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  • CM-3.2 CM-3.2 Credit Grading System

    • CM-3.2.1

      The banks should have in place appropriate credit grading systems (classification) to help assess asset quality and credit exposures including performing receivables.

      October 07

    • CM-3.2.2

      Credit grading systems offer a number of benefits. Analysis of a bank's entire book can reveal important insights to bank's management in the functioning and ultimately the health of the bank. Credit grading systems provide the means for a more systematic assessment of asset quality. They are particularly useful in assisting in the early detection of asset quality problems within a bank by highlighting credit with above normal risks.

      October 07

    • CM-3.2.3

      The CBB does not favour the imposition of a standard credit grading system for all banks. Instead, the CBB will rely, wherever possible, upon the credit grading system adopted by each bank. This preference reflects the fact that banks generally have devoted significant resources to developing grading systems that best fit their individual product mix.

      Amended: January 2011
      October 2007

    • CM-3.2.4

      Each bank is hence required to provide to the CBB a statement of its current policy in respect of its credit grading system (including definitions used to classify exposures). Banks that do not intend to implement a credit grading system should indicate to the CBB their reason for not doing so. The CBB expects to have the endorsement of the Board of the bank concerned.

      Amended: January 2011
      October 2007

    • CM-3.2.5

      Banks looking to implement a credit grading system, or to update their current system, should consider the following points:

      (a) The system should cover a broad range of the bank's asset portfolio, including unrestricted investment accounts, restricted investment accounts and other off-balance sheet exposures;
      (b) The system should cover both performing and impaired assets - it is common for grading systems to have sufficient range of grades, covering exposures with the lowest risk to those where losses are expected;
      (c) Banks should detail credit grading system in a credit policy statement, and should develop procedures for the determination and regular review of the credit risk grades;
      (d) Banks should establish formal forums in the form of committees to review the compliance with the credit policy parameters and the concentration of exposure attributable to various economic and industrial sectors in accordance with the credit policy;
      (e) Particular attention should be given to those facilities which involve a higher than normal risk, or which are impaired;
      (f) It is imperative that the policies relating to the provisioning for Islamic banks should be clearly laid down, fully identifying provisions relating to assets financed by own funds and those by the investment account holders; and
      (g) Facilities should, at minimum, include four categories along the following lines:
      (i) '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);
      (ii) '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;
      (iii) '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; and
      (iv) 'Loss credits' are considered uncollectible 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 affected in the future.
      Amended: April 2011
      October 2007