Skip to main content

Article 11: Portfolio Management and Internal Reporting

C 3/2024-STD
11.1
LFIs must ensure that Credit Risk acquired through underwriting, refinancing and other mechanisms is fully monitored, reported and mitigated when necessary. For that purpose, LFIs must develop and implement comprehensive procedures, methodologies and systems to monitor the credit worthiness of each financial instrument, each Obligor, and relevant segments and portfolios. Such monitoring must cover all financial instruments and portfolios generating Credit Risk.
 
11.2
Portfolio management must be integrated with the underwriting process so that information flows back and forth between the two processes. LFIs must demonstrate that the conclusions of portfolio management are used in the processes of risk acquisition.
 
11.3
LFIs must review the performance of individual Wholesale Credit Facilities at least annually. The rating of all Credit Facilities and Obligors must be reviewed at least on a yearly cycle. More frequent reviews can be necessary depending on the individual circumstances of Obligors and on the economic environment.
 
11.4
The monitoring process must incorporate steps to ensure that funds are used in accordance with the Facility legal agreement of each Obligor. The LFI must track the usage of the borrowed funds/financing proceeds and methodically identify their sources of Repayment. In the case of syndicated Facilities, it is the responsibility of each syndicate Lender/financier to understand the usage of funds via a monitoring process coordinated by the lead arranger.
 
11.5
One of the key objectives of the monitoring process is to identify occurrences of fund diversion; that is situations where the disbursed funds are not used for the purpose originally intended. The monitoring process must incorporate steps to ensure that funds are used in accordance with the Facility legal agreement of each Obligor.
 
11.6
Aggregation: The monitoring process must be performed at several levels of portfolio aggregation, so that segmentation leads to homogeneous pools of Credit Facilities with common risk drivers. LFIs incorporated in the UAE, which have branches and/or Subsidiaries, must capture and consolidate a group-wide view of Credit Risk. LFIs must implement robust systems and methods to aggregate Credit Facilities across the key risk drivers relevant to each LFI’s portfolio, including but not limited to, Obligor segments, rating grades, product types, collateral type, geographies, industries, Credit Facility maturity and Obligor metrics (e.g. LTV, DSCR, gearing, leverage).
 
11.7
Data gathering: LFI must implement reliable and timely data processes to support appropriately portfolio management. At a minimum, LFIs must implement the following:
 
a.
Robust systems and processes to collect and aggregate internal data in order to convey an accurate representation of Credit Facilities arising from all instruments across the organisation.
 
b.
Robust systems and processes to collect, aggregate and process external data to support the accurate measurement of Credit Risk, including but not limited to, up-to-date financial information (including sector-specific financial performance), collateral data (including indices relevant to the collateral type) and Obligors’ performance against legal covenants, where applicable. The system should be able to present the portfolio’s Credit Risk Profile across a variety of underlying risk drivers, including those referenced in Article 11.6.
 
c.
Historical Default rates and recovery rates must be collected for all material segments in order to support the accurate and prudent estimation of provisions.
 
11.8
Analytics: LFI must implement adequate methodologies, models and analytical tools to identify and measure Credit Risk regularly at several levels of aggregation and segmentation. This assessment must rely on Obligors’ probability of Default, loss given Default, the size of their Credit Facility upon Default and the estimation of collateral values.
 
11.9
Reporting: A robust reporting mechanism must be put in place to analyse the characteristics of credit portfolios and to communicate the observations and conclusion of credit reviews and analysis. Management information must be provided on a frequent and timely basis to the Board and Senior Management, in formats suitable for their use and understanding. As part of this the Board must be informed on: the Credit Risk Profile’s trend compared to the previous reporting period; and the change in underwriting standards, either through policy changes or actual practice, over time.
 
11.10
Risk mitigation: Upon the review of the performance of individual credit instruments and portfolios, LFIs must have a robust process to discuss observations, escalate concerns and implement risk mitigating actions and corrective actions, such as an additional collateral request, a rating downgrade, Credit Facility restructuring, liquidation, sell-off, hedging, portfolio rebalancing, or any other action. Such process must be rigorously documented.
 
11.11
Monitoring: LFIs must ensure the monitoring of the performance of each Credit Facility and Obligor upon restructuring. This process must be based on pre-defined indicators and limits specific to each Restructured Credit Facility. All distressed Restructured Credit Facilities must be subject to close monitoring as long as they remain distressed but not less than a minimum period of 12 months, supported by regular analysis and reporting. For Retail Obligors, LFIs can implement such enhanced monitoring of restructured Facilities at portfolio levels.