confidence - Investing In Africa

Management Discussions & AnalysisOperation Review (cont’d)• Related party exposure to a singleentity is not to exceed 2% of Tier 1capital without prior approval of theCentral Bank, subject to the aggregateexposure to all related parties not toexceed 25% of Tier 1 capital.During the year, the Bank reported tothe Central Bank all group exposuresexceeding 15% of its capital base. Asat 30 June 2005, the aggregatecredits exposures of 15% and abovestood at 43% of capital basecompared to 105% as at 30 June2004, mainly driven by the increase incapital base. This is well within the600% limit set by the Central Bank. TheBank’s concentration of credit hasbeen decreasing over the past twoyears due to the significant increase inits capital base and the Group’scontinued strategy to diversify itsportfolio and risks. All related partyexposures are reviewed by the BoardConduct Review Committee everyquarter and are reported to theCentral Bank. Approval has beensought and obtained from theregulators where aggregate exposureshave exceeded the regulatory limits.The Bank has set more conservativelimits on concentration of exposuresby portfolio, group of related entitiesand entity within a country and theselimits are monitored by the RiskCommittee every quarter. Exposureceilings have also been set for newproducts and are regularly reviewedagainst actual performance.Sanction of credit and expenses are approved by the Board Committee, withcertain defined authority delegated to management and senior executives.Credit Risk ProfileIn order to standardise the credit rating and assessment process, the Bank is usingMoody’s Financial Analyst to rate its macro business banking customers, SmallBusiness Underwriting Matrix for micro business banking customers and Experian-Transact for its personal banking segment. Indicative prices are being set basedon the riskiness of the customer, the industry and type of facility and tenor, whichreflect the price that needs to be charged to the client in order to achieve therequired return on capital. On a crude aggregation basis, by using the basicweighted average method, the credit risk rating of the Group is on average 5 ona scale of 1 to 10, which is acceptable. All unrated companies and impairedaccounts have been defaulted to 10. Currently the Bank is implementingMoody’s Risk Advisor to enable a comprehensive assessment of customers, bothon financial and non-financial factors, in line with the Basle II Accord.Chart 3 - Group Exposures with Expected Losses as at June 30, 2004 and 2005Exposure(MUR Million)10,0009,0008,0007,0006,0005,0004,0003,0002,0001,000-1 2 3 4 5 6 7 8 9 10Exp June 2005 Exp June 2004FRRExpenditure LossesJune 2005Expenditure LossesJune 2004Expected Losses(MUR Million)120.00100.00The Group’s exposure grew by 8% year on year and Business Bankingrepresented 80% of total exposure as at 30 June 2005 compared to almost82% as at 30 June 2004, the decrease attributable mostly to growth in thepersonal banking segment.80.0060.0040.0020.0081