Annual Report 2007

3. Capital risk
Technical Capital – In accordance with the General Law for Financial
System Institutions of Ecuador and the Resolutions Codification of
the Ecuadorian Superintendency of Banks and Insurance and the
Banking Board, the Bank must maintain a 9% ratio between technical
capital and the total of the amount weighted for risk of assets
and contingencies. Furthermore, the technical capital may not be
less than 4% of total assets plus contingencies.
The Bank evaluates the capital risk through the Assets and Liabilities
Committee - ALCO, whereby periodic monitoring of compliance
with forecast of capital needs is performed.
4. Credit risk
There are two sources of credit risk for the Bank: On the one hand,
credit risk arises from customer lending; on the other hand, credit
risk is also incurred with interbank placements and from securities.
Credit risk is further divided into credit default risk and credit portfolio
risk in order to facilitate close risk management.
4.1. Credit default risk from customer lending
The management of credit default risk begins with the Bank’s loan
officers. Thanks to the Bank’s thorough credit analysis, the risk is
minimized at the beginning of the credit cycle, i.e. when the loan
application is received and processed by the responsible loan
officer. Key to the high quality of the Bank’s credit analysis is an
extensive training of its loan officers and a comprehensive cash
flow analysis.
Close relationships with credit customers in accordance with the
Bank’s mission to be a “neighborhood bank” are an important tool
for avoiding arrears and identifying problems at an early stage. The
Bank has an escalation process in place that defines the steps to be
taken when a client’s ability to service the outstanding loan shows
signs of deterioration. Due to the Bank’s credit methodology, it has
been able to establish its position as a responsible and serious
lending institution.
The effectiveness of this tight risk management is reflected in the
low arrears rate of the Bank’s loan portfolio.
Breakdown of loan portfolio by days in arrears:
The Bank’s credit portfolio risk is naturally limited by the credit
strategy resulting from its business model, in particular its focus
on small and very small loans and the geographical and economic
sector diversification of the loan portfolio.
F i n a n c i a l S tat e m e n t s
Loan portfolio PAR (>30 days) PAR as % Net write-offs Net write-offs as %
of loan portfolio of loan portfolio
As at December 31, 2007 184,378 2,799 1.52% 724 0.39%
As at December 31, 2006 110,772 1,968 1.78% 890 0.80%
The structure of the loan portfolio is regularly reviewed within the
Bank in order to identify potential events which could have an impact
on large areas of the loan portfolio (common risk factors) and if
necessary to limit the exposure to certain business sectors.
Individually significant loans are those above US$50,000, which
are reviewed for impairment on an individual basis (specific impairment).
For the calculation, a discounted cash flow approach is
applied.
Impairment for individually insignificant loans in arrears is calculated
on a portfolio basis at historical default rates. Eight or more
days in arrears is considered objective evidence of impairment. For
all impaired loans, portfolio-based allowances for impairments are
made, again based on historical loss experience.
The total allowance for impairment losses is presented in note 19.
4.2. Credit default risk with interbank placements and from securities
The Bank limits its deposit and other banking transactions to sound
local or international banks. The exposure to each counterparty is
limited based on an individual assessment; this limit may not exceed
20% of the regulatory capital of the bank. The limits are approved
by the Risk Committee of the Bank. The financial and market
performance of the counterparties is continuously monitored by
the Risk Department.
5. Liquidity risk
Banco ProCredit divides financing risk into a predominantly shortterm
liquidity risk (liquidity shortages) and a medium- and longterm
funding risk (shortage of equity and debt).
Liquidity risk is the risk of not being able to meet financial obligations
when they come due.
In the Bank, liquidity risk is monitored on a daily basis by the Treasury
Department; furthermore it is part of the monthly Assets and
Liabilities Committee (ALCO) meetings, in which senior management
participates.
The daily liquidity position is monitored by fulfillment of indicators;
the short-term liquidity position is monitored on a cash flow basis
for a forecast period of 6 months.