MAS published an information paper on the thematic review of collateral management standards and practices of corporate lending business of banks. The paper outlines sound benchmarking practices for financial institutions in corporate lending business. The key observations from this review cover the themes of governance over collateral management, collateral portfolio monitoring, valuer selection, and valuation practices. The review showed that most banks apply stricter requirements in assessing the valuation of collateral for problem credits or non-performing loans (NPLs). However, some banks lacked appropriate mechanisms to monitor collateral composition and failed to use updated and realistic valuations for collateral, including of loans that turned non-performing.
MAS expects banks to benchmark themselves against the good practices set out in this paper. Banks should assess the ability of their internal controls and processes to achieve good credit risk management outcomes effectively and take steps in a risk-appropriate manner to address gaps, if any. In performing their internal benchmarking, banks should consider their specific organizational structures, business models, and risk profiles. The identified areas of improvement for banks that were part of this thematic exercise have been set out under the following themes:
- Governance over Collateral Management. Effective oversight by the board and senior management is critical in managing credit risk in loan and collateral portfolios of banks. The board and senior management are responsible for developing business and risk management strategies that are consistent with the risk appetite of the bank.
- Collateral Portfolio Monitoring. Banks should have timely, accurate, and comprehensive information on credit exposures and collateral portfolios to facilitate prompt credit risk monitoring. Such information should also be reported to the board and senior management, including credit committees and relevant forums, to facilitate effective credit risk management oversight. Banks should conduct stress tests on collateral, where applicable.
- Valuer Selection. Collateral values should be assessed in a prudent manner. Banks should ensure that valuations obtained are independently sourced, reliable, and reflect the market conditions. It is important that banks set out clear policy requirements with regard to the valuers or appraisers who provide the appraisals for the assets pledged to the bank, including those obtained through appraisal pricing systems or other price feeds .
- Valuation Practices. Collateral values should be updated regularly to reflect prevailing price levels or market values. It is important that banks adopt proper appraisal practices that lead to realistic and substantiated valuations and use valuation methods and assumptions that are both reasonable and prudent.
This is the third review in a series of credit thematic reviews of corporate loan portfolios of banks. The three thematic reviews, taken together, covered key control elements of credit life cycle of banks and highlighted sound practices that the industry should benchmark against. MAS started this third and final phase of credit thematic reviews in 2018, focusing on the collateral management standards and practices of selected banks. All three phases of MAS’ credit thematic inspections have shown that there continues to be room for improvement in the banks’ credit risk management of their corporate loan portfolios in various aspects of credit underwriting, credit review, and collateral management standards and practices. The MAS expectations and good practices set out in all the three information papers and take risk-appropriate steps to address any gaps. MAS looks to the boards and senior management of banks to provide oversight and maintain high standards in this area. MAS plans to continue to engage banks on the effectiveness of their credit risk management as part of its ongoing supervision.
Keywords: Asia Pacific, Singapore, Banking, Collateral Management, Corporate Lending, Thematic Review, Credit Risk, NPLs, MAS
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