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Banks should establish overall credit limits at the level of individual borrowers and counterparties, and groups of connected counterparties that aggregate in a comparable and meaningful manner different types of exposures, both in the banking and trading book and on and off the balance sheet.
SAMA has separately specified exposure limits for single counterparties and group of connected counterparties. While remaining within the overall limits specified by SAMA, banks can establish more conservative exposure limits. Banks are required to have well-defined policies and procedures for establishing their internal exposure limits as such limits are an important element of credit risk management. The limit structure should set the boundaries for overall risk taking, be consistent the bank’s overall risk management approach, be applied on a bank-wide basis, allow management to monitor exposures against predetermined risk tolerance levels and ensure prompt management attention to any exceptions to established limits. Banks should take into account the following parameters in establishing their exposure limits:
a.
The size of the limits should be based on the credit strength of the borrower, genuine requirement of credit, economic conditions and the bank’s risk tolerance;
b.
The limits should be consistent with the bank’s risk management process and commensurate with its capital position;
c.
The limits should be established for both individual borrowers as well as groups of connected borrowers. The limits can be based on the internal risk rating of the borrower or any other basis linked to the borrower’s risk profile;
d.
There can be separate limits for different credit products and activities, specific industries, economic sectors or geographic regions to avoid concentration risk. The ultimate objective should be to achieve reasonable diversification of credit portfolio;
e.
The results of stress testing should be taken into account in the overall limit setting and monitoring process;
f.
Credit limits should be reviewed regularly at least annually or more frequently if the borrower’s credit quality deteriorates;
g.
All requests of increase in credit limits should be fully evaluated and substantiated.
Banks should closely monitor their credit exposures against established limits and put in place adequate procedures for timely identification of any exceptions against the approved limits. There should also be well defined procedures to deal with any excesses over approved limits. Furthermore, all such instances of excesses over limits should be reported to the senior management along with the details of the corrective action taken. Exceptions to the approved limits should be approved at senior level by the authorized persons. In case of occurrence of frequent exceptions, the management or the board should review the limit structure and devise a strategy to ensure non-occurrence of such breaches.
