for; • the types of credit to be given; and • the terms and conditions to be applied on the credits granted.

9. Measurement methods

9.1. Monitoring and review

9.1.1. The process of evaluating and reviewing credit exposures regularly is fundamental to measuring and reporting exposures accurately.

9.2. Individual credits

9.2.1. An effective credit monitoring system should include measures to: • ensure that the banking institution understands the current financial condition of the borrower; • ensure all credits are in compliance with existing covenants; • monitor the usage of approved credit lines by borrowers; • ensure that the projected cash flow of major credits meet debt servicing requirements; • ensure that, where applicable, collateral provides adequate coverage; and • identify and classify potential problem credits on a timely basis.

9.3. Independent portfolio review

9.3.1. The review should cover the following: • monitor composition and concentration of risk; • review significant shifts in the portfolio composition; • migration of risk levels within the portfolio segment that could lead to increased risk levels or a review of credit-granting standards; • monitor changing economic environment, trends and events that could create new risk or increase the existing risk profile of the portfolio; • adequacy of provisioning levels of each portfolio; and • adequacy of earnings in relation to the risk in the portfolio.

9.4. Stress analysis

9.4.1. Three areas the banking institution should examine are: • economic or industry downturns; • market-risk events; and • liquidity conditions.

9.5. Limiting Risk

9.5.1. Scope of limits set boundaries for organizational risk-taking; be consistent with the institution’s overall risk measurement approach; be applied on a bank-wide basis where credit risks also arise in other activities of the banking institution; permit management to control exposures and to monitor actual risk taking against predetermined tolerances, as set by the Board or committee that oversees credit risk management; and ensure that exposures which exceed certain predetermined levels receive prompt management attention.

9.6. Individual Credit Limits

9.7. Portfolio Concentration

9.7.1. Concentrations occur when, among other things, a banking institution’s portfolio contains a high level of direct or indirect credits to: - a particular industry or sector - a geographic region - a type of credit facility or product group - a foreign country or a group of countries with strongly interrelated economies - a type of security - credits with same maturity

9.8. Breaches in limits

9.9. Reporting

9.9.1. The reporting system should be able to provide adequate information on: the composition of the portfolio; concentrations of credit risk; quality of various portfolios; and rehabilitated and “watch-list” accounts both on an entity and on a consolidated basis across various products (including off-balance sheet activities)

10. Responsibility of the BOD are to ensure that: • Sound credit culture is a corporate value within the banking institution • Management is fully capable of managing the activities of the banking institution and policies on credit risk management are effectively implemented with including having the necessary tools for monitoring credit risk. • mechanisms exist for the approval or review of any activity or product which results in the banking institution assuming new or higher credit risk. • It is informed of the appropriate organization structure for the management of credit risk within the institution and any changes to such structure thereof. • It is regularly informed of the credit risk exposure and quality of the banking institution’s exposure and review the overall portfolio composition.

11. Reports to be received by the BOD

12. The BOD must make a decision on: • Whether the new activity is suitable from the business perspective and complies with its business plan and current regulations. • Whether they are satisfied that the new activity will be adequately incorporated within the credit risk management process of the banking institution and conducted according to the standards set by the BOD.

13. The amount of exposures undertaken in credit activities, broken down by categories, for example, by types of exposures, products and level of credit grades; • Large concentrations of credit. • Problem loan list which identifies problem or watch credits and the banking institution’s potential loss on each significant problem credit and past due account;. • Status of significant credits under rehabilitation programs. • Credit areas with high rapid growth. • Significant credit exception reports.

14. Lending policy

14.1. The banking institution’s lending policy should set basic standards and procedures to address the following:

14.2. the composition of the loan portfolio as a whole;

14.3. standards for individual credit decisions (including standard appraisal template and evaluation approach);

14.4. delineation of lines of authority and responsibilities to enable the management to monitor and control the lending activities; and

14.5. procedures governing compliance with loan-related policies or other applicable laws or regulations.

15. Evaluation Process For Credit Activities

15.1. Each product approval / evaluation program should be signed

15.2. off by the various management in charge on the following risks:

15.3. Credit risk

15.4. Market risk (if any)

15.5. Liquidity risk (if any)

15.6. Legal risk

15.7. Accounting and financial reporting

15.8. Audit and internal control

16. Credit Appraisal Requirement

16.1. At the minimum, the factors to be considered and documented in approving credits must include: - the purpose of the credit and source of repayment - the integrity and reputation of the borrower - the current risk profile (including the nature and aggregate amounts of exposure) of the borrower and its sensitivity to economic and market developments - the borrower’s repayment history and current capacity to repay, based on historical financial trends and cash flow projections

17. Risk of Measurement

17.1. A banking institution’s system for measuring credit exposure should: Be comprehensive and accurate; and Enable risks to be aggregated and assessed on a bank-wide basis across all the various banking products, including off-balance sheet activities, and, for those operating as a group, on a group-wide basis.

18. Managing Problem Credits

18.1. The review should enable the banking institution to understand better how problem credits and losses develop and identify weaknesses in the banking institution’s existing credit- granting process and monitoring process. The review should: • compare the credit’s terms and characteristics with lending guidelines; reassess the borrower’s condition at the time of approval; • assess the timeliness of problem identification; • assess the accuracy of collateral evaluation; • assess documentation adequacy; and • assess the effectiveness of credit conditions imposed.