CM-3.5 CM-3.5 Collateral
CM-3.5.1
The extension of credit is often supported by
collateral provided by the customer or third parties. When the credit decision is based oncollateral value, independent timely appraisals of thecollateral should be obligatory, including provision for sufficient security margins.October 07CM-3.5.2
In principle,
collateral can improve the credit grading of a customer, but experience suggests that over-reliance oncollateral is unsound because very often when a credit facility goes sour thecollateral turns out to have less value than estimated or is, at worst, illusory.October 07CM-3.5.3
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 ofcollateral in the form of real estate, as it involves additional uncertainties and the costs of maintaining the property.October 07CM-3.5.4
As a matter of principle,
collateral should not replace a careful assessment of the borrower's ability to repay.October 07
