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  • CM-1.5 CM-1.5 Credit Administration and Collateral Management

    • CM-1.5.1

      Conventional bank licensees must have in place a system for the ongoing administration of their various credit risk exposures.

      Added: June 2022

    • CM-1.5.2

      In developing their credit administration areas, conventional bank licensees must ensure:

      (a) The efficiency and effectiveness of credit administration operations, including monitoring documentation, contractual requirements, legal covenants, collateral etc.;
      (b) The accuracy and timeliness of information provided in management information systems (‘MIS’);
      (c) Adequate segregation of duties;
      (d) The adequacy of controls over all ‘back office’ procedures; and
      (e) Compliance with prescribed policy and procedures, as well as applicable laws and regulations.
      Added: June 2022

    • CM-1.5.3

      For the various components of credit administration to function appropriately, senior management must understand and demonstrate that it recognises the importance of this element of monitoring and controlling credit risk.

      Added: June 2022

    • CM-1.5.4

      The credit files must include all information necessary to ascertain the current financial condition of the borrower or counterparty, as well as sufficient information to track the decisions made and the history of the credit. For example, the credit files must include current financial statements, financial analyses and internal rating documentation, internal memoranda, reference letters and appraisals.

      Added: June 2022

    • CM-1.5.5

      Conventional bank licensees must develop and implement comprehensive procedures and information systems to monitor the condition of individual credits and single obligors across the licensee’s various portfolios. These procedures need to define the criteria for identifying and reporting potential problem credits and other transactions to ensure that they are subject to more frequent monitoring, as well as possible corrective action, classification and/or provisioning.

      Added: June 2022

    • Collateral Requirements

      • CM-1.5.6

        When the loan decision is primarily based on collateral value, independent and timely appraisals of the collateral by a third party valuation expert must be undertaken, and the licensee must ensure that the collateral value is sufficiently higher than the exposure amount.

        Added: June 2022

      • CM-1.5.7

        The requirement in Paragraph CM-1.5.6 shall not apply to publicly traded instruments that are provided as collateral for which daily fair value is available from independent sources.

        Added: June 2022

      • CM-1.5.8

        Conventional bank licensees can utilise the transaction structure, collateral and guarantees to help mitigate risks (both identified and inherent) in individual credits, but transactions must be entered into primarily on the strength of the borrower’s repayment capacity. Collateral cannot be a substitute for a comprehensive assessment of the borrower or counterparty, nor can it compensate for insufficient information. It must be recognised that any credit enforcement action (e.g. foreclosure proceedings) can eliminate the profit margin on the transaction. In addition, conventional bank licensees need to be mindful that the value of collateral may well be impaired by the factors that have led to the diminished recoverability of the credit. Conventional bank licensees must have a policy covering the acceptability of various forms of collateral, procedures for the ongoing valuation of such collateral, and a process to ensure that the collateral is, and continues to be, enforceable and realisable. With regard to guarantees, conventional bank licensees must evaluate the level of coverage being provided in relation to the credit-quality and legal capacity of the guarantor. Licensees must be careful when making assumptions about implied support from third parties, such as the government.

        Added: June 2022

      • CM-1.5.9

        The value of the collateral must be updated periodically. In adverse market conditions and in the case of collateral that support Stage 2 and 3 credit exposures, the valuations must be conducted at least annually. If the exposure is backed by inventory or goods located in the obligor’s premises, additional measures must be in place to physically inspect and verify the existence and valuation of the collateral.

        Added: June 2022

      • CM-1.5.10

        Since expected credit loss (ECL) provisions are dependent on the recoverable value of collateral held, conventional bank licensees must obtain appropriate valuations of the collateral. The licensee must have a reliable and timely collateral valuation system which must include factors such as the legal enforceability of claims on collateral, ease of realisation of collateral, effects of currency and maturity mismatches, and be based on current market conditions.

        Added: June 2022