The Board has ultimate control and oversight of the credit risk policies for the Bank and these policies are reviewed on at least an annual basis. The policies are designed to provide effective internal control within the Bank. Any developments in the customers’ financial situation are closely monitored by the Bank, thus enabling it to assess whether the basis for granting the credit facility has changed. However, a new review is triggered when changes happen in regulations and guidelines. Credit facilities are generally granted on the basis of an understanding of customers’ individual financial circumstances, cash flows, assessments of market conditions and security procedures. The facilities should match the customers’ creditworthiness, capital position and assets to a reasonable degree and customers should be able to substantiate their repayment ability. In order to reduce credit risk, the Bank generally requires collateral that corresponds to the risk for the product segment.
As per Basel II Capital Accord, a Rating System must have 2-Dimensions and provide for a separate assessment of borrower and transaction characteristics to provide for a meaningful differentiation of risk. In that respect, over the reporting financial period, the Bank implemented CRISIL Risk Solutions which provide a suite of software that is critical for ensuring compliance with regulatory guidelines, such as Basel II. CRISIL’s Risk Assessment Model (RAM) is the largest deployed internal risk rating solution in India. This model, as well as CRISIL Retail Scoring Solution (CRESS), has been implemented to assist the Bank in complying with the requirements under the internal ratings-based approach of the Basel II Accord. Both models now facilitate credit risk appraisal of a borrower through a judicious mix of objective and subjective methodologies and act as a comprehensive database for all borrower-specific information. CRISIL’s rating grades and description for each grade is as follows:
|AAA||Investment Grade - Highest safety||Borrowers rated AAA are judged to offer highest safety of timely|
|AA+||Investment Grade - High safety||Borrowers rated AA+ are judged to offer high safety of timely payment.|
|AA||Investment Grade - High safety||Borrowers rated AA are judged to offer high safety of timely payment.
They differ in safety from AA+ only marginally
|A||Investment Grade - Adequate safety||Borrowers rated A are judged to offer adequate safety of timely payment.|
|BBB||Investment Grade - Moderate safety||Borrowers rated BBB are judged to offer moderate safety of timely payment.|
|BB||Investment Grade - Moderate safety||Borrowers rated BB are judged to offer moderate safety of timely payment of interest and principal for the present. There is only a marginal .|
|B||Investment Grade - Minimum safety||Borrowers rated B are judged to carry minimum safety of timely payment of interest and principal for the present.|
|CC||Sub-Investment Grade - Inadequate||Borrowers rated CC are judged to carry inadequate safety of timely payment.|
|C||Sub-Investment Grade - High risk||Borrowers rated C have a greater susceptibility to default.|
|D||Highly susceptible to Default / Default||Borrowers rated D are in default or are expected to default on maturity.|
Monitoring weaknesses in portfolios
Credit risk exposures and weaknesses are in fact managed through the robust credit assessment, structuring and regular monitoring process. The latter, under the responsibility of the Credit Recovery Unit, involves the monitoring of daily credit excesses on accounts as well as the review of all potential credit losses on a timely basis. Those exposures showing signs of deterioration are put on watch list, the files are reviewed at least monthly to ensure prompt actions are taken. The basis to provisioning and loan assessment is based on the Guideline on Credit Impairment measurement and Income Recognition issued by Bank of Mauritius.
Corporate accounts that are showing signs of deterioration or a likelihood of potential credit losses risk are recorded on the watchlists (WL) comprising two categories graded in line with the perceived severity of the risk attached to the lending, and its probability of default.
These lists are updated monthly and circulated to the relevant recovery manager. Once an account has been placed on WL, the exposure is carefully monitored and, where appropriate, exposure reductions are effected. When an account becomes impaired, it will normally, but not necessarily, have passed through each of the two categories, which reflect the need for increasing caution and control. Where a borrower’s financial health gives grounds for concern, it is immediately placed into the appropriate category. While all borrowers, regardless of financial health, are subject to a full review of all facilities on at least an annual basis, more frequent interim reviews may be undertaken should circumstances dictate.
Within the retail portfolios, the approach is consistent with the Bank’s policy of raising a collective impairment allowance as soon as objective evidence of impairment is identified. Retail accounts can be classified according to specified categories of arrears status, which reflects the level of contractual payments which are overdue. The probability of default increases with the number of contractual payments missed, thus raising the associated impairment requirement. Once a loan has passed through a prescribed number of statuses and downgrades, it will enter recovery status where the file shall be classified and monitored by the recovery unit.