Credit Rating /Scoring
CM-1.4.6
Conventional bank licensees must have in place a Board approved policy to develop, review and implement an internal risk rating system. Such a system must be able to assign acredit risk rating or scoring to obligors that accurately reflects the obligors’ risk profile and likelihood of loss.Added: June 2022CM-1.4.7
Conventional bank licensees must assign risk ratings or scoring in a consistent manner to enable thelicensee to classify obligors by risk ratings or scoring and have a clearer understanding of the overall risk profile of its portfolio. Thelicensee’s credit risk policy must define the various risk grades of its rating system. Criteria for assigning risk grades and the circumstances under which deviations from the criteria are permitted must be set. Thecredit risk policy must also define the roles of different parties involved in the rating process.Added: June 2022CM-1.4.8
The
credit risk rating/scoring process must appropriately group credit exposures on the basis of sharedcredit risk characteristics.Added: June 2022CM-1.4.9
Conventional bank licensees’ credit exposures must be grouped according to sharedcredit risk characteristics, so that changes in the level ofcredit risk respond to the impact of changing conditions on a common range ofcredit risk drivers. This includes considering the effect on the group’scredit risk in response to changes in forward-looking information, including macroeconomic factors. The licensee must review the appropriateness of the grouping implemented upon initial recognition based on similar credit risk characteristics, at regular intervals, at least annually, to ensure that the relevant characteristics and their impact on the level ofcredit risk of the different groupings have not changed over time.Added: June 2022CM-1.4.10
Conventional bank licensees must validate their risk rating or scoring system and ascertain its applicability to their portfolio prior to implementation. An external independent party, other than the external auditor, with necessary expertise in model validation, must conduct the validation of the risk rating/scoring and ECL models every three years and upon development of the model, and also when there are material changes to the portfolio, rating/scoring model or model parameters (See also Paragraph CM-1.2.22 (c)).Added: June 2022CM-1.4.11
Conventional bank licensees that use a judgmental rating or scoring system must ensure that each rating is unique, well-defined and distinct from other ratings in the rating scale. The relevant risk factors and weights employed in the rating/scoring methodology must be appropriate for the risk profile of the obligors in different market segments, such as corporations, small and medium-sized enterprises (‘SMEs’), and financial institutions.Added: June 2022CM-1.4.12
Risk ratings must be assigned at the inception of lending and updated at least on an annual basis. Additionally,
conventional bank licensee must review the ratings or scoring as and when adverse events occur. Risk ratings or risk scores assigned to various obligors must be reviewed by thelicensee ’s personnel that are independent of those involved in loan origination. As part of its portfolio monitoring, thelicensee must generate reports on credit exposures by risk rating/scores. Trend and migration analysis between risk ratings /scores must also be conducted to detect changes in the credit quality of the portfolio.Added: June 2022CM-1.4.13
The
licensee may establish target limits for risk grades to highlight concentration in particular rating bands. The analysis of the portfolio by risk ratings is meaningful only when thelicensee’s rating or scoring system is able to consistently assign similar ratings or scores to obligors with similar risk profiles.Added: June 2022CM-1.4.14
After the credit facility has been granted, its performance must be monitored at regular intervals. This includes an appropriate periodic review of financial statements, a reassessment of
collateral and update of appraisals, and attentive monitoring of conditions in the borrower's industry. Credit supervision constitutes the first line of detection of difficulties and provides thelicensee with an opportunity to address problems before losses are sustained. The loan review must ensure that the credit files are complete and that all loan approvals and other necessary documents relating to the obligor are available.Added: June 2022CM-1.4.15
Conventional bank licensees must perform regular credit reviews. The purpose of a credit review is to verify that credits are granted in accordance with thelicensee’s credit risk policy and to provide an independent judgment of asset quality.Conventional bank licensees must conduct credit reviews with updated information on the obligor’s financial and business conditions, as well as the conduct of the account. Exceptions noted must be evaluated for impact on the obligor’s creditworthiness.Added: June 2022CM-1.4.16
Credit reviews must also be conducted on a consolidated group basis to factor in the business connections among connected entities. The performance of the underlying assets in the case of securitisation exposures must also be included in the credit reviews.
Added: June 2022CM-1.4.17
Credit reviews must be performed and documented at least once a year other than for facilities subject to collective assessments. For Stage 2 and 3 accounts (See Paragraph CM-1.8.23), however, more frequent reviews must be conducted. Procedures must also be instituted to ensure that reviews are conducted at the appropriate frequency. A process to approve deferment of credit reviews must also be put in place. For consumer loans, annual credit reviews of individual obligors are only needed if significant and a portfolio analysis does not identify
credit risk related issues or problems. However, credit exceptions and deterioration must be monitored and reported.Added: June 2022
