Annual Report 2012 - The Cyprus Development Bank

annual report 2012NOTES TO THE FINANCIAL STATEMENTSFor the year ended 31 December 201231. FINANCIAL RISK MANAGEMENTThe Group, as a financial organisation, is exposed to risks, the most important of which are credit risk, market risk, liquidity riskand operational risk.The Group implements internal mechanisms for continuous and systematic monitoring of the above risks in order to avoidexcessive concentration of such risks. The nature of such risks and the manner of dealing with them are explained below:Risk management frameworkThe Group establishes risk management policies to identify and analyse the risks faced by the Group, to set appropriate risk limitsand control procedures, and to continuously monitor such risks as well as the Group’s adherence to limits and controls. Riskmanagement policies are reviewed regularly to reflect changes in market conditions, products and services rendered.(a) Credit riskIn the ordinary course of business the Group is exposed to credit risk. Credit risk emanates from the potential inability ofclients to repay their loans and other credit facilities and the non–compliance with their contractual obligations. Credit riskis monitored through various control mechanisms in order to prevent undue risk concentration and to price facilities andproducts on a risk adjusted basis.The Group establishes the financing policies and sets limits on credit exposures to clients and ensures that these policiesand limits, as well as the related credit sanctioning procedures and controls, are complied with in the conduct of the Group’soperations. The Group takes collateral for the loans and credit facilities it grants to clients. Credit risk from connected clients’accounts is monitored on an aggregated basis. The creditworthiness of clients is assessed using credit rating and creditscoring systems. Provisions for impairment have been made for possible losses that may arise in relation to specific accountsin the portfolio.The Group’s policy relating to suspension of income on loans and advances and provisions for impairment of doubtful accountsis stated in note 3 – Significant Accounting Policies.The Group set limits for the composition of the portfolio of loans and advances and monitors compliance with them. The creditrisk exposure of the Group is diversified across the various sectors of the economy. The terms of loans and advances maybe renegotiated due to deterioration in the client’s financial position. The Group implements a restructuring policy in orderto maximise collection opportunities and minimise the risk of default. The revised terms usually include extending maturity,changing timing of interest and principal payments and amendements of terms of loan covenants.Internal Audit undertakes audits of the Group’s portfolio of loans and advances and of the Group’s credit processes.The Group assesses the credit risk relating to investments in liquid funds, mainly debt securities and placements with banks,and recommendations for counterparty and country limits are submitted to the Assets and Liabilities Committee (ALCO) forapproval.43