Minimum Capital Requirements for Credit Risk

Effectiveness of monitoring systems: the bank must be able to monitor both the quality of the receivables and the financial condition of the seller and servicer. In particular: (1) The bank must: (a) assess the correlation among the quality of the receivables and the financial condition of both the seller and servicer; and (b) have in place internal policies and procedures that provide adequate safeguards to protect against such contingencies, including the assignment of an internal risk rating for each seller and servicer. (2) The bank must have clear and effective policies and procedures for determining seller and servicer eligibility. The bank or its agent must conduct periodic reviews of sellers and servicers in order to verify the accuracy of reports from the seller/servicer, detect fraud or operational weaknesses, and verify the quality of the seller’s credit policies and servicer’s collection policies and procedures. The findings of these reviews must be well documented. (3) The bank must have the ability to assess the characteristics of the receivables pool, including: (a) over-advances; (b) history of the seller’s arrears, bad debts, and bad debt allowances; (c) payment terms; and (d) potential contra accounts. (4) The bank must have effective policies and procedures for monitoring on anaggregate basis single-obligor concentrations both within and across receivables pools. (5) The bank must receive timely and sufficiently detailed reports of receivables ageings and dilutions to: (a) ensure compliance with the bank’s eligibility criteria and advancing policies governing purchased receivables; and (b) provide an effective means with which to monitor and confirm the seller’s terms of sale (e.g. invoice date ageing) and dilution. 16.117 Effectiveness of work-out systems: an effective programme requires systems and procedures not only for detecting deterioration in the seller’s financial condition and deterioration in the quality of the receivables at an early stage, but also for addressing emerging problems pro-actively. In particular: (1) The bank should have clear and effective policies, procedures, and information systems to monitor compliance with (a) all contractual terms of the facility (including covenants, advancing formulas, concentration limits, early amortization triggers, etc.) as well as (b) the bank’s internal policies governing advance rates and receivables eligibility. The bank’s systems should track covenant violations and waivers as well as exceptions to established policies and procedures. (2) To limit inappropriate draws, the bank should have effective policies and procedures for detecting, approving, monitoring, and correcting over- advances. (3) The bank should have effective policies and procedures for dealing with financially weakened sellers or servicers and/or deterioration in the quality of receivable pools. These include, but are not necessarily limited to, early termination triggers in revolving facilities and other covenant protections, a structured and disciplined approach to dealing with covenant violations, and clear and effective policies and procedures for initiating legal actions and dealing with problem receivables.