sefa CREDIT PROCEDURES
BY
Credit Risk Unit
2014
TABLE OF CONTENTS
1.
CREDIT AND LENDING RISK – KEY PRINCIPLES ........................................................................................... 6
2.
APPLICATION PROCESS – NEW CLIENT RELATIONSHIPS ............................................................................ 6
3.
4.
2.1.
Overview........................................................................................................................................... 6
2.2.
Early risk review................................................................................................................................ 7
DUE DILIGENECE .......................................................................................................................................... 8
3.1.
Application documents..................................................................................................................... 9
3.2.
Risk analysis .................................................................................................................................... 11
3.2.1.
Institutional and management capacity assessment ............................................................... 11
3.2.2.
Source and application of funds............................................................................................... 12
3.2.3.
Structurally sub-ordinated cash flows...................................................................................... 12
3.2.4.
Market and competitor analysis .............................................................................................. 12
3.2.5.
Financial strength of borrower and cash flow analysis ............................................................ 13
3.2.6.
Validation of cash flow assumptions and sensitivity analysis .................................................. 13
3.2.7.
Technical viability and soundness ............................................................................................ 14
3.2.8.
Environmental impact .............................................................................................................. 14
3.2.9.
Socio-economic impact ............................................................................................................ 14
3.2.10.
Legal analysis ............................................................................................................................ 15
3.3.
Credit risk ratings............................................................................................................................ 15
3.4.
Facility terms and conditions/covenants ....................................................................................... 16
3.4.1.
Terms and conditions ............................................................................................................... 16
3.4.2.
Covenants ................................................................................................................................. 16
3.4.3.
Tenor ........................................................................................................................................ 17
3.4.4.
Interest rates ............................................................................................................................ 17
3.4.5.
Initiation fees ........................................................................................................................... 17
3.4.6.
Grace period ............................................................................................................................. 18
MANAGEMENT OF COLLATERAL ............................................................................................................... 18
4.1.
Overview......................................................................................................................................... 18
1
5.
4.2.
Valuation of collateral .................................................................................................................... 19
4.3.
Guidelines for the revaluation of collaterals .................................................................................. 20
4.3.1.
Valuation methodologies ......................................................................................................... 20
4.3.2.
Frequency of valuation............................................................................................................. 20
4.3.3.
Revaluation of collateral .......................................................................................................... 21
4.4.
Monitoring and reporting of collateral .......................................................................................... 21
4.5.
Realisation of collateral .................................................................................................................. 21
4.6.
Administration of collateral............................................................................................................ 21
4.7.
Release of collateral ....................................................................................................................... 22
APPLICATION OF CREDIT RISK RATINGS ................................................................................................... 22
5.1.
Overview......................................................................................................................................... 22
5.2.
Definition of the master credit rating scale ................................................................................... 22
5.2.1.
Rationale and function of a master credit rating scale (‘the master scale”) ........................... 22
5.2.2.
The master scale mapping ....................................................................................................... 22
5.3.
5.3.1.
Control mechanisms for sefa’s credit risk rating systems .............................................................. 24
sefa credit models – a phased delivery .................................................................................... 24
5.4.
Key risk principles, governance and directives covering the credit risk rating activities ............... 24
5.5.
Credit risk rating – a key risk management mechanism and principles ......................................... 24
5.6.
Mandatory credit risk rating is required for all credit transactions ............................................... 25
5.7.
Approval of credit ratings ............................................................................................................... 25
5.8.
Components of a credit risk model ................................................................................................ 25
5.8.1.
The key risk components of a credit risk model ...................................................................... 25
5.8.2.
The estimation of the key risk components of a credit model and the calculation of expected
loss (EL)..................................................................................................................................... 26
5.9.
Risk of obligors in the origination stage of a credit submission ..................................................... 26
5.9.1.
Procedure for recommending a credit risk rating .................................................................... 26
5.10.
Input of information into the model .............................................................................................. 27
5.11.
The mandatory use of a standardised ratings output template .................................................... 27
5.12.
Recommendation of a risk rating ................................................................................................... 28
5.12.1.
Override of a recommended risk rating ................................................................................... 29
5.12.2.
The recordal of an override...................................................................................................... 29
2
5.13.
6.
5.13.1.
Ongoing monitoring and review of credit risk ratings – an overview ...................................... 29
5.13.2.
Formal clients and ratings reviews (annual) ............................................................................ 30
5.13.3.
Earlier reviews/credit risk ratings based on changed risk circumstances................................ 31
APPROVAL AUTHORITIES .......................................................................................................................... 31
6.1.
7.
8.
Post approval negotiations and facility documentation ................................................................ 31
6.1.1.
Approval record........................................................................................................................ 31
6.1.2.
Signing of facility agreements .................................................................................................. 32
6.1.3.
Validity periods......................................................................................................................... 32
DISBURSEMENT OF FUNDS ON LOAN ACCOUNTS .................................................................................... 33
7.1.
Overview......................................................................................................................................... 33
7.2.
Key principles.................................................................................................................................. 33
7.3.
Disbursement preparation ............................................................................................................. 34
7.4.
Disbursement ................................................................................................................................. 35
7.5.
Suspension of disbursement on problematic loans ....................................................................... 35
7.6.
Amendment of disbursement schedule ......................................................................................... 35
7.7.
Raising of upfront fees ................................................................................................................... 35
7.8.
Efficiency of the disbursement process ......................................................................................... 36
7.9.
Documentation and record keeping .............................................................................................. 36
ONGOING MONITORING AND REVIEW .................................................................................................... 37
8.1.
Overview......................................................................................................................................... 37
8.2.
Transfer criteria .............................................................................................................................. 37
8.3.
Formal annual review ..................................................................................................................... 38
8.4.
Divisional review register ............................................................................................................... 38
8.4.1.
9.
Annual reviews of credit risk ratings .............................................................................................. 29
Facility availability period ......................................................................................................... 38
FORMAL ANNUAL REVIEWS ...................................................................................................................... 38
9.1.
The formal annual review process ................................................................................................. 38
9.1.1.
Annual review submissions to be timely.................................................................................. 38
9.1.2.
Mancom can set a requirement for a more frequent cycle of reviews ................................... 39
9.1.3.
The waiving of a formal annual review .................................................................................... 39
3
9.1.4.
9.2.
Requirements for a development impact assessment at formal review ................................. 39
Documentation to be submitted for a formal annual review process in the case of a distressed
client ............................................................................................................................................... 39
10. ANNUAL REVIEW ANALYSIS APPROACH ................................................................................................... 40
10.1.
Obligor’s future orientation – analysis and evaluation approaches .............................................. 40
10.2.
Review of terms, conditions and covenants .................................................................................. 40
10.3.
Review of collaterals and values .................................................................................................... 40
11. REPORTING OF CREDIT AND EQUITY PORTFOLIOS (INCLUDING DEVELOPMENT IMPACT
ASSESSMENT)............................................................................................................................................. 41
11.1.
Overview – purpose of process ...................................................................................................... 41
11.2.
Divisional reporting Framework ..................................................................................................... 41
11.3.
Divisional reporting framework...................................................................................................... 42
12. MANAGING PROBLEMATIC EXPOSURES – WORKOUT AND RESTRUCTURING........................................ 42
12.1.
Overview......................................................................................................................................... 42
12.2.
Procedure regarding the nature, extent and timing of WRU’s, involvement in clients ................. 43
12.3.
Formal process for handover to WRU ............................................................................................ 43
12.4.
Procedure regarding transfer of assets back from WRU to business support co-ordinators and
the Collections Unit ........................................................................................................................ 44
12.4.1.
Transfer back criteria ............................................................................................................... 44
12.5.
Post-mortem analysis and evaluation by WRU .............................................................................. 44
12.6.
Policy framework and risk principles and governance directives covering WRU’s activities ........ 44
13. CREDIT POLICY IMPLEMENTATION – ACCOUNTABILITY AND CONSEQUENCES OF MISCONDUCT......... 46
13.1.
Credit management capability ....................................................................................................... 46
13.2.
Accountability by line management ............................................................................................... 46
13.3.
Risk and talent management.......................................................................................................... 46
13.4.
Compliance with policy and consequence of misconduct ............................................................. 46
14. CREDIT POLICY OWNERSHIP, DEVELOPMENT AND MAINTENANCE PROCEDURES AND
RESPONSIBILITIES ...................................................................................................................................... 47
14.1.
Overview......................................................................................................................................... 47
14.2.
The risk division’s roles and responsibilities in respect of this policy directive ............................. 47
4
14.3.
The Risk Division’s credit and investment policy formulation and maintenance – key principles
and approaches .............................................................................................................................. 47
REFERENCES ................................................................................................................................................ 48
5
1.
CREDIT AND LENDING RISK – KEY PRINCIPLES
2.
APPLICATION PROCESS – NEW CLIENT RELATIONSHIPS
2.1.
Overview
It is mandatory that credit and lending risks be proposed on a basis that allows for deal differentiation
but also simultaneous alignment with core credit and lending risk principles and practices to ensure
consistency across all lines of business.
Through the approved credit policy, sefa will ensure that the credit-granting function is properly
managed and that credit exposures are within levels consistent with prudential standards and internal
limits. sefa will therefore establish and enforce internal controls and other practices to ensure that
exceptions to policies, procedures and limits are reported in a timely manner to the appropriate level
of management.
Clearly defined criteria, analysis and evaluation approaches including forward looking analysis are
required to be formally set out in a framework of minimum information requirements to ensure
adequate insights. Additionally scrutiny and analysis to ensure that key risks, revenue and cost drivers
are surfaced, well understood, challenged based on varying scenarios, in particular, likely downside
scenarios.
Facility submissions must be based primarily on the strength of a borrower’s repayment capacity and
cash flow as well as development impact. sefa’s lending is not primarily based on collateral but on the
strength of the business case and cash flows. As such Collateral, although an important element to
mitigate risk, will not constitute a substitute for a comprehensive assessment, nor should collateral
compensate for insufficient information or inadequate cash-flow.
The application documentation is required to provide a balanced appraisal built upon a foundation of
accurate information, thoughtful and integrated analysis and evaluation of the risks, sources of
repayment, mitigants, terms, conditions and covenants, culminating in a summation of points for and
against the credit or investment proposal.
Credit and lending appraisals are complex. A submission for facilities in respect of a new client forms
the informational foundation for the institution’s relationship with the client. It is necessary that
6
expertise, commensurate with the size and complexity of the envisaged transaction, is utilised to source,
refine, propose and present submissions to credit committees (SME and MANCOM).
It is necessary that the proposal is professionally executed, that the application documentation is
complete in itself and that the probability of time consuming rework and resubmission is avoided. The
adage “get it right the first time” is important from the client relationship perspective, reputational as
well as internal efficiency considerations.
2.2.
Early risk review
When an application is at an enquiry stage, it is expected that the respective regional office will perform
an early risk review test of the application. The intention of the early risk review is to determine at
inception if the application fits the policy mandate and minimum eligibility requirements of sefa as well
as to determine sefa’s credit appetite for the respective transaction. This is therefore a preliminary
analysis or a concept review with the purpose of ensuring that an application is compliant with the
operating mandate and policies of the Institution and to guide the Investment Officer in terms of the
critical elements and risk to be assessed in relation to the specifics of the proposed funding. An early
review is not a credit decisioning forum but must be conducted for all credit applications or business
initiatives falling within the Institution’s mandate to inform the decision on the acceptance of the
transaction into the pipeline or the termination of the transaction. It is the responsibility of the Regional
Manager to ensure that has a review is done. A summary report on the purpose of funding and on the
applicant is prepared and discussed. After the Regional Manager has determined policy fit and is assured
that the application is in line with the mandate of sefa, the Regional Manager will then give the go ahead
for the preparation of due diligence.
Passing of concept review confirms that the proposal is likely to comply with sefa’s policies including
developmental impact, expected profitability and standards of integrity, subject to due diligence and
negotiation. This should take place before significant cost has been incurred.
An approval of an early review gives the transacting team approval to continue with the appraisal of the
transaction. The Regional Manager shall be responsible to approve the Investment Officer that will
undertake a due diligence trip if such trip is necessary. Before any due diligence trip is undertaken
7
sufficient desk top work must be carried out based on information provided by the client and other
independent research conducted by the Investment Officer.
3.
DUE DILIGENECE
The SMME credit committee shall consider and approve all credit facilities within as per its delegation.
The full due diligence of all applications shall come before this committee. The essence of this
committee is to ensure that the due diligence addresses all pertinent risk issues for approval.
Among other issues, the committee considers the following:

Project Background

Project Cost and Proposed Funding Structure

Project Company and Sponsors

Rationale for sefa involvement

Project Assessment including financial feasibility highlights

Market Assessment

Legal Assessment

Key project risk and Mitigations

Terms and Conditions
It is expected that the Due diligence report will contain sufficient information both financial and
subjective from prospective clients and Investment Officers, to enable a comprehensive assessment of
the true risk profile of the borrower or counterparty by the committee. Depending on the type of credit
exposure and the nature of credit relationship to date, the factors to be considered and documented in
the due diligence report is as follows:

The purpose of the credit and sources of repayment;

Detail description of the project or underlying reasons for the application and application of funding
required;

The Developmental Impact of the project;

The current risk profile of the borrower or counterparty and the collateral and its sensitivity to
economic and market developments;

The organisation or shareholding structure of the borrower;
8

The borrower’s repayment history and the current capacity to repay, based on historical financial
trends and cash flow projections (as appropriate for existing businesses);

The borrower’s business expertise and the status of the borrower’s economic sector and its
position within the sector;

Terms and Conditions of the Loan as well as covenants and, where applicable, the adequacy and
enforceability of collaterals or guarantees.
3.1.
Application documents
All Credit and/or Investment proposals submitted to any of sefa Credit Committees are to be in line with
sefa’s mandate, policies, sector strategies, appraisal guidelines and best practises and in the format
specified by the Risk Division.
The following documents will be required for all transactions:

Application forms;

Surety form(s)- if applicable;

Certified copies of identity documents of all affected individuals;

Marriage certificate (if applicable);

Short CV of the key personnel;

Proof of residence – utility bill/sworn affidavit (not older than 3 months);

Valid tax clearance certificate;

Valid company registration documents with CIPC;

Company profile;

Company’s financial statement (audited and unaudited) where applicable;

6 months latest bank statement (personal and Business);

Purchase order;

Loan utilisation breakdown;

Supporting quotation(s) on supplier(s) letterhead(s);

Personal income and expenditure schedule;

Personal assets and liabilities statement;

Proof of own contribution and source (if applicable); and
9

If a judgment, notice, default is issued against the applicant, a letter or document to prove that
arrangements are in place to settle the account or proof that the amount is settled must be
provided.
The Investment Officer leading the transaction is responsible for the compilation of the Appraisal Report
in line with the approved appraisal guidelines.
The appraisal or credit submission for Direct Lending should be in line with the following guidelines;

Introduction and Project background
o
Brief background on the origin of the project, indicating the parties involved and specifics of
the project;
o
Project objective and description; Output/results to be achieved as agreed with the
Borrower;
o


Project Cost and Proposed funding structure
o
Indicate total project cost;
o
Sponsor’s initial commitments and Owner contribution;
o
Structure of the deal;
Project Company and Sponsors
o


Facility/loan amount;
Company/Borrower Profile, History, Mandate and Core Operations;
o
Key Members/Shareholders profile and expertise;
o
No of years in business;
o
Rationale for company involvement in the transaction;
o
Key Investments to date and performance;
o
Total facilities with other financial Institutions;
o
Credit History & Record;
Rationale for sefa involvement
o
Rational for sefa’s involvement in the proposed transaction;
o
Expected estimated development impact;
o
Strategic and mandate fit;
Project Assessment
10
o
Financial and feasibility highlights, including scenarios and ratio analysis, financial analysis
of company results;


o
Transaction cash flow forecast showing ability to service sefa loan and investment;
o
Company and Management Analysis including SWOT analysis;
o
Technical/Operational Highlights; Raw Materials and Supplier Analysis;
Market Assessment
o
Size of the market;
o
Competitive forces within the market;
o
Market Profitability;
Legal Assessment
o

Key Project Risk and Mitigations
o
3.2.
Contracts and assessment of other legal issues;
Securities/collateral

Conclusion and Recommendations

Terms and conditions
Risk analysis
3.2.1. Institutional and management capacity assessment
The main business activities of the borrower including history need to be presented. Where the
institution has previously approved facilities for the client, these need to be disclosed including their
current status and performance.
A detailed analysis of the main shareholders must also be presented. Where key shareholders are
politically exposed persons, such information must be disclosed in the application as well as strict
adherence to the guidelines on PEPs. Analysis of key shareholders includes their business background
as well as their strategic importance to the client. Adherence to acceptable corporate governance
standards could be a key consideration in assessing the strength and capacity of the client.
In order to demonstrate the ability of the client to execute on its business plan, key management has to
be identified and their capacity to manage the business analysed. Management experience and skills
must be the focus of the analysis. The organisational capacity, including availability of key personnel and
11
systems, needs to be assessed in the context of the business to ensure their ability to deliver on strategic
and operational business objectives. Additionally, the implications of a dynamic change in the business
risk, which the funding may introduce, must also be analysed as part of the capacity assessment.
3.2.2. Source and application of funds
The purpose of funding required must be stated including the source of other funds required to
complete the project or the business plan. A detailed breakdown of the application of funds must be
presented to ensure a clear understanding of how funds are going to be used and sufficiency thereof to
meet the needs of the client. Care must be taken to ensure that the level of funding required, the
appropriateness of the term structure of the facility proposed based on the borrowers cash flow profile
and the repayment thereof are consistent with what is modeled in the Base Case Financial Model.
3.2.3. Structurally sub-ordinated cash flows
Additionally, particular analysis consideration must be given in cases where the borrower is structurally
subordinated from operating cash flows of the underlying entities that provided the sources of cash
flow for debt servicing and repayment. The facility and legal structuring solutions must be robust to
diminish the increased risk associated with such lending.
It shall always be a condition of sefa funding that disbursement will only take place when a project or
business plan is fully funded. The client or its shareholders must also be able to provide alternative
funding sources to ensure completion of the project or a business plan in case of cost overrun or change
in project scope.
3.2.4. Market and competitor analysis
An appropriate market analysis must be undertaken to investigate the existence of a market for the
client’s products and/or outputs of the project being financed. This is compulsory for all term loans.
Demand and supply trends must be analysed to determine market share and impact of competition.
Current and future trends, substitutes and complementary products, developments in the industry
including pricing mechanisms must be analysed thoroughly.
12
Strategic analysis tools such as Porter’s Five Force Model, SWOT Analysis and PESTEL Analysis are useful
tools for analysing the market potential of a product as well as its positioning against existing and
potential competitors. The aim of such analysis should be to establish the viability of the project or
business plan and its ability to generate sufficient cash flows, in the context of market risk dynamics, to
repay its obligations on time.
3.2.5. Financial strength of borrower and cash flow analysis
All credit applications must be accompanied by at least the most recent two years of historical financial
statements (Audited where possible) consisting of an Income Statement, Balance Sheet and Cash Flow
Statement in the case of where the client’s company has been in existence for that amount of time. For
companies that have existed for less than two years, the most recent year-end financial statements plus
any other available financial information must be used.
For start-up businesses, asset or project or bridging finance type applications, the sponsor’s cash flow
projections must be presented and analysed to evidence their strength and ability to support the
proposed project.
3.2.6. Validation of cash flow assumptions and sensitivity analysis
Projected cash flows must be analysed showing the impact of the proposed financing. The main focus
should be to determine if projected cash flows, using realistic assumptions, are sufficient to meet the
client’s operational needs and also repay all liabilities in a timely manner and fashion.
Assumptions made in arriving at the projected cash flows need to be scrutinised for and stress tested
against key performance drivers. When stress tests and “what if” scenarios are performed, focus should
not only be on single factor/ driver changes at a time, but must also focus on changes to a combination
of factors/drivers. The analysis must also provide a realistic view on the possibility of such stress
scenarios occurring and mitigations against them.
It is the requirement of sefa that all financial information supplied to the institution is in English. It is
therefore the responsibility of the client to ensure that where original financial information is not English
it is translated into English and the accuracy thereof is satisfied by their auditors or accounting officers.
13
3.2.7. Technical viability and soundness
In a complex project or asset based finance, an assessment of the technical aspects of the projects for
which the institution’s financing is to be used should be undertaken. The analysis must as a minimum
focus on the technical validity and soundness of the project, including implementation methods and
technology to be used, as well the validity of the estimated costs.
Where projects are of a complex nature, the services of an external consultant should be employed to
ensure full coverage of the key technical risks. When appointing an external consultant, the credit
committee must ensure that such consultants have a good reputation and the required experience and
skills to deliver on sefa’s requirements. Where there are multiple lenders involved in a transaction, it is
expected that such consultants will be appointed jointly with other lenders. The services of such
consultants must continue to be used for the duration of the implementation of the project or business
plan until technical completion is achieved.
3.2.8. Environmental impact
Environmental impact assessment will be done on a case by case basis. This means that environmental
impact assessment will only be done if the transaction in question warrants such assessment. The ability
of the client to manage any environmental impacts resulting from the project financed by sefa is to be
assessed. Where there are environmental risks attached to the project being financed, a thorough
assessment of such risks and mitigations thereof must be carried out.
3.2.9. Socio-economic impact
All sefa financed projects and clients are subject to a socio-economic impact assessment. Any socioeconomic impact, positive or negative, resulting from sefa’s financing must be assessed and presented.
Where there are potential negative impacts, mitigations against these are to be presented. These
potential negative impacts shall not form part of sefa exclusion list as presented in the approved credit
policy.
14
3.2.10. Legal analysis
The legal capacity of the borrower to assume the obligation is a key aspect of assessment. A structural
subordination of a borrower, remote from the operational cash flows which give rise to repayment
sources, needs to be carefully considered, mitigants and rights created through enforceable legal
documentation.
The Legal Advisor may form part of the transaction team to undertake a thorough assessment of all
contracts and legal issues that could have an impact on the client or project, thereby impacting the
client’s ability to meet its obligations to sefa. The Legal Advisor shall also ensure the completeness of
the Term Sheet as well as any pertinent legislation pertaining to the transaction.
3.3.
Credit risk ratings
Credit risk ratings are critical to the credit risk management function in sefa. This is to ensure that loans
are prudently classified in terms of riskiness for the purpose of, pricing, credit impairments and overall
monitoring. Credit risk ratings also assist sefa to achieve consistency in internal risk measurement. All
credit facilities must be rated at inception and the rating must be reviewed at least annually unless
otherwise determined by the Risk Division. The region submitting a credit application for approval shall
be responsible to ensure that the application is accompanied by a rating schedule, in a format approved
by The Risk Division, and signed by the Head of Credit Risk.
Credit ratings of facilities shall be approved by the credit committee approving the facility within the
mandates and delegated authorities of the different approving committees..
Credit ratings shall be carried out using Credit Models developed internally and officially approved by
the Risk Division. In rating any transaction or client, care must be taken to ensure that the rating model
used is appropriate for the nature and characteristics of the specific transaction or client.
15
3.4.
Facility terms and conditions/covenants
3.4.1. Terms and conditions
Terms and conditions of a loan shall be used to ensure that the risks of the transaction are minimised.
This must be facilitated through the use of both negative and positive covenants which can be financial
or non-financial in nature. The terms and conditions of the facility must be relevant for the nature of
the transaction that sefa enters into and must be understood and acceptable to all parties involved in
the transaction. These terms and conditions form the basis of sefa’s relationship with the client for the
duration of the facility and must also be included in the legal agreements and the monitoring plan.
3.4.2. Covenants
A loan covenant is a clause in the lending contract that requires the borrower to do, or refrain from
doing, certain things. Covenants can either be affirmative (protective) or negative (restrictive); and
either financial or non-financial. Affirmative and protective covenants respectively specify things that
the borrower has to do and those that they must not do to comply with the loan agreement.
Covenants are an important tool that sefa uses to protect itself against any deterioration in the credit
quality of the obligor while the facilities advanced remain outstanding. Covenants allow for regular and
frequent communication with the borrower which in turn results in an up-to-date assessment of the
borrower’s credit quality.
Properly structured covenants provide triggers or early-warning signals of trouble, which allows sefa to
take rapid remedial action. When covenants are triggered, proper processes must to be followed to take
an appropriate course of action to ensure that sefa’s position is protected.
When setting covenants, a systematic approach must be followed to ensure effectiveness of such
covenants. The objectives of the covenants in terms of the risk that is being mitigated and the
effectiveness of the covenant in mitigating the risk must be thoroughly considered. To be effective,
covenants must be stated in terms that are well defined and measurable. Measurement and reporting
periods must be agreed with the borrower and contained in the facility agreement. It is also important
that the covenant is such that the borrower can comply with it and that sefa is able and willing to enforce
it. In case of financial covenants, the borrower is required to provide detailed calculations of the metrics
16
when reporting so as to ensure compliance with the agreed definitions. The basis of computations must
be clearly set out in facility agreement
In summary, effective loan covenants must be simple, well defined, measurable, risk reducing and
reasonable. Furthermore, the covenants must allow for early intervention and should not be set at
measurement points that are close to financial stress risk conditions that could result in minimum
recovery options.
When the condition of the client deteriorates, appropriate action must be taken even if the
deterioration is detected outside of the normal review cycle. A Rapid Risk Review (RRR) procedure is to
be utilised to escalate concerns as soon as these become evident.
3.4.3. Tenor
The tenor of the loan must be structured to meet the needs of the client and not to provide the longest
possible repayment period. Payments must be structured to match projected cash flows with any
seasonality in the client’s cash flows taken into consideration and should not exceed five (5) years.
3.4.4. Interest rates
Interest rates must be set so as to ensure that sefa is appropriately compensated for the risk that it is
taking. The committee that has the mandate to approve the transaction shall also approve the interest
rate to charge on the transaction. The Credit Risk Unit shall have responsibility for pricing each
transaction. Where an interest rate lower than that determined by Credit Risk Unit is required, business
shall present the recommended interest rate and a motivation thereof to the mandated Committee, in
the format prescribed by the mandated Committee. The mandated committee has the mandate to
approve the final lower interest rate.
3.4.5. Initiation fees
Upfront fees charged in relation to the facilities made available to the client shall be determined by the
Division responsible for the transaction and approved by the final approving committee. In setting the
fees, the Division shall take into account the costs incurred by sefa in originating the transaction and
making the facility available to the client.
17
Past due fees and unpaid fees become a credit risk and must be reflected as part of the exposure to the
client. The fees should be upfront fees and as such always recovered either by the client paying in
advance, or by adding the fee to the loan amount and amortising it over the period of the loan.
All fees must be set with due consideration of the regulatory requirements, including but not limited to
the National Credit Act.
3.4.6. Grace period
Circumstances may dictate that the borrower may need a grace period on loan repayments so as to
provide enough time to generate cash flows. Any grace periods must be in line with the business needs
of the borrower. Request for grace periods shall form part of the credit application and approved as part
of the approved terms and conditions of the facility. Ordinarily, no grace periods will be provided where
the client’s existing business generates sufficient cash flows to repay the loan.
Grace periods in respect of interest payments will only be granted in exceptional circumstances due to
the impact this has on sefa’s cash-flows and the ability to monitor and detect payment default on a
timeous basis. Interest grace periods shall not exceed a period of 6 months
4.
MANAGEMENT OF COLLATERAL
4.1.
Overview
Although sefa does not fund on the basis of collateral, collateral remains an instrument to enhance the
quality of credit and mitigate credit risk inherent in lending and investment transactions by increasing
the ratio of recoverable debt in the event of default and by implication reducing the loss given default
(LGD) of credit exposures
The final decision on the collateralization required will be made by the relevant decision-making
authority (Credit Committees) in the final consideration of the Credit for approval. Line-of-business is
accountable for the negotiation of the terms and conditions, including collaterals, and conclusion of
legal agreements with obligors.
18
4.2.
Valuation of collateral
The responsibility for providing sefa with the initial valuation of collateral is that of the counter party or
collateral issuer, which is subject to sefa’s right of verification of the reliability of the valuation source.
The cost for the initial valuation and registration of collateral shall be borne by the client, unless
otherwise agreed upon.
Due to the nature of sefa’s business, the realisable value of collateral should be on a forced sale value.
In view of this, the following collateral haircuts will be applied throughout the term of the loan.
Asset Linked Securities
Land and Buildings
Commercial Property
Residential Property
Vacant Land
Vehicles
Equipment
Investment Linked Securities
Listed Shares and Unit Trust
Haircut Applicable
20%
45%
60%
80%
50%
50%
Investment Account and Bank Deposits
100%
Endowment Policies and Bonds
10%
Revenue Linked
Loan A/c
100%
Debtors Book
80%
Supported Undertaking Linked Securities
Surety
90%
3rd Party Guarantee
90%
50%
Forced value will also be considered in the event of material changes in the market or indication of
financial distress of obligors that can impact adversely on the quality of collateral.
19
For non-performing loans, the business unit responsible for the credit, or if transferred for Workout and
Restructuring Unit, must conduct an assessment of the expected realisable value of collateral on a caseby-case basis. Where justified, an independent evaluation may be requested to determine the value of
commercial assets as a going concern or liquidation sale.
The Risk Division shall provide guidelines for the valuation of collaterals. Increasingly, the valuation of
collateral classes will be driven by derived computations of recovery rates based on actual experience
under varying stress conditions and/or further discount (“haircut”) of the underlying valuations, based
on carrying costs of recovery and other criteria. The envisaged approach will also provide consistency
in collateral valuations across portfolios. The methodologies will be encapsulated into the resultant
predicted Loss Given Default (LGD) for an obligor.
4.3.
Guidelines for the revaluation of collaterals
4.3.1. Valuation methodologies
sefa should apply standard generally accepted methodologies for the valuation of the different types of
collateral. These include:

Where the client has been liquidated, the Liquidation Value methodology can be used, which is the
value of the assets when sold separately from the rest of the organisation as distinguished from
going-concern or fair market value, which may be higher because of organisation value or goodwill;

To cater for collateral whose market value is highly volatile, sefa should apply a conservative haircut
when valuing it for the purpose of determining the extent to which an exposure is secured. The
quantum of that haircut will depend on the price volatility of the collateral, the term of the
exposure. The margins (and haircuts) applied in the valuation of pledged collateral should be reassessed from time to time to ensure that the collateral margins reflect current market conditions.
4.3.2. Frequency of valuation
All securities will valued in the event of a default on loan repayments. However this does not preclude
PIM from assessing the value of the security of a client that is in stress.
Ad-hoc valuations will also be done where securities have been exposed to extreme physical
deterioration, adverse changes in market developments.
20
4.3.3. Revaluation of collateral
The responsibility for the on-going monitoring of the quality of credit, including the adequacy of
collateral coverage, resides with PIM in joint consultation with respective Business Unit.
4.4.
Monitoring and reporting of collateral
The relevant PIM Unit is responsible for the monitoring and reporting of collateral held on their
respective lending portfolios. The following duties shall be performed by the business PIM Unit in this
regard:

From time to time, conduct physical inspection of movable and immovable assets pledged and
ceded as collateral;

From time to time, review sefa’s legal right of entitlement to collaterised assets and reconfirm the
status of agreements reached and undertakings given as security, including third party guarantees,
with relevant collateral issuers;

Together with the annual review of credit facilities, assess and comment on the integrity of
collateral values; and

As part of the Divisional Portfolio Reporting measure and report on the adequacy of security
coverage for the respective divisional credit portfolios.
4.5.
Realisation of collateral
The realisation of collateral in the event of liquidation and/or recovery of outstanding debt on
securitised non-performing transactions will be undertaken by WRU in consultation with the relevant
PIM Unit and in accordance with the policy on the management of non-performing loans.
4.6.
Administration of collateral
Legal Services must monitor the status of the Collateral Register and follow up on outstanding
documentation and records, as well as report on the overall status of the Collateral Register maintained
on a Collateral Management System.
All collateral documentation must be forwarded to a centralized facility for filing.
21
The centralized facility function must take possession of intrinsic assets and tradable collateral
instruments pledged as security and is responsible for the safe keeping of such instruments.
4.7.
Release of collateral
Collateral held by sefa will be released after the debt or obligation which the collateral secures has been
paid or satisfied in full.
Any decision to release, exchange or vary collateral must be taken, with the prior written consent of the
Head of both Credit, irrespective of the level at which the project was approved.
5.
APPLICATION OF CREDIT RISK RATINGS
5.1.
Overview
At a transactional level, credit risk rating ensures that credits are prudently classified in terms of their
riskiness as a basis for determining the appropriate pricing and loan loss provisioning at origination.
Credit risk rating also forms an integral part of the monitoring of the quality of individual assets over
their life time
Consequently, the directives set out in the paragraphs below cover the key risk principles and criteria,
methodologies and practices which deal with the standardized computation and required application of
credit risk ratings throughout the lifecycle of the credit risk of an obligor or a counterparty.
5.2.
Definition of the master credit rating scale
5.2.1. Rationale and function of a master credit rating scale (‘the master scale”)
sefa measures credit risk by using a Probability of Default (PD) Master scale. The Master scale is a
uniform yard-stick against which credit worthiness can be measured for all its obligors and
counterparties and across all its segments. A master rating scale provides sefa, with a single common
scale to which all rating systems can be mapped, allowing for the risk in all of sefa’s credit risk assets to
be estimated and expressed consistently within the grades of this scale.
5.2.2. The master scale mapping
sefa has adopted a prudent and gradual approach in the application of credit risk ratings, taking into
22
consideration the current availability of historic loss data. sefa has developed , two internal risk rating
models which cover lending to the following asset classes:

Bridging /Greenfield Finance;

Balance Sheet Lending;
The credit risk rating criteria are therefore consistent across all sefa’s asset classes.

Mapping to a “probability of default” (PD)
All credit obligors and counterparties are rated to a default grading and these are mapped to a
Probability of Default. The institution will categorise its current exposures according to a Standard
and Poor’s 10- grade rating scale
“default probabilities” which correspond to a statistical
probability of clients, in that rating class, defaulting within a twelve month period.

The master scale model
The master scale model scores and ranks borrowers by reducing the resultant risk into a single
expression of risk measurement for each obligor, within the 10 grade rating scale. This also allows
the risk to be contrasted and compared across portfolios of diverse credit risks or groups of defined
obligors or peer groups, notwithstanding that the underlying computations were processed
through different credit models.

sefa’s 10 Grades PD Master scale
sefa’s 10 grades Master scale set out in the table below which also reflects the PD range associated
with the particular internal risk grade:
Default Grade
1
2
3
4
5
6
7
8
9
10
Risk Premium
0,06%
0,14%
0,68%
1,13%
1,90%
3,20%
5,50%
9,50%
16,00%
99,00%
Actual Risk Price
0,06%
0,14%
0,68%
1,13%
1,90%
2,20%
2,80%
3,40%
4,00%
5,00%
23
5.3.
Control mechanisms for sefa’s credit risk rating systems
5.3.1. sefa credit models – a phased delivery
sefa’s approach to measuring credit risk seeks to align with international best practice. However, the
development of models is based on a phased plan of delivery and the credit risk concepts and measures
will increasingly be used in the institution’s decision making processes at both operational and strategic
levels.
5.4.
Key risk principles, governance and directives covering the credit risk rating activities
The Unit (currently Credit Risk Unit within The Risk Division) is required to:

Should aim at having the appropriate organizational structure and key functional skills to carry out
the specialized roles and responsibilities covering end-to-end credit ratings development and
maintenance.;

Have formal, documented procedures which sets out the rule sets and processes for the usage of
each of the approved rating models and the Master Scale credit ratings;

Provide an advisory service, training and a collaborative intervention approach with divisions to
assist and entrench the understanding and usage of credit ratings within business and their credit
operations; and

Ensure that credit risk ratings and their component elements are accurate and utilised to develop
insightful metrics for credit portfolio reporting.
5.5.
Credit risk rating – a key risk management mechanism and principles
Credit risk rating serves as a key mechanism to manage credit risk at transactional and portfolio levels
of exposure. At a transactional level, credit risk rating ensures that credits are prudently classified in
terms of their riskiness and as a basis for determining the appropriate pricing. Credit risk rating also
forms an integral of the monitoring of the quality of individual assets over their life time.
At a portfolio level, credit risk rating is applied in the aggregation of risk exposures across individual
transactions and the calculation of unexpected losses.
24
Through the usage of the primary risk components of credit models, PD, EAD, LGD, are also inputs into
the calculation of portfolio metrics, to indicate, in conjunction with other risk factors, the quality and
underlying trends of credit exposures assumed.
Credit Risk ratings will increasingly be utilised to derive risk differentiated mandates, as well as credit
risk policies and procedures which will be driven by ratings based rule sets.
Risk rating models enable the rigorous quantification and ranking of credit risk inherent in the granting
of credit to different types of counterparties and asset classes. Risk rating models provide a tool for the
objective assessment of the borrower and transaction characteristics and differentiation of risk based
on consistent and relevant criteria. The outcome of the risk rating, assuming reliable and quality model
inputs, gives a forward looking prediction of the PD as a basis for making an informed choice between
avoiding, accepting or mitigating the inherent risk.
5.6.
Mandatory credit risk rating is required for all credit transactions
All credit related transactions must be risk rated at inception and during annual review. A review of
credit risk ratings must also be conducted at any time in response to an indication of counterparty
distress or detection of events that could impact adversely on the risk profile of a transaction.
5.7.
Approval of credit ratings
Only theCredit Committees are authorised to approve and sign off on a recommended credit rating. It
is an integral part of a committee’s credit approval or review decision. A recommended rating cannot
be regarded as having been sanctioned without the necessary formal decision page being issued and
the approved rating recorded in the committee’s meeting minute.
5.8.
5.8.1.
Components of a credit risk model
The key risk components of a credit risk model
The assessment of credit risk relies heavily on quantitative models and tools. As such credit risk is broken
down into the common risk components of PD, EAD and LGD that are modelled at a client, facility level.
25
These risk components are then used in the calculation of a number of aggregate risk measures such as
Expected Loss. Credit Risk margin is therefore calculated on the basis of possible losses from the credit
portfolio. A potential loss in sefa’s credit business is mainly Expected loss (EL).
5.8.2.
The estimation of the key risk components of a credit model and the calculation of expected
loss (EL)
The computation is in terms of the following formula:
PD x EAD x LGD = EL where the component elements are defined as follows:

Probability of Default (PD) - The probability of default measures the likelihood of a client defaulting
on its obligations within the next twelve months and is a primary component of the internal risk
rating calculated for all clients.

Exposure at Default (EAD) - The exposure at default denotes the total amount sefa expects to be
outstanding to a particular counterparty at the time of the counterparty’s default. sefa will
calculate these estimates for each facility through models developed on the basis of internal default
data as well as credit expert’s experience with particular product type.

Loss Given Default (LGD) - Loss given default is the loss expected on a particular facility in the event
of default and thus recognises any credit risk mitigants that sefa may employ such as collateral.
sefa will calculate LGD from expert judgment primarily driven by the type of and amount of
collateral held;

Expected Loss (EL) - Expected Loss is derived from the borrower’s or project’s estimated Probability
of Default and the predicted exposure at default less the recovery rate. i.e. all expected cash flows,
especially from the realisation of collateral.
5.9.
Risk of obligors in the origination stage of a credit submission
5.9.1. Procedure for recommending a credit risk rating
Risk rating is conducted as part of the due diligence at origination stage to enable an objective
assessment of the riskiness of the obligor. The diagram below shows a high level flow for the
recommendation of a risk rating and the final decision on the credit risk margin incorporated into the
pricing of a credit.
26
Conduct full due
diligence
Populate model
Request credit risk
margin
Validate financial
input data
Run model &
recommend credit
risk margin
Credit
Pricing
Approval
Committee
Authority
Group
Credit
Risk
Investment Officer /
Team
Diagram 11.7.1 Risk rating at completion of due diligence
Approve/decline
recommended
terms
If approved
Draft & present
Appraisal Report
Approve/override
credit risk margin
Approve final
pricing
5.10. Input of information into the model
The Credit risk analyst responsible for the respective deal must populate the relevant model when
sufficient information is available and the transaction is ready for submission.
5.11. The mandatory use of a standardised ratings output template
Standardised Rating reporting templates, tailored for each asset class (Balance Sheet, and Greenfield),
form part of the appraisal report that is tabled to the respective Credit Committees. The standardised
ratings reporting templates are design to ensure consistent assessment across all asset classes and are
a mandatory submission with all appraisal reports whether at origination, review or at key risk
intervention events, as defined by Credit Risk Unit. The template below is an example of the
standardized template:
27
5.12. Recommendation of a risk rating
CRU will run the model and recommend a credit risk rating and a risk margin based on the outcome of
the risk rating for incorporation into the credit submission, by way of the mandatory Standardised
Ratings Output Template, which also includes the appropriate risk pricing for the transaction. The
recommended credit rating is subject to final approval by the Credit Committee and the risk premium
is a key consideration into the final pricing decision made by the Credit Committee.
28
5.12.1. Override of a recommended risk rating
In the event the Credit Committee believes that critical factors of the transaction have not been taken
into consideration in the credit risk rating model or that the underlying assumptions are erroneous
and thus, in their expert judgment, the rationale for the outcome is not logical, the mandated credit
committee where the respective transaction approval mandate resides, can direct an override
adjustment to the risk rating.
5.12.2. The recordal of an override
In the event that the authorised committee overrides the recommended credit risk rating, the
rationale for the change is required to be included in the credit committee’s decision page, duly signed
off and recorded in the covering minutes of the credit committee meeting.
5.13.
Annual reviews of credit risk ratings
5.13.1. Ongoing monitoring and review of credit risk ratings – an overview
The credit risk rating of all existing clients and credit facilities are subject to annual review during the
life time of the credit. The purpose of annual risk rating reviews is to analyse and evaluate the obligor’s
performance during the period under review and to consider their prospects into the future. The
review of credit risk ratings, in a format directed by The Credit Risk Unit, forms an integral part of the
annual review of the credit. The credit ratings also support the monitoring of the quality of the lending
book.
As shown in Diagram below, credit risk ratings will be reviewed on an annual basis for all obligors and
counterparties even where there are no indication of any deterioration in the quality of the credit, as
well as on an event driven basis when an early indication of distress is detected.
29
Monitor credit quality
& conduct credit watch
No indication of distress
Indication of distress
Update model
input data on an
annual basis
Update model
input data on an
interim/ ad hoc
basis
Prepare review
documentation
Validate financial
input data
Run model to update
credit risk rating
Credit Review
Authority
Group Credit
Risk
Portfolio Officer / Team
Diagram 11.9.1 Annual and event triggered reviews
Review risk rating
5.13.2. Formal clients and ratings reviews (annual)
An annual risk rating review will be conducted on al wholesale transactions and Direct Lending’s term
loans and Installment Sales Agreement This will be done in order to analyse and evaluate the obligor’s
performance during the period under review and to consider their prospects into the future. The
relevant Post Investment Officer must populate both the financial and subjective information into the
relevant risk rating model. All information, both financial and subjective, is to be validated by the
Credit Risk Unit prior to the update of the risk rating for recommendation to MANCOM.

Information required for annual reviews of credit risk ratings
For annual review, CRU will again request the Post Investment officers within the respective
Business Division to provide detailed a simple analysis on the credit profile of sefa’s clients
30

Expiry of Credit Risk Rating can lead to a down grade
If an obligor’s credit risk rating expires and it is still not rated by the respective PIM Unit within a
period of two months after the annual review expiry date of the obligor’s limit, the client Credit
Rating is automatically down grade by one PD notch. The CRO can override the down grade given
a compelling reason for the expiry of a limit as a result of a delayed annual review of facilities.
5.13.3. Earlier reviews/credit risk ratings based on changed risk circumstances
In addition to annual reviews, the credit risk rating of borrowers must be reviewed as and when signs
of financial distress are detected or indication of a change in the transaction’s risk profile becomes
evident. In such event and/or risk triggered instances the review of the risk rating will require up to date
management accounts and will follow the same procedure as outlined for the annual review.
6.
APPROVAL AUTHORITIES
All credit and investment approvals are to be carried out in accordance with sefa’s approval mandates
as determined and approved by the Board from time to time. Each of sefa’s credit committees shall
function in accordance with its approved charter.
Meeting are pre-set and the teams ensures that their proposals are submitted within the submission
requirements set by each of the committees.
When an application is referred back for resubmission, the resubmission shall start at the committee
that referred it back. Under exceptional circumstances, the Executive of the Division submitting the
application for approval can request the CRO to formally waive this requirement.
6.1.
Post approval negotiations and facility documentation
6.1.1. Approval record
After the facility has been approved, the investment officer, shall with the assistance of a delegated
resource from Credit Risk, compile an approval record for the final approval by Head of Credit (for
facilities falling within the mandate of the SME Credit Committee), Chief Risk Officer (for facilities falling
within the mandate of the MANCOM) or Chief Executive Officer (for facilities falling within the mandate
of the Exco) before commencing with final negotiations of the facility agreements with the client.
31
An Approval Record is a record of approval that at a minimum shall contain the following documents:

The Decision Record of the approving committee meeting showing that the transaction is
approved;

Final Appraisal Report Submitted to the approving committee. If the credit assessment report was
submitted separate from the appraisal report, the credit assessment report must also be included
in the approval record;

An approved term sheet which shall form the basis for final negotiations with the client;

An approved monitoring schedule;

Declaration of Interest form signed by all members of the transaction team and the Group
Executive of the Division doing the transaction;

A credit rating schedule indicating the approved credit rating;

A schedule indicating summary of anticipated development impacts; and

An approved memorandum addressing all queries raised by the final approving committee. This
memorandum will have been signed and approved by the authority delegated to do so by the
final approving committee, in accordance with sefa delegation mandates.
6.1.2. Signing of facility agreements
Once the approval record has been signed, negotiations with the client to finalise facility agreements
can be commenced. Only persons explicitly named in terms of the CEO’s delegations for signing of
facility agreements (credit and investments) shall have the authority to sign facility agreements
between sefa and a client.
Before finalisation and signature of Loan agreements, any deviations from the approved terms and
conditions must be approved by the CRO.
6.1.3. Validity periods
Save as otherwise approved, failure to ensure signature of the facility agreements within 2 months
after the date of the Decision Record or anticipated Financial Close (which must be stated in the
document) of the committee approving the facility, such facility approval shall automatically lapse.
32
A request to extend the validity period of a facility may be submitted before the expiry date of the
facility to the relevant authority. Such request shall be accompanied by an updated project review
performed independently by the investment officer. The project review shall be approved by both the
Head of Credit and the Head of the business division to which the transaction belongs.
7.
DISBURSEMENT OF FUNDS ON LOAN ACCOUNTS
7.1.
Overview
Funds on loan accounts are disbursed in accordance with the terms of lending agreements entered into
with counterparties and are subject to counterparty compliance with the conditions of the agreements.
The disbursement of funds is processed through three stages, which are disbursement preparation,
authorisation and settlement.
The disbursement of funds increases sefa’s exposure to primarily credit risk, but also imposes other
forms of business risk, reputational risk. The disbursement of funds must be informed and enabled by a
rigorous monitoring process to ensure that the quality of the credit is not compromised by either noncompliance with conditions or adverse changes in the risk profile of the transaction.
The disbursement of funds is processed through three stages, which are disbursement preparation,
disbursement, authorisation and disbursement settlement. The processing of requests for drawdown
on loans has a significant administrative and control component involving various internal functionaries
and is subject to segregated sign-offs. Efficiency in the processing of disbursements is important and
must be conducted with a minimum delay in hand-over between functionaries.
7.2.
Key principles
The first disbursement on any credit transaction shall be made only after the obligor has fully complied
with conditions precedent, unless otherwise stipulated in the credit agreement. Compliance with
conditions precedent must commence as soon as practically possible after conclusion of the credit
agreement and be completed in a timely manner before the planned first disbursement. In the event
where a counterparty is unable to comply with conditions precedent prior to submission of a first
drawdown, the obligor must submit a timely request for the amendment or waiving of the relevant
33
condition(s)in writing, stating the reasons for non-compliance and the planned time frame for
compliance.
Sign-off on disbursements must be made within the formal delegated authorisation structure after a
compliance certificate has been issued. The Head of Credit Risk shall be responsible for the release of
all disbursements.
Disbursement of funds must be suspended temporarily in the event of an early indication of financial
distress or emergence of other external circumstances that may impact adversely on the ability of the
obligor to meet its debt obligations. A rapid due diligence reassessment must be conducted and, if
concerns are found to be material, must be escalated to heads in business and credit risk areas for
resolution prior to the next planned disbursement.
7.3.
Disbursement preparation
Upon receipt of the request for drawdown, the PIM officer must verify that the drawdown request is
legally in order and that the drawdown documentation is correct and complete in terms of the
conditions of the agreement. If not, the PIM Officer must notify the borrower and collect outstanding
documentation prior to proceeding with the processing of the request for drawdown.
In the event where the counterparty is fully compliant with conditions precedent (for a first
disbursement) or with other conditions (for subsequent disbursements) and the quality of the credit
remains uncompromised in terms of the risk profile, the PIM Officer must forward the drawdown
request to the relevant official in Finance for processing.
Finance must validate sefa details, confirm funds availability and request the registration of the claim.
Upon completion, Finance must notify the relevant PIM officer to proceed with the disbursement
process.
The PIM Officer must obtain a compliance certificate from the Head of Credit or his delegation and
based on that prepare a Disbursement Form in order to obtain authorization for disbursement. The
Disbursement Form must be accompanied by validation of compliance with conditions and validation
of satisfactory performance and risk profile.
34
In the event where the counterparty is not fully compliant with conditions of the credit or the credit
transaction is deemed to be problematic as a result of indication of distress or poor counterparty
performance, the PIM Officer must notify line management of the receipt of the drawdown request and
await a management resolution prior to processing the drawdown request.
7.4.
Disbursement
The PIM Officer must forward all documentation, including records of sign-off and approval, to a
delegated resource within the Finance Department. The Delegated Finance Resource must conduct a
final check of completeness of the disbursement documentation and compliance prior to releasing the
drawdown request for settlement.
7.5.
Suspension of disbursement on problematic loans
The Head of Credit Risk must, where considered to be prudent, temporarily suspend disbursement on
any credit transaction in the event of early indications of financial distress on the part of a counterparty,
potential deviation from the agreed upon terms and conditions or awareness of circumstances that can
impact adversely on the implementation of the planned deliverables and/or achievement of the agreed
upon development outcome.
7.6.
Amendment of disbursement schedule
In the event where the planned drawdown schedule has changed, the obligor must submit a timely
request for the rescheduling of draw downs, stating the reasons for the request and the planned time
frame for future draw downs.
7.7.
Raising of upfront fees
Line management is responsible for initiating the raising of upfront fees payable by obligors in terms of
the credit agreement.
35
7.8.
Efficiency of the disbursement process
All divisions involved in the processing of disbursements shall have documented standard operating
procedures in place for the efficient execution of their respective duties. The procedures must provide
for the segregation of duties and other internal controls to adequately mitigate operational risks
within acceptable thresholds, as well as contain clear rules for the escalation of problems.
Officers involved in the assessment and monitoring of credit, such as PIM Officers and Credit Risk
Analysts, should ensure that information required for the authorisation of disbursements is
continuously kept up to date and readily available when drawdown requests are received.
Line management must ensure that any potential problem or concern that may impact on the quality
of the credit is detected as early as possible and resolved in time to avoid delays in the disbursement
of funds upon receipt of a drawdown request.
Managers of front line units must maintain oversight of the disbursement process to keep close check
on progress in the processing of individual drawdown requests and respond quickly to any perceived
delay. Obligors must be kept informed of progress in the event where disbursement cannot be made
within the expected time frame.
Internal Audit shall conduct independent assessments and provide assurance to the CRO on the
efficiency of the disbursement process.
7.9.
Documentation and record keeping
The manager of the business unit which originated the credit must ensure that all approval loan
documentation has been signed-off and placed with Corporate Secretariat. It is considered to be
prudent for the PIM function to conduct, prior to making a first disbursement, a thorough validation of
the completeness of documentation on the file.
36
8.
ONGOING MONITORING AND REVIEW
8.1.
Overview
Once a credit or equity investment has been approved and notwithstanding whether the facility has
been disbursed or not taken up within three months, it is necessary to continuously monitor the risk
and additionally to undergo a formal review, on an annual basis, to the exposure or unutilized approved
limits.
The monitoring requirement is also in respect o f any approved terms and conditions, covenants set out
in the obligor’s term sheet and/or monitoring plan.
Additionally, ongoing monitoring is a continuing process of engagement with the borrower. Formal and
informal approaches are used to identify any early indications of adverse performance, internal and
external factors and issues which might increase the risk associated with an exposure. An earlier
intervention usually allows for a wider range of effective options to be considered to mitigate risk and
can lead to an improvement in sefa’s position. In contrast, late interventions in what might already be
a stressed situation provide little remedial opportunities and a much higher risk outlook for sefa
Ongoing monitoring is also a requirement with regard to divisional portfolio credit and investment
quality assessment and assurance. This policy will also contain specific guidelines which govern portfolio
analysis, evaluation and reporting. These approaches covering divisional requirements as well as specific
reports will serve at Mancom and the Board.
8.2.
Transfer criteria
As a rule, all clients that have had an initial disbursement, should be introduced to Business Service
Coordinators (BSC) in the regions as well as the Post Investment Monitoring Unit. However this does not
preclude instances where there could be dual relationship management of a client between the
Investment Officer and the Business Service Coordinator.
Clients should also be transferred to Collections Unit before payment is due. However once a client
misses three instalments or a sign of distress is detected, then such a client will have to be automatically
transferred to WOU.
37
8.3.
Formal annual review
Notwithstanding the requirement for on-going monitoring on a regular basis, all facilities and
investments approved and accepted by clients are required to be formally reviewed within 12 months
of the signature date of the approval record and annually thereafter.
8.4.
Divisional review register
Each business division shall hold a Review Register which sets out high level content as to the status of
their annual reviews, in a format defined by The Risk Division and reported to the CRO on a basis and
cycle as directed by The Risk Division
8.4.1. Facility availability period

Failure to ensure signature of the investment/loan agreements (commitment) within 2 months
after approval date, such facility shall automatically lapse.

Facility availability period may be extended if application for extension is approved before the
lapse date. An updated high level review of the facility has to be submitted for approval under
the duly mandated delegated authorities. Facility availability may be extended for a further 1
months only once under the mandated delegated authorities and then only if no material changes
in circumstances or risk profile is evident.

Facilities that have not had their first disbursement 2 months after commitment (loan/equity
agreement signing) require an updated review of the facilities, taking into account market and
client-specific issues.
9.
FORMAL ANNUAL REVIEWS
9.1.
The formal annual review process
9.1.1. Annual review submissions to be timely
All approved term Loans and Installment Sales agreement facilities are subject to annual review to the
mandated review committee. Divisions are required to diarise to commence the review process, so
that submissions are presented toMancom in a timely manner, ahead of the internal 12 month review
expiry date.
38
9.1.2. Mancom can set a requirement for a more frequent cycle of reviews
Mancom can specify a requirement for a more frequent cycle of reviews for obligors of concern and
additionally, stipulate a lesser extent of review detail but these submissions cannot substitute for a
formal annual review without authority from the CRO. Such dispensation will only be given in
exceptional circumstances.
9.1.3. The waiving of a formal annual review
In the light of the foregoing more frequent obligatory interim reviews, the waiving of a formal review
has to be motivated to the CRO. Consideration for a waiver will only be given on an exceptional basis.
9.1.4. Requirements for a development impact assessment at formal review
Facilities that are subject to a development impact assessment are to be reviewed in conjunction with
an updated development impact evaluation on the basis and in a format as directed from time to time
by CRO.
9.2.
Documentation to be submitted for a formal annual review process in the case of a distressed client

Credit and Investment review documentation in the format specified by The Risk Division from time
to time;

Where appropriate an up-to-date audited financial information and spread sheet as directed by
The Risk Division;

Where appropriate and requested by the Credit Risk Unit, a twelve month forecast Balance Sheet,
Income Statement and Cash Flows together with underlying assumptions;

Extracts from obligors 2 year Strategic and Business Plan supported by assumptions and indication
of key business drivers, if available, otherwise comment on prospects;

Rating Schedule, recommendation and sign off by Head of Credit Risk Unit; and

Attestation by the Head of Legal Services that collaterals are in place per the term sheet.
39
10.
ANNUAL REVIEW ANALYSIS APPROACH
10.1. Obligor’s future orientation – analysis and evaluation approaches
The purpose of an annual review is to analyse and evaluate the obligor’s performance during the period
under review and to consider their prospects into the future, at least 12 months ahead. The analysis and
evaluation is in the context of the changing risks that an obligor faces within the external environment
they operate in. Additionally, the assessment must cover the obligor’s key internal factors and issues
which present risk or are likely to do so, within the next twelve months.
Additionally, the review document is to be based on historic as well as current financial and other
relevant information. Assumptions and/or key business drivers must be validated to ensure that
expectations are realistic, with particular regard to cash-flow consequences.
An element of stress scenario setting and “what if?” analysis must be included to consider the
consequences of changes to key assumptions on financial performance expectations.
10.2. Review of terms, conditions and covenants
The review must revisit all the terms, conditions and covenants which were set at the approval stage
including an updated technical analysis (where relevant). The status of financial covenants shall be
demonstrated by measurement (where relevant) and/or confirmation of compliance to other terms and
conditions
10.3. Review of collaterals and values
As part of the review, divisional resources mandated by the Head of Credit are required to cross check
the existence of all agreements and collateral documentation, as set out in the term sheet, against the
Collateral Register/Database to ensure ongoing compliance to the terms and conditions of the facility
when it was originally approved or last reviewed.
The division is to attest to the foregoing in their review sign off. Additionally, all collateral values are to
be updated for the annual review in line with the underlying credit policy directives regarding
revaluation frequency.
40
11.
REPORTING OF CREDIT AND EQUITY PORTFOLIOS (INCLUDING DEVELOPMENT IMPACT ASSESSMENT)
11.1. Overview – purpose of process
The purpose of portfolio risk reporting is to provide insightful and timely analysis and evaluation to
determine the quality of credit and equity portfolios, on a measured basis, as well as a trends analysis
covering the risk performance of the portfolios over defined comparative reporting periods.
The reporting approach is frame-worked to drive consistency across all divisions and to provide the
capability for aggregation of the information to serve different levels of stakeholders.
The portfolio risk reporting should be carried out on a regular basis, at frequencies and covering
reporting periods as defined by The Risk Division. The mandatory measurements to be used, reporting
procedures and the design of reporting templates, are governed by the Risk Division directives.
The Risk Division directs the minimum levels of detail which is required to be disclosed and the most
appropriate, mandatory metrics to characterize divisional portfolio risk. Some of the metrics are generic
to both business divisions, whereas others will capture risk perspectives and features which are unique
to the division’s business positioning.
11.2. Divisional reporting Framework
The Risk Division defines the template which covers the minimum and mandatory reporting periods,
features, characterizations and metrics used for the divisional reporting. The methodologies and
formulas used to calculate the metrics as well as the underlying rationale are advised by The Risk
Division.
The Head of the respective business departments can direct that further, more detailed, aspects of
their division’s risk portfolios be characterized, measured, analysed and evaluated, over and above
the risk elements defined by The Risk Division. The motivation for the inclusion of further metrics
must be presented to the Head of Credit Risk as well as the basis for the computation of any new
metrics. New measurements must have data integrity and calculations are required to be
mathematically sound.
41
11.3. Divisional reporting framework
The enhanced reporting approach is an evolving process and will be subject to improvements as more
insightful data and risk measurements become available over time. The Risk Division will direct the
minimum reporting content and any subsequent changes, by way of directives issued to the divisions,
from time to time.
12.
MANAGING PROBLEMATIC EXPOSURES – WORKOUT AND RESTRUCTURING
12.1. Overview
A deterioration in Credit and/or Equity quality is required to be identified at an early stage so that the
risk concerns and issues are well understood. Appropriate mitigation options must be regularly
reviewed and re-evaluated and rapidly initiated as soon as considered necessary.
In the event it becomes necessary to take active and rigorous remedial steps, actions can then be taken
in a timely manner and on an informed basis. An early intervention usually provides more options for
mitigating the risk exposure to sefa. It also improves the probability for a successful rehabilitation or an
effective collection and recovery outcome.
Early problem recognition approaches have been designed to support the early detection of credit and
equity fund weaknesses and to formally surface concerns together with tactical action plans to improve
sefa's position.
Overview – Roles and Responsibilities of Workout and Restructuring Unit (WRU) and the need for an
independent Recovery function
In the event an exposure deteriorates to a stage where a more intensive and complex intervention is
necessary to either workout or rehabilitate a problematic risk, the management of the much
deteriorated exposure and the ongoing, direct interactions with a defaulted obligor are required to be
carried out in a specialized workout function, segregated from the division which originated the
transaction.
42
WRU, part of The Risk Division Division, is in place to provide an independent, concentrated focus and
specialized recovery effort, carried out by a team of workout experts. The transfer of such cases from
Divisions to WRU is a mandatory requirement. It is triggered by risk events and conditions.
12.2. Procedure regarding the nature, extent and timing of WRU’s, involvement in clients
For purposes of this document, “Restructuring” is defined as a method which sefa will use with
outstanding obligations, to alter the term of the loan agreement in order to achieve some advantage.
Sefa will therefore use some form of debt restructuring to help clients avoid default on existing debt.
Debt restructuring could take the following forms:

Deferments of capital repayments;

Capitalisation of interest (deferment of interest payments);

Rescheduling of repayment terms (capital and/or interest);

Release of any security (tangible and intangible) for any reason whatsoever;

Conversion of debt finance to equity / quasi-equity and vice-versa; or

Approval of new funding to an existing client in financial difficulty.
12.3. Formal process for handover to WRU
The hand-over of the obligor to the WRU team is formal process in which the client relationship is
severed from the Collection Unit and the subsequent ongoing workout strategies and direct interactions
with the obligor are assumed by WRU, under periodic feedback to the originating Division.
As a rule, clients should be transferred to WRU when one or more of the following (“Transfer Criteria”)
occurs:

Any capital and/or interest payments owed by a client to sefa fall in arrears by more than 60 days
or miss two consecutive payments. However this excluding clients whose arrear position are the
cause of sefa’s internal processes

A client whose arrear position has deteriorated by a further 30 days or more since the date on
which it applied for a deferment and no restructuring has been approved by the sefa

sefa decides to issue summons against a client.

sefa or another creditor obtains judgment against a client.
43

sefa or another creditor attaches the assets of a client.

sefa or another creditor applies for the liquidation of a client.

The client ceases or intends to cease its operations.

A major disruption affecting the future viability of the client occurs in a client’s business operations,
e.g. resignation/death of a key management member/s, fire causing destruction of production
capacity, fraudulent activities committed by a client against sefa or other third parties, etc.
12.4. Procedure regarding transfer of assets back from WRU to business support co-ordinators and the
Collections Unit
12.4.1. Transfer back criteria
Clients will be transferred back from WOU to BSC and the Collections Unit when the reason for the
transfer of a client to WRU has disappeared:

A restructuring plan as proposed by WOU has been approved and successfully implemented;

The client has strictly adhered to the terms of the Restructuring (e.g. revised repayment terms) for
at least 6 consecutive payments (or less if properly motivated) following the implementation of the
Restructuring plan.
Decisions to transfer clients from WOU to BSC will be taken at the MANCOM where all the stakeholders
will be present. These “transfer back” decisions will be effective from the date of the MANCOM and
will be captured in the minutes of the MANCOM.
12.5. Post-mortem analysis and evaluation by WRU
WRU is required to carry out post-mortem reviews so that Divisions can better understand how problem
exposures and losses develop. As part of the review, WRU is able to highlight weaknesses in existing
Credit and Equity Policies and Procedures (P&P), particularly those governing approval and monitoring
processes.
12.6. Policy framework and risk principles and governance directives covering WRU’s activities
WRU is required to:
44

Have the appropriate organizational structure and key functional skills sets in place to carry out the
more complex interventions assumed in work-out and recovery interventions;

Have a formal, documented procedure and format for the acceptance of matters handed-over by
Divisions to WRU as well as those hand-back by WRU to Divisions;

Ensure that Equity components of Credit remedial interventions are handled on a basis that there
is clarity regarding the respective Divisional and/or WRU responsibilities for the work-outs of the
Equity and Credit aspects, as well as joint reporting in those situations where a Division retains the
Equity remedial involvement but WRU assumes the Credit work-out responsibility;

Additionally, any potential conflicts in interests between Equity and Credit approaches are
identified early in the process and in need referred to CRO for guidance;

Provide an advisory service and a collaborative intervention approach with Divisions to assist and
entrench early problem recognition and the joint development of remedial options and tactics at
the earliest stage, before a work-out eventuates;

Have well founded analysis and evaluation approaches based on validated information supported,
where necessary, by due diligence;

Optimize financial recovery in the shortest possible timeframe;

Facilitate, implement and monitor a stabilization or turnaround strategy for non-performing loans,
duly documented;

Where feasible, restructure/reschedule distressed and delinquent exposures, as a primary solution;

Act in a timely manner to recognise the need to raise the appropriate level of specific impairment,
interest reserving or stoppage, in terms of methodologies agreed by The Risk Division;

Ensure the recovery of costs incurred by sefa during the recovery/rehabilitation process;

Maintain development impact and protect asset values;

Ensure a regular feed-back to Divisions in terms of on-going interactions and divisional portfolio
reporting;

Present insightful work-out reports by way of case-by-case submissions and tactical
recommendations to improve sefa’s position, during the life cycle of the remedial interventions;

Present portfolio risk reporting, in a consistent manner, at frequencies and appropriate detail, in
terms of formats agreed by The Risk Division. Portfolio reports are required to reflect group as well
as Divisional perspectives, utilizing appropriate graphics, tables and pertinent commentary to
demonstrate and explain key features and trends; and
45

13.
Have in place a policy and procedure for write-offs.
CREDIT POLICY IMPLEMENTATION – ACCOUNTABILITY AND CONSEQUENCES OF MISCONDUCT
13.1. Credit management capability
The performance of sefa in the pursuance of its objectives is to a large extent dependent on its ability
to manage credit risk effectively. The Policy requires that sefa applies best practices in the assessment,
measurement, monitoring and control of credit risk. This, in turn, imposes substantial challenges on the
capacity deployed in business divisions to ensure that the end-to-end credit process is implemented in
accordance with desired standards of excellence.
13.2. Accountability by line management
Line management, as owners of the credit process, is accountable for ensuring that adequate capacity
exists at all times in terms of the ability of business divisions to manage credit risk inherent in their
respective areas of operations within sefa risk appetite. At individual level, line management must
ensure that front line staff has sufficient levels of skills to cope with the complexity of conducting credit
risk assessments and applying appropriate measures to treat unacceptable levels of exposure to losses
in the origination of credit, as well as the monitoring and management of the quality of credits on sefa’s
loan book.
13.3. Risk and talent management
Line managers are expected to nurture and retain key talent and must ensure that skills deficits of
individual staff members are identified and addressed in a planned and cohesive manner. Staff members
are expected to take ownership for the development of their careers, in conjunction with their line
managers, and are expected to make optimal use of training and mentoring opportunities made
available by sefa.
13.4. Compliance with policy and consequence of misconduct
The accountability for the compliance with the Policy resides with line management. Line managers
must ensure that their decisions and actions in the management of credit risk are aligned with the
principles and practices embodied in the Policy. Unless escalated and authorised at an appropriate level
46
of authority, any deviation from the Policy is deemed to constitute an act of misconduct and will be
subject to disciplinary action in accordance with sefa’s Disciplinary Code and procedures.
14.
CREDIT POLICY OWNERSHIP, DEVELOPMENT AND MAINTENANCE PROCEDURES AND
RESPONSIBILITIES
14.1. Overview
The objective of formalising Credit Risk Policies and Procedures is to ensure that risks inherent in
sefa’s lendings and investments are taken and managed in a responsible manner and that minimum
standards that direct sound practices are coherently articulated in this policy directives that align with
the Board’s Level One policy statement in respect of risks assumed within sefa.
14.2. The risk division’s roles and responsibilities in respect of this policy directive
Risk Division assumes responsibility for leading the proactive development of new as well as
improvements and changes to this policy.
14.3. The Risk Division’s credit and investment policy formulation and maintenance – key principles and
approaches
The risk division’s policy identification, assessment, approval and execution processes comprise the
adoption of the following key principles and approaches:

The assignment of this policy functional responsibility to a specific policy manager who has
ownership of the end-to-end credit policy development and maintenance, approval, coordination
and communication processes

The design, recordal and execution of the end-to-end credit policy formulation and maintenance
procedures that encompass the following processes and underlying work-flows:
i.
Proactive identification of change needs;
ii.
Formulation, analysis and evaluation as well as recommendation of change needs;
iii.
Change request tracking;
iv.
Approval procedures and processes (including embedding in relevant charters of the
respective governing committees);
47
v.
Adoption and implementation at the credit policy. Communication of changes;
vi.
Recordal and filing of electronic and hard copies;
vii.
On- going monitoring, maintenance and annual review;
viii.
Status reporting including policy exceptions;
ix.
On- going alignment with Level One Board Risk Policy Statement;
x.
Identification of new/changed key credit and equity policy issues/principles and relevant
input into Level One policy formulation/review; and
xi.
Annual attestation of alignment between policies and procedures at Levels One and this
policy.
REFERENCES
Books

Tony Van Gestel and Bart Baesens (2009): Credit Risk Management: Basic Concept, Second Edition,
Oxford University Press

Ranson B.J (2005): Credit Risk Management, USA: Sheshunoff

Bessis J (2006): Risk Management in Banking, Second Edition. England: John Wiley & Sons

Bhati, M (2006) Credit Risk Management and Basel I; An Implementation Guide ,Risk Books
Journal Articles

Principles for the Management of Credit Risk Basel Committee on Banking Supervision, September
2000

Sound Management and Supervision Practices for Credit Risk, Association of Supervisors of Banks of
the Americas, June 2008

Best Practices for the Management of Credit Risk, Bank Negara Malaysia, September 2002

Credit Risk Management, Monetary Authority of Singapore, February 2006

Credit Risk Management, State Bank of Pakistan, 2004

Sam Miller, The Importance of Credit Risk 2010

Guidelines for Commercial Banks and Development Finance Institutions, State of Pakistan Bank 2005
INTERNAL PUBLICATIONS
48

Sefa Corporate Plan 2013/14 – 2017/18

Direct Lending – Credit Policy

Wholesale Lending Investment Policy, Processes and Procedures
49