October 25, 2018

MAS published a report on the thematic assessment of credit review standards and practices of corporate lending business. The assessment found that the banks had established policies and processes to monitor and manage the exposures of their corporate borrowers. However, there is room to improve the robustness of their credit grading, credit monitoring, and portfolio management processes.

MAS conducted the thematic review between October 2016 and June 2017. The thematic review focused on assessing the following for banks:

  • Credit grading standards and practices against the credit grading requirements under MAS Notice 612 on Credit Files, Grading, and Provisioning
  • Credit monitoring framework and controls
  • Loan portfolio management framework and processes

The review found that while the Notice 612 sets out both quantitative and qualitative criteria for credit grading, there were instances where banks had placed stronger emphasis on quantitative factors, such as repayment conduct, in determining the credit grade without adequate consideration of the qualitative factors. There were also instances of restructured loans not being classified appropriately in line with the requirements of the Notice. The watch-list process could be enhanced for more effective identification and management of accounts, with signs of credit weaknesses.

On portfolio management, some banks did not conduct adequate credit stress tests on a regular and timely basis to assess the impact of economic shocks or worrying trends in the local operating environment. Stress test scenarios should also be enhanced to incorporate macroeconomic and industry trends. Furthermore, as credit grades could be one of the inputs used to determine the amount of loan-loss provisions under FRS 109, banks should ensure that their credit grading standards are sufficiently robust. Notwithstanding that the general credit environment has improved, banks should continue to strengthen their credit review standards and practices.

Additionally, some banks conducted a post-mortem on non-performing loans (NPLs) to identify reasons for their deterioration and determine whether there were preemptive actions that could have been taken before the loans turned non-performing. The post-mortem was generally performed by units that were independent of the business such as internal audit and remedial management. The outcome of the reviews was reported to senior management, which would ensure that appropriate and timely actions were taken to rectify the noted weaknesses.

 

Keywords: Asia Pacific, Singapore, Banking, NPLs, MAS Notice 612, Stress Testing, Corporate Lending, FRS 109, Credit Risk, Credit Grading, MAS

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