Problem loans management practices : Ecobank Ghana Limited as a case study

V. Soundness problem loans management criteria

Up to this point the literature review has focused on some global perspectives and factors

relating to the internal workings of corporate systems and how they impact on loans management. Despite the absence of consensus on internationally agreed standards, significant strands of thought run through the prescriptions of leading financial institutions. From the preceding literature review, it appears a sound Problem loans Management system is founded on three main pillars, namely:

- The credit risk management: it constitutes the framework within which credit applications

are processed and as aforesaid it can sometimes be chargeable for problem loans occurrences.

- Loans classification and provisioning: it is particularly important because it provides a mechanism to classify loans by degree of riskiness and develop specific remedial management strategies.

- Remedial management: Key actions to be made and strategies to be developed at each stage of the remedial management process.

1. Credit Risk Management

These are some of the criteria a good Credit Risk Management System must have as

recommended by the ICBC¹⁵:

1. Pre-lending controls:

¾ Detailed credit policy and management rules

¾ Internal Rating System to assess credit risk

¾ Centralized review of customers credit limits

2. On-lending controls:

¾ Authorization management

¾ Approval of credit business

3. Post-lending controls:

¾ Credit monitoring

¾ Field inspection

¹⁵ Industrial and Commercial Bank of China, Annual Report 2003

27 MBA in Banking and Finance

2. Loans classification and provisioning

A good loans classification system looks like the following one, regardless of the names given

to the different classes:

Classification	Loan Classification System	Provision
Class A	Debts fully secured by cash collateral even if overdue. Borrowers are up-to-date in repayments. Debts above suspicion overdue for less than 1 month.	1% - 2%
Class B	Debts overdue for a period between 1 month and 3 months.	10% - 15%
Class C	Debts overdue for a period between 3 months and 6 months.	25% - 30%
Class D	Debts overdue for a period between 6 months and 12 months.	50% - 75%
Class E	Debts overdue for a period above 1 year.	100%

In the above classification system does not emphasize on the perception of future events

concerning the borrower's financial situation by the analyst, as did many organizations in their recommendations. We considered that appreciation of future events could vary from person to person and can lead to different classifications of the same asset.

Intervals have been provided for provisions so that the problem loans officer can make different levels of provision for assets classified in the same category but with different probabilities of failure.