Banks
need to enunciate a system that enables them to monitor quality of the credit
portfolio on day‐to‐day basis and take remedial measures as and when any
deterioration occurs. Such a system would enable a bank to ascertain whether
loans are being serviced as per facility terms, confirm the adequacy of
provisions, and establish that the overall risk profile is within limits
established by management and compliance of regulatory limits. Monitoring
procedures and systems should be in place so as to provide an early signal of
the deteriorating financial health of a borrower.
An
Early Alert Account is one that has risks or potential weaknesses of a material
nature requiring monitoring, supervision, or close attention by management. If
these weaknesses are left uncorrected, they may result in deterioration of the
repayment prospects for the asset or in the Bank’s credit position at some
future date with a likely prospect of being downgraded to worse. Despite a prudent
credit approval process, loans may still become troubled. Therefore, it is
essential that early identification and
prompt reporting of
deteriorating credit signs be done to ensure swift action to protect the Bank’s
interest. Regular contact with customers will enhance the likelihood of
developing strategies mutually acceptable to both the customer and the Bank.
Representation from the Bank in such discussions should include the local legal
adviser when appropriate.