Sefa CREDIT AND LENDING POLICY



4762503971925sefa CREDIT AND LENDING POLICYbyCredit Risk Unit2013 790000sefa CREDIT AND LENDING POLICYbyCredit Risk Unit2013 TABLE OF CONTENTS TOC \o "1-4" \h \z \u 1.CREDIT AND LENDING RISK – KEY PRINCIPLES PAGEREF _Toc368318931 \h 52.CONSIDERATIONS PRIOR TO THE ASSUMPTION OF CREDIT AND LENDING RISK PAGEREF _Toc368318932 \h 72.1.Formal sign off of a new risk based business activity PAGEREF _Toc368318933 \h 72.2.New credit and lending risk product development PAGEREF _Toc368318934 \h 72.3.Underlying business strategies and plans to support new credit and lending products PAGEREF _Toc368318935 \h 72.4.Responsibility for the quality of potential business introduced PAGEREF _Toc368318936 \h 72.5.Underlying measurement, management, monitoring, reporting, and system support for new credit and lending products PAGEREF _Toc368318937 \h 83.FINANCING ELIGIBILITY CRITERIA PAGEREF _Toc368318938 \h 83.1.Requirements for a credit risk framework fit including exclusions PAGEREF _Toc368318939 \h 84.KEY ELIGIBILITY CRITERIA AND CONNECTED PRINCIPLES PAGEREF _Toc368318940 \h 94.1.Mandate and strategic fit PAGEREF _Toc368318941 \h 94.2.Transactions with Politically Exposed Persons, Family member of sefa employee or board member PAGEREF _Toc368318942 \h 114.3.Alignment with business plans PAGEREF _Toc368318943 \h 124.4.Development impact PAGEREF _Toc368318944 \h 124.5.Risk acceptance criteria PAGEREF _Toc368318945 \h 124.6.Risk and reward relationship PAGEREF _Toc368318946 \h 135.TYPES OF FACILITIES PAGEREF _Toc368318947 \h 135.1.Wholesale lending products PAGEREF _Toc368318948 \h 135.1.1.Business loans PAGEREF _Toc368318949 \h 135.1.2.Credit Indemnity Scheme PAGEREF _Toc368318950 \h 145.1.3.Land Reform Empowerment Facility PAGEREF _Toc368318951 \h 145.1.4.Joint Ventures and funds PAGEREF _Toc368318952 \h 155.2.Direct lending products PAGEREF _Toc368318953 \h 155.2.1.Working capital facilities PAGEREF _Toc368318954 \h 155.2.2.Asset finance PAGEREF _Toc368318955 \h 165.2.3.Term loans PAGEREF _Toc368318956 \h 165.2.4.Revolving loan PAGEREF _Toc368318957 \h 165.2.5.Bridging loan PAGEREF _Toc368318958 \h 166.APPLICATION PROCESS – NEW CLIENT RELATIONSHIPS PAGEREF _Toc368318959 \h 176.1.Overview PAGEREF _Toc368318960 \h 176.2.Application framework PAGEREF _Toc368318961 \h 186.3.Key requirements for credit and/or lending applications PAGEREF _Toc368318962 \h 186.4.Aggregation of exposures and commitments PAGEREF _Toc368318963 \h 186.5.Know your client (KYC) process PAGEREF _Toc368318964 \h 197.DUE DILIGENCE PAGEREF _Toc368318965 \h 197.1.Appeals to the Credit Committees PAGEREF _Toc368318966 \h 197.2.Independent assessment of application by Credit Risk Unit PAGEREF _Toc368318967 \h 197.3.Term sheet / Facilities Letters covering terms, conditions, covenants and collaterals PAGEREF _Toc368318968 \h 207.4.Other key documents to accompany application for facilities PAGEREF _Toc368318969 \h 207.5.Facility terms and conditions/covenants PAGEREF _Toc368318970 \h 207.5.1.Terms and conditions PAGEREF _Toc368318971 \h 207.5.2.Covenants PAGEREF _Toc368318972 \h 217.5.3.Tenor PAGEREF _Toc368318973 \h 227.5.4.Interest rates PAGEREF _Toc368318974 \h 227.5.5.Grace period/Moratorium PAGEREF _Toc368318975 \h 238.MANAGEMENT OF COLLATERAL PAGEREF _Toc368318976 \h 238.1.Overview PAGEREF _Toc368318977 \h 238.2.Key principles PAGEREF _Toc368318978 \h 248.3.Origination of collateral PAGEREF _Toc368318979 \h 258.4.Eligibility and kind of collateral PAGEREF _Toc368318980 \h 258.5.Perfection of collateral PAGEREF _Toc368318981 \h 268.6.Valuation of collateral PAGEREF _Toc368318982 \h 268.7.Considerations relating to Sureties PAGEREF _Toc368318983 \h 278.8.Monitoring and reporting of collateral PAGEREF _Toc368318984 \h 279.APPLICATION OF CREDIT RISK RATINGS PAGEREF _Toc368318985 \h 289.1.Overview PAGEREF _Toc368318986 \h 289.2.Annual reviews of credit risk ratings PAGEREF _Toc368318987 \h 2810.APPROVAL AUTHORITIES PAGEREF _Toc368318988 \h 2910.1.1.Signing of facility agreements PAGEREF _Toc368318989 \h 2910.1.2.Validity periods PAGEREF _Toc368318990 \h 2911.DISBURSEMENT OF FUNDS ON LOAN ACCOUNTS PAGEREF _Toc368318991 \h 2911.1.Overview PAGEREF _Toc368318992 \h 2911.2.Key principles PAGEREF _Toc368318993 \h 3011.3.Raising of upfront fees PAGEREF _Toc368318994 \h 3111.4.Efficiency of the disbursement process PAGEREF _Toc368318995 \h 3112.ONGOING MONITORING AND REVIEW PAGEREF _Toc368318996 \h 3112.1.Overview PAGEREF _Toc368318997 \h 3112.1.1.Facility availability period PAGEREF _Toc368318998 \h 3213.FORMAL ANNUAL REVIEWS PAGEREF _Toc368318999 \h 3313.1.The formal annual review process PAGEREF _Toc368319000 \h 3313.1.1.Annual review submissions to be timely PAGEREF _Toc368319001 \h 3313.1.2.The waiving of a formal annual review PAGEREF _Toc368319002 \h 3313.1.3.Requirements for a development impact assessment at formal review PAGEREF _Toc368319003 \h 3313.2.Documentation to be submitted for a formal annual review process in the case of a distressed client include: PAGEREF _Toc368319004 \h 3314.REPORTING OF CREDIT AND EQUITY PORTFOLIOS (INCLUDING DEVELOPMENT IMPACT ASSESSMENT) PAGEREF _Toc368319005 \h 3414.1.Overview – purpose of process PAGEREF _Toc368319006 \h 3414.2.Divisional reporting framework PAGEREF _Toc368319007 \h 3415.MANAGING PROBLEMATIC EXPOSURES – WORKOUT AND RESTRUCTURING PAGEREF _Toc368319008 \h 3515.1.Overview PAGEREF _Toc368319009 \h 3515.2.Procedure regarding the nature, extent and timing of WRU’s involvement in clients PAGEREF _Toc368319010 \h 3515.3.Formal process for handover to WRU PAGEREF _Toc368319011 \h 3615.4.Procedure regarding transfer of assets back from WRU to business support coordinators PAGEREF _Toc368319012 \h 3715.4.1.Transfer back criteria PAGEREF _Toc368319013 \h 3715.5.Post-mortem analysis and evaluation by WRU PAGEREF _Toc368319014 \h 3716.CREDIT POLICY IMPLEMENTATION – ACCOUNTABILITY AND CONSEQUENCES OF MISCONDUCT PAGEREF _Toc368319015 \h 3716.1.Credit management capability PAGEREF _Toc368319016 \h 3716.2.Accountability by line management PAGEREF _Toc368319017 \h 3716.3.Risk and talent management PAGEREF _Toc368319018 \h 3816.pliance with policy and consequence of misconduct PAGEREF _Toc368319019 \h 3817.CREDIT POLICY OWNERSHIP, DEVELOPMENT AND MAINTENANCE PROCEDURES AND RESPONSIBILITIES PAGEREF _Toc368319020 \h 3817.1.Overview PAGEREF _Toc368319021 \h 3817.2.The risk division’s roles and responsibilities in respect of this policy directive PAGEREF _Toc368319022 \h 38CREDIT AND LENDING RISK – KEY PRINCIPLESThe Risk Division is responsible for developing Credit policies and procedures and to convey minimum standards and key approaches to identify, measure, monitor and control credit and lending risks at both the individual obligor and at portfolio levels. All business and lending policies and procedures should be in line with the credit policies and procedures. Line of business management, at all levels of operation, as well as their credit and lending risk officials, are responsible for implementing the credit and lending policies and procedures approved by the Board. Furthermore, lines of business (Direct and Wholesale Lending) are required to ensure alignment with the minimum standards and key directives set out in this policy and where necessary entrench and operationalise these instructions within their own divisional routines, processes and procedures. This responsibility includes ensuring that there are:Clear division of lines of authority and responsibility for managing credit and lending risk and there is a functional segregation of roles and responsibilities between the deal origination and risk management operatives. Additionally, the process of credit risk recovery shall be performed independently of individuals involved in the origination of transactions; Adequate and effective operational procedures, internal controls and systems for identifying, measuring, monitoring and controlling credit and lending risk are in place to implement the credit and lending policies and standards approved by Board;Effective management information systems and data integrity to ensure timely, accurate and insightful reporting of credit and lending risks at individual, aggregated and portfolio levels of exposure. Additionally, measurement of the composition and concentration of risks, correlated and clusters of exposure expressed in terms of:Limits by obligors, obligor groups, risk ratings distribution, industry sectors, geography or sensitivity to single factors, problem exposures and adequacy of impairment;Applicable Rating Models as part of a well-structured internal risk rating system which provides for sufficient Group gradations to differentiate the degree of credit risk at obligor and portfolio levels;Sufficient resources and competent personnel are allocated to manage and control the daily operations and credit and lending risk functions effectively; andRegular reviews of the procedures which have been put into place to manage credit and lending risk in the light of business positioning strategies, product and service innovation and changing business conditions. Management must ensure that these changes are appropriate, sound and correctly approved and implemented.A healthy Credit and Lending risk culture is a combination of its risk values, beliefs, practices and management attitudes. These define the organisational risk environment and determine the risk acceptance behavior in line with sefa’s requirements. It fosters the usage of a common risk language throughout the organisation.At all times this policy shall be read in conjunction with all applicable laws and regulations.The following represent the best practices in developing and retaining a strong credit and lending risk organizational culture:Management must regularly assess the consistency of credit and lending practices within sefa’s risk appetite, prudential limits and policy and procedures;Management must place high importance on credit and lending quality, and this must resonate throughout sefa, both through communications and actions;There must be strong leadership and a skilled management team within the credit and lending functions;Management accepts responsibility and accountability for credit and lending quality and encourages sound lending practices from all employees within the lending divisions;The credit and lending policy shall be documented in a clear, concise written format and enforced by the Chief Risk Officer;Clear accountability must be established for every employee involved in the management of credit and lending risk. Risk vigilance is a mandatory requirement. Competency must be reflected in the risk takers’ performance evaluation and subject to regular review;Strategic and business plans must embody a risk analysis and evaluation. New areas of business must be selected in conformity with sefa’s Risk Appetite and Prudential Limit directives and Portfolio risk guidelines. Clear credit and lending standards, objectives, measurements, monitoring and reporting must be put into place to underline risk taking aspirations;The communication of credit and lending policy, standards, strategic and business plans, incentive programs must be transparent and consistent to avoid confusion and a conflict of priorities and align with institutional objectives;Policy exceptions should seldom occur. If they do arise, these must be escalated in a timely manner and be supported by proper justifications and documentation and appropriate approvals by authorised bodies;Strong credit and lending procedures, systems and controls in respect of approvals, rating, monitoring, early problem recognition, review, portfolio review and audit must be in place;Regular training on sefa’s credit and lending policy and procedure is important to reinforce required standards and as part of an operative’s ongoing development.CONSIDERATIONS PRIOR TO THE ASSUMPTION OF CREDIT AND LENDING RISK Formal sign off of a new risk based business activityAny new risk based business activity must be approved by the Board of Directors or its appropriate delegated committee before it is implemented.New credit and lending risk product developmentNew products require planning and careful oversight to ensure the risks are appropriately identified and managed. The institution must ensure that the risk of new products and activities are properly mitigated through to adequate procedures and controls before being introduced or undertaken.Underlying business strategies and plans to support new credit and lending productsIn considering new credit and lending risk products, the institution will expect the business strategies and plans to cover the intended positioning. Furthermore, the assessment of both the development impact and the credit and operational risk inherent in the new product is a requirement. It is also expected that sefa is adequately compensated for the risk inherent in all new products.Responsibility for the quality of potential business introducedPrimary responsibility for the quality of potential business introduced together with all information used to assess these prospects is that of the team introducing it. Ultimately, the Executive responsible for the Division is accountable for ensuring this requirement is met and that only quality risk and credible related information is introduced and presented to sefa.Underlying measurement, management, monitoring, reporting, and system support for new credit and lending productsAll the risks associated with a new credit and lending product are required to be analysed and understood. The assessment of risks inherent in new products must include other risks that might overlap into other risk disciplines. Credit and lending risks must be considered in tandem with other risks that might arise and upon approval, these must be correctly assimilated into the respective scope of functional responsibilities, such as operational or financial risks. Furthermore, the underlying risks are to be measured and monitored. Effective and efficient systems are to be in place to facilitate the foregoing functions and for reporting purposes. It is also expected that once a new product is approved and implemented, business will be required to regularly report to the Credit Committee or its delegated committee, the overall risk assessment as well as envisaged development impact of the new product. Portfolio reviews must additionally highlight the performance of new risk-based business positioning, on a basis directed by the Risk Division.FINANCING ELIGIBILITY CRITERIARequirements for a credit risk framework fit including exclusionsIn line with the sefa credit risk framework, the Institution will not assume certain defined risk. Client relationship and facilities are, thus, prohibited in the following circumstances and/or to the entities/individuals specifically excluded, as set out in the list below:Shareholder initiated exclusions, or business whose trade or operations may prejudice the reputation and good standing of sefa;Speculative real estate;Speculative trading and hedging for the Institution’s own position;Political parties or organisations;Leveraged buy-out funds or listed companies;Loans to refinance existing debts;People under debt review, or unrehabilitated insolvents, as well as businesses under business rescue or liquidation;Business relationships and transactions with entities and individuals that contravene, in any way, the provisions of the following legislation:The Prevention of Organised Crime Act No. 121 of 1998 (POCA);The Financial Intelligence Centre Act 38 of 2001 (FICA); andThe Protection of Constitutional Democracy against Terrorist and Related Activities Act No 33 of 2004 (POCDATARA)(See Annexure A for brief summary of the above)Entities/individuals whose primary business involves arms related transactions ;Religious entities and any other activities which could cause a moral dilemma for sefa;Companies involved with child labour;Transactions that do not contribute positively to development impact, or ventures inconsistent with the mandate of sefa;Companies whose primary business involves gaming and gambling, or “morally harmful” industries – tobacco, liquor, sex trade; Business relationships/transactions that transgress tax, accounting, regulatory requirements as well as societal norms and environmental legislation;Any business relationships/transactions that may have the potential to threaten or damage sefa’s reputation or cause a breakdown in trust and confidence in the Institution; Primary Agriculture, except for cash crops;Entities where sefa employee or board member has a financial interest;Individuals and entities listed on the IDC Delinquency register; and Immediate family members of a sefa employee or a Board member, which includes life partners, parents and children. KEY ELIGIBILITY CRITERIA AND CONNECTED PRINCIPLESMandate and strategic fitsefa was established to meet key government priorities as set out in the medium term strategic framework (MTSF) particularly in respect of outcome 4, being to create decent employment through inclusive growth. This outcome recognizes that survivalist, micro, small and medium enterprises (SMME’s) present an important vehicle to address the issues of employment creation, poverty alleviation and economic growth to redress equality imbalances that presently exist in the country. sefa also endeavours to meet the National Development Plan’s Vision 2030, which promotes social equity through growing the economy, eliminating poverty and reducing inequality. By addressing the market failures in serving the SMME market and creating sustainable enterprise development, sefa intends playing a key role in job creation, poverty alleviation and socio-economic development and equality for all.The development nature of sefa’s lending may therefore result in sefa focusing on higher relative risk than would be found in a commercial organisation. The following eligibility criteria will apply to both Direct and Wholesale Lending:Applicants must be South African citizens, with valid South African Identity Documents or legal entities controlled by South African Citizens with a valid South African Identity Documents or permanent residents who hold a valid RSA ID document;Be legally constituted including sole traders with a fixed physical address;The financed operations must be conducted within the borders of South Africa, and the controlling interest (>50%) of the business enterprise must be held by a South African Citizens with a valid South African Identity Documents or permanent residents who hold a valid RSA ID document;If sefa finances transactions that take place outside its borders or of an export nature sefa must be satisfied that the proceeds will be remitted to RSA;The Enterprise(s) must be compliant with generally accepted corporate governance practices appropriate to the client’s legal status; The project must demonstrate ability to create new jobs as well as the desired level of development impact andWholesale Lending will also have the following extended eligibility criteria;It should have a national or provincial reach. The business model should be sustainable.The company should have a strong SMME focus.The business must have a clearly defined target market in line with sefa’s strategic objectives.It should have a developmental agenda, with a bias towards women, youth and rural development.It must be compliant with generally accepted corporate practices.It must have a business plan that meets the basic criteria set out in sefa’s business plan guidelines.In approving facilities, consideration will be given to the expected development impact of the project. The integrity and reputation of the project concerned is a principal consideration as well as their legal capacity to assume the liability. Applicants should also provide a written proposal or business plan that meets the requirements of sefa’s loan application criteria.All transactions must therefore fit the mandate as well as sefa’s strategy. The obligor’s ability to generate sources of repayment or equity value on their own showing is a principal aspect of the Institution’s credit analysis and evaluation.Transactions with Politically Exposed Persons Where a transaction involves financing to a Politically Exposed Persons (PEP), such interest should be immediately declared to ensure transparency and enhancement of the monitoring of the decision process. Such transaction will be dealt with on its merit and at arm’s length at all times and the necessary governance process to deal with such transactions will be followed."politically exposed person" (PEP) is a term describing someone who has been entrusted with a prominent public function, or an individual who is closely related to such a person. Most financial institutions view such clients as potential compliance risks and perform enhanced monitoring of accounts that fall within this category.Although there is no global definition of a PEP, most countries have based their definition on the Financial Action Task Force (FATF) definition:current or former senior official in the executive, legislative, administrative, military, or judicial branch of the government;a senior official of a major political party;a senior executive of a government-owned commercial enterprise, being a corporation, business or other entity formed by or for the benefit of any such individual;an immediate family member of such individual; meaning spouse, parents, siblings, children, and spouse's parents or siblings; andany individual publicly known (or actually known by the relevant financial institution) to be a close personal or professional associate of a PEP.Alignment with business plansAll credit and lending activities should be in line with approved business positioning strategies. All business plans within the Institution are required to demonstrate the implications of both credit and lending risks as well as all other associated risks have been considered in the business positioning strategies and tactical plans.Development impactThe project teams are required to demonstrate the development impact outcomes of all transactions on a basis directed by the Risk Division.Risk acceptance criteriaCredit Risk Management involves identification, analysis, measuring, monitoring and managing of existing and potential risks inherent in any product or activity.The basis for an effective credit risk management process is the identification and analysis of existing and potential risks inherent in any product or activity. It is therefore essential that the Institution must have sufficient capacity to manage the risk that sefa is exposed to. For the effective management of risk, sefa must have in place effective people, processes and systems which will enable the institution to manage and control the credit risk inherent in its lending activities. Credit Risk Officers are expected to have a complete understanding of the risk associated with the institution’s credit and lending activities as well as understand the relevant factors and market conditions which can affect credit and equity quality and assess the impact of changes in these factors on the institution’s risk profile and financial performance. Employees involved in any transactional activities are, therefore, expected to be capable of conducting those operations to the high standard and in compliance with the institution’s Policies and Procedures.sefa shall utilise transaction structure, collateral and or sureties to help mitigate risk (both identified and inherent) in individual credits but transactions will be entered into primarily on the basis of the strength of the borrower’s repayment capacity and the development impact. Risk and reward relationshipGranting credit involves accepting risks as well as well as being satisfactorily compensated for the risk taken. sefa is therefore required to assess the risk/reward relationship in any credit and lending decision as well as the overall profitability of the transaction.In evaluating whether, and on what terms to grant credit, sefa will assess the risk against expected return, factoring in appropriate financial and non-financial (e.g. collateral, restrictive covenants etc.) terms. The actual terms and facility will be driven by a multiple of factors with anticipated cash flows being a principle determinant.TYPES OF FACILITIESIn order to achieve its mandate, the following products are available to be advanced by the institution.Wholesale lending productsBusiness loans In response to the mandate and broad strategic objectives of sefa, the Wholesale Lending Division will ensure that sefa delivers products and services through financial intermediaries (FIs) and other partners to fulfil its commitments to the SMME market. The target market for these loans are financial institutions, Retail Finance Intermediaries, Micro Finance Intermediaries (e.g. RFIs, MFIs, and FSCs) and co-operatives that are operating within the SMME sector. The FIs further on-lend to individual SMME’s, which are sefa’s ultimate target market. They are structured in a single or multiple take-up based on the intermediaries needs and requirements. The repayments of the loans are generally structured to provide for capital and/or interest moratoriums to assist the intermediaries with the cash flow as many of these institutions are highly geared with nominal equity contribution and/or security other than the book. The funding facilities to FI’s ranges from around R5 million up to around R100 million, whereas the funding facilities extending through the FI’s, in particular, MFI’s ranges from R 500 to R 5,000. Draw-downs of the facility is spread over a period of time based on the funding requirements of the SMME serviced by the FI. Specific developmental targets are set as part of the loan facilities to achieve sefa’s development objectives. To support these objectives preferential interest rates may be offered. By advancing such facilities sefa will not take direct risk on the underlying projects or business activities funded by the institution’s facilities, but rather on the balance sheet of the financial institution to which the facilities are advanced. It is therefore imperative that a thorough risk assessment of the intermediary is carried out so as to establish the ability of such intermediary to repay sefa’s facilities as well at the performance of the projects funded using sefa’s facilities. These loans are also supported with institutional strengthening by way of grant funding and technical support where the need has been identified. In most instances board representation by sefa is incorporated as part of the facility to ensure that good corporate governance and compliance is adopted and implemented by the intermediary. Credit Indemnity SchemeThe purpose of the scheme is to encourage the leveraging of funding by commercial funding institutions by providing these institutions with the security shortfall for SMMEs who are able, other than security, to justify facilities in the formalised financial market. The scheme consist of a fund that offers a credit guarantee to financial institutions to provide finance for SMMEs. The scheme is aimed at assisting SMMEs in obtaining finance from financial institutions to establish a new business, expand or acquire an existing business in circumstances where they would not, without the support of indemnity cover, qualify for such financing in terms of the institution’s lending criteria. Land Reform Empowerment Facility The Land Reform Empowerment Facility (LREF) has been developed as a Broad Based Black empowerment fund capitalised by the Department of Rural Development and Land Reform and supported by the European Union. The funding is made available through the commercial institutions and other reputable agriculture lenders aimed at Black beneficiaries. Sefa assists these projects with training and skills development interventions by means of a training grant. Joint Ventures and fundsThese funds include joint ventures, partnership funds created with reputable organisations to address specific markets and sectors. These Special Purposes Vehicles are created using the specialised skills and/or markets reach of the participating investors who each contribute equity to the vehicle. The tenure of these Special Purpose Vehicles are spread in most instances over a ten year period with the provision to extend for a further year or two. Each participating investor appoints a senior executive to the Board of the SPV and together with specialist fund management support create access to finance with support to the targeted SMME’s.Direct lending productssefa’s Direct Lending focuses on products that advance credit directly to the SME’s. These products are targeted primarily at small and medium-sized businesses operating in most sectors of the economy requiring loans ranging from R50?000 to R5 million. In exceptional circumstances, sefa will endeavor to accommodate SMEs requiring funding below R50 000 in cases where they are not able to get funded through the wholesale channel. sefa provides a range of retail financing products to cover the needs of SME. The retail products on offer is are follows:Working capital facilitiesAs a Development Finance Institution, sefa’s funding approach is to provide short term funding. This is an advance to facilitate short term working capital requirements for the procurement of goods and/or services including operational expenses to fulfil existing customer contracts or orders. This loan duration is a maximum of 12 months.Asset financeAsset finance is one of the most effective ways through which sefa provides funding for developmental purposes. This is a provision of finance for the acquisition of fixed assets for use in the operation or expansion of the business, with each advance repayable monthly on an amortized basis including interest. The loan duration is for the economic useful life of the asset, not exceeding 60 months. Although development impact is a key financing consideration, such transactions supported by sefa must be financially viable, economically and socially sound; technically feasible and environmentally sustainable.Term loansThis is an advance which is linked to clear delivery variables, with a fixed tenure of between 1 and 5 years. The advance is generally amortized in equal monthly (or quarterly) instalments of principal and interest over the life of the term loan. The purpose of the loan is to finance longer term working capital requirements, specific capital acquisition and/or business expansion projects. The loan duration is a minimum of 12 months, a maximum of 60 months. Revolving loanThis advance is available to established sefa’s clients with satisfactory credit records to facilitate short-term capital requirements for the delivery of existing customer contracts or orders. The capital repayments plus interest are structured in relation to the cash flow projections of the borrower. The loan duration is a maximum of 12 months. However, this may be extended at the end of that period if the account is satisfactory and circumstances justify it subject to payment of a renewal fee. Bridging loanThis loan is for businesses which do not have sufficient capital to fulfil their tenders or orders. The loan duration is a maximum of 12 months. The documentation required for the assessment of such transactions will not require business plans.APPLICATION PROCESS – NEW CLIENT RELATIONSHIPSOverviewIt is mandatory that credit and lending risks be proposed on a basis that allows for deal differentiation but also simultaneous alignment with core credit and lending risk principles and practices to ensure consistency across all lines of business.Through this Credit Policy, sefa will ensure that the credit-granting function is properly managed and that credit exposures are within levels consistent with prudential standards and internal limits. sefa will establish and enforce internal controls and other practices to ensure that deviations to policies, procedures and limits are reported in a timely manner to the appropriate level of management.Clearly defined criteria, analysis and evaluation approaches including forward looking analysis are required to be formally set out in a framework of minimum information requirements to ensure adequate insights. Additionally scrutiny and analysis to ensure that key risks, revenue and cost drivers are surfaced, well understood, challenged based on varying scenarios, in particular, likely downside scenarios.Facility submissions must be based primarily on the strength of a borrower’s repayment capacity and cash flow as well as development impact. sefa’s lending is not primarily based on collateral but on the strength of the business case and cash flows. As such Collateral, although an important element to mitigate risk, will not constitute a substitute for a comprehensive assessment, nor should collateral compensate for insufficient information or inadequate cash-flow.The application documentation is required to provide a balanced appraisal built upon a foundation of accurate information, thoughtful and integrated analysis and evaluation of the risks, sources of repayment, mitigants, terms, conditions and covenants, culminating in a summation of points for and against the credit or lending proposal.Credit and lending appraisals are complex. A submission for facilities in respect of a new client forms the informational foundation for the institution’s relationship with the client. It is necessary that expertise, commensurate with the size and complexity of the envisaged transaction, is utilised to source, refine, propose and present submissions to Credit Committees.It is necessary that the proposal is professionally executed, that the application documentation is complete in itself and that the probability of time consuming rework and resubmission is avoided. The adage “get it right the first time” is important from the client relationship perspective, reputational as well as internal efficiency considerations.Application frameworkAll employees involved in recommending transactions to sefa’s Credit and Lending Committees are accountable for their recommendations as are credit and lending committees that approve and/or recommend decisions to higher committees for final approval. All parties and committee members must consider whether or not recommending or approving a credit and/or lending is appropriate for both the institution and the client. A recommendation does not imply that a credit or lending is without risk; rather it means the risks have been identified and are appropriate and prudent for sefa to undertake.Key requirements for credit and/or lending applicationsA credit and/or lending application shall provide information about the client as well as a clear and careful identification and analysis of the risk factors involved in the transaction. Risk analysis on clients with historical trading history must be based on historical, current and expected future performance of the client. Regarding new businesses, assumptions and/or key business drivers must be validated to ensure that expectations are realistic especially with regards to cash-flow generation ability (and therefore ability to repay on time) and expected development impact outcomes. Key business drivers must be subjected to stress testing to consider the impact of changes to key assumptions.Aggregation of exposures and commitmentsWhere the client applying for the facility has an existing exposure with sefa, such exposure must be fully disclosed. Exposures can be direct or indirect through related parties. Guidance on whether related party lending should be aggregated or not must be sought from the relevant Credit Committee. Exposures must be disclosed according to type (i.e. debt, equity, guarantees, etc.) with debt being split out according to ranking (i.e. senior, junior subordinate and mezzanine). Aggregation of exposures must also include facilities that have been approved but not yet drawn. These include facilities that have been approved but not yet committed or those that have been committed but not yet drawn down.Sector aggregation must be summarised, if relevant, in the portfolio. Aggregation and/or measurement in terms of Board defined Risk Appetite/ Prudential Limits must also be reflected on a basis directed by the Risk Division.Know your client (KYC) process All key principals, especially those responsible for signature of the facility agreements with sefa are to be subjected to the KYC requirements as per the Financial Intelligence Centre Act (FICA). An external credit enquiry must be done on the applicant (individual) to verify the applicants’ details, their credit record and any other relevant information. Any recent judgments or adverse information will normally disqualify any applicant unless sound motivation to the contrary exists. Credit Bureau checks must be conducted on all companies and their directors. It is expected that the KYC process shall be conducted very early on in the appraisal process.DUE DILIGENCEMandated Credit Committees shall consider and approve all credit facilities within its delegation on the basis of a well-structured due diligence report which addresses all pertinent risk issues specific to the proposed facility.Appeals to the Credit CommitteesAny appeal to a rejected funding application shall be subjected to the approval of the Chair Person of the respective Credit Committee. Independent assessment of application by Credit Risk UnitThe Credit Risk Unit is to perform an independent credit risk assessment of the transaction and indicate support or no support, and the basis thereof. The role of the Credit Risk Analyst is not to re-appraise the transaction but rather to critically assess the risks and propose appropriate additional mitigations. Credit and Business staff (Wholesale and Direct Lending) shall endeavour to reach agreement on a transaction before it is submitted to any Credit Committee.Term sheet / Facilities Letters covering terms, conditions, covenants and collateralsA proposed term sheet, prepared in a format specified by the Legal Services Unit (LSU) and prepared in consultation with a legal Advisor shall be part of the submission of all applications for Wholesale Lending. The final term sheet to be given to the client shall be in alignment with the terms, conditions, covenants and collaterals approved by the mandated Credit Committee. Such term sheet will form the basis of the negotiations with the client as well as the final legal agreements.Other key documents to accompany application for facilitiesThe following documents must specifically accompany all applications being presented to any of the institution’s Credit Committees:A credit rating schedule, in a format specified by Credit Risk Unit, indicating the proposed credit rating of the facility or client, as the case may be. The Head of Credit Risk Unit will sign the schedule to indicate support for the proposed credit rating. Credit ratings of facilities are to be confirmed and considered by the committee with the delegated authority for approving the transaction.A summary of expected Development Impact outcomes in a format specified jointly by the Risk Division. Such summary shall be part of the credit submission. This summary document is to form the basis upon which sefa shall monitor the Development Impact performance of the project. Facility terms and conditions/covenantsTerms and conditionsTerms and conditions of a loan shall be used to ensure that the risks of the transaction are minimised. This must be facilitated through the use of both negative and positive covenants which can be financial or non-financial in nature. The terms and conditions of the facility must be legally and practically enforceable and relevant for the nature of the transaction that sefa enters into and must be understood and acceptable to all parties involved in the transaction. These terms and conditions form the basis of sefa’s relationship with the client for the duration of the facility and must also be included in the legal agreements and the monitoring plan.CovenantsA loan covenant is a clause in the lending contract that requires the borrower to do, or refrain from doing, certain things. Covenants can either be affirmative (protective) or negative (restrictive); and either financial or non-financial. Affirmative and protective covenants respectively specify things that the borrower has to do and those that they must not do to comply with the loan agreement. Covenants are an important tool that the institution uses to protect itself against any deterioration in the credit quality of the obligor while the facilities advanced remain outstanding. Covenants allow for regular and frequent communication with the borrower which in turn results in an up-to-date assessment of the borrower’s credit quality. Properly structured covenants provide triggers or early-warning signals of trouble, which allows sefa to take rapid remedial action. When covenants are triggered, proper processes must to be followed to take an appropriate course of action to ensure that the institution’s position is protected. When setting covenants, a systematic approach must be followed to ensure effectiveness of such covenants. The objectives of the covenants in terms of the risk that is being mitigated and the effectiveness of the covenant in mitigating the risk must be thoroughly considered. To be effective, covenants must be stated in terms that are well defined and measurable. Measurement and reporting periods must be agreed with the borrower and contained in the facility agreement. It is also important that the covenant is such that the borrower can comply with it and that sefa is able and willing to enforce it. In case of financial and other reporting covenants, the borrower is required to provide detailed calculations of the metrics when reporting so as to ensure compliance with the agreed definitions. The basis of computations must be clearly set out in facility agreement.In summary, effective loan covenants must be simple, well defined, measurable, risk reducing and reasonable. Furthermore, the covenants must allow for early intervention and should not be set at measurement points that are close to financial stress risk conditions that could result in minimum recovery options.TenorThe tenor of the loan must be structured to meet the needs of the client and not to provide the longest possible repayment period. Payments must be structured to match projected cash flows with any seasonality in the client’s cash flows taken into consideration.Interest ratesInterest rates must be set so as to ensure that sefa is sufficiently compensated for the risk that it is taking. The committee that has the mandate to approve the transaction shall also approve the interest rate to charge on the transaction. The pricing for each transaction will be based on the approved sefa Pricing Policy, using the approved pricing model. Where there is a business case for an interest rate which is different from what was determined using the model, the relevant business area management shall present the recommended interest rate and a motivation thereof to the Relevant Credit Committee, in the format prescribed by the Relevant Credit Committee. The credit committees therefore have the mandate to approve the final interest rate.Facility fees Upfront fees charged in relation to the facilities made available to the client shall be determined by the Division responsible for the transaction and approved by the final approving Committee. In setting the fees, the Division shall take into account the costs incurred by sefa in originating the transaction and making the facility available to the client. Past due fees and unpaid fees become a credit risk and must be reflected as part of the exposure to the client. The fees should be upfront fees and as such always recovered either by the client paying in advance, or by adding the fee to the loan amount and amortising it over the period of the loan.All fees must be set with due consideration of the regulatory requirements, including but not limited to the National Credit Act.Grace period/MoratoriumCircumstances may dictate that the borrower may need a grace period on loan repayments so as to provide enough time to generate cash flows. Any grace periods must be in line with the business needs of the borrower, considered on a case by case basis considering the structure and cash flows and should not exceed 12 months for capital repayments. Request for grace periods shall form part of the credit application and approved as part of the approved terms and conditions of the facility. Ordinarily, no grace periods will be provided where the client’s existing business generates sufficient cash flows to repay the loan.Grace periods in respect of interest payments will only be granted in exceptional circumstances due to the impact this has on sefa’s cash-flows and the ability to monitor and detect payment defaults on a timeous basis. Interest grace periods shall not exceed a period of 6 months.MANAGEMENT OF COLLATERALOverviewAlthough sefa does not fund on the basis of collateral, it serves as an instrument to enhance the quality of credit and mitigate credit risk inherent in lending and lending transactions by increasing the ratio of recoverable debt in the event of default and by implication reducing the loss given default (LGD) of credit exposures. In some instances the element of ensuring personal commitment is also locked in through the taking of collateral.Security is any form of collateral that sefa will take in support of credit extension. Collateral is simply, assets that have been pledged by the counterparty or by a third party on behalf of a counterparty as security for the credit granted. In this document, the terms ‘collateral’ and ‘security’ are used interchangeably.Where collateral is offered or deemed to be prudent, consideration must be given to the eligibility of collateral in terms of the economic value of the underlying assets and the enforceability of sefa’s legal rights or entitlement to the asset. Assets that cannot be repossessed for “moral” or “community” reasons must be considered with due care for collateral purposes. Assets that may not be repossessed for “Moral” reasons include those assets that the borrower cannot live without. A typical example is the borrower’s primary residence, or main residence, which is the dwelling, where the borrower usually resides, typically a house or an apartment. For the purposes of this policy, the client can only have one primary residence at any given time. As such sefa will only consider the pursuit of the primary residence of its clients in a legal action, in cases listed in section 8.7 of this chapter. Assets not repossessed for “community” reasons include any collateral that is legally owned by the community. The security coverage required will be determined by the risk profile of the obligor, the materiality of the loan and the sustainability of the funds application.The final decision on the collateralization required will be made by the relevant decision-making authority (Credit Committees) in the final consideration of the Credit for approval. Line-of-business is accountable for the negotiation of the terms and conditions, including collaterals, and conclusion of legal agreements with obligors.Key principlesThe key principles for the management of collateral are the following: The business units of sefa will pursue the procurement of acceptable collateral on credit transactions on a case by case basis;The decision as to which kind of collateral can be accepted will depend on the circumstances of a particular transaction and must be taken only after a thorough credit appraisal process;Where the borrower is unable to provide the required security, approval of the credit must be motivated and presented to the mandated Credit Committee. There shall be no waiving of security unless agreed and approved by the mandated Credit Committee;Where collateral is required, the terms and conditions relevant to the collateral must be incorporated into the legal agreement. The agreement must specify both the specific conditions precedent relevant to the collateral required, as well as the standard conditions relevant to the variance of collateral;The cost for any process required to value and perfect collateral shall be borne by the client as a standard condition for credit transactions where collateral is required. The cost of holding collateral is incorporated into the cost of the credit;Ownership of collateral resides with the business divisions (Wholesale and Direct Lending), from the registration of collateral upon conclusion of loan agreements until the release of collateral upon fulfillment of debt obligations. The business divisions are expected to exercise full diligence in the registration and perfection of sefa’s entitlement to securitised assets and the valuation of the expected amount of recovery through the sale of these assets;Legal Services will render advice on the eligibility of recommended collateral and the enforceability of the conditions relevant to the collateral. Credit Risk will conduct independent assessments of the adequacy of security coverage as part of the review of the risk inherent in lending transactions. The Legal Officer will also provide administrative assistance in the lodgment of collateral documentation and the maintenance of data;The variance of collateral must be considered in the event of a material change in the value of the collateral or the credit risk profile of the counterparty as part of the portfolio management function. This can entail the replacement or substitution of collateral, as well as the top-up or addition of collateral;Collateral held by sefa will be released after the debt or obligation which the collateral secures has been paid or satisfied in full. Origination of collateralThe securitisation of credit must be considered on a case by case basis in the origination of new lending and lending deals. Preference should be given to forms of security that has a realisable economic value and where sefa has a registered entitlement to the underlying assets or lendings. The relevant approving committee will decide on the adequacy of security coverage as part of the consideration of the terms and conditions for the granting of the loans. The relevant business unit must liaise with the obligors on the collateral requirements as part of the negotiation of terms and conditions.Eligibility and kind of collateralThe eligibility criteria for collateral must be enforced strictly to render adequate recovery in the event of default and includes that the collateral:Is sufficient and relevant to mitigate sefa’s risk concerns;Must be legally enforceable; andCan be held at least for the duration of the exposure.Lodgment and registration of collateralWhen accepting any kind of collateral, the relevant business division must ensure that all the required legal processes to lodge (e.g. sureties or cession) and/or register (e.g. bonds) the collateral have been undertaken. The steps required to lodge or register a particular kind of collateral depend on the collateral and are governed by the applicable legal principles. The relevant business in consultation with Legal Services should ensure that credit documentation, including guarantees and pledge agreements, are legally enforceable in all relevant jurisdictions and that sefa’s legal entitlement to securitised assets has been registered with the relevant authorities.Where appropriate, Legal Services should obtain positive legal opinions to this effect. Where the lodgement or registration of security is to be undertaken by external attorneys, such attorneys must be appointed by Legal services.With the exception of fixed property or security over incomplete assets, it is a condition precedent that prior to all disbursements, all the security should be in place. Any amendment or waiving of collateral conditionality must be motivated and presented for approval by the relevant delegated authority strictly in accordance with standard practices for the amendment or waiving of loan terms and conditions.Valuation of collateralThe responsibility for providing sefa with the initial valuation of collateral is that of the counter party or collateral issuer, which is subject to sefa’s right of verification of the reliability of the valuation source. The cost for the initial valuation and registration of collateral shall be borne by the client, unless otherwise agreed upon.Due to the nature of sefa’s business, the realisable value of collateral should be on a forced sale value. Collateral haircuts will also be applied in line with the pricing model. Forced value will also be considered in the event of material changes in the market or indication of financial distress of obligors that can impact adversely on the quality of collateral.Considerations relating to Suretiessefa will take as collateral, personal sureties including residential properties with a view to secure personal commitment of the client. However, legal action in terms of these sureties, and in particular the private residences will be pursued with due care and taking into account the regulatory requirements. Legal action will be pursued in one or more of the following instances, where the surety:Defrauded sefa;Misused proceeds of advances made by sefa for personal reasons and any other reasons not in the interest of the business;Misappropriated business funds;Intentionally provided misleading information to sefa; Sold their sefa funded assets or businesses without sefa’s consent including shares and membership interest;Traded recklessly whist still indebted to sefa;Failed to co-operate in providing any information, which sefa is contractually entitled to request such as management account;Compromised sefa‘s interest in any manner not covered by the circumstances above;All avenues of recovery of the indebtedness have been exhausted. Monitoring and reporting of collateralThe relevant Post Lending Monitoring (PIM) Unit is responsible for the monitoring and reporting of collateral held on their respective lending portfolios. The following duties shall be performed by the business PIM Unit in this regard:From time to time, conduct physical inspection of movable and immovable assets pledged and ceded as collateral;From time to time, review sefa’s legal right of entitlement to collaterised assets and reconfirm the status of agreements reached and undertakings given as security, including third party guarantees, with relevant collateral issuers;Together with the annual review of credit facilities, assess and comment on the integrity of collateral values; andAs part of the Divisional Portfolio Reporting measure and report on the adequacy of security coverage for the respective divisional credit portfolios.APPLICATION OF CREDIT RISK RATINGSOverviewCredit risk ratings are critical to the credit risk management function in sefa. It ensures that sefa prudently classifies loans in terms of their riskiness as a basis for determining the appropriate pricing, loan loss provisioning at origination and for monitoring the quality of assets over their life time. A standardised and consistent application of measurements of creditworthiness is critical in the end-to-end credit procedures and practices as it facilitates a more uniform treatment of risk differentiated credit approaches. Credit risk rating serves as a key mechanism to manage credit risk at transactional and portfolio levels of exposure. All credit risk related transactions are risk rated at inception, at annual review and at any other defined intervention points and particularly where risk is deemed to have increased.The foregoing paragraphs set out the risk governance structure that regulates credit risk rating methodologies and the construct and usage of models from which the ratings are calculated. Policies and procedures that direct how the credit models themselves are to be developed and validated are technical in content and are, therefore, will be contained in a credit risk rating system policy and procedures.Annual reviews of credit risk ratingsThe credit risk rating of all existing clients and credit facilities are subject to annual review during the life time of the credit. The purpose of annual risk rating reviews is to analyse and evaluate the obligor’s performance during the period under review and to consider their prospects into the future. The review of credit risk ratings, in a format directed by The Credit Risk Unit, forms an integral part of the annual review of the credit. The credit ratings also support the monitoring of the quality of the lending book. APPROVAL AUTHORITIESAll credit and lending approvals are to be carried out in accordance with sefa’s approval mandates as determined and approved by the Board from time to time. Each of the institution’s Credit Committees shall function in accordance with its approved Charter.Signing of facility agreementsOnce the Decision Record has been signed, negotiations with the client to finalise facility agreements can be commenced. Only persons explicitly named in terms of the CEO’s delegations for signing of loan agreements (credit and lendings) shall have the authority to sign facility agreements between sefa and a client. Before finalisation and signature of loan agreements, any deviations from the approved terms and conditions must be approved by the person so delegated by the Committee approving the transaction. Validity periodsSave as otherwise approved, failure to ensure signature of the loan agreements within 2 months after the date of the Decision Record of the committee approving the facility, such facility approval shall automatically lapse. A request to extend the validity period of a facility may be submitted before the expiry date of the facility to the relevant authority. Such request shall be accompanied by an updated project review performed independently by the lending officer. The project review shall be approved by both the Head of Credit and the Head of the business division to which the transaction belongs. DISBURSEMENT OF FUNDS ON LOAN ACCOUNTS OverviewFunds on loan accounts are disbursed in accordance with the terms of loan agreements entered into with counterparties and are subject to counterparty compliance with the conditions of the agreements. The disbursement of funds is processed through three stages, which are disbursement preparation, authorisation and actual disbursement. The disbursement of funds increases sefa’s exposure to primarily credit risk, but also imposes other forms of business and reputational risks. The disbursement of funds must be informed and enabled by a rigorous monitoring process to ensure that the quality of the credit is not compromised by either non-compliance with conditions or adverse changes in the risk profile of the transaction. The processing of requests for drawdown on loans has a significant administrative and control component involving various internal functionaries and is subject to segregated sign-offs. Efficiency in the processing of disbursements is important and must be conducted with a minimum delay in hand-over between functionaries. Key principlesThe first disbursement on any credit transaction shall be made only after the obligor has fully complied with Conditions Precedent, unless otherwise stipulated in the Loan Agreement. However disbursement should take place within 6 months of signed agreements. This date shall be referred to as the Terminal Draw Date. Compliance with Conditions Precedent must commence as soon as practically possible after conclusion of the credit agreement and be completed in a timely manner before the planned first disbursement. In the event where a counterparty is unable to comply with Conditions Precedent prior to submission of a first drawdown, the obligor must submit a timely request for the amendment or waiving of the relevant condition(s)in writing, stating the reasons for non-compliance and the planned time frame for compliance.Sign-off and release of disbursements must be made within the formal delegated authorisation structure after a Compliance Certificate has been issued. The Head of Credit Risk shall be responsible for the release of all disbursements. Disbursement of funds must be suspended temporarily in the event of an early indication of financial distress or emergence of other external circumstances that may impact adversely on the ability of the obligor to meet its debt obligations. A rapid Due Diligence reassessment must be conducted and, if concerns are found to be material, must be escalated to Heads in business and credit risk areas for resolution prior to the next planned disbursement.Raising of upfront feesLine management is responsible for initiating the raising of upfront fees payable by obligors in terms of the credit agreement. Efficiency of the disbursement processAll divisions involved in the processing of disbursements shall have documented standard operating procedures in place for the efficient execution of their respective duties. The procedures must provide for the segregation of duties and other internal controls to adequately mitigate operational risks within acceptable thresholds, as well as contain clear rules for the escalation of problems. Officers involved in the assessment and monitoring of credit, such as PIM Officers and Credit Risk Analysts, should ensure that information required for the authorisation of disbursements is continuously kept up to date and readily available when drawdown requests are received. Line management must ensure that any potential problem or concern that may impact on the quality of the credit is detected as early as possible and resolved in time to avoid delays in the disbursement of funds upon receipt of a drawdown request.Managers of front line units must maintain oversight of the disbursement process to keep close check on progress in the processing of individual drawdown requests and respond quickly to any perceived delay. Obligors must be kept informed of progress in the event where disbursement cannot be made within the expected time frame.Internal Audit shall, periodically, conduct independent assessments and provide assurance to the CRO on the efficiency of the disbursement process.ONGOING MONITORING AND REVIEW OverviewOnce a credit or equity lending has been approved and notwithstanding whether the facility has been disbursed or not taken up within twelve (12) months, it is necessary to continuously monitor the risk and additionally to undergo a formal review, on an annual basis, to the exposure or undrawn loan facility. The monitoring requirement is also in respect of any approved terms and conditions, covenants set out in the obligor’s term sheet and/or monitoring plan. Additionally, ongoing monitoring is a continuing process of engagement with the borrower. Formal and informal approaches are used to identify any early indications of adverse performance, internal and external factors and issues which might increase the risk associated with an exposure. An earlier intervention usually allows for a wider range of effective options to be considered to mitigate risk and can lead to an improvement in sefa’s position. In contrast, late interventions in what might already be a stressed situation provide little remedial opportunities and a much higher risk outlook for sefa.Ongoing monitoring is also a requirement with regard to divisional portfolio credit and lending quality assessment and assurance. This policy will also be supported by specific guidelines which govern portfolio analysis, evaluation and reporting. These approaches covering divisional requirements as well as specific reports will serve at Mancom and the Board.Facility availability periodFailure to ensure signature of the lending/loan agreements (commitment) within 2 months after approval date, such facility shall automatically lapse.Facility availability period may be extended if application for extension is approved before the lapse date. An updated high level review of the facility has to be submitted for approval under the duly mandated delegated authorities. Facility availability may be extended for a further 1 month only once under the mandated delegated authorities and then only if no material changes in circumstances or risk profile is evident.Facilities that have not had their first disbursement 2 months after commitment (loan/equity agreement signing) require an updated review of the facilities, taking into account market and client-specific issues.FORMAL ANNUAL REVIEWSThe formal annual review processAnnual review submissions to be timelyAll approved facilities are subject to annual review to the mandated review committee. Divisions are required to diarise to commence the review process, so that submissions are presented to Mancom in a timely manner, ahead of the i 12 month review expiry date.The waiving of a formal annual reviewIn the light of the foregoing more frequent obligatory interim reviews, the waiving of a formal review by the respective Business Unit (Wholesale or Direct lending) has to be motivated to the CRO. Consideration for a waiver will only be given on an exceptional basis. Requirements for a development impact assessment at formal reviewFacilities that are subject to a development impact assessment are to be reviewed in conjunction with an updated development impact evaluation on the basis and in a format as directed from time to time by CRO.Documentation to be submitted for a formal annual review process in the case of a distressed client include:Credit and Lending review documentation in the format specified by The Risk Division from time to time;Where appropriate an up-to-date financial information (audited where possible) and spread sheet as directed by The Risk Division;Where appropriate and requested by the Credit Risk Unit, a twelve month forecast Balance Sheet, Income Statement and Cash Flows together with underlying assumptions;Extracts from obligors 2 year Strategic and Business Plan supported by assumptions and indication of key business drivers, if available, otherwise comment on prospects;Rating Schedule, recommendation and sign off by Head of Credit Risk Unit; andConfirmation by the Head of Post Lending and Monitoring Unit that collaterals are in place per the term sheet.REPORTING OF CREDIT AND EQUITY PORTFOLIOS (INCLUDING DEVELOPMENT IMPACT ASSESSMENT)Overview – purpose of processThe purpose of portfolio risk reporting is to provide insightful and timely analysis and evaluation to determine the quality of credit and equity portfolios, on a measured basis, as well as a trends analysis covering the risk performance of the portfolios over defined comparative reporting periods.The reporting approach is frame-worked to drive consistency across all divisions and to provide the capability for aggregation of the information to serve different levels of stakeholders.The portfolio risk reporting is carried out on a regular basis, at frequencies and covering reporting periods as defined by The Risk Division. The mandatory measurements to be used, reporting procedures and the design of reporting templates, are governed by The Risk Division directives.The Risk Division directs the minimum levels of detail which is required to be disclosed and the most appropriate, mandatory metrics to characterize divisional portfolio risk. Some of the metrics are generic to both business divisions, whereas others will capture risk perspectives and features which are unique to the division’s business positioning. Divisional reporting frameworkThe enhanced reporting approach is an evolving process and will be subject to improvements as more insightful data and risk measurements become available over time. The Risk Division will direct the minimum reporting content and any subsequent changes, by way of directives issued to the divisions, from time to time.MANAGING PROBLEMATIC EXPOSURES – WORKOUT AND RESTRUCTURINGOverviewA deterioration in Credit and/or Equity quality is required to be identified at an early stage so that the risk concerns and issues are well understood. Appropriate mitigation options must be regularly reviewed and re-evaluated and rapidly initiated as soon as considered necessary.In the event it becomes necessary to take active and rigorous remedial steps, actions can then be taken in a timely manner and on an informed basis. An early intervention usually provides more options for mitigating the risk exposure to sefa. It also improves the probability for a successful rehabilitation or an effective collection and recovery outcome. Early problem recognition approaches have been designed to support the early detection of credit and equity fund weaknesses and to formally surface concerns together with tactical action plans to improve sefa's position.Overview – Roles and Responsibilities of Workout and Restructuring Unit (WRU) and the need for an independent Recovery functionIn the event an exposure deteriorates to a stage where a more intensive and complex intervention is necessary to either workout or rehabilitate a problematic exposure, the management of the much deteriorated exposure and the ongoing, direct interactions with a defaulted obligor are required to be carried out in a specialized workout function, segregated from the division which originated the transaction.Workout and Restructuring Unit (WRU), part of The Risk Division, is in place to provide an independent, concentrated focus and specialized recovery effort, carried out by a team of workout experts. The transfer of such cases from Divisions to WRU is a mandatory requirement. It is triggered by risk events and conditions.Procedure regarding the nature, extent and timing of WRU’s involvement in clientsFor purposes of this document, “Restructuring” is defined as a method which sefa will use with outstanding obligations, to alter the term of the loan agreement in order to achieve some advantage. Sefa will therefore use some form of debt restructuring to help clients avoid default on existing debt. Debt restructuring could take the following forms:Deferments of capital repayments;Capitalisation of interest (deferment of interest payments);Rescheduling of repayment terms (capital and/or interest);Release of any security (tangible and intangible) for any reason whatsoever;Conversion of debt finance to equity / quasi-equity and vice-versa; or Approval of new funding to an existing client in financial difficulty.Formal process for handover to WRUThe hand-over of the obligor to the WRU team is formal process in which the client relationship is severed from the Division and the subsequent ongoing workout strategies and direct interactions with the obligor are assumed by WRU, under periodic feedback to the originating Division.As a rule, clients should be transferred to WRU when one or more of the following (“Transfer Criteria”) occurs:Any capital and/or interest payments owed by a client to sefa fall in arrears by more than 60 days or miss two consecutive payments. sefa decides to issue summons against a client.sefa or another creditor obtains judgment against a client.sefa or another creditor attaches the assets of a client.sefa or another creditor applies for the liquidation of a client.The client ceases or intends to cease its operations.A major disruption affecting the future viability of the client occurs in a client’s business operations, e.g. resignation/death of a key management member/s, fire causing destruction of production capacity, fraudulent activities committed by a client against sefa or other third parties, etc.Procedure regarding transfer of assets back from WRU to business support coordinatorsTransfer back criteriaClients will be transferred back from WRU to PIM when the reason for the transfer of a client to WRU has disappeared: A restructuring plan as proposed by WRU has been approved and successfully implemented;The client has strictly adhered to the terms of the Restructuring (e.g. revised repayment terms) for at least 6 consecutive payments (or less if properly motivated) following the implementation of the Restructuring plan.Decisions to transfer clients from WRU to PIM will be taken at the MANCOM where all the stakeholders will be present. These “transfer back” decisions will be effective from the date of the MANCOM and will be captured in the minutes of the MANCOM. Post-mortem analysis and evaluation by WRUWRU is required to carry out post-mortem reviews so that Divisions can better understand how problem exposures and losses develop. As part of the review, WRU is able to highlight weaknesses in existing Credit and Equity Policies and Procedures, particularly those governing approval and monitoring processes.CREDIT POLICY IMPLEMENTATION – ACCOUNTABILITY AND CONSEQUENCES OF MISCONDUCTCredit management capabilityThe performance of sefa in the pursuance of its objectives is to a large extent dependent on its ability to manage credit risk effectively. The Policy requires that sefa applies best practices in the assessment, measurement, monitoring and control of credit risk. This, in turn, imposes substantial challenges on the capacity deployed in business divisions to ensure that the end-to-end credit process is implemented in accordance with desired standards of excellence. Accountability by line managementLine management, as owners of the credit process, is accountable for ensuring that adequate capacity exists at all times in terms of the ability of business divisions to manage credit risk inherent in their respective areas of operations within sefa risk appetite. At individual level, line management must ensure that front line staff has sufficient levels of skills to cope with the complexity of conducting credit risk assessments and applying appropriate measures to treat unacceptable levels of exposure to losses in the origination of credit, as well as the monitoring and management of the quality of credits on sefa’s loan book.Risk and talent managementLine managers are expected to nurture and retain key talent and must ensure that skills deficits of individual staff members are identified and addressed in a planned and cohesive manner. Compliance with policy and consequence of misconductThe accountability for the compliance with the Policy resides with line management. Line managers must ensure that their decisions and actions in the management of credit risk are aligned with the principles and practices embodied in the Policy. Unless escalated and authorised at an appropriate level of authority, any deviation from the Policy is deemed to constitute an act of misconduct and will be subject to disciplinary action in accordance with sefa’s Disciplinary Code and procedures. CREDIT POLICY OWNERSHIP, DEVELOPMENT AND MAINTENANCE PROCEDURES AND RESPONSIBILITIES OverviewThe objective of formalising Credit Risk Policies and Procedures is to ensure that risks inherent in sefa’s lendings and lendings are taken and managed in a responsible manner and that minimum standards that direct sound practices are coherently articulated in this policy directives that align with the credit risk management framework in respect of risks assumed within sefa. The risk division’s roles and responsibilities in respect of this policy directiveRisk Division assumes responsibility for leading the proactive development of new as well as improvements and changes to this policy.This policy will be reviewed at least annually.ANNEXURE AThe Prevention of Organised Crime Act No 121 of 1998 (POCA)To introduce measures to combat organised crime, money laundering and criminal gang activities; to prohibit certain activities relating to racketeering activities; to provide for the prohibition of money laundering and for an obligation to report certain information; to criminalise certain activities associated with gangs;To provide for the recovery of the proceeds of unlawful activity; for the civil forfeiture of criminal assets that have been used to commit an offence or assets that are the proceeds of unlawful activity; To provide for the establishment of a Criminal Assets Recovery Account; to amend the Drugs and Drug Trafficking Act, 1992; to amend the International Co-operation in Criminal Matters Act, 1996;To repeal the Proceeds of Crime Act, 1996; To incorporate the provisions contained in the Proceeds of Crime Act, 1996; and to provide for matters connected therewith. The Financial Intelligence Centre Act, "FICA", seeks to:Establish a Financial Intelligence Centre and a Money Laundering Advisory Council in order to combat money laundering activities;Impose certain duties on institutions and other persons who might be used for money laundering purposes;Amend the Prevention of Organised Crime Act, 1998, and the Promotion of Access to Information Act, 2000; and provide for matters connected therewith.The Protection of Constitutional Democracy against Terrorist and Related Activities Act No 33 of 2004 (POCDATARA) seeks to;This act has been constituted to Provide for measures to prevent and combat terrorist and related activities; to provide for an offence of terrorism and other offences associated or connected with terrorist activities; Provide for Convention offences; Give effect to international instruments dealing with terrorist and related activities; Provide for a mechanism to comply with United Nations Security Council Resolutions, which are binding on member States, in respect of terrorist and related activities; to Provide for measures to prevent and combat the financing of terrorist and related activities; Provide for investigative measures in respect of terrorist and related activities; and Provide for matters connected therewith. ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download