Generic Retail Credit Risk Analysis

Definition

Generic Retail Credit Risk Analysis covers general best practices when performing Credit Risk Analysis for consumer lending

EBA Requirements

Institutions should analyse the loan application of the borrower in order to ensure that the application is in line with the institutions’ credit risk appetite, policies, credit-granting criteria, limits and relevant metrics, as well as any relevant macroprudential measures where applied by the designated macroprudential authority.

Institutions and creditors should, in line with the relevant consumer protection legislation, assess the borrower’s ability and prospect to meet the obligations under the loan agreement, covering, in particular, an assessment of the borrower’s source of repayment capacity, taking into account specificities of the loan, such as nature, maturity and interest rate.

Collateral, in the case of secured lending, by itself should not be a predominant criterion for approving a loan and cannot by itself justify the approval of any loan agreement. Collateral should be considered the institution’s second way out in case of default or material deterioration of the risk profile, and not the primary source of repayment, with the exception of when the loan agreement envisages that the repayment of the loan is based on the sale of the property pledged as collateral or liquid collateral provided.

When assessing the borrower’s ability to meet obligations under the loan agreement, institutions and creditors should take into account relevant factors that could influence the present and future repayment capacity of the borrower, and should avoid inducing undue hardship and over-indebtedness. The factors should include other servicing obligations, their remaining duration, their interest rates and the outstanding amounts, and repayment behaviour, e.g. evidence of any missed payments and their circumstances, as well as directly relevant taxes and insurance if known.

If the loan application is submitted jointly by more than one borrower, institutions and creditors should perform the creditworthiness assessment on the basis of the joint repayment capacity of the borrowers.

If a loan agreement involves any form of guarantees from third parties, institutions should assess the level of protection provided by the guarantee, and if relevant, conduct a creditworthiness assessment of the guarantor, applying the relevant provisions of these guidelines, depending on whether the guarantor is a natural person or an enterprise.

For assessing the borrower’s ability to meet obligations under the loan agreement, institutions and creditors should adopt suitable methods and approaches, which may include models, as long as these guidelines are met. The selection of the suitable and adequate method should depend on the risk level, size and type of loan.

See Also

• EBA Guidelines on Loan Origination and Monitoring