______________________________________________________________________________

Statement of Guidance
Credit Risk Management
1. Statement of Objectives

1.1. To provide guidance on the requirement imposed on licensees by Rule 3(B).

1.2. The management of credit risk is a critical element of a comprehensive
approach to risk management and significant to the long-term success of any
banking organisation.

1.3. The objective of credit risk management is to maximise a banks riskadjusted rate of return by maintaining credit risk exposure within acceptable
parameters. Banks need to manage the credit risk exposure inherent in the
entire portfolio as well as the risk in individual credits or transactions.

2. Guidance on Establishing a Credit Risk environment

2.1. The board of directors should review and approve, at least annually, the credit
risk strategy and significant credit risk policies of the bank. The strategy
should reflect the banks tolerance for risk and the level of profitability the
bank expects to achieve for incurring various credit risks.

3. Guidance on Operating under a sound credit granting process

3.1. Banks should operate within sound, well-defined credit-granting criteria.
These criteria should include a clear indication of the banks target market
and a thorough understanding of the borrower or counterparty, as well as the
purpose and structure of the credit, and its source of repayment.
3.2. Banks should have a clearly established process in place for approving new
_____________________________________________________________________________________________
Policy and Research Division

Page 1 of 3

L:\Administration\IT Division\Projects\Website\Content\Updates\SOG\SOG_Credit_Risk_Management.doc

______________________________________________________________________________
credits as well as the amendment, renewal and re-financing of existing
credits.
3.3. All extensions of credit should be made on an arms-length basis. In
particular, credits to related companies and individuals should be authorised
on an exception basis, monitored with particular care and other appropriate
steps taken to control or mitigate the risks of non-arms length lending.

4. Guidance on Maintaining an appropriate credit administration,

measurement and monitoring process
4.1. Banks should have in place a system for the ongoing administration of their
various credit risk-bearing portfolios.
4.2. Banks should have in place a system for monitoring: 1) the condition of
individual credits, including determining the adequacy of provisions and
reserves, and 2) the overall composition and quality of the credit portfolio.
4.3. Banks should have information systems and analytical techniques that enable
management to measure the credit risk inherent in all on- and off-balance
sheet activities.

5. Guidance on Ensuring adequate controls over credit risk

5.1. Banks should establish an internal system, separate from the approval
process, which provides for the ongoing assessment of the banks credit risk
management

processes

and

the

results

of

such

reviews

should

be

communicated directly to the board of directors and senior management.

5.2. Banks should ensure that the credit-granting function is being properly
managed and that credit exposures are within levels consistent with
_____________________________________________________________________________________________
Policy and Research Division

Page 2 of 3

L:\Administration\IT Division\Projects\Website\Content\Updates\SOG\SOG_Credit_Risk_Management.doc

______________________________________________________________________________
prudential standards and internal limits.
5.3. Banks should have a system in place for early remedial action on deteriorating
credits, managing problem credits and similar workout situations.

6. Further Guidance
This Statement of Guidance has been developed using Principles for the

Management of Credit Risk, September 2000, and Best Practices for Credit Risk
Disclosure, September 2000 issued by The Basel Committee on Banking
Supervision.

Institutions should consult the aforementioned papers for further

guidance on the establishment and maintenance of a Credit Risk Management

System.

_____________________________________________________________________________________________
Policy and Research Division

Page 3 of 3

L:\Administration\IT Division\Projects\Website\Content\Updates\SOG\SOG_Credit_Risk_Management.doc