Credit Review is the regular or ad-hoc re-evaluation of the Credit Risk attributed to a customer, borrower or counterparty for the purpose of Credit Risk Management. It is relevant in the context of longer term relationships and contracts where there is a possibility of material change versus the initial Risk Profile established during the Credit Origination or Credit Decision phase.
The credit review process is similar to an initial Credit Risk Analysis but has (minimally) the additional information obtained in the duration of the relation.
Institutions should also perform regular credit reviews of borrowers that are at least medium-sized or large enterprises, with a view to identifying any changes in their risk profile, financial position or creditworthiness compared with the criteria and the assessment at the point of loan origination, as well as reviewing and updating any relevant internal credit rating/scoring.
The review process and frequency should be specific and proportionate to the type and risk profile of the borrower and the type, size and complexity of the credit facility, and should be specified in relevant policies and procedures. Institutions should carry out more frequent reviews if they identify a deterioration in the credit and asset quality. The overall credit risk monitoring framework and data infrastructure should allow institutions to verify that regular credit reviews have been performed in accordance with the credit risk policies and procedures, and for the identification of any outliers/exceptions to be flagged for follow up.
To this end, institutions should also, if appropriate, periodically update relevant financial information on the borrower and assess the new information against the creditworthiness assessment criteria established in accordance with Section 4.3 of these guidelines. The collection and assessment of this information should support the institution in recognising the early warning signs of declining credit quality.
Institutions should carry out periodic reviews for the purposes of the assessment of the borrower’s risk of default and the potential need for the migration between risk categories and grades.
Borrowers’ credit reviews should include an assessment of existing debt and borrowers’ sensitivity to external factors, such as foreign exchange rate volatility, if relevant, that may affect the size of debt and repayment capacity, also in line with the sensitivity analysis requirements, as specified in Section 5.2.6.
Institutions should assess risks associated with the refinancing of existing debt, monitoring loans with bullet/balloon repayment terms separately from other loans on a regular basis. They should analyse potential effects on a borrower’s inability to roll over/refinance existing debt, and include inter alia a forward-looking macroeconomic outlook and access to capital markets as well as other types of debt structures. Institutions should closely monitor the borrowers’ ability to repay or refinance their debts throughout a loan’s lifecycle and not just when the borrower is approaching the end of a loan’s term.
A regular credit risk review should take into consideration both the individual and the total risk profile of the exposure, including relevant macroeconomic factors and specific economic sectors or activities and how the repayment capacity may be affected by these factors.
If applicable, institutions should also review guarantors under the credit facility agreement. In addition to the assessment of the guarantor’s continued creditworthiness, an analysis of effectiveness of a guarantee should also take into account the enforceability and the time needed to realise the guarantee.
In addition to monitoring credit and financial metrics, institutions should take into account information related to qualitative factors that could have a relevant influence on the repayment of a loan. These factors could include information on the quality of management, agreements/disagreements among owners, an owner’s commitment to the borrower, forecast market growth, a company’s pricing power, a cost structure and flexibility of costs, the trend, size and nature of capital expenditure and research and development expenditure, and the allocation between debt holders and servicers within the consolidated group of institutions.
- EBA, Guidelines on loan origination and monitoring EBA/GL/2020/06