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Banks should ensure that the following requirements are incorporated with respect to the management of collaterals accepted by them:
i.
Banks should properly document the collateral arrangements and have in place clear and robust procedures that ensure that any legal conditions required for declaring the default of a borrower and timely collection/ liquidation of collateral are observed.
ii.
Banks should fulfil any contractual and statutory requirements in respect of, and take all steps necessary to ensure, the enforceability of the collateral arrangements under the law applicable to their interest in the collateral. In connection therewith, banks should conduct sufficient legal review confirming the enforceability of the collateral arrangements in all areas of operations, for example, foreign branches and subsidiaries. They should re-conduct such review as necessary to ensure continuing enforceability.
iii.
The collateral policies and procedures should ensure mitigation of risks arising from the use of collateral, including risks of failed or reduced credit protection, valuation risks, risks associated with the termination of the credit protection, concentration risk arising from the use of collateral and the interaction with the bank's overall risk profile.
iv.
The financing agreements should include detailed descriptions of the collateral as well as detailed specifications of the manner and frequency of revaluation.
v.
Banks should calculate the market and the forced sale values (incorporating haircuts) of the collateral at a minimum frequency to enable it to form an objective view of borrower or workout viability; such valuations should incorporate the cost and time to realise, maintain and sell the collateral in the event of foreclosure.
vi.
Where the collateral is held by a third party, banks should take reasonable steps to ensure that the third party segregates the collateral from its own assets.
vii.
While conducting valuation and revaluation, banks should take into account any deterioration or obsolescence of the collateral.
viii.
Banks should have the right to physically inspect the collateral. They should also have in place policies and procedures addressing their exercise of the right to physical inspection.
ix.
When applicable, the collateral taken as protection should be adequately insured against the risk of damage the risk of damage.
