2.1 Early Warning Signals as a Tool for Preventing NPLs

Effective from Jan 06 2020 - Jun 30 2020
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One of the keys to maintaining acceptable levels of Non-Performing Loans lies in the ability to identify potential payment difficulties of a borrower as early as possible. SAMA views instituting an effective framework within regulated entities as a mandatory requirement. The sooner the problem is identified, the easier it will be to remedy it. Early warning signals (EWS), fully integrated into the bank's risk management system, is a crucial tool to identify and manage upcoming problems with a borrower’s ability to service his loan.
The purpose of the EWS is therefore twofold:
i.	To produce an early signal of potential payment difficulties of the borrower; and
ii.	To allow the opportunity to develop a corrective action plan at a very early stage.
iii.	When the borrower exhibits early warning signs, the bank should proactively identify the driver and assess whether the borrower’ case should continue to be handled by the business / commercial unit or if the Workout Unit (whether involved in a shadow capacity at first or have full control of the case) should be involved.
Banks should ensure that proper training is provided to the business units on how to manage accounts with early signs of stress.