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Credit Review and Credit Control (Steps in Conducting credit review…
Credit Review and Credit Control
Credit Review
Definition
An independent, formal evaluation program to examine outstanding loans for policy compliance, credit quality, documentation and signs of deterioration
Purpose
Financial Health
Adequate security coverage
Detect problems early to reduce losses
Internal credit rating: Grading
Loan reserves: provision for bad debts
Frequency of review
Group account to be reviewed together
Classified/problem loans to be reviewed more frequently
Usually on annual basis to coincide with receipt of financials
Frequency depends on size, complexity and risk of loan
Review by exception: frequent excesses, past due loans, industry have problems; loan/collateral deficiencies
Steps in Conducting credit review
Review pricing and profitabaility
Check if accounts have profitable
Review security control
Check that security documents (title deeds) are in bank's possession. Update value of all securities to ensure adequate coverage and that securities are appropriately insured and well-maintained
Review adequacy of facilities
Check if existing facilities are sufficient
Review loan agreement
Verify borrower has not breached loan covenant/any part of loan agreement. Take actions to improve/prevent further deterioration
Review financial risk
For
individuals
: Update income statement, employment status, liabilities
For
corporate
: Obtain latest financial statements, cash flow projections and compute ratios & analyse financial statements
Review loan and collateral documentation
Verify existence of resolutions, security agreements, title deeds, guarantees etc
Ensure documents are properly executed and filed
Check loan has been in accordance with documented loan structure and approval
Review operating risk
Company visit: Observe operations to update info
Find out co's future plans
Review whether changes to economy and market conditions have affected biz and to what extent
Review credit documentation
Check credit file to find out whether loan has been properly documented
Whether changes in terms of loan are properly documented
Gathering of relevant info
ACRA search
Update financial, ageing reports etc
Review legal regulatory and policy complaince
Ensure statutory and internal credit guidelines are adhered and complied with
Credit Files
Definition
Bank's written documentation of its overall relationship with the borrower
Based on MAS Notice 612, all banks are required to maintain credit files on all borrowers and info must be in English
Importance
Good lending practices as quality of decision depends on completeness and accuracy of credit file
Allows other officers to cover or service effectively
For audit purpose
Facilitate MAS inspection
Basic requirements
Outline terms of loan agreement
Enable user to make assessment of past performance of borrower
Contain sufficient financial information
Outline existing/potential weakness in loan
Contains basic info of:
Credit facility
Description of facility type
Purpose of facility
Terms of facility
Collateral
Guarantor's info
Appraisal of credit application
Approval and basis of approval by management
Qualitative analysis based on: i) borrower info, ii) history of relationship with customer, iii) Analysis of business and industry risk, iv) Financial positions and performances
Assessment and recommendations of account officer
Capital resources
Collateral appraisal and value
Borrower
Natural persons: Occupation, Employer, Income, Financial position
Business: Background and history, organisation structure, management team, shareholders, financial position
Periodic Credit Review
Assessment ad recommendations of credit review officer
Approval an basis of approval; revision in terms and conditions and changes in credit grading
Latest available info on: i) outstanding facilities utilised, ii) conduct and serving of account
Analysis of industry and business risk
Grading of credit facilities
Classified Grade
DOUBTFUL
Exhibits more severe weaknesses than in sub-standard
Prospect of full recovery appears questionable
Prospect of losses is high but amount cannot be determined
Loans past due 120 days but less than 180 days
LOSSES
Little/nothing can be done to recover outstanding from collateral/assets
Past due loans more than 180 days
Loans not collectable
SUB-STANDARD
Credit facility exhibits definable weaknesses (unable to meet contractual repayment terms), either in respect of business, cash flow/financial position of borrower that may jeopardise repayment on existing terms
MAS Notice 612: bank shall, at a minimum, assign a classified grading to any loan facility when payment is past due by 90 days/if repayment is on a quarterly, semi-annual/annual basis, as soon as default occurs
Unclassified Grades
PASS
Prompt payment
No signs of potential weakness in payment, cash flow or financial position
SPECIAL MENTION
Economic & market conditions may affect the profitability and biz in the future
If not corrected timely, may affect adversely repayment in future and requires close monitoring
Declining trend in operation signals potential weakness in financial position but does not jeopardise repayment