sefa credit and lending policy - sefa - login pageintranet.sefa.org.za/content/docs/sefa credit risk...

59
sefa CREDIT AND LENDING POLICY BY Credit Risk Unit 2013

Upload: ngongoc

Post on 24-Apr-2018

217 views

Category:

Documents


3 download

TRANSCRIPT

Page 1: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

sefa CREDIT AND LENDING POLICY

byCredit Risk Unit

2013

Page 2: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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

1

Page 3: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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

2

Page 4: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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

3

Page 5: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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

4

Page 6: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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;

5

Page 7: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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

6

Page 8: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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.

7

Page 9: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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.

8

Page 10: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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;

9

Page 11: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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

10

Page 12: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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

11

Page 13: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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.

12

Page 14: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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.

13

Page 15: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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

14

Page 16: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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.

15

Page 17: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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

16

Page 18: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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.

17

Page 19: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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.

18

Page 20: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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

19

Page 21: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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:

20

Page 22: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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.

21

Page 23: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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

22

Page 24: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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.

23

Page 25: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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.

24

Page 26: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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;

25

Page 27: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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.

26

Page 28: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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;

27

Page 29: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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.

28

Page 30: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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

29

Page 31: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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

30

Page 32: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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

31

Page 33: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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

32

Page 34: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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.

33

Page 35: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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.

34

Page 36: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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

35

Page 37: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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.

36

Page 38: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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,

37

Page 39: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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

38

Page 40: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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.

39

Page 41: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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;

40

Page 42: sefa CREDIT AND LENDING POLICY - sefa - Login Pageintranet.sefa.org.za/Content/Docs/Sefa Credit Risk Policy... · Web viewsefa CREDIT AND LENDING POLICY by Credit Risk Unit 2013 TABLE

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.

41