Monetary Authority of Singapore Risk Management Guidelines on Credit Risk – Overview and Summary of Requirements

• By: Staff Editor
• Date: March 08, 2013

• Both off- and on-balance sheet transactions may give rise to credit risks.
• Various economic instruments may also be responsible for exposing an institution to credit risk.
• The possibility of credit risks occurring alone is non-existent and a risk event normally involves both credit and market risks.

• Each institution must realize the credit risk level it will be able to bear. It needs to devise a risk management tactic that maintains its business targets and credit risk tolerance.
• The strategy of credit risk needs to be submitted to the Board members periodically for review. The employees need to know the various concerns and changes.

• Each institution needs to form a risk management structure equivalent to the nature and size of its activities.
• The institution should form a senior management committee to establish and supervise the framework of credit risk management. The committee must include senior management from control functions and business line.
• The control and risk management feature of an institution must remain independent of the function of credit origination.

• The Board has to approve credit policies and it must also be in charge of approving any exceptions and changes to the procedures.
• Credit policies should establish guidelines and conditions for the granting, monitoring, management and maintenance of credit, at both portfolio and individual transaction levels.
• Credit policies will remain effective only if they are known throughout the institution and revision of the policies on a regular basis is a must for incorporating shifting external and internal circumstances.

• Board members can delegate the authority of credit term changes or approval to the credit committee and senior members.
• The assignment of such authority must depend on the ability, suitability and experience of the staff.
• The establishment of credit approving authority is a must for dealing with unsecured and secured credit along with particular products.

• Particular criteria for credit are necessary for an institution to define the characteristics and types of its choice obligors.
• For the obligor to adhere to credit criteria, the institution needs to possess minute details regarding the obligor, repayment source as well as the reason for credit.
• The credit criteria of an institution can shape its risk profile.

• A credit limit must be in place for single and groups of obligors for proper credit risk management.
• The limit’s size must depend on the obligor’s credit strength and the risk tolerance of the institution.

• Credit extensions should be made at arm’s length. This applies to credit offered to parties relating to the institution or its directors.
• The senior management board has no say in the process of decision making for credits to individuals and companies.
• Credits of this sort should be closely monitored and steps to control and mitigate risks should be taken.

• An institution can mitigate credit risks through use of guarantees and collateral.
• Guarantees for credit facilities must be evaluated in relation to credit quality, legal capacity and strength of the guarantor.

• Each institution is capable of monitoring individual credits through the establishment of a separate system.
• Key indicators of credit condition should be specified and monitored. These indicators can be from the following:
  • Financial position and business conditions
  • Conduct of accounts
  • Loan covenants
  • Collateral valuation
  • External rating and market price

• Periodical credit reviews are a must in every institution.
• Credit reviews should be performed at least once a year

• Adequate provisions, in compliance with existing regulations, must be made for classified risks
• Loan classification and provisions should be subject to independent review and approval
• Loans should be properly and promptly graded to reflect the assessed credit strength of the borrower
• If loan grading is linked to an institution’s internal risk rating, a proper process mapping internal rating to regulatory rating must be implemented and followed
• Collateral should be properly evaluated. Institutions should have a reliable and timely collateral valuation system that considers factors such as:
  • Legal enforceability of claims on collateral
  • Ease of realization of collateral
  • Current market conditions

• Institutions should have processes in place to manage problem credits at an early stage. Classified accounts should be managed by a dedicated remedial process This process should include:
  • Review of collateral and security documents
  • Formulation of remedial strategies
  • Negotiation and follow-up
  • Status report and review
• It would a best practice for the institution to have a separate unit that solely focuses on problem credits

• An institution must have robust procedures for the following credit administration activities:
  • Credit documentation
  • Disbursement
  • Billing and repayment
  • Maintenance of credit files
  • Collateral documents 

• Institutions should have policies to develop, review and implement internal risk rating systems where necessary
• These systems should be validated and their applicability to relevant portfolios evaluated before implementation
• Statistical models used in these systems to assess portfolios must be evaluated
• Risk ratings should be assigned at the start of the lending process and updated at least annually
• Statistical models should be periodically back-tested after their implementation

• It is important for an institution to monitor credit risk on portfolio basis to handle concentration risk.
• Every institution must measure and identify the concentration risk present in its credit portfolio.
• Institutions must have appropriate limits to cap concentration risks at an acceptable level.
• Branch offices in geographies with high concentration risks must monitor and manage this at the branch level
• Trends in loan growth, collateral values and asset quality must be monitored to detect any weaknesses in the credit portfolio
• Credit risks of portfolios must be evaluated using the credit value-at-risk or credit portfolio models

• Stress testing scenarios should be relevant to the institution’s portfolio
• It is necessary for the institution to document its stress testing policy.

• Each institution needs to formalize extra procedures and policies for managing credit risk in the trading book.
• These additional policies must cover areas such as:
  • considerable obligor concentrations and exposures,
  • settlement and pre-settlement risks,
  • obligor ratings,
  • credit exceptions,
  • provisioning and
  • non-performing contracts
• Only those personnel with necessary authorization can approve of credit lines
• Credit reviews should be undertaken by a department independent of front-office functions and should be done before establishing a relationship with the obligor
• Simulation analysis as well as analytical tools can be used for measuring Potential Future Exposure (PFE)
• Clear policies on collateral arrangements with obligors should be established
• Stress testing of obligor credit exposures should be performed to identify those vulnerable to extreme or one-way market movements

Read the MAS Risk Management Guidelines on Credit Risk in full.