Back Custom print Link Text Only Rich Text Print

  • CM-2 CM-2 Assessment of Credit Quality

    • CM-2.1 CM-2.1 Overview

      • CM-2.1.1

        A realistic assessment of credit quality is an essential feature of effective credit risk management. The starting point for a systematic review of credit quality is a comprehensive review of the bank's written credit policies and practices. These include, but are not limited to:

        (a) Credit approval procedures;
        (b) Credit underwriting criteria; and
        (c) Credit administration processes.
        Amended: January 2011
        October 2007

      • CM-2.1.2

        Credit quality is a relative concept based on performance prospects and external variables. Trends in the economy and changes in markets and prices of goods affect the evaluation of loan repayment value. Assessing credit risk is a dynamic concept which needs to take into account the business cycle and the economic environment.

        October 07

      • CM-2.1.3

        The objectives of the credit assessment are to determine:

        (a) Whether the applicant/customer will have sufficient future liquid resources to honour credit obligations according to the agreed terms;
        (b) Whether the applicant's/customer's present and future prospects indicate that they will continue as a going concern in the foreseeable future;
        (c) Is the applicant / customer of sufficient integrity; and
        (d) To what extent does any security offered affect the risk inherent in the facility.
        Amended: January 2011
        October 2007

    • CM-2.2 CM-2.2 Credit Ratings

      • CM-2.2.1

        Credit officers should assign credit ratings to the loans they originate. This will help the Credit Committee to assess the credit judgement in assigning credit ratings and pricing for credits. The ratings should have several categories with additional breakdowns in each Category:

        (a) 'Standard credits' are those which are performing as the contract requires. There is no reason to suspect that the creditor's financial condition or collateral adequacy has depreciated in any way. The bank is very likely to extend additional funds to this borrower if requested (subject to internal or legal credit restrictions);
        (b) 'Watch credits' are currently protected from loss but are potentially weak; they constitute a risk, but the risk is not such that it justifies a rating of Substandard;
        (c) 'Substandard credits' are inadequately protected by the paying capacity of the obligor or by the collateral pledged. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of Substandard assets does not have to exist in individual assets classified Substandard;
        (d) 'Doubtful credits' have all the weaknesses inherent in a credit classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable. The possibility of Loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its rating as an estimated Loss is deferred until its more exact status may be determined;
        (e) 'Loss credits' are considered uncollectable and of such little value that their continuance as assets is not warranted. The rating does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.
        October 07

      • CM-2.2.2

        The classification should normally apply to the entire balance of an outstanding facility because if a problem exists with the one credit, it normally applies to the whole facility and not just the payment or individual credit, which may be overdue. This is a conservative approach, which will alert bank management and the Board to the full extent of a potential problem.

        October 07

    • CM-2.3 CM-2.3 Collateral

      • CM-2.3.1

        The extension of credit is often supported by collateral provided by the customer or third parties. When the loan decision is based on collateral value, independent timely appraisals of the collateral should be obligatory, including provision for sufficient security margins.

        October 07

      • CM-2.3.2

        In principle, collateral can improve the credit rating of a customer, but experience suggests that over-reliance on collateral is unsound because very often when a loan goes sour the collateral turns out to have less value than estimated or is, at worst, illusory.

        October 07

      • CM-2.3.3

        Misjudgements about collectability are frequently the cause; collateral is often illiquid, difficult to value during periods of financial distress and costly to realise through foreclosure or other legal means. Particular concern may be appropriate in the case of collateral in the form of real estate, as it involves additional uncertainties and the costs of maintaining the property.

        October 07

      • CM-2.3.4

        As a matter of principle, collateral should not replace a careful assessment of the borrower's ability to repay.

        October 07