MORNBFI Vol. 1 - Planters Development Bank

§§ 4301Q - 4301Q.609.12.31of which is owned by subject corporation,unless the terms of the transactions are notmore favorable than those of other similartransactions.§§ 4301Q.1 - 4301Q.5 (Reserved)§ 4301Q.6 Large exposures and creditrisk concentrations. The followingguidelines shall govern managing largeexposures and credit risk concentrations inline with the objective of strengthening riskmanagement in the quasi-banking system.a. General principles(1) A QB can be exposed to variousforms of credit risk concentration which ifnot properly managed may cause significantlosses that could threaten its financialstrength and undermine public confidencein the QB.(2) Credit risk concentrations may arisefrom excessive exposures to individualcounterparties, groups of relatedcounterparties and groups of counterpartieswith similar characteristics (e.g.,counterparties in specific geographicallocations, economic or industry sectors).(3) Diversification of risk is essential inquasi-banking. Many past QB failures havebeen due to credit risk concentrations ofsome kind. It is essential for QBs to preventundue credit risk concentrations fromexcessive exposures to particularcounterparties, industries, economic sectors,regions or countries.(4) While concentration of credit risksis inherent in quasi-banking and cannot betotally eliminated, they can be limited andreduced by adopting proper risk controland diversification strategies. Safeguardingagainst credit risk concentrations shouldform an important component of aQB’s risk management system.(5) The board of directors of a QB shallbe responsible for establishing andmonitoring compliance with policiesgoverning large exposures and credit riskconcentrations of the QB. The boardshould review these policies regularly (atleast annually) to ensure that theyremain adequate and appropriate for theQB. Subsequent changes to theestablished policies must be approved bythe board.(6) The policy on large exposures andcredit risk concentrations shall, at aminimum, covers the following:(a) Exposure limits that are reasonablein relation to capital and resources for –(i) Various types of borrowers/counterparties (e.g. government, banks andother FIs, corporate and individualborrowers);(ii) A group of related borrowers/counterparties;(iii) Individual industry sectors;(iv) Individual countries; and(v) Various types of investments.(b) The circumstances in which theabove limits can be exceeded and the partyauthorized to approve such excesses, e.g.,the QB’s board of directors or creditcommittee with delegated authority fromthe board;(c) The delegation of credit authoritywithin the QB for approving largeexposures;(d) The procedures for identifying,reviewing, managing and reporting largeexposures of the QB;(e) The definition of exposure.QBs should take into account the nature oftheir business and the complexity of theirproducts. In any case, a QB’s exposures toa counterparty should include its on and offbalancesheet exposures and indirectexposures; and(f) The criteria to be used foridentifying a group of related persons;(7) The board and senior managementof a QB should ensure that:(a) Adequate systems and controls arein place to identify, measure, monitor andreport large exposures and credit riskQ RegulationsPart III - Page 2Manual of Regulations for Non-Bank Financial Institutions