2.

CREDIT RISK MANAGEMENT

2.1. DEFINITION OF CREDIT RISK

The Enat Bank has adopted same definition of the Basel Accord, which is
"credit risk is the risk of default due to the fact that the Bank’s borrowers are
either unable to perform their obligation or unwilling to perform obligations in
line with the agreed terms resulting in economic loss to the Bank."

2.2 . CREDIT RISK MANAGEMENT

Credit risk management is the practice of mitigating loss due to a borrower's
failure to make payments on any type of debt by understanding the adequacy
of both a bank's capital and loan loss reserves at any given time.

2.3. RESPONSIBLE ORGANS ON CREDIT RISK MANAGEMENT

While managing credit risk, there are different organs, which have different
kinds of responsibilities as indicated here below:

2 .3. 1. THE BOARD OF DIRECTORS

The Board of Directors shall:
a) Approve broad business strategies and policies that govern or influence
the management of credit risk of the bank;
b) Establish appropriate organizational structure for the proper functioning
of credit management at all levels and it is being understood that credit risk
management will be a prime function of the Bank;
c) Ensure that adequate human and physical resources are put in place for
the proper management and follow up of loans and advances;
d) Set out the banks' tolerance for credit risk in the context of types of
credits, economic sectors, and maturities ;
e) Establish goals for credit quality, earnings and growth;
D Establish clear lines of delegation _:wit ed it - rela te d delegation of
authority and approval levels;
g) Ensure that senior management has a full understanding of the credit
risk incurred by the bank;
h) Ensure that the bank's management adopts procedures to ensure that
the objectives of the credit risk management strategy and policies are achieved;
i) Ensure that credit risk is adequately measured, monitored and
controlled;
j) Effectively communicate the strategies and policies to all relevant bank
personnel; and
k) Periodically re-evaluate significant credit risk management policies as
well as overall business strategies that affect the credit risk exposure of the
bank;
1) Specify the content and frequency of management reports to the board.

2.3.2. BOARD RISK AND COMPLIANCE COMMITTEE

The Board Risk and Compliance Committee is responsible:
a) Reviewing and recommending credit risk management strategies, policies
and credit risk tolerance limits for BoD Approval;
b) Reviewing and assessing adequacy of credit risk management policies
and framework in identifying, measuring, monitoring and controlling credit
risk and the extent to which these are operating effectively;
c) Ensuring infrastructure, resources and systems are in place for credit
risk management;
d) Ensuring that the staff of the Bank is responsible for implementing
credit risk management system and perform those duties independently to
the Bank's risk taking activities;
e) Reviewing management's periodic reports on credit risk exposure,
portfolio composition, risk event and credit risk management activities.
f) Deliberate on credit risk measurement models and standards;
g) Deliberate on reports from management concerning credit risk and
compliance issues in order to oversee these risks and assess their effect on
capital levels;
h) Ensure that credit risk is managed within the tolerance level of the Bank;
review the Bank’s actual credit risk profile against its risk appetite as well as
any exceptions to risk appetite as reported by the Executive Management.
i) Monitor credit risk compliance in line with the Bank's Compliance
j) Review the Bank's loans & advances and provisioning m line with
NBE's Directive SBB/43/2008;

2.3.3. BOARD LOAN REVIEW COMMITTEE

The board of directors shall be responsible under its loan review committee for
monitoring compliance with the credit risk management strategy. This is
usually accomplished through periodic loan review reports originating from
Risk and Compliance Management Department of the bank. The reports shall
provide sufficient information to satisfy the board of directors that Enat bank
is complying with its credit risk management policies and NBE directives. The
Loan Review committee shall review loans in line with NBE directives as
indicated below:
a) Conduct/require independent reviews of credit operations to assess
whether the bank's policies and procedures are being properly followed on
ongoing basis;
b) Review exposures and policies regarding credit to related parties as
defined by the NBE directives ;
c) Review exposures and policies regarding credit to companies controlled
by the bank through ownership or management structure;
d) Review all credit exposures that are in excess of the cred it approval
authority delegated to management;
e) Review all restructured exposures;
fj Review trends in portfolio quality and the adequacy of the bank's provision
for credit losses;
g) Ensure compliance with all relevant laws, regulations and NEE directives.

2.3.4. THE EXECUTIVE MANAGEMENT

The Executive Management shall:
a) Develop procedures and practices that facilitate the implementation of
the broad credit risk management strategy and policies adopted by the board;
b) Undertake the management of credit risk in accordance
the delegated authority developed by the board
c) Develop measures that will facilitate the measurement, monitoring and
control of credit risk;
d) Implement a system of internal controls that will serve as an effective
check over the measures used to manage credit risk;
e) Ensure that internal audit reviews the credit risk management system on
an on-going basis;
f) Monitor the quality of the credit portfolio and ensure that the portfolio is
classified in line with the regulatory directives on provisioning, uncollectible
exposures written off and loan losses provisions are accounted in line with the
regulatory requirements;
g) Ensure that internal audit reviews are conducted on an ongoing basis
and assess the credit portfolio and credit risk management system;
h) Develop lines of communication to ensure the timely dissemination of
credit risk management policies and other credit risk management information
to all individuals involved in the process; and
i) Develop an effective system of reporting to the board on issues related to
the management of credit risk.

2.3.5. RISK AND COMPLIANCE MANAGEMENT DEPARTMENT

The Risk and Compliance Management Department shall:

a) Develop, propose and review periodically credit risk limit along with
various lines, including tenure, product, industry and communicate same to
the Credit Management Department of the Bank;
b) Review credit policies, methodologies, guidelines and procedu res;
c) Evaluate credit risk classification criteria and setting loan loss
prov1s10ning requirement notwithstanding to the NBE's directives with respect
to the same;
d) Evaluate and ensure loan-loss provisioning;
e) Identify, evaluate/measure, control and monitor credit risk;
f) Ensure that the Bank has complied with all applicable laws, directives
and regulations in relation to credit risk management of the Bank;
g) Liaise with the supervisory organ and other financial institutions with
respect

2.3.6. THE CREDIT MANAGEMENT DEPARTMENT

The Credit Management Department shall:
a) Be in charge of the day-to-day credit functions of the Bank;
b) Ensure that current credit information is requested and received for the
requested loan;
c) check the technical, procedural and substantive contents of the
credit proposals;
d) make detailed analysis on credit proposals and present same to
the appropriate Credit Committee with its own recommendations for approval;
e) follow-up and ensure timely repayments of loans as per the
contracted
agreement;
f) ensuring the banks credit quality in collaboration with the Risk and
Compliance Management Department;
g) monitor credit decisions;
h) manage the credit portfolio of the Bank;
i) Prepare and compile various reports.

2.4. CREDIT RISK PHILOSOPHY

The management of credit risk has always been a fundamental element of the
Ban k's business execution although in recent times local and international
events have, increased the expectations for the management of risk in the
Bank. The Bank's credit risk management approach is an approved Bank wide
risk management methodology and philosophy to ensure adequate and effective
risk management. In addition, the methodology also provides regulatory
principles that, together with the risk management approach, will continue to
ensure optimum return on shareholders' equity through the application of the
following core principles:

• The Bank is willing to assume credit risk limits as stipulated m this

risk program;
• Clear assignment of responsibilities and accountabilities;
• Common Ban k-wide risk management framework and process;

• The identification of uncertain future events that may influence the

achievement of business plans and strategic objectives; and
• The integration of risk management activities within the Bank and across
its business lines.

Accordingly, one of the objectives of the risk management philosophy is to

ensure that mitigating strategies are geared to deliver reliable and timely risk
management information. Enat Bank's approach to risk accepts and holds
risk management limits as a core competency that allows the business to
optimize risk taking through objectivity and transparency that will ensure
effective and efficient risk valuing and optimized returns within a
chosen risk appetite.

2.5. STRATEGY, POLICY AND PROCEDURE OF THE CREDIT RISK

MANAGEMENT

a) The bank's credit strategy shall clearly determine its risk appetite. Once
it is determined, the bank shall develop a plan to optimize return while keeping
credit risk within the predetermined limits. Specifically, the credit risk strategy
should clearly outline the following:
• Should reflect the general philosophy of this risk program as has been
indicated in the introductory part and the tolerance limit established by board
and seniors management;
• The bank's plan to grant credit based on various customer segments and
products, economic sectors and geographical locations.
• Target market within each lending segment, preferred level of
diversification/concentration.
• Pricing strategy.
b) The credit policy and procedure of the bank shall be in compliance with
the laws, regulations and directives of the country and the supervisory organs
that are applicable to the banking industry;
c) The policy and procedure shall cover -.adequacy of measuring,
monitoring
d) The credit policy and procedure shall clearly specify and aim to obtain an
in depth understanding of its clients, their credentials and businesses in
order to fully know their customers.
• Ensure the "Know Your Customer" principle;
• Ensure that enhanced customer due diligence is made;
• Ensure early recovery or resolution of granted loan problems;
• Ensure that profitability and satisfactions of stakeholders are together
. .
mcreas1ng.
e) The policy and procedure shall specify:
• Credit products and tenure and customer classification;
• New products development and approval;
f) The policy and procedure shall pinpoint the authority, responsibility and
accountability of the Board of Directors, the President and all credit
performers;
g) The policy and procedure shall identify individual loans to a related party
as well as the total amount of such loans and to monitor and report on such
loans through an independent credit review process;
h) The policy shall have sound and prudent credit appraisal, approval and
decision-execution process:
• The purpose and source of repayment, credit worthiness, credibility,
previous track, future cash flow projection, terms & conditions of the credit,
adequacy and enforceability of collateral or guarantees, current risk profile of
the counterparty, sensitivity to economic and market developments and
borrower's business expertise and management capability, and capacity of the
borrowers;
• Independency, rationality, competency, experience and integrity credit
approving teams/ individuals;
• Way of communication and preconditions for appropriate execution of
the credit disbursement.
i) The policy and procedure shall incorporate Loan follow-up and product
pricing:
• To ensure and enhance end users, repayment and customer satisfaction;
• To draw action plan for early resolution of problems on the credit
granted.
j) The policy and procedure shall address recovery and write-off matters:
• To resolve the non-performing loans, there should be an independent
loan recovery team;
• The criteria shall be effective enough and clear to address write-off.
• The policy and procedure shall clearly define the exceptions and
deviations of the credit system with the approval level.
K) The Bank's granting procedures should include identifications mechanisms
for connected counterparties that exhibit financial interdependence by way of
common ownership, common control or other connecting links(for example,
common management, familiarties)
1) The Bank should establish credit limit;
M) The Bank should establish limits for groups of connected counterparties
that aggregate different types of on and off balance sheet exposure
2.6. CREDIT RISK MITIGATION
The major credit risk mitigation mechanisms are:
• The Bank shall put into practice cash flow-based lending. The primary
protection against losses is the ability and willingness of the customer to repay
the borrowings. Collateral shall never be a substitute for creditworthiness.
• The Bank may extend fully or partially unsecured loans based on the
result of credit and risk analysis/appraisal reports. In this regard, fully
unsecured loan shall mean loans and advances provided without any
collateral, whereas partially unsecured loan shall mean loans and advances
provided against below a certain margin of collateral values to be set in the
credit procedure.
• Customers with viable business, creditworthy and clean track records
are eligible to borrow unsecured loans and advances.
• However, based on the level of risks associated with the business and/or
the customer, collateral shall be considered as a risk mitigating factor, after
proper analysis/ appraisal of the credit.proru?_sal.
• Include the acceptability of various forms of collateral, procedures for the
ongoing valuation of such collateral, and a process to ensure the collateral is,
and continues to be, enforceable and realizable; and
• With regard to guaran tees, banks should evaluate the level of coverage
being provided in relation to the credit-quality and legal capacity of the
guarantor.

2.7. AUTHORITY FOR LOAN APPROVAL

I. The discretionary lending authority limits of the Senior Management
Credit Committee
a. All credit facilities above the Branch Credit Committee and Head Office
Credit Committee limit, chaired by the Bank's President
b. All clean loans

II. Head Office Credit Committee(Chaired by V/President Operat io ns )

a. Facility renewals up to Birr 10 million approved by the SMCC
b. Administrative renewals of facilities for a maximum of
two months
c. Handles the appeals of customers on credit requests in itia lly decided
by the branch
III. Branch Credit Committee(Which will be Chaired by the respective
Branch Managers)
3.1. . All Branches
a. All bid bond guarantee facilities secured against only cash and
building.
b. Other guarantees against only cash and building up to Birrl million .

c. The total guarantee approved by the branch shall not exceed 10 million
at any one time.

3.2. Special Branch

a. Only term loan against building collateral up to birr 500,000 the total
exposure of the branch shall not exceed Birr 5 million at any one time
3.3. Grade A Branches
a. Only term loan against building collateral up to Birr 400,000 the total
exposure of the bra nch shall not exceed Birr 4 million at any one time
3.3. Grade B Branches
a. Only term loan against building collateral up to Birr 200,000 the total
exposure of the branch shall not exceed Birr 2 million at any one time
3.3. Grade C Branches (has not been set a limit)

v. The Discretionary lending authority limits of Women Financing Scheme

Credit Committee (WFSCC)
Up to 300,000 for women applicants that shall be entertained through the
Women Financing Scheme
VI. The Discretionary lending authority limits of Individuals.
a) President-Excess drawing above one million up to three million.
b) V/President Operat ion s -Exce s s drawing above 200,000 up to one
million.
c) Director, Credit Management Department-Ex ces s drawing above
branches' limit up to 200,000.
d) Branches
• Grade 'A' Branch Excess drawing up to Birr 50,000. The total exposure
of the branch should not exceed Birr 500,000 at any one time.
• Grade 'B' Branch-Excess drawing up to Birr 20,000. The total exposure
of the branch should not exceed Birr 200,000 at any
• Grade 'C' Bra nch-Exces s drawing up to Birr 10,000. The total exposure
of the branch should not exceed Birr 100,000 at any one time.

2.8. THE CREDIT RISK MANAGEMENT PROCESS

It is a known fact that risk management is a continuous process to be

performed by individuals/ teams through the previously defined logical steps.

2.8.1. IDENTIFICATION OF CREDIT RISK

As defined in the outset, credit risk has the risk of default resulting from the
borrower's inability or unwillingness to perform obligations as per the agreed
conditions. The factors that cause default could, however, be internal or
external. With regard to this, the default may happen due to various reasons,
such as the following:
a) Inadequate loan granting process
1. Competency of individual s / Teams;
11. Integrity of individuals / Teams;
111. Insufficient Information
b) Lack of continuous and enough follow-up;
c) Lack of proper documentations;
d) Diversion of fund by borrowers from the predetermined purpose; and
e) Incompetency of business management, etc.

The identification process of credit risk at the transaction level is prima rily
done by the performers upon close interaction with the Risk and Compliance
Management Department (RCMD).

2.8.1.1.1. CREDIT RISK IDENTIFICATION TECHNIQUE

The following methods shall be used to identify the Credit Risk:
a) Internal management reports;
b) Monthly and quarterly credit reports;
c) Monthly and quarterly credit follow up reports;
d) Quarterly loan review reports; and
e) Monthly return reports from the branches.

2.8.2. MEASUREMENT OF THE CREDIT RISK

A bank's ability to measure its credit risk depends on the quality, timeliness
and availability of information it has. Furthermore, the skill or expertise that
the bank possesses and the methodology applied in manipulating the
data/information determines the accuracy of the measurement process at
large. The following meaning shall be employed for the purpose of credit risk
measurement:
a) Analyzing and classifying the Bank's on and off-balance sheet exposures
in different risk category (e.g. full risk, medium risk and low risk. This should
be also indicated in the Bank's Credit management procedure;
b) Portfolio analysis: The need for credit portfolio management emanates
from the necessity to optimize the benefits associated with diversification and
to reduce the potential adverse impact of concentration of exposures to a
particular borrower, sector or industry.
c) Ratio Analy s is : Ratio analysis is one of the techniques or methods to
measure the credit risks. The credit quality of the bank can be assessed using
the following ratios:
• Non-Performing Loans to Total Outstanding Loans& Advances(NPLratio)
• Total Provision to NPLs Ratio
• Top twenty borrowers to total loans ratio
• Loan Loss Provisions to Total Loans Ratio. This ratio will give a useful
insight into the quality of a bank's loan portfolio.
• Provision for Loan Loss to Non-Perf9rrning Loans
• Weighted average risk grade of lh c-'p or tf--o-- li

• Total Loans to Total Assets

• Total loans to total capital
d) Loan Review: Loan review plays a critical assurance function within a
bank, providing transparency to both the Senior Management and the Board of
Directors on how credit risk is being managed. An effective loan review process
can provide and an independent, objective view of the level of credit risk bemg
accepted by the bank serves as an "early warning" indicator as the risk
increases.
The identified and then measured risk factors shall be controlled after
appropriate in-built controlling mechanism is placed. In light of th is , the
controlling mechanism begins with revising and evaluating the existing
controlling system and the system by itself must be rated as:
• Insufficient and inadequate;
• Excessive more than needed; and
• No control at all.

Cognizant of the above facts and in line with continuous identification and
measurement processes the controlling aspect of credit risk management
continues too. Besides, an action plan shall draw and placing mitigating
mechanism for those risks should be a permanent task.

2.8.2.1. CREDIT RISK LIMITS

Banks need to take analyzed and calculated risks and set limits that enable
to spread its exposure across individual borrowers, to enforce compliance with
the bank's diversification strategy and for supervisory control. The Bank's limit
shall encompass the following g, among other things:
I. Credit Limit Economic Sector

S/No Economic Sector Items Tolerable Limits Maximum

Allowable Deviations Maxi mum Tolerable
Limit s
1 Agriculture 1 4 5
2 Industry 7 8 15
3 Domestic Trade Servicc(DTS) 16 7 23
4 Export 17 8 25
•-
5 Import 22 8 30
6 Hotel and Tourism 4 3 7
7 Transport and Communication 4 6 10
8 Building and Construction 26 9 35
9 Others 3 2 5
Total 100

II. Credit Limit by Tenure

S/No Description of Tenure Limits
1 Short-Term Loans 40%
2 Medium-Term Loans
60%
3 Long-Term Loans
Total 100%

III. Other Limits

S/No
1
2 Description of Tenure
Loan to Total asset ratio NPL Ratio Limits 70% 5%
3 NPL to Total Capital ......... 2 0 %
4 Special mention loan to total Loa n - : ' 20%
5 Large borrowers loans(> 10% of total loan) to total Capital 200%
6 Large borrowers loans(> 5% of total loan) to total Capital 200%
7 Loans and advances with arrears 40%
8 Geographic Regions, City braches, 80% of the total
portfolio and 20% for the outlaying branches;
Ratio 80:20
9 Class of security More than 90% secured and the maximum 10%
is on clean basis
10 Associated borrowers Not more than 35% of the
Bank's Capital
Total
IV. Overdraft Facility limit
The total outstanding balances of overdraft credit facilities shall not exceed
25% of the total outstanding loans and advances of the bank at any given time.
V. Revolving loan limit
The total outstanding balances of revolving credit facilities shall not exceed
10% of the total outstanding loans and advances of the bank at any given time.
VI. Clean loan limit
The total outstanding balances of clean loans shall not exceed 15% of the total
outstanding loans and advances of the bank at any given time.
VII. Excess Drawing Limit
The total excess drawing limit of the Bank shall not exceed 1.5% of the total
outstanding loan and advance of the Bank at any one time

VIII. Credit Limit for Single Borrower and Related Party

The bank shall be always control the position of loans and advances as per the
NBE's directive No.SBB/53/ 12.
a) Single Borrower Limit
The aggregate sum of loans or advances extended or permitted to be
outstanding directly or indirectly by Enat Bank to any on-e p...erson,
who is not related to Enat
Bank, shall at no time exceed 25% of the tota l,capital the bank.
b) Related Party Limit
1. The aggregate sum of loans or advances extended or permitted to be
outstanding directly or indirectly to one related party at any one time shall
not exceed 15% of the total capital of the bank.
ii. The aggregate sum of loans extended or permitted to be outstanding
directly or indirectly to all related parties at any one time shall not exceed 35%
of the total capital of the bank;
iii. For groups of connected counter parties that aggregate different types of
on and off balance sheet exposure shouldn't exceed 35% of the Bank's capital;
1v. Enat Bank S.C. shall not extend loans to related parties on
preferential terms with respect to conditions, interest rates and repayment
periods other than the terms and conditions normally applied to other
borrowers.
v. However, the following types of loans or extensions of credit shall not be
subject to the credit limit prescribed in this section:
a) Loans fully secured by cash collateral; and
b) Loans fully secured by cash substitute.

2.8.3. MONITORING OF CREDIT RISK

Monitoring credit risk includes producing of reports to the concerned organs on
the status and risk exposure level of the bank. The monitoring process of credit
risk incorporates, among other things:
a) Monitoring the credit risk level of the bank in light of the approved
credit risk
limits;
b) Monitoring the Bank's credit process in line with the regula tory
requirements;
c) Monitoring potential sources of inherent credit risk that could arise from
off balance sheet items; and
d) Monitoring adverse impacts of other risks on the credit risk.

2 .8.3.1. REPORTING
Risk and Compliance Management Department generates reports which are
produced based on the needs of different end users for decision making and
review. Accordingly the following are indicating the reporting process which is
expected to be deliberated within 45 days after the final date reporting .date:
SN Types of Report Producer Reporting Period End User
1. Risk & Compliance
Management Report Risk & Compliance Management Department
Quarterly BOD, NBE, Executive Management
2. Credit Review Report Risk & Compliance Management
Department Quarterly BOD, NBE, Executive Management

2.9. INTERNAL RISK RATING

Internal risk ratings are an important tool in monitoring and controlling credit
risk. In order to facilitate early identification , the ban k 's internal risk
rating system shall be responsive to indicators of potential or actual
deterioration in credit risk e.g. financial position and business condition of the
borrower, conduct of the borrower's accounts, adherence to loan agreements,
value of collateral, etc. Credits with deteriorating ratings shall be subJect to
additional oversight and monitoring, for example, through more frequent visits
from follow-up officers and inclusion on a watch list that is regularly reviewed
by senior management.

The ratings assigned to individual borrowers or counterparties at the time

the credit is granted must be reviewed on a periodic basis and individual
credits should be assigned a new rating when conditions either improve or
deteriorate and then upgrading/ downgrading/ maintaining the existing level
depending on the performance of the customer.

Ensuring the adequacy of the system in categorizing credit portfolio by credit

characteristics and risk rating 1s mandatory to establish and implement
comprehensive risk program in the Bank. This principally depends on the
strengthen of the Bank's Credit Management and Risk and Compliance
Management functional departments. Above all, the Ban k's BoD Risk and
Complian ce and Loans Review subcommittee discharging proper oversight role
under the framework of the full board can ensure the adequacy of the Ban
k's systemic categorizing credit portfolio by credit characteristics and risk
rating.
2.10. . STRESS TESTING
Credit stress testing plays a critical role in assessing the potential impact of
a range of low probability and high impact severity circumstances on the
bank's overall credit and liquidity risk profile. The stress testing shall be
performed by the Risk and Compliance Management Department and the
credit stress testing shall be performed:
a) Under different scenarios-that is, normal and stress situations like the
percentage increase in NPLs (by 10%, 30% and 50%) and default by large
borrowers (top 1st , top 211c1 and top 5). The underlying
assumptions are income before tax is assumed, static balance sheet; quarterly
NBE recovery rate is used. This is to sec its impact on provisioning and earning
& capital.
b) Based on the regulatory requirements;
c) Under an anticipated future strategy;
d) ln line with the approved ratios, limits and matrices;
e) Based on the sensitivity analysis.

The output of the tests shall be reviewed periodically by semor management

and appropriate action taken in cases where the results exceed agreed
tolerances.

2 . 11. . CREDIT DECISION ON EXCEPTIONS AND DEVIATIONS

2 . 11. 1. DEFINITION OF EXCEPTIONS AND DEVIATIONS

Exceptions shall mean that loans and advances approved by variations from
the credit process procedure. The nature of the loan request or issues raised
therein is, however, within the spirit of the credit procedure of the Bank.
Deviations shall mean that loan requests which have not covered m the credit
procedure of the Bank. The nature of the loan request or issues raised therein
is without or beyond the spirit of the credit procedure manual.
2.11.2 APPROVAL AND LEVEL OF EXCEPTIONS AND DEVIATIONS
a) Loans and advances approved on exceptions and deviations shall be
limited based on the level of the risk exposures.
b) Loans and advances to be approved by exception from the credit
procedure shall be decided by the next higher Credit Approving Committee.
Such decisions shall be justified with sound reasons and must, however, be
reported to the President on a quarterly basis.
c) Whereas loans and advances to be approve by deviation shall be referred
to the Board of Directors for appropriate directions or inclusion of policy
provisions. So that the concerned credit approving committee or the President
will consider the request accordingly.
d) Exception reports shall be produced every month and reviewed by the senior
Management Credit Committee.
The Board shall also review "exception" reports in its quarterly loan review.
e) If the amount of exception is high, the Board, upon analysis and
recommendation by the Management, shall reconsider the bank's tole ra n ce
for risk and subsequently revise the bank's credit.

2.12. CREDIT FILES

The credit files should include all of the information necessary to ascertain the
current financial condition of the borrower or counterparty as well as sufficient
information to track the decisions made and the history of the credit.
2.13. MANAGEMENT INFORMATION SYSTEM

The availability of robust management information system is the most

important pre requisite for the identification of portfolio, segmenting a portfolio,
diversifying risk and monitoring portfolio risks. Best experiences, in this
regard, shows that the MIS database should include both on- and off-balance-
sheet credit exposures. If a bank lacks adequate data on each loan or does not
possess a system to "slice and dice" the data for analysis, the Management's
ability to manage the loan portfolio might be compromised.
The Bank shall, therefore, have adequate, accurate and timely management
information system, which encompasses at least the following:
a) Overall information on the bank's credit exposure to the:
1. Economic sector and specific industry;
11. Product and geographic regions; and
111. Single borrower and group-related parties.
b) The system should provide credit information on a regular basis; and
c) The information to be provided shall be easy for updating.

2.14. INTERNAL CONTROLS

In order to ensure an effective risk management process, there should be an

internal audit function and that internal audit function should perform
periodic checking on whether the credit risk management system is properly
implemented and the established policies and control procedures in respect of
risk management arc complied with.

Internal control for credit risk includes:

• A strong control environment;
• Adequate process for identifying and evaluating credit risk;
• The establishment of control activities such as policies and procedures;
• Adequate information systems; and,
• Continual review of adherence to established policies and procedures.
• Adequate and effective segregation of duties within
the credit management and administration systems.
• Clear and independent internal credit inspections or audits;
• Establishing and implementing_ efficient and effective
credit
• Adequate and updated documentation (e .g . observance of co n tra c tu a
l obligation and legal covenants and maintenance of collateral);

Internal Audit function organ of the Bank should be structured and organized
principally to confirm to all stakeholders of the Bank the following major
responsibilities as commented on the Bank's draft risk program document by
NEE:
l. Credit have been granted in compliance with the Bank' credit policies
and procedures;
2. Periodic reports on all the exposures are available to senior management
and are submitted to the Board;
3. Weaknesses in the credit risk management process are identified
and reported to the board;:
4. Exceptions to established policies and procedures are reported to the
Board