Article 7: Significant Increase in Credit Risk

C 3/2024-STD Effective from 30/11/2024

7.1

The LFI must assess and document regularly whether the Credit Risk of a financial instrument has increased significantly since its initial recognition. The identification of Significant Increase in Credit Risk (“SICR”) must be done in accordance with accounting standards, the LFI’s internal policy on SICR and must incorporate the requirements presented in these standards. It must be based on all available, reasonable and supportable information; including forward-looking information. The identification of SICR must be employed by LFIs to determine the staging of Obligors and Facilities as explained in Article 9 below on classification and provisioning.

7.2

The indicators employed for the identification of a SICR must be regarded as early warning indicators to the identification of the Obligor’s unlikeliness to pay, articulated earlier in this regulation and the these standards. Consequently, for Obligors subject to a SICR, the identification process must also consider the possibility of a further deterioration in credit worthiness leading to unlikeliness to pay. Such analysis must be fully documented. Wholesale Obligors must be considered individually not as a portfolio.

7.3

Each LFI must review forward-looking information and determine appropriate indicator to determine if an SICR has occurred. Those indicators must include, but not be limited to, the number of Deferrals granted to the Obligor and the Days-Past-Due.

7.4

For each Obligor, LFIs must implement a rigorous process to regularly assess whether a SICR has occurred. This process can be based on information at the level of each Credit Facility or at pool or portfolio level. If an LFI decides to set its SICR criteria threshold at the level of a group of Credit Facilities, the Facilities within that group must have similar Credit Risk drivers.

7.5

LFIs must ensure that the assessment of SICR is applied at different levels of granularity for connected financial instruments, e.g. Credit Facility level, Obligor level and/or group level. Such assessment must be documented.

7.6

As a precursor to SICR, LFIs should implement a watch list mechanism, employed for forward-looking Credit Risk management, appropriate to the size and complexity of the LFI.

7.7

Deferral indicator:

Any individual Credit Facility of a Wholesale Obligor, subject to 3 or more Deferrals of instalments due in a rolling 24-month period, must be identified as a deteriorating asset and therefore subject to SICR, unless there is supportable and documented evidence that no SICR has occurred. This requirement applies to Credit Facilities that are material to the LFI for a given Obligor, i.e. Credit Facilities representing more than 5% of the total Obligor’s financial obligations to the LFI.

If the Obligor has 3 or more Deferrals of consecutive instalments then the days-past-due counter commences from the original due date of the first deferred instalment. Relevant classifications and required provisions must be applied on the basis of this day count.

7.8

DPD indicator: Credit Facilities with Repayments more than 30 Days-Past-Due must be identified as deteriorating assets and therefore subject to SICR. If the 30 Days-Past-Due presumption is rebutted, this must be fully documented with reasonable and supportable information evidencing that no SICR has occurred.

7.9

Other indicators: For all Obligor types, in addition to the Deferral indicator and the DPD indicator, LFIs must review forward-looking information to determine if a SICR has occurred. Such a review must include a comprehensive assessment of quantitative and qualitative drivers of Credit Risk associated with each Obligor. This assessment must be fully documented and retained as evidence. During this assessment, it may not be possible to identify a single discrete event. Instead, the combined effect of several events can cause a SICR.

7.10

Exceptions: For a Credit Facility where it has been determined that no SICR has occurred despite being triggered by the indicators above, such evidence must be formally evaluated and agreed upon by the CCO and CRO before being formally approved at the most Senior Management committee.

7.11

For Wholesale Obligors, relevant indicators of a SICR may include, but are not limited to those outlined below. LFIs must be in a position to demonstrate that they have analysed these elements:

Deterioration of financial performance, including but not limited to, actual or expected decline in revenues or margins, increase in operating risks, deficiencies in working capital, breaching/deterioration of quantitative Credit Facility covenants and/or rising liquidity risks.

Deterioration in the value, quality or income-producing ability of the Obligor’s assets, increase in balance sheet leverage and/or negative equity. Deterioration in the ability of the Obligor to utilise its assets, for instance caused by the loss or damage of these assets.

Deterioration in the competitive position of the Obligor. Disruption in the position of the Obligor vis-a-vis its clients and/or suppliers. Disruption in the business and/or economic conditions, in particular, bankruptcy of a counterparty, economic difficulty in the sector in which the Obligor operates, particularly when taking into account the Obligor’s position in that sector.

Ineffective governance, sudden management changes, sudden change in the scope of business or organizational structure (such as the discontinuance of a segment of the business) that can result in a significant change in the Obligor’s ability to meet its obligations.

Downgrade of the Credit Facility in publicly available information from external parties, such as rating agencies and/or a credit bureau.

Any other contributor to deterioration in credit worthiness, such as the following:

i.	Unavailable/inadequate financial information and/or financial statements,
ii.	Qualified report by external auditors,
iii.	Significant contingent liabilities,
iv.	Pending litigation resulting in a detrimental impact,
v.	Loss of key staff critical to the organization,
vi.	Increase in operational risk and higher occurrence of fraudulent activities which are material to impact Repayment of Facilities,
vii.	Continued delay and non-cooperation by the Obligor in providing key relevant documentation to the LFI.

Any other evidence that full Repayment of Interest and principal without realization of collateral is unlikely.

For Wholesale Obligors, where the majority owning Parent is showing stress such as SICR or worse, then there is a risk of diversion of funds from the Obligor, who should also be considered as subject to SICR.

7.12

Economic environment: LFIs must analyse and document the relationship between macroeconomic conditions and Obligors’ Credit Risk drivers for the purpose of SICR assessment. This requirement applies to all types of portfolios. Such analysis can be performed at the level of individual Obligors or pools of Obligors, provided that jointly assessed Obligors share similar risk drivers. LFIs must also demonstrate that adequate economic analysis is performed to support this process. In addition to macroeconomic analysis, the SICR assessment must be supported by industry-level analysis, both current and forward-looking, including implications of any geopolitical, environmental and operating risks.