Risk management continued operations and by complying with the exposure limits Applications for mortgage loans of Retail Banking established by the NBG. The Bank also mitigates its clients are completed by the Mortgage Loan Officer and credit risk by obtaining collateral and using other security submitted to the Credit Risk Manager, who evaluate arrangements. The Bank monitors the market value of the credit risks and determine the amount, terms and collateral, requests additional collateral in accordance with conditions of the loan, which must be approved at the the underlying agreement and monitors the market value appropriate level of the Credit Committee. In the case of collateral obtained during its review of the adequacy of micro financing loans and SME loans of less than of the allowance for ELC/impairment losses. The exposure US$ 1.0 million, loan officers evaluate loan applications, to financial institutions is managed by limits covering prepare a project analysis and submit proposals to on and off-balance sheet exposures and by settlement the relevant Credit Risk Manager, who makes the final limits with respect to trading transactions such as foreign decision. Loans of more than US$ 1.0 million to SMEs are exchange contracts. approved by the Head of SME Credit Risk Analysis unit. The Credit Committees approve individual transactions Collateral and the Credit Risk department establishes credit risk The Bank typically requires credit support or collateral categories and the provisioning rates, which are set as as security for the loans and credit facilities that it per the provisioning methodology. The Bank’s Deputy grants. The main forms of credit support are guarantees CEO, Chief Risk Officer, the Credit Risk department and and rights to claim amounts on the borrower’s current the Portfolio Risk Management department review the account with the Bank or other assets. The main forms credit quality of the portfolio and set provisioning rates, of collateral for corporate lending are charges over in consultation with the Bank’s CEO and Deputy CEO, real estate properties, equipment, inventory and trade Chief Financial Officer, on a monthly basis. receivables and the main form of collateral for retail lending is a mortgage over residential property. In the case The Bank’s credit quality review process provides early of corporate loans, the Bank usually requires a personal identification of possible changes in the creditworthiness guarantee (surety) from the borrower’s shareholders. of counterparties, including regular collateral revaluations. Under the Bank’s internal guidelines, collateral should Counterparty limits are established by the use of a credit be provided (where it is required) to cover outstanding risk classification system, which assigns a risk rating to liabilities during the entire duration of a transaction. each counterparty. Risk ratings are subject to regular As of 31 December 2018, 85.7% of the loan portfolio revision. The credit quality review process allows the Bank was collateralised. An evaluation report of the proposed to assess the potential loss as a result of the risks to which collateral is prepared by the Asset Evaluation department it is exposed and to take corrective action. The Bank makes or by the third party asset appraisal company and available to its customers guarantees/letters of credit, submitted to the appropriate Credit Committee, together which may require that the Bank makes payments on their with the loan application and Credit Risk Manager’s behalf. Such payments are collected from customers based report. When evaluating collateral, the Bank discounts on the terms of the guarantee/letter of credit. They expose the market value of the assets to reflect the liquidation the Bank to similar risks to loans and these are mitigated value of the collateral. by the same control processes and policies. Loan approval procedures Measurement Exposure and limits are subject to annual or more frequent The procedures for approving loans, monitoring loan review. The Bank’s compliance with credit risk exposure quality and for extending, refinancing and/or restructuring limits is monitored by the Credit Risk department on a existing loans are set out in the Bank’s Credit Policies continuous basis. The allowance is based on the Expected that are approved by the Supervisory Board and/or the Credit Loss (ECL) associated with the probability of Management Board of the Bank. The Credit Committees default in the next 12 months, unless there has been a approve individual transactions. significant increase in credit risk since the loan origination, in which case the allowance is based on the ECL over The Bank evaluates Corporate Investment Banking clients the life of the asset. The allowance for credit losses is on the basis of their financial condition, credit history, based on forward- looking information, which takes business operations, market position, management, level into consideration past events, current conditions and of shareholder support, proposed business and financing forecasts of future economic conditions. The Bank plan and on the quality of the collateral offered. The establishes the ECL of financial assets on a collective basis appropriate level of the relevant Credit Committee is and on an individual basis when a financial asset or group responsible for making the decision for loan approval of financial assets is impaired. The Bank creates the based on credit memorandum and, where appropriate, ECL by reference to the particular borrower’s financial the Credit Risk Manager’s report. condition, the number of days the relevant loan is overdue, changes in credit risk since loan origination, any forecasts The loan approval procedures for Retail Banking loans for adverse changes in commercial, financial or economic depend on the type of retail lending products. Applications conditions affecting the creditworthiness of the borrower for consumer loans, including credit cards and auto loans and other qualitative indicators, such as external market up to GEL 50,000 are approved by the scoring system. or general economic conditions. If in a subsequent period 56 Annual Report 2018Bank of Georgia Group PLC