Skip to main content
Entire section Custom print Text Only Rich Text Print / Save as PDF
Download Original PDF

3. Monitoring:

No: 41033343 Date(g): 6/1/2020 | Date(h): 11/5/1441 Status: In-Force
Once increased credit risk is identified, it is crucial for the bank to follow up on the signal received as soon as possible, and develop a corrective action plan to pre-empt potential payment difficulties. The intensification of communication with the borrower is of utmost importance. The action plan may be as simple as collecting missing information such as an insurance policy or as complex as initiating discussions on a multi-bank restructuring of the borrower's obligations.
 
While the borrower remains on the watch list, bank’s primary contact with the borrower remains the business officer/portfolio manager, although the head of business as well as risk management, are expected to take a more active involvement in the decision and action process for larger, more complex loans. While on the watch list, the borrower should be classified in a lower rating than “ordinary” borrowers.
 
All loans in the bank's portfolio should be subject to the EWS described above. This applies to performing loans that never defaulted, but to restructured loans as well.
 
A. Timeline
 
For EWS to be effective, clear deadlines for actions should be in place, and consistently enforced (see an indicative timeline in Table below). The level and timing of the monitoring process should reflect the risk level of the loan. Large loans should be monitored closely and by the Risk department and respective Credit committees or any higher management committees.
 
Banks should also establish the criteria to monitor large corporate loans and at the same time importance to be provided to smaller loans, and the same should be followed by designated staff within the bank, with the results reported to the management.
 
IndicatorResponsibilityWorkout (once the trigger identified)Description
Any triggers identified / or any Signal receivedRelationship Manager (RM) / Portfolio Manager (PM).Max 1 working day.RM / PM starts analyzing the borrower details to investigate further.
Follow up with the borrower and report with analysisRelationship Officer / Portfolio Manager.Max 3 working days for a material loan and 5 working days for others.RM / PM contacts borrower determines reasons, and provide analysis.
Decision on further actionsRelationship Manager & Head of Business; EWS manager.Max 6 working days for material loan and 10 working days for others.Decision for a loan to be: (i) put on watch list and potential request for corrective action; (ii) left without action or mitigating measures; and (iii) transferred to Workout Unit.
Review of watch listRelationship Manager & Head of Business, EWS manager and Credit Committee.Every fortnightly for material loans and 1 month for others, the list is reviewed and amended, if needed.Risk manager/EWS manager (in consultation with Head of Business) monitors the performance of the borrower and agreed mitigation measures. If needed, based on the recommendation of Credit Committee or any other delegated committee takes decision to transfer to Workout Unit.
Final decisionHead of Business /Risk manager, EWS manager.Banks as per their internal policy can specify the maximum time a borrower can remain on watch list.Borrower can be on watch list only on a temporary basis. Banks should assess as how much time should be specified for which the borrower remains in watch list, once the specified time is completed a final decision should be taken, i.e., loan either removed from watch list (if problems are resolved), or transferred to Workout Unit.
 
B. Establishing criteria for transfer to Workout Unit:
 
Banks shall establish and document a policy with clear and objective time-bound criteria for the mandatory transfer of loans from Loan Originating Units to the Workout Unit along with the specification of relevant approvals required for such transfers. The policy should include details on areas where proper collaboration is required between the Workout Unit and Loan Originating Units especially in scenarios where the borrowers are showing signs of stress but still being managed by the Loan Originating Units.
 
While corrective actions should be taken as soon as a problem is identified, if the problem cannot be solved within a reasonably short period, the loan should be transferred to the Workout Unit (WU) for more intensive oversight and resolution. Allowing past-due loans to remain within the originating unit for a long time perpetuates the problem, leads to increased NPL levels within the bank, and ultimately results in a lower collection/recovery rate.
 
C. Following are generally the key indicators for transferring to Workout Unit (not all-inclusive):
 
i.Days past due (DPD) based on internal thresholds and considering the nature of the borrower should be included as a mandatory trigger (For further guidance on this refer to SAMA rules on Credit Risk Classification and Provisioning).
 
ii.Debt to EBITDA ≥ Internally set threshold dependent on the nature and industry of the borrower (not applicable to an MSME, in cases wherein reliable financial information is not available),
 
iii.Net loss during any consecutive twelve-month period ≥Internally set threshold dependent on the nature and industry of the borrower,
 
iv.A loan classification of “Watch list ” if syndication is involved and/or reputational/legal issues are at stake;
 
v.Length of time on watch list (e.g., more than twelve months), or at least two unsuccessful prior restructurings;
 
vi.An indication of an imminent major default or materially adverse event, including government intervention or nationalization, notice of termination of operating license or concession, significant external rating downgrade of borrower or guarantor, sudden plant closure, etc.;
 
vii.Litigation, arbitration, mediation, or other dispute resolution mechanism involving or affecting the banks; or
 
viii.Evidence or strong suspicion of corruption or illegal activity involving the borrower or the borrower's other stakeholders.
 
Note: Banks are encouraged to develop customized indicators for the MSME sector. 
 
The decision to transfer a loan to the Workout Unit should be based on a refined judgment that the loan will not be repaid in time, in full and urgent action is needed in view of the borrower’s deteriorating situation. The above-mentioned criteria can give a clear signal that: (i) loan-level is unsustainable; (ii) equity of a company has been severely depleted; or (iii) previous restructurings were not successful, and more drastic measures should be applied. 
 
Exceptions to this policy should be rare, well documented in writing, and require the approval of the Board of Directors or any other bank's board designated committee. 
 
Note: Banks should define clear and objective criteria in its internal documentation, for handing over a borrower to the workout and legal support unit, as well as the criteria for returning the borrower back to the commercial unit for regular management. The commercial unit and the workout and legal support unit must he completely separated in terms of functional, organizational and personnel issues. 
 
The work out unit should seek to restructure the loan and maximize banks recovery for borrowers considered as viable. Borrower's viability needs to be evaluated in light of comparing the losses that may transpire in case of restructuring versus foreclosure. 
 
However, on the other hand, foreclosure proceedings may be initiated, if the bank after due process concludes that the case is ineligible for restructuring consideration either because of financial or qualitative issues.