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sefa CREDIT AND LENDING POLICY
byCredit Risk Unit
2013
TABLE OF CONTENTS
1. CREDIT AND LENDING RISK – KEY PRINCIPLES...........................................................................................5
2. CONSIDERATIONS PRIOR TO THE ASSUMPTION OF CREDIT AND LENDING RISK......................................7
2.1. Formal sign off of a new risk based business activity......................................................................7
2.2. New credit and lending risk product development.........................................................................7
2.3. Underlying business strategies and plans to support new credit and lending products.................7
2.4. Responsibility for the quality of potential business introduced......................................................7
2.5. Underlying measurement, management, monitoring, reporting, and system support for new credit and lending products............................................................................................................8
3. FINANCING ELIGIBILITY CRITERIA...............................................................................................................8
3.1. Requirements for a credit risk framework fit including exclusions.................................................8
4. KEY ELIGIBILITY CRITERIA AND CONNECTED PRINCIPLES..........................................................................9
4.1. Mandate and strategic fit................................................................................................................9
4.2. Transactions with Politically Exposed Persons, Family member of sefa employee or board member........................................................................................................................................11
4.3. Alignment with business plans......................................................................................................12
4.4. Development impact....................................................................................................................12
4.5. Risk acceptance criteria................................................................................................................12
4.6. Risk and reward relationship........................................................................................................13
5. TYPES OF FACILITIES.................................................................................................................................13
5.1. Wholesale lending products.........................................................................................................13
5.1.1. Business loans.........................................................................................................................13
5.1.2. Credit Indemnity Scheme........................................................................................................14
5.1.3. Land Reform Empowerment Facility.......................................................................................14
5.1.4. Joint Ventures and funds.........................................................................................................15
5.2. Direct lending products.................................................................................................................15
5.2.1. Working capital facilities.........................................................................................................15
5.2.2. Asset finance...........................................................................................................................16
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5.2.3. Term loans...............................................................................................................................16
5.2.4. Revolving loan.........................................................................................................................16
5.2.5. Bridging loan...........................................................................................................................16
6. APPLICATION PROCESS – NEW CLIENT RELATIONSHIPS..........................................................................17
6.1. Overview.......................................................................................................................................17
6.2. Application framework.................................................................................................................18
6.3. Key requirements for credit and/or lending applications.............................................................18
6.4. Aggregation of exposures and commitments...............................................................................18
6.5. Know your client (KYC) process.....................................................................................................19
7. DUE DILIGENCE.........................................................................................................................................19
7.1. Appeals to the Credit Committees................................................................................................19
7.2. Independent assessment of application by Credit Risk Unit.........................................................19
7.3. Term sheet / Facilities Letters covering terms, conditions, covenants and collaterals.................20
7.4. Other key documents to accompany application for facilities......................................................20
7.5. Facility terms and conditions/covenants......................................................................................20
7.5.1. Terms and conditions..............................................................................................................20
7.5.2. Covenants................................................................................................................................21
7.5.3. Tenor.......................................................................................................................................22
7.5.4. Interest rates...........................................................................................................................22
7.5.5. Grace period/Moratorium.......................................................................................................23
8. MANAGEMENT OF COLLATERAL..............................................................................................................23
8.1. Overview.......................................................................................................................................23
8.2. Key principles................................................................................................................................24
8.3. Origination of collateral................................................................................................................25
8.4. Eligibility and kind of collateral.....................................................................................................25
8.5. Perfection of collateral..................................................................................................................26
8.6. Valuation of collateral...................................................................................................................26
8.7. Considerations relating to Sureties...............................................................................................27
8.8. Monitoring and reporting of collateral.........................................................................................27
9. APPLICATION OF CREDIT RISK RATINGS...................................................................................................28
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9.1. Overview.......................................................................................................................................28
9.2. Annual reviews of credit risk ratings.............................................................................................28
10. APPROVAL AUTHORITIES.........................................................................................................................29
10.1.1. Signing of facility agreements.................................................................................................29
10.1.2. Validity periods.......................................................................................................................29
11. DISBURSEMENT OF FUNDS ON LOAN ACCOUNTS...................................................................................29
11.1. Overview.......................................................................................................................................29
11.2. Key principles................................................................................................................................30
11.3. Raising of upfront fees..................................................................................................................31
11.4. Efficiency of the disbursement process.........................................................................................31
12. ONGOING MONITORING AND REVIEW....................................................................................................31
12.1. Overview.......................................................................................................................................31
12.1.1. Facility availability period........................................................................................................32
13. FORMAL ANNUAL REVIEWS.....................................................................................................................33
13.1. The formal annual review process................................................................................................33
13.1.1. Annual review submissions to be timely.................................................................................33
13.1.2. The waiving of a formal annual review....................................................................................33
13.1.3. Requirements for a development impact assessment at formal review.................................33
13.2. Documentation to be submitted for a formal annual review process in the case of a distressed client include:................................................................................................................................33
14. REPORTING OF CREDIT AND EQUITY PORTFOLIOS (INCLUDING DEVELOPMENT IMPACT ASSESSMENT)
..................................................................................................................................................................34
14.1. Overview – purpose of process.....................................................................................................34
14.2. Divisional reporting framework....................................................................................................34
15. MANAGING PROBLEMATIC EXPOSURES – WORKOUT AND RESTRUCTURING........................................35
15.1. Overview.......................................................................................................................................35
15.2. Procedure regarding the nature, extent and timing of WRU’s involvement in clients..................35
15.3. Formal process for handover to WRU...........................................................................................36
15.4. Procedure regarding transfer of assets back from WRU to business support coordinators.........37
15.4.1. Transfer back criteria..............................................................................................................37
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15.5. Post-mortem analysis and evaluation by WRU.............................................................................37
16. CREDIT POLICY IMPLEMENTATION – ACCOUNTABILITY AND CONSEQUENCES OF MISCONDUCT.........37
16.1. Credit management capability......................................................................................................37
16.2. Accountability by line management..............................................................................................37
16.3. Risk and talent management........................................................................................................38
16.4. Compliance with policy and consequence of misconduct.............................................................38
17. CREDIT POLICY OWNERSHIP, DEVELOPMENT AND MAINTENANCE PROCEDURES AND
RESPONSIBILITIES.....................................................................................................................................38
17.1. Overview.......................................................................................................................................38
17.2. The risk division’s roles and responsibilities in respect of this policy directive.............................38
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1. CREDIT AND LENDING RISK – KEY PRINCIPLES
The 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:
o Limits by obligors, obligor groups, risk ratings distribution, industry sectors, geography or
sensitivity to single factors, problem exposures and adequacy of impairment;
o 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;
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Sufficient resources and competent personnel are allocated to manage and control the daily
operations and credit and lending risk functions effectively; and
Regular 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
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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.
2. CONSIDERATIONS PRIOR TO THE ASSUMPTION OF CREDIT AND LENDING RISK
2.1. Formal sign off of a new risk based business activity
Any new risk based business activity must be approved by the Board of Directors or its appropriate
delegated committee before it is implemented.
2.2. New credit and lending risk product development
New 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.
2.3. Underlying business strategies and plans to support new credit and lending products
In 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.
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2.4. Responsibility for the quality of potential business introduced
Primary 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.
2.5. Underlying measurement, management, monitoring, reporting, and system support for new credit and
lending products
All 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.
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3. FINANCING ELIGIBILITY CRITERIA
3.1. Requirements for a credit risk framework fit including exclusions
In 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:
i. Shareholder initiated exclusions, or business whose trade or operations may prejudice the
reputation and good standing of sefa;
ii. Speculative real estate;
iii. Speculative trading and hedging for the Institution’s own position;
iv. Political parties or organisations;
v. Leveraged buy-out funds or listed companies;
vi. Loans to refinance existing debts;
vii. People under debt review, or unrehabilitated insolvents, as well as businesses under business
rescue or liquidation;
viii. 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); and
The Protection of Constitutional Democracy against Terrorist and Related Activities Act No
33 of 2004 (POCDATARA)
(See Annexure A for brief summary of the above)
ix. Entities/individuals whose primary business involves arms related transactions ;
x. Religious entities and any other activities which could cause a moral dilemma for sefa;
xi. Companies involved with child labour;
xii. Transactions that do not contribute positively to development impact, or ventures
inconsistent with the mandate of sefa;
xiii. Companies whose primary business involves gaming and gambling, or “morally harmful”
industries – tobacco, liquor, sex trade;
xiv. Business relationships/transactions that transgress tax, accounting, regulatory requirements as
well as societal norms and environmental legislation;
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xv. 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;
xvi. Primary Agriculture, except for cash crops;
xvii. Entities where sefa employee or board member has a financial interest;
xviii. Individuals and entities listed on the IDC Delinquency register; and
xix. Immediate family members of a sefa employee or a Board member, which includes life
partners, parents and children.
4. KEY ELIGIBILITY CRITERIA AND CONNECTED PRINCIPLES
4.1. Mandate and strategic fit
sefa 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:
i. 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;
ii. Be legally constituted including sole traders with a fixed physical address;
iii. 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
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with a valid South African Identity Documents or permanent residents who hold a valid RSA ID
document;
iv. 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;
v. The Enterprise(s) must be compliant with generally accepted corporate governance practices
appropriate to the client’s legal status;
vi. The project must demonstrate ability to create new jobs as well as the desired level of
development impact and
Wholesale 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.
4.2. 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
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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; and
any individual publicly known (or actually known by the relevant financial institution) to be a close
personal or professional associate of a PEP.
4.3. Alignment with business plans
All 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.
4.4. Development impact
The project teams are required to demonstrate the development impact outcomes of all transactions
on a basis directed by the Risk Division.
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4.5. Risk acceptance criteria
Credit 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.
4.6. Risk and reward relationship
Granting 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.
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5. TYPES OF FACILITIES
In order to achieve its mandate, the following products are available to be advanced by the institution.
5.1. Wholesale lending products
5.1.1. Business 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
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incorporated as part of the facility to ensure that good corporate governance and compliance is
adopted and implemented by the intermediary.
5.1.2. Credit Indemnity Scheme
The 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.
5.1.3. 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.
5.1.4. Joint Ventures and funds
These 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.
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5.2. Direct lending products
sefa’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:
5.2.1. Working capital facilities
As 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.
5.2.2. Asset finance
Asset 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.
5.2.3. Term loans
This 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
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capital requirements, specific capital acquisition and/or business expansion projects. The loan
duration is a minimum of 12 months, a maximum of 60 months.
5.2.4. Revolving loan
This 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.
5.2.5. Bridging loan
This 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.
6. APPLICATION PROCESS – NEW CLIENT RELATIONSHIPS
6.1. Overview
It 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.
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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.
6.2. Application framework
All 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.
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6.3. Key requirements for credit and/or lending applications
A 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.
6.4. Aggregation of exposures and commitments
Where 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.
6.5. 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
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conducted on all companies and their directors. It is expected that the KYC process shall be conducted
very early on in the appraisal process.
7. DUE DILIGENCE
Mandated 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.
7.1. Appeals to the Credit Committees
Any appeal to a rejected funding application shall be subjected to the approval of the Chair Person of
the respective Credit Committee.
7.2. Independent assessment of application by Credit Risk Unit
The 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.
7.3. Term sheet / Facilities Letters covering terms, conditions, covenants and collaterals
A 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.
7.4. Other key documents to accompany application for facilities
The following documents must specifically accompany all applications being presented to any of the
institution’s Credit Committees:
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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.
7.5. Facility terms and conditions/covenants
7.5.1. Terms and conditions
Terms 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.
7.5.2. Covenants
A 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.
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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.
7.5.3. Tenor
The 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.
7.5.4. Interest rates
Interest 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
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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.
7.5.5. Grace period/Moratorium
Circumstances 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.
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8. MANAGEMENT OF COLLATERAL
8.1. Overview
Although 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.
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8.2. Key principles
The 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;
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Collateral held by sefa will be released after the debt or obligation which the collateral secures
has been paid or satisfied in full.
8.3. Origination of collateral
The 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.
8.4. Eligibility and kind of collateral
The 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; and
Can be held at least for the duration of the exposure.
8.5. Lodgment and registration of collateral
When 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.
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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.
8.6. Valuation of collateral
The 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.
8.7. Considerations relating to Sureties
sefa 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;
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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.
8.8. Monitoring and reporting of collateral
The 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; and
As part of the Divisional Portfolio Reporting measure and report on the adequacy of security
coverage for the respective divisional credit portfolios.
9. APPLICATION OF CREDIT RISK RATINGS
9.1. Overview
Credit 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.
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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.
9.2. Annual reviews of credit risk ratings
The 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.
10. APPROVAL AUTHORITIES
All 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.
10.1.1. Signing of facility agreements
Once 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
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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.
10.1.2. Validity periods
Save 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.
11. DISBURSEMENT OF FUNDS ON LOAN ACCOUNTS
11.1. Overview
Funds 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
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the processing of disbursements is important and must be conducted with a minimum delay in hand-
over between functionaries.
11.2. Key principles
The 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.
11.3. Raising of upfront fees
Line management is responsible for initiating the raising of upfront fees payable by obligors in terms of
the credit agreement.
11.4. Efficiency of the disbursement process
All 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
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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.
12. ONGOING MONITORING AND REVIEW
12.1. Overview
Once 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
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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.
12.1.1. Facility availability period
Failure 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.
13. FORMAL ANNUAL REVIEWS
13.1. The formal annual review process
13.1.1. Annual review submissions to be timely
All 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.
13.1.2. The waiving of a formal annual review
In 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.
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13.1.3. Requirements for a development impact assessment at formal review
Facilities 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.
13.2. 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; and
Confirmation by the Head of Post Lending and Monitoring Unit that collaterals are in place per
the term sheet.
14. REPORTING OF CREDIT AND EQUITY PORTFOLIOS (INCLUDING DEVELOPMENT IMPACT ASSESSMENT)
14.1. Overview – purpose of process
The 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.
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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.
14.2. Divisional reporting framework
The 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.
15. MANAGING PROBLEMATIC EXPOSURES – WORKOUT AND RESTRUCTURING
15.1. Overview
A 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 function
In 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
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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.
15.2. Procedure regarding the nature, extent and timing of WRU’s involvement in clients
For 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.
15.3. Formal process for handover to WRU
The 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.
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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.
15.4. Procedure regarding transfer of assets back from WRU to business support coordinators
15.4.1. Transfer back criteria
Clients 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.
15.5. Post-mortem analysis and evaluation by WRU
WRU 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.
16. CREDIT POLICY IMPLEMENTATION – ACCOUNTABILITY AND CONSEQUENCES OF MISCONDUCT
16.1. Credit management capability
The 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,
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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.
16.2. Accountability by line management
Line 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.
16.3. Risk and talent management
Line 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.
16.4. Compliance with policy and consequence of misconduct
The 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.
17. CREDIT POLICY OWNERSHIP, DEVELOPMENT AND MAINTENANCE PROCEDURES AND
RESPONSIBILITIES
17.1. Overview
The 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
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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.
17.2. The risk division’s roles and responsibilities in respect of this policy directive
Risk 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.
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ANNEXURE A
The 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;
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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.
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