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.
| 
