Annex 58: Sample Credit Policies and Procedures Manual

Microfinance Institutions (MFIs) Upgrading and Rating Initiative of the Development Bank of Austria (OeEB) in East Africa

SAMPLE CREDIT POLICIES AND PROCEDURES MANUAL

By Sharon C. Mosin ATC Consultants

October 2009

Oesterreichische Entwicklungsbank www.mfi-upgrading initiative.org

Sample Credit Policies and Processes Manual October 2009 We would like to acknowledge valuable contribution and suggestion by the Team Leader Ms. Janis Sabetta, which greatly enriched this manual. This Sample Manual is to be used as Guide to MFIs in developing their own Manuals. What is contained in the Manual is not conclusive and each MFI should adapt what is relevant to their Institutions situations. Each Manual should be a living tool for the Board and the staff, and should be frequently updated by the Board. Credit Policies and Procedures Manual is aimed to provide the framework for and GUIDE the Lending activities of the MFI with the objective of minimizing Credit risks. The CEO is used to refer to either Chief Executive officer, Managing Director and General Manager. The MFIs should adapt whichever of applicable. Similarly, CO has been used to refer to the front line officers; credit officer, Loan officer, Filed officer or Accounts officer. MFIs should use what is applicable to them.

Sample Credit Policies and Processes Manual October 2009

TABLE OF CONTENTS LIST OF ACRONYMS ................................................................................................................3 1.0 INTRODUCTION ..............................................................................................................4

1.1 1.2 1.3

2.0

Purpose and Scope of this Manual ................................................................................... 4 Code of Conduct............................................................................................................... 4 Background information of XYZ MFI .............................................................................. 5
CREDIT MANAGEMENT STRUCTURE AND POLICIES ................................................6

2.1 2.2 2.3 2.4 2.5 2.7 2.8 2.9

3.0

General Principles ........................................................................................................... 6 Credit Authorities ............................................................................................................. 6 Approval Limits Policy .................................................................................................... 9 Loan Provisions and Write off Policy .............................................................................. 9 Institutional Limits and Credit Exposure ....................................................................... 10 Loan Application Form and Loan Appraisal Form ........................................................ 12 Discouraged Loans ......................................................................................................... 12 Pricing of Credit Facilities Guidelines ........................................................................... 13
TARGET MARKET ........................................................................................................14

3.1 3.2
4.

Target Market Definitions and Risk Acceptance Criteria .............................................. 14 Target Market, Products and Services............................................................................ 14
CREDIT PROCESSES AND PROCEDURES ................................................................15

4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.9 4.10 4.11
5

General Principles and Guidelines ................................................................................. 15 Area coverage ................................................................................................................. 15 Loan documentation ....................................................................................................... 15 Area Market Analysis..................................................................................................... 17 Screening individuals and groups .................................................................................. 18 Loan Orientation Training (LOT) .................................................................................. 20 Processing Loans applications ....................................................................................... 21 Loan approval and documentation ................................................................................. 22 Loan disbursement ......................................................................................................... 23 Loan repayment and banking ......................................................................................... 23
CREDIT RISK RATING ..................................................................................................25

5.1
6

Credit Risk Classification Guide .................................................................................... 25

PORTFOLIO PLANNING, MANAGEMENT AND REPORTING .....................................26

6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8

Portfolio Planning .......................................................................................................... 26 Relationship Management .............................................................................................. 26 Collateral Inspection and Evaluation ............................................................................. 26 Release of collateral/Security ......................................................................................... 28 Substandard and Problem Loans .................................................................................... 28 Delinquency Management and Recovery system .......................................................... 28 Loan Restructuring and Refinancing.............................................................................. 32 Portfolio reports.............................................................................................................. 33

Annex 1 Portfolio Aging Report .............................................................................................34 Annex 2 Loan Appraisal Form ...............................................................................................35 Annex 3 Risk Classification Guide .....................................................................................37

Sample Credit Policies and Processes Manual October 2009

LIST OF ACRONYMS

BCC BOD CO CEO LAF MFI

Board Credit Committee Board of Directors Credit Officer Chief Executive officer Credit Application Form Microfinance Institutions

Sample Credit Policies and Processes Manual October 2009

1.0 INTRODUCTION

1.1 Purpose and Scope of this Manual

The purpose of this Credit Policies and Procedures Manual is to create a set of standardized policies and procedures for the lending activities of XYZ MFI. The Policies and Procedures have been designed to assist the Credit Department, as well as other departments of the Institution in the performance of their duties. The main objective is to ensure thorough loan appraisal and proper monitoring of all outstanding loans. This includes both supervision of outstanding loans as well as recovery of overdue loans. Each Credit Officer (CO) is responsible for their own loans throughout the credit cycle from initial identification of prospective borrowers to complete repayment of outstanding amounts. description of all stages of the lending process. All Staff are required to strictly adhere to the rules outlined herin as a means of reducing risks. 1.2 Code of Conduct The Credit Officers and all staff shall always behave respectfully towards borrowers. When meeting/phoning or in any discussions with clients, he/she should start by saying the name of the MFI and then his/her own name (showing identification as appropriate). The Credit Officers/all staff should keep the appointments that he/she has made. If for any reason he/she should be unable to do so the borrower(s) in question must be notified in good time. Credit staff should maintain a professional distance in his/her dealings with borrowers. He/she should always bear in mind the fact that if problems arise he/she will have to scrutinise the borrowers' activities and may have to initiate legal proceedings. This is a particularly important consideration in cases where the applicant is known to the Credit staff - and indeed, if the case it is essential that the application be handled by a different Credit staff. All information regarding the borrower is to be treated in strict confidence. Confidentiality includes taking care not to store files in places that are accessible to the public. Orderly file management makes it possible to get more work done in the same amount of time, which ultimately has a positive impact on operations. This Credit Manual provides a detailed

Sample Credit Policies and Processes Manual October 2009

If problems occur, and possibly errors have been made, they should not be covered up. Management must hear bad news fast and first. Any coverup is a fundamental breach of trust. 1.3 Background information of XYZ MFI Mission and Vision Core Values Broad Strategies

Sample Credit Policies and Processes Manual October 2009

2.0 CREDIT MANAGEMENT STRUCTURE AND POLICIES 2.1 General Principles (a) The credit

process

for

XYZ

Microfinance

Bank

will

encourage

the

decentralizations of all credit decisions/approvals from the Board Credit Committee (BCC), the CEO, Management Credit Committee (MCC), Branch Credit Committee (BCC), to Credit officer. (b) The Loan officers will initiate credit relationship, which will structure and package the deals for Recommendation/approval by the appropriate authorities. The dayto-day management of the relationship rests with the initiating officer. (c) To ensure timely approvals and general efficiency, credit initiators shall obtain full information/documentation so as to complete analysis of the credit within a maximum of five (5)1 working days from the date of receipt of request, which shall be stamped on the application. The objective is to ensure that final decisions are taken and communicated on applications within a maximum of one week, irrespective of the nature and location of the credit 2.2 Credit Authorities 2.2.1 Board of Directors (BOD)

The Board of XYZ Microfinance Bank has overall responsibility for the credit policy of the MFI and subsequent revisions of same. Other specific responsibilities include the following: o o o o o Approving significant revisions to credit policy Establishing portfolio distribution guidelines in conformity with existing Regulations. Approving XYZ Microfinance Banks credit management structure. Establishing credit approval authorities including the level of delegation. Approving write-offs, in excess of the limits delegated to the Board Credit Committee (BCC). o o Approving all credits in excess of the limits delegated to BCC. Approving changes in the legal lending limits and risk limits used in the bank. Board Credit Committee (BCC):

2.2.2

It is up to the MFIs to decide what is workable for them

Sample Credit Policies and Processes Manual October 2009

The Board Credit Committee (BCC) is a standing committee of the Board. The BCC therefore exercises the Board's responsibilities on credit and credit related issues as outline in the Board Manual which will include: Approving changes in lending rate in consonance with Government regulations. Approving Target Market Definitions and Risk Acceptance Criteria for the lending units. Approving provisions for non-performing loans based on presentation by the CEO and in line with existing regulations Approving new financial products initiatives. Approving the rating grid for credits and the credit process. 2.2.3 The Managing Director/Chief Executive Officer

The CEO is responsible for reviewing and recommending all credit items which are to be submitted to the Board Credit Committee and; Establishing guidelines for pricing of credit facilities to be approved by the Board. Approving all credits, which are within his/her approval limit Reviewing the portfolio diversification in line with guidelines given BCC. Reviewing credit related systems and their implementation. Monitoring portfolio risk and managing decisions to improve. Reviewing and recommending write-offs based on the presentation of the Recovery Department, which are recommended by the Recovery Committee. Reviewing provisions for non-performing loans based on presentation of Credit Administration department and regulatory guidelines as well as Board approval 2.2.4 Ensuring implementation of all credit policies and procedures by all staff Management Credit Committee(MCC) by the

Sample Credit Policies and Processes Manual October 2009

The Management Credit Committee is the highest advisory body to the CEO on credit issues. The CEO chairs it or a member appointed by him/her. Members of the MCC include CEO2, and All Departmental Heads, Head of Internal Audit / Risk /Managers, Officer next in rank to the Head of Internal Audit / Risk as Secretary and Branch Manager. The Committee shall meet once in a week. All extensions of credit above individual approval limits must be recommended by the majority of at least three authorised members of the MCC which must include the CEO, and Head of a Business Group/Branch Manager other than the one originating the credit. Other responsibilities of the MCC include reviewing for referral to the CEO, all credit and credit related issues as follows: Credit related systems and procedural issues Issues affecting credit process efficiency and/or effectiveness Annual reviews of the Credit Policy to be conducted by the RISK ASSET MANAGEMENT Credit process elements rated unsatisfactory by the RISK ASSET MANAGEMENT and Audit Departments.

2.2.5

Suggestions to the Credit Policy as may be submitted by any staff/Group.

Branch Credit Committee/Branch Manager

The Branch Credit committee will be responsible for approving loans within their limit and above Credit officers limit. The Branch Credit Committee is made up of Branch manager, Credit officer, branch accountant/finance officer and marketing officer where applicable. The Branch Manager will be responsible for the supervision of credit officer, credit administration and overall performance of the portfolio at the branch. This will include: Ensuring policies and procedures are adhered to at the branch including conducting field studies, loan application and appraisal process Delinquency management Identifying problematic loan earlier enough and finding ways of mitigating the risks

The CEO/CEO is usually a member of the Management Credit committee if the institution is still young and growing. For larger established institutions, General Manger Credit usually chairs the Management Credit Committee

Sample Credit Policies and Processes Manual October 2009

2.2.6 Credit Officer

The credit officer as the link between the clients and the institution is responsible for initial contact with the client. The credit officer shall conduct preliminary appraisal of the potential client and approval of loans within his/her approval limit. 2.3 Approval Limits Policy As approved by the Board, the approval limits for XYZ MFI shall be as follows: Board of Directors Board Credit Committee Chief Executive Officer Management Credit Committee Branch Credit Committee/Branch Manager Credit Officer 2.4 Loan Provisions and Write off Policy 2.4.1 Provisioning3 Policy Above Sh... Up to Sh. Up to Sh Up to Sh.. Up to Sh.. Up to Sh

XYZ MFI shall provide for loans and advances, bad and doubtful debts as follows: For Loans that are classified4 as; 0 days past due 1-30 days past due 31-60 days past due 61-90 days past due 1% 5% 25% 75%

More than 90 days past due 100% A sample Portfolio Aging Report is given in Annex 1

3 4

MFIs should abide by Minimum Regulationary provisions in their respective countries. Provided in the Kenyan Microfinance Act 2006 Regulations Guidelines

Sample Credit Policies and Processes Manual October 2009

2.4.2 Write off Policy It is XYZ MFIs policy to write- off immediately5 any portion or all of an credit facility (including an overdraft) judged to have become uncollectible. And in any case not less than annually. The Write off of principal does not cancel the obligor indebtedness to the Bank. Therefore, Write off must never be communicated to the customer. Write off is approved by the Board on recommendation of the Board Credit Committee and the CEO. The recommendation for the write-off of a particular Loan will originate with the Area/Branch Manager using a request to write off Loan form, which shall also be endorsed by both the Operations and Finance Managers/Management Credit Committee. Only the Managing Director can propose a Loan for write- off to the Board. A Written- off loan will appear in the banks books while the loan tracking will be kept off balance but continues to be followed.. Recovery of Write off credit remains the responsibility of the assigned Relationship manager. A Write off should not diminish collection efforts as recovery of Write off asset is extremely important. The recovery efforts shall cease when it becomes clear that there is no realistic prospect of recovery and the cost of recovery efforts exceed the benefits to be derived from recovery of the credit facility. Cessation of collection efforts does not affect the obligation of the customer to XYZ MFI, and is not communicated to the customer. 2.5 Institutional Limits and Credit Exposure The lending activities of XYZ MFI, will be carried out within the constraints imposed by the Legal Lending Limit6 and the Country Risk Limits. The applicable legal lending limit will be communicated to all appropriate units by the CEO.

5 6

Within the period stipulated in the regulations of the country the MFI operates MFIs to refer to respective regulations e.g. Microfinance Act 2006 for Kenya provides that; Loans exceeding 5% of Institutions core capital shall not be extended to a single end user and Institutions shall not extend a microfinance loan to any single end user or his associate that exceed 2% of its core capital

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The principle of consolidation applies in assessing adherence to the legal lending limit. All credit facilities to a borrower must be aggregated with all credit facilities extended to any related party to the borrower. It will be the responsibility of all Credit staff to ensure that outstanding on all credit relationships under their supervision are kept at all times within the legal lending limit. Situations, which might be construed as violating this limit, will be immediately referred to the CEO for review and determination of the appropriate course of action. No credit facility shall in aggregate exceed 20%7 of the institutions total loan portfolio

All Credit facilities require approvals before they are offered to customers. No additional exposure should be created under an expired facility or limit. Every exposure created under a facility limit must have an expiry date.

2.5.1

Types8 of Credit Exposure

Facilities and, therefore, the exposure are structured to minimize risks. Guidelines as give hereunder shall be followed: Credit Lines: These expire within 12 months from the date of approval. Current Line Facilities may be structured to allow drawings by way of overdrafts and short term advances depending on the customer's business cycle, but the maturity of any credit exposure should not extend beyond the expiry date of the facility. Term Loans: Include any non-revolving facility where the final maturity extends beyond one year from the date approved by the MFI. Deposit Placement Limits: are documented approved limits and are structured as these limits enable MFI to place funds (time/call deposits) with financial institutions, with maturities not exceeding the expiry date of the facility. Leasing Facilities: A lease facility must be structured to allow the Bank to promptly and effectively repossess the leased asset in the event of a default by the customer.

7 8

Will be dependent on the individual MFI s lending exposure and regulatory provision These are strictly examples only, to give MFIs an Idea of credit exposure

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2.6 Credit Approval Process The credit approval process starts from the receipt of customers' request by the Lending Units and the processing of same, which culminates in the approval of a credit facility by the appropriate approval authority. The process ends with the communication of an approval of facility to the customer through an offer/commitment letter. The approval process entails a detailed analysis of the customer and the transaction, which are summarized on the MFIs standard Loan Application Form (LAF) and Loan Appraisal Form. 2.7 Loan Application Form and Loan Appraisal Form Loan Application Forms and Loan Appraisal Forms are signed by the Credit officer and then reviewed/recommended for approval by the Branch Manager/ Head of Credit. The forms are thereafter forwarded to appropriate authorized individual or committee including the BCC where necessary. The objective is to ensure that decision is taken within one9 (1) working day from the date of receipt, which shall be stamped on the application. Thereafter, reviewing/recommending officers should attempt to process within one day each. The objective is to ensure that a decision is taken on each credit request within One10 (1) week of the receipt of same. Before a Credit Officer commits the Bank, verbally or otherwise to an extension of credit to any borrower, a proper approval is required from the appropriate lending authority. 2.8 Discouraged Loans11 The MFI specifically discourages the following types of credit facilities:
9

loans that bailout or replace other lenders who wish to withdraw loans to political candidates, parties or other political organizations

May vary from MFI to MFI May vary from MFI to MFI-can be shorter or longer time depending on MFI efficiency 11 This is just an example, MFIs will have their own lending restrictions depending on their mission, vision and core values
10

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Sample Credit Policies and Processes Manual October 2009

loans to gambling enterprises loans for drugs and alcohol related activities loans relating to armament activities loans or guarantees/bonds in respect of criminal cases with Courts or Tribunals.

2.9 Pricing of Credit Facilities Guidelines When pricing a loan, the MFI should bear in mind the market factors and competition, financial standing/credit worthiness of the borrower, the loan purpose, tenor and risk involved to arrive at the total yield and Return on Assets. Interest rates chargeable on credits will be such as to earn a return commensurate with the level of risk being assumed by the MFI. At the same time, the rates shall be as dictated by market conditions and/or statutory requirements. Penalty Interest shall also be charged on excesses over approved limits and past due repayments. Various types of fees and commissions shall accrue to the MFI on all credit e.g. agency/management/ commitment/advisory/ renewal/ arrangement/consultancy/ vending fees, discount/turnover commissions etc. Interest, Commission and Fees structure shall be determined and advised to all credit operators by the Board, through the Assets and Liabilities Committee (ALCO) from time to time. All operators are expected to adhere to the advised structure. Deviations will have to be formally approved. Interest shall be accrued and charged periodically but not less than monthly. Fees and Commissions may be charged upfront or at other specific intervals. All charges shall be debited to a customer's account, but some fees or commissions have to be paid before the commencement of a facility, the customer shall be required to lodge such funds in the account. In all cases the effective interest rate shall be clearly communicated to the clients, All fees, commissions, interest rates and their calculations must be transparent and understood by the client.

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Sample Credit Policies and Processes Manual October 2009

3.0 TARGET MARKET 3.1 Target Market Definitions and Risk Acceptance Criteria Target Market Definition identifies the characteristics of the type of customer to which MFI will market credit products and thus eliminate undesirable business segments from consideration. Risk Acceptance Criteria are specific financial, managerial, environmental and competitive benchmarks which are used to enable the credit staff to separate desirable from undesirable business. These are to be developed by the lending units and reviewed by the Group Heads for approval by the BCC in consultation with CEO and MCC. Deviations from these standards must be addressed in the Credit/Approval Memorandum. 3.2 Target Market, Products and Services 3.2.1 Target Market

XYZ MFI target market are active micro entrepreneurs etc etc(target market should be diversified to minimize risk of portfolio concentration) 3.2.2 Products and Services

Each MFI to describe their credit products and services at minimum the description should include: Name of the Product and target market Duration/Loan Term Delivery Methodology i.e. group or individual Interest Rates and other fees Collateral Requirements Eligibility Criteria specific to the product Etc..

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Sample Credit Policies and Processes Manual October 2009

4. CREDIT PROCESSES AND PROCEDURES 4.1 General Principles and Guidelines The purpose of this section is to discuss in detail the different steps that the Credit Officer (CO) should take to give out Loans and ensure that they are fully repaid. The CO is generally responsible for the following major tasks in performing his or her duties: Assessing the demand and competition for financial services in their target area. Outreaching and promoting the organization in the target area. Receiving and following up inquiries, screening prospects, educating and orienting prospective clients. Providing clients with prescribed Loan application forms to apply for Loans at the right time. Supporting clients in analyzing Loan applications, evaluating and taking appropriate security to secure the Loans, documenting Loan decisions, and forwarding applications to Area/Branch Manager/ supervisor for disbursement. Following up disbursements and supervising and managing Loan repayment. Following up clients, providing financial and business advice, and supporting associations/groups in formulating and carrying out strategies to recover delinquent Loans. The rest of this section contains information for the CO on how to go about his or her work. 4.2 Area coverage While it is the intention of XYZ MFI to provide services to its target clients in every part of the country, it cannot be everywhere at the same time and remain sustainable. As a general rule, therefore, outlets shall be opened depending on the identified demand in a particular area, and one branch/area will control no more than 5 satellite offices. 4.3 Loan documentation The following documents shall be kept at the area/branch office and be updated by the CO as part of the management information system in monitoring and tracking loans, groups and clients: Original copies of registration and client intake forms

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Sample Credit Policies and Processes Manual October 2009

Duplicate copies of loan application and agreement forms Original copies of loan appraisal notes Clients follow-up notes and correspondence Duplicate copies of security documents, for example signed transfer forms, signed Power of Attorney forms, pre-signed liens on bank accounts, pre-signed cheques, motor vehicle logbooks, etc. Copies of asset insurance forms Clients Identity card copies and passport size photographs 5. All documents moving by courier services or any other means from the branches to the Head Office and from the Head Office to the branches shall be registered both at the points of origin and destination. 6. Each XYZ MFI branch shall keep an insured fireproof safe or filing cabinet where clients files and documents can be kept. 7. Each client shall be assigned a section in the client file/group/association, which should be referenced with the same unique identification number as the one assigned to him or her in the banking software. 8. Each Area/Branch Manager shall ensure that all files as well as the documents they contain are safely locked into the safe at the end of each working day. 9. At no time should security files remain outside the safe after they have been used. 10. Access to securities shall only take place in accordance with the four eyes principle, which means that no document shall be added or removed from the safe or individual clients file without a second authorized person being present and also signing for it. 11. To ensure compliance with the four eyes principle, the person/persons responsible for the custody of loan securities shall maintain two sets of keys to the cabinet, and two separate individuals shall keep the two sets of keys (of separate locks). 12. Sensitive securities such as land title deeds and certificates of life insurance or pension plan shall be registered into a securities register following an alphabetical order for easy reference. 13. Both the clients and CO shall sign the securities register at any time when a security is submitted or retrieved by the client. If any document is retrieved from the safe by the CO for any purpose, he or she shall be liable for the security retrieved for the time that it remains in his or her possession.

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Sample Credit Policies and Processes Manual October 2009

4.4 Area Market Analysis12 Prior to starting credit or savings operations in any area the MFI undertakes to conduct a comprehensive market survey in the area with a view to determining demand for credit and market potential in the area. It is only upon being satisfied with the market survey report that the MFI embarks on establishing its activities in an area. Before starting to assess clients13 for intake, the CO shall analyze the assigned area to determine if there is enough business and to know more about the competition and financial needs of clients in the area. Before starting the intake, the CO shall do the following to know more about the business and competition in the target area: By looking around for economic activities conducted in the area. How diverse and dynamic are these activities? Are both men and women involved? How big are the businesses? By talking to and listening to the people involved in different economic activities discuss their businesses. What are their visions and dreams for the future? What challenges are they facing in their businesses? What resources do they have? How are they currently meeting their financial needs? What are their preferences for financial services? Are the people open and helpful in giving information? By learning from people who might know the area more than you do. Lean about the credit culture of the people. Do they have access to financial services? Can the people be trusted with credit? What kinds of activities would be most useful to support in the area? Learn about the local economy is it growing or not, is it controlled by a few people? Does the area have a history of robbery and collapsed businesses? Has there been a credit program in the area before, did it succeed or fail? Collect information from people.

It is crucial for every MFI to carry out a thorough market research for all its products in all its target areas of operations 13 This can be groups, Associations or individual clients

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4.5 Screening individuals and groups The CO shall collect details about the individual client members following a market area analysis exercise. The CO shall ensure that loan clients do not give biased information in order to get loans by collecting their particulars, such as name, address, assets and income along with the details of the family members/partners, when they are still unfamiliar with MFI requirements for loans. The CO shall also collect pre-intake information from prospective clients early enough to determine the ones that are likely to be eligible and thus worth spending more time visiting and orienting for business with XYZ MFI. At pre-intake Individual and Group Assessment Forms will help the CO establish early enough the chance of prospective clients to qualify for business with XYZ MFI. 4.5.1 Pre-intake assessment of a group

The CO shall collect, verify, and widely cross-check the following details before accepting to register a particular group/association for loan purposes: Age of client, borrowing history, composition of the group (gender balance, type of income generating activities that members do, etc), level of participation in the group, their knowledge of other groups, including market associations, and participation in other activities within the community. Independently, find out how each group works and its activities, both financial and non-financial. The officer shall establish each groups primary interests, needs, and concerns in terms of the future and its record in serving its own members. He or she shall find out if a group has any linkages with any others nearby, especially if it has any links with another service provider. Show the location of each prospective group contacted on a map to visualize the distance and their proximity in relation to each other and the hub office. The CO shall take the following steps in collecting information about a prospective clients(Individual or Groups): For group clients, visit the potential group to scrutinize members During the visits, probe the group officials for their readiness for business with XYZ MFI and explore their needs. The officer shall also share with the group

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any concerns and changes required to be registered for example to start keeping records, if they are not yet doing so, drafting a group constitution if they do not have one already. During the visits, provide initial information on XYZ MFI service delivery mechanisms, requirements, and range of services. The groups require this information to decide whether to do business with XYZ MFI. Build good will and working relationships, make useful contacts, and begin to form opinion on the integrity and ability of group members for business with XYZ MFI. 4.5.2 Assessment of individual clients: This will be done before the clients/associations/groups access credit. It will be done on a prescribed form. The following are eligibility criteria; Be ABC citizen. Have no criminal record or history of default. Be a owner-manager of viable income generating activity, or have at least six months demonstrable experience in running a viable enterprise. The revenue from the income generating activities is adequate to successfully service a Loan regularly. Be conversant in terms of training on the sector he is targeting for Lending (e.g. dairy, horticulture, crafts etc). Be resident or run a business within a 20km radius of the satellite, or Area/Branch Office. Be willing and have the capacity to meet conditions and terms of service set by XYZ MFI. For Loan guaranteed by an association or group, the individual must be an active member of such a group/association and his/her application must be approved by the group/association officials. Any individual client who is ineligible under the terms listed above shall not be party to any contract with XYZ MFI.

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4.6 Loan Orientation Training (LOT) The CO shall plan and provide a series of mandatory Loan orientation training (LOT) to an association/group over a required minimum duration of two14 months. LOT shall range from a single one-day session to a series covering a period of eight weeks depending on the size and needs of a group as determined by the officer during the screening process. The series of LOT shall proceed according to the curriculum developed for the purpose and depending on the background profile of each association/group. Every client shall undergo the LOT, and shall have a mandatory orientation on the following fundamental aspects of XYZ MFIs business relationship with groups/its clients: Financial obligations and duties under group guarantee lending. Group leadership and management Legal aspects and responsibilities of individual clients Group constitution The length for each LOT session shall be determined by association/group, which is in a better position to know about members commitments and availability. XYZ MFI shall require every Group Loan client to undergo a LOT because: To ensure cohesiveness of the association/group. Associations/groups would be getting into a financial transaction with a third party for the first time, and often have little appreciation of the risks that they get into individually and collectively by co-guaranteeing each other. Associations/groups assume primary responsibility in screening, appraising, approving, and managing Loans to their individual members, a responsibility for which they are inexperienced and normally poorly prepared. Associations/groups are required to maintain a set of independent records to track and monitor their transactions within the group, including their savings and banking of Loan repayments, a responsibility for which they are likely to have neither prior knowledge nor experience. The agenda shall focus on group lending policies and procedures and the Loan approval procedures.

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MFIs will decide on what is workable for them

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Sample Credit Policies and Processes Manual October 2009

The CO shall help associations to set up Loan assessment committees during the LOT, which he or she shall train in depth on how to assess Loan applications. The CO shall distribute and assist members in filling in Loan applications. 4.7 Processing Loans applications All Loan applications shall be made in prescribed Loan Application and Agreement Forms. Clients shall apply for Loan through the prescribed Loan application forms only after reaching an agreement with the group for group guaranteed Loans, and with the CO for individual Loans, on their business screening. The officer shall check each filled up application form to ensure that the client has provided all the information required in making a decision on the application. The CO shall refer to Loan assessment form in assessing applications. In case the CO is not satisfied with the information provided by the client, he or she shall ask for additional information from the core for group guaranteed Loans and from any relevant source for individual Loans and also conduct an in-depth interview with the client. For group guaranteed Loans, the CO shall assist the group members in appraising Loan applications by leading a discussion on the applicants income generating activity, weekly/monthly repayment installments, and Loan terms. The CO shall also explain to the association/group all the risks involved in making a bad credit decision. 4.8 Security on Lending XYZ MFI shall accept a wide range of securities mostly depending on the size of the loan and determining these: a. The CO shall refer to the product description on specific securities acceptable on different types of Loans. b. All Asset Loans shall be insured against risks specified by the insurance company, and clients shall pay a premium upon Loan disbursement. These risks shall be discussed and agreed between XYZ MFI and the insurance company. c. Compulsory Savings (Loan Security Fund): the CO shall advise and encourage new clients to build up their cash collateral up to the level required on the Loans they intend to apply for.

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d. The different levels of compulsory savings required as set forth in the product description. e. XYZ MFI shall ensure that interest is paid on compulsory amounts and credited automatically into clients accounts. f. Clients may withdraw in part or in full cash from their LSF either on exit or after fully discharging their financial obligation. A client is entitled to receive the balance of LSF deposited over their tenure with XYZ MFI plus interest on the amounts, less any payments required in covering Loan defaults by any of his or her group members. g. Each client shall pay an insurance premium towards an insurance against fire and death or disability. The insurance premiums are paid by a client upon disbursements based on Loan amount, as set in the product description. h. XYZ MFI shall apply the fund to offset Loan balances on the death of a client or failure of business due to any one of the specified catastrophes. The insurance fund shall also be applied against other major catastrophes to the business such as fire. i. The insurance fund is a credit insurance plan, not a life insurance plan.

4.9 Loan approval and documentation All Loans shall be approved based on amounts and opinions of different officers on the following aspects of the applicant: Honesty, integrity and credit worthiness of the borrower Net worth of the borrower Outside borrowings Financial condition of other businesses operated by the borrower. Technical and managerial competence Marketability of products Profitability of operations Financial requirements of the borrower and basis for calculation Quality and value of securities offered by the borrower. The terms and conditions on which Loan can be sanctioned, i.e., amount of Loan, repayment frequency, security, etc.

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Sample Credit Policies and Processes Manual October 2009

Technical competence and experiences of the client on the use of Loans applied for All Loans shall be approved only after discussions and agreement with the client, based on the limits provided for each Loan product. The Loan Agreement and Contract form shall be a legally binding document once the parties to the contract sign it. 4.10 Loan disbursement Loans shall be disbursed by cheque/ cash/electronic in the name of the applicant at the scheduled time specified in the Loan agreement and guarantee form. No15 CO shall be allowed to carry or disburse any Loans by cash. For associations/groups Lending shall be disbursed in phases in cases where an association/ group has more than 100 members to minimize risk. Copies of Loan documents shall be sent back to clients after being processed into the Loan tracking system. The client acknowledges that he/she has selected the credit facility, including their size, design, model and capacity, and suppliers For Asset finance/lease, the client shall at his own cost, procure and take delivery of the Leased asset from the XYZ MFI or Suppliers and shall safeguard the Leased assets on behalf of the XYZ MFI for the duration of this Agreement. Delivery or tender of delivery by the XYZ MFI or Supplier to the Loan applicant should be within 30 (thirty) days of the agreement/or Loan approval. The CO shall inspect the Leased assets on behalf of the organizations before taking delivery and shall accept the Leased assets on the organizations behalf so that the ownership of the Leased assets shall pass to the XYZ MFI. The Loan applicant warrants to the XYZ MFI that the Leased assets will not be defective in any way and shall be suitable for the purpose for which they have been acquired. 4.11 Loan repayment

15

It is recommended that where disbursement and/or collection by cash is impractical, cash on transit must be insured and appropriate controls should be in place

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Sample Credit Policies and Processes Manual October 2009

For association/group Loans the CO shall attend each scheduled meeting to supervise and monitor Loan repayment. The CO shall train group officials and members on the Loan payment procedures. The CO should ensure that the repayments are made as per the loan schedule by collecting copies of deposit slips from the clients (groups and individuals) each repayment date. 4.12 Banking procedures

Each group shall be responsible for collecting and banking loan repayments to XYZ MFI. Monies collected by group shall be banked intact immediately after receipt and updating of documents relevant to the transaction. The specific banking procedures after collection for group loans shall include the following: Group officials appoint one or two people at random to go for banking on that day, who immediately proceed to the bank to deposit money collected. Any losses for whatever cause are the responsibility of the one or two people responsible for banking on that day. It is recommended that different members of the group, randomly selected at each meeting take turns in banking, collections, to minimize the risk of theft and robbery. On banking, the bank shall stamp the deposit slip and retain the original. The duplicate copy shall be given to those paying in the deposit, who shall then return it to the group/sub-group treasurer immediately to retain for record purposes. A copy of the banking slip is forwarded to the CO who will automatically provide a receipt to the group for the payments. For individual loans, the client should bank the repayment and present a copy of the banking slip to the CO during his monthly visits or take the copy to the MFI office.

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Sample Credit Policies and Processes Manual October 2009

5 CREDIT RISK RATING

XYZ MFI shall use risk rating for all credit risk associated with each facility. Ratings for business loans range from A (minimal risk) to G (loss). Rating for banks and other financial intuitions with which XYZ MFI places deposits however range from A(minimal risk) to D (substandard risk). Risk Rating is an important factor in the pricing of credit facilities and allocation of management attention A-C = Normal Business Risk. Loan Officer can recommend facility under prevailing lending programmers. D= management Attention Risk (Watch list) with the possibility of reverting to non-accrual basis on some of the fast deteriorating accounts. Any new credit extension in this category is discouraged, but can be done on Exception basis only. E-G= criticized credit. To be treated on non-accrual basis only and appropriate provisions for bad debt made. 5.1 Credit Risk Classification Guide 5.1.1 Operations Managers Classification

Each credit package must clearly state on the LAF and Loan Appraisal Form, the COs risk rating. Facilities are rated rather than customers, e.g. an overdraft to a customer may be rated B whereas a term loan to the same customer C. As the credit quality of a facility improves or deteriorates, the CO should initiate risk-rating changes 5.1.2 Risk management classification

Risk management classification which shall confirm or disagree with the COs classification must be obtained before presentation of the credit package to the approving authority and the BCC where the risk rating is changed accordingly. Risk Managements rating is final rating for all credits. Risk Management may also change the risk rating of a facility during their bank wide portfolio review. An example of Risk Classification Guide is given in Annex 3

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Sample Credit Policies and Processes Manual October 2009

PORTFOLIO PLANNING, MANAGEMENT AND REPORTING

6.1 Portfolio Planning (a) Each Year, Credit Management Committee will develop details of expected net credit growth and sect oral allocation of credit exposure of the MFI. (b) The plan will take into cognizance with the provision of credits and monetary policy guidelines, current size of the banks portfolio, etc. The monetary net growth and sectorial exposure allowed will therefore be distributed among the loan group (c) At periodic intervals, the Credit Management will evaluate returns on Credit and sectoral exposures on the basis of which it will issue directives that are aimed at ensuring compliance with portfolio expectations. 6.2 Relationship Management Operations Mangers (OMs) and other team members (Loan Officers) must credit risks and opportunities The Relationship Manager/Business Development Officer/Loan officer will prepare an annual plan detailing the level of customer contact proposed and the general strategy to be adopted for the relationship. This is required for all Group Accounts and individuals and should be filed along with the LAF and Loan Appraisal Forms Credit reference(where possible) must be obtained on all new customers and annually in the case of old customers 6.3 Collateral Inspection and Evaluation Management of secured credit requires frequent periodic evaluation of collateral held and verification of the adequacy of margins. Internal reporting is supplemented by physical inspection of the collateral. These inspections should be performed at credit initiation, and at least annually. The more volatile the price movements of the collateral and weaker the obligors financial performance, the more frequent the evaluation should be. maintain

regular contact with customers to monitor the changing environment and its effect on the

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Sample Credit Policies and Processes Manual October 2009

Outside independent appraisers should be used where we lack adequate internal collateral valuation capacity. Where tangible assets are taken as security. They must be properly insured and XYZ MFI named as loss payee. COs will be required to inspect physically, the security and support documentation pertaining to their accounts at the time of each annual review. Evidence of compliance with this requirement will be recorded on the Loan Appraisal Form. Credit Administration Department will withhold implementation of the facilities until the provisions of this clause have been satisfied. 6.3.1 Classification of Securities

Security could be classified in to possessor and proprietary. A proprietary security is one that transfers the title or the proprietary rights in the property to the creditors. It may or not include the right to take possession e.g mortgage. 6.3.2 Evaluation of Securities The adequacy and acceptability of a collateral security to a lender depends on a number of factors including. a) The nature of the credit facility sought b) The amount of the credit facility c) The duration of credit facility d) the integrity of the credit borrower 6.3.3 When to Require Security Several conditions some of which are listed below might necessitate the putting in place of collateral; Borrower is new to the MFI Borrower has erratic sales and earnings Borrower fails to clean up account upon expiration of current line facility Very high leveraged borrower with assurance to liquidate all debts to lenders Borrower has a weak secondary source of re-payment. Borrower is not in a group

6.3.4

Acceptable Collateral Group Savings Landed Property Chattel Mortgages etc.

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Sample Credit Policies and Processes Manual October 2009

6.4 Release of collateral/Security Before collateral/security can be released during or after the tenor of facility, the Operation Officer/CO must ensure that the MFI is not disadvantaged and that approval has been obtained. Releases may change the character of the facility from a secured to an unsecured facility. 6.5 Substandard and Problem Loans Recognition of credits that have deteriorated to, or are approaching problem status is a high propriety for Loan Officers. Any time there is significant adverse change in the financial or business condition of a customer, or if a customer is not meeting its business plan, all credit facilities for that customer should be reviewed promptly to determine required action. Potential problems should be identified, appropriate risk-rated and placed on Management attention in sufficient time to permit re-structure and improvement of the banks position. It is the responsibility of Loan Officers to identify promptly, credits that fall into these categories and review them with appropriate strategies and action plans to restore them to performing status. 6.6 Delinquency Management and Recovery system All credit facilities shall be disbursed in time and be regularly followed up to ensure good maintenance of the assets and efficient recoveries. For Group Loans Where a Loan account becomes irregular, it is first desirable for the CO to exercise peer pressure in recovering delinquent Loans for group guaranteed lending and to make regular visits and hold discussions with individual clients rather than using legal methods. The CO is strongly encouraged to adopt the following steps in making recovery of delinquent and overdue balances: Regular follow up (once a month compulsory) of clients by the CO at their business and residential premises. Providing statements of accounts regularly. Discussions with group members on the Loan performance of each of their members Raising the issue of default during the group meetings and ensuring that the group and subsequently the group members takes up the risk of default by one of its members

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Sample Credit Policies and Processes Manual October 2009

Meeting with clients as soon as default occurs and making an immediate visit to borrowers house or business premises as soon as default is noticed. Seizure of assets by the guarantors. For Individual Loans Regular follow up (once a month compulsory) of clients by the CO at their business and residential premises. Providing statements of accounts regularly. Discussions with the client on their Loan performance and raising issues of default during regular meetings Meeting with clients as soon as default occurs and making an immediate visit to borrowers house or business premises as soon as default is noticed. Seizure of pledged assets by the MFI 6.6.1 Follow up and Recovery For both Group and Individual Loans The officer should closely watch the following aspects of the client upon Loan disbursement: Whether loan was used as originally proposed with maximized outputs Personal and individual discipline in attending meetings and keeping to agreed obligations. Trend of production and sales in clients business. Tagging and verification of asset for insurances purpose in case of leases Change in value or location of other securities pledged by client to group. The CO shall visit all clients regularly as part of the customer care service and also to get any early signs or warning of a potential default. While visiting a delinquent client, the officer shall carefully document the discussion with them, the clients point of view on the delinquency and undertakings to specific deadlines agreed if action is required, and their attitude/mood at the time of the visit. A copy of these notes should be kept in the clients file, which can help the officer or someone else who takes over the portfolio to spot the intentions of the loan applicant if he or she is giving inconsistent promises or reasons for falling behind in his/her rental payment. An Overdue Follow Up Form will be developed to help the officer systematically analyze and document visits to a delinquent client. While visiting delinquent clients for follow up, the CO shall obtain the following information:

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Sample Credit Policies and Processes Manual October 2009

State of the clients business/asset, whether it is open full time, whether there is a significant drop in working capital (stock), whether he or she has relocated the business, and the state and presence of the items pledged as collateral. The clients acknowledgement of the exact amount that is overdue and any additional amount to be collected in penalties. Amount of cash immediately available with the client towards recovery of the amount overdue (issue receipt on the spot) and a time-bound proposal to make good the amount overdue or delinquent. The COs view of the clients proposal towards recovery. Clients prioritized alternative proposals towards loan recovery, including a mutually agreed point at which XYZ MFI shall step in and pursue its interests without further reference. Clients commitment and state of attitude to the group for group guaranteed Loans and individual members, and his or her willingness to continue with group. 6.6.2 The CO Dealing with missed payments being the person on the ground is the best placed to judge what

action would be most effective in collecting a missed payment. Group Loans For group guaranteed Loans, the group officials shall ask the client(s) who have missed a single or have made partial installment payment to explain to the group the following: Why he/she has not brought his/her installment. What plans he/she has to make good this installment. Declare his/her willingness and ability to pay the next due installments together with the installment already in arrears. Request the members to assist him/her in making the required installment. When he/she shall make good the missed installment. Outline how he/she will get the necessary cash to pay off the amount in arrears. The group meeting shall not adjourn until the matter has been resolved and is fully documented. The group may in addition decide to immediately constitute a follow-up team to visit the member to review his or her willingness and ability to continue with the group. During a missed payment follow-up visit, the follow-up team shall review the financed asset, key security or other securities that the client had pledged to the group when he or she was taking

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Sample Credit Policies and Processes Manual October 2009

the present Loan. An important objective for the visits is to obtain a verified promise of how and when the client intends to pay the missed payment. The follow-up team may decide to take away with them the financed asset, or other security pledged by the client during the visit based on their assessment of the situation. Individual Loans For individual Loans, the CO shall ask the client(s) who have missed a single or have made partial installment payment to explain the following: Why he/she has not brought his/her installment. What plans he/she has to make good this installment. Declare his/her willingness and ability to pay the next due installments together with the installment already in arrears. When he/she shall make good the missed installment. Outline how he/she will get the necessary cash to pay off the amount in arrears. The CO shall not ensure that the client explains all these at minimum and plan of action is agreed and documented. The CO shall also review the financed asset, key security or other securities that the client had pledged to the group when he or she was taking the present Loan. An important objective for the visits is to obtain a verified promise of how and when the client intends to pay the missed payment. The CO may decide to take away with them the key security, or other security pledged by the client during the visit based on their assessment of the situation. Once a client is declared in default, he or she shall repay all the outstanding Loan balance at once. In the first step to recover the loan balance, the CO shall recover an equivalent amount of the outstanding balance from his or her savings. If the total amount of the clients savings is not sufficient to cover the outstanding balance, the CO shall recover what is still outstanding from other group members savings in equal amounts enough to cover the residual balance in full. For individual borrowers, the CO shall start the process of recovering r securities pledged by the client, For group guaranteed Loans, where members have paid for a defaulter from their own savings or any other source, the CO shall take the following procedure:

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Sample Credit Policies and Processes Manual October 2009

The group shall pass a resolution to issue the client who has defaulted with a seven-day Notice of Default and Intention to Recover Debt Notice. If the client does not settle his or her outstanding Loan balance within seven days of the notice, the group shall proceed with administrative and legal proceedings to sell the securities pledged by the client to group to meet any shortages. Where the proceeds from the sale of security exceed the outstanding balance plus costs, the client shall be given back the balance after all his or her obligations to group. Where the proceeds from sale of the asset and security are less than the outstanding balance plus costs, the group shall bear the loss. In the event that a whole group defaults, the CO shall immediately inform the branch manager or immediate supervisor and take the following steps: The officer should start by discussing with selected group members or a sub-group of sympathetic member about how they could recover the outstanding debt to the group. The officer should not recover the debt from the savings of the good clients in the group until all efforts have failed. As a second step, the officer together with the loyal members should approach the local administration to ask for their help in recovering outstanding debt. Thirdly, if the problem remains unresolved, the officer should document the case and hand over the group to the Area/Branch Manager, who should consult with the companys lawyer on how to go about recovering the money and even prosecuting the client in court where necessary. Finally, the Area/Branch Manager should document and share the lessons from the group. 6.7 Loan Restructuring and Refinancing No loans shall be restructured or refinanced except under very special circumstances like in the event of hospitalization following a road accident and on the request of the Branch Manager or Operations Manager. A loan may only be restructured or refinanced IF the borrowers past and/or future cash flow is affected by an event that temporarily destroys a major income earning asset AND the customer has a steady cash flow from which the loan can be repaid. A loan may be restructured or refinanced only after a reassessment by the CO using the relevant loan application form for rescheduling and refinancing.

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Sample Credit Policies and Processes Manual October 2009

A loan shall not be eligible for restructuring or refinanced if the applicant does not have a steady cash flow from which the loan can be repaid. No loan shall be restructured or refinanced, except on the recommendation by the Operations Manager to the CEO. The CEO shall approve all loan restructuring and refinancing.

Note: Restructured and refinanced loans should be tracked separately 6.8 Portfolio reports a. As part of the process of managing Loans, the CO shall keep an accurate and up to date record of every Loan under his or her care and will regularly report clients in arrears or defaulted. b. The CO shall also develop strategies and proposals towards recovery of bad and doubtful Loans and advice the Area/Branch Manager when to provide for bad and doubtful Loans or recommend write-offs. c. Towards this goal, the officer shall ensure that all the clients under him/her maintain proper records, which he or she should regularly. d. Information to be contained in the loans and advances report MUST include: Portfolio at risk aged and any outreach indicators of import to XYZ MFI Number of active borrowers Number of active female borrowers Number of active male borrowers Number of new borrowers during the period Number of active loans Number of loans disbursed during the period Value of loan disbursed during the period Number of loans outstanding Value of outstanding loan portfolio Number of loans written off Value of loans written off Number of loans in Recovery or Recovered Value of loans in Recovery or Recovered

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Sample Credit Policies and Processes Manual October 2009

Annex 1 Portfolio Aging Report MonthDate.Year..
Number of Days Past Due 0 days(Normal) 1-30 days(Watch) 31-60 days(Substandard) 61-90 days(Doubtful) More than 90 days(Loss) Total Rescheduled/ Renegotiated loans 0 days(Normal) 1-30 days(Watch) 31-60 days(Substandard) 61-90 days(Doubtful) More than 90 days(Loss) Grand Total No. of Loans/ ACs Outstanding Loan Portfolio Required Provisioning % 1% 5% 25% Required provisioning Amount Security Held Minimum Provision % Portfolio At Risk

75% 100%

1% 5% 25%

75% 100%

Authorized Signatory: Name of Officer. Designation.. Signature Date.. Source- CBK Microfinance Regulation Guidelines

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Sample Credit Policies and Processes Manual October 2009

Annex 2 Loan Appraisal Form
Business Name: Borrowers Name Incremental Factor CO: Borrowing History Loan No: 1 2 3 *Attach all relevant passbooks Financial Statement Summary: Income (Annual) Sales Other Income Total Income Expenses Purchases Salaries Rent Utilities Transport Other Expenses Household Expenses Total Expenses Net Income Annual loan installment Debt Service Coverage (DSC) Desired DCS Ratio Min. 2. Calculation of DSC. (Annual net income/Annual loan installment) Use of loan proceeds Item XYZ MFI Funds 1 2 3 Total Project Cost Percentage % Loan Amount: Loan Term: Date of Appraisal: Loan No.

Date Disbursed:

Amount Disbursed:

Current Amount Outstanding:

Owners Funds

Total

100 %

Collateral Substitutes Business and Personal Assets Item 1. Credit History 2. Business Assets (Attach Schedule) 3. Households (Attach Schedule) 4. Business Stocks 5. Other Securities (Land, Stocks, MVs etc) Total Value Discount Rate 50% 50% 50% As per retail schedule Liquidation Value

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Sample Credit Policies and Processes Manual October 2009

6. Client Savings 7. Guarantors savings 8. Group Guarantee 20% 80% 10% of loan

N/A

TOTAL LIQUIDATION VALUE TOTAL LOAN VALUE INCLUDING INTEREST TOTAL LIQUIDATION VALUE/TOTAL LOAN VALUE (%) Guideline on completing the collateral substitute table: i) Where the client has got adequate security based on appraisal and principle of KYC, ii) Total liquidation value over total value should be at least 100% GROUP ASSESMENT: Name of group..product Year of formation Year of registration. Current membership ..Male.Female Drop outs to date Number of founder members still in the group. Average attendance Repayment rate as per latest loan status report. No. of clients with loans%investment Outstanding loan portfolio ..Total savings.(Attach group listings) Net exposure before deal..After deal... CLIENT ASSESMENT Year business started..Type of business.. No. of years in current business Past repayment record (%).(Attach statement) Meeting attendance. Saving balance.. (%) Cash collateral (Attach statement) Any lump sum PaymentAmount Deposited. Conduct of Bank account(Attach current bank statements) MARKET ASSESMENT Business location. Nature of business retail/Wholesale Main products/services. Main customers... Main suppliers. Existence of similar businesses. What periods are peak sales recorded?........................................................................... KEY RISKS: Comment on; Competition Default in the group In adequate collateral Business failure Lack of financial statements Risky sector etc. Mitigating factors E.g.; Cohesive group with adequate group structures

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Sample Credit Policies and Processes Manual October 2009

Annex 3
Class Name A. Minimal Risk Strong group guarantee mechanisms Minimal overall exposure Minimal drop outs since formation etc

Risk Classification Guide

Brief Excellence business credit Superior asset quality, Excellence capacity excellence depth. liquidity and and debt and with Guidance Extremely low risk that the facility will not be retired as agree (less than 1 in 100 probability). No reasonable impede upon terms Low risk that facility will not be retired according to its terms (less than 1 in 50 probability). No reasonably impede terms, vulnerability per will agreed could repayment but vulnerability per will agreed

coverage

management

repayment

B. Modest Risk.

Good business credits, very good asset quality and liquidity. Strong debt capacity and coverage, very good management in all positions.

vulnerabilities

conceivably arise in the future. C. Average Risk Good business credit, good asset quality and liquidity, strong debt capacity and average and good management in most positions Modest risk that facility will not be retired as agreed (less than 1 in 25 probability); from the primary

source of repayment, but clearly identify alternative source of repayment exists. Very low risk of loss or non performing status under realistic economic scenario.

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Sample Credit Policies and Processes Manual October 2009

D. marginal Risk required Below average business credit. Marginal quality. Acceptable Somewhat asset strained Marginal credit with sign-ficant risk that facility will not be retired as agred (less than 1 in 10

(management attention watch list )-Red Flag

liquidity, limited debt capacity and coverage list. some management weankness. To be put on watch

probability). No clearly identified alternative source or repayment, but low risk of loss of principal or interest under most probable Vulnerabilities, should they occur, could result in A down-grade. Tight Management for D rated critical conditions precedent to attending its portfolio quality objectives. Our exposure should be managed down except where it could be managed up to C rating within a short time

E. High Risk (Critical) Red Flags

Below average business credit. Generally undesirable business constituting an undue and unwarranted credit risk. Normal repayment jeopardy; no ultimate loss. While loss of principal and interest is not certain, current shortfalls in paying capacity of obligor and interest /or collateral cover /or principal.

Weak credit with substantial risk that facility will not be retired according to its terms(grater than 1 in 10 probability). No clearly

identified alternative in source or repayment, but low risk of loss of principal and modest risk of nonperforming status under the

probable scenario a consensual restructure is however, probable identified they vulnerabilities could should in occur, result

may result in partial loss of and Consider reversal of interest and transfer Consider restructure and collateral support. F. High risk (Very Loss of interest has occurred or is likely to occur and there is potential Collection loss in of full principal. is highly to non-accrual basis.

downgrade.

rescheduling/ additional

Weak credit substantial risk the facility will not be retired according to its terms. No clearly identified alternative source of repayment. High risk of loss of principal and

Critical)

improbable. Non-accrual status.

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Sample Credit Policies and Processes Manual October 2009

Valuation of the loan will result in the provision high riskof non-performing status which could result in substantial write-offs. G. High Risk (loss) Collection of outstanding is so doubtful that the loan does not warrant. Classification as an active Principal payment. Non-performing in excess of one year with highly remote chances of

account of the bank. Full write-off even though partial recovery may be possible in future.

Unenforceable/unidentified alternative repayment source with little or no dialogue with customer.

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