Strategic Report Strategic Report Strategic Report Financial Additional Overview Strategy Performance Governance Statements Information the amount of the ECL decreases the previously department prepares and submits monthly reports to recognised loss is reversed by an adjusted ECL account. the ALCO. The ALCO monitors the proportion of maturing The determination of ECL is based on an analysis of funds available to meet deposit withdrawals and the the assets at risk and reflects the amount which, in the amounts of interbank and other borrowing facilities that judgement of the Bank’s Management Board, is adequate should be in place to cover withdrawals at unexpected to provide for expected losses considering forward- levels of demand. looking information. The liquidity risk management framework models the Provisions are made against gross loan amounts and ability of the Bank to meet its payment obligations under accrued interest. Under the Bank’s internal loan loss both normal conditions and extreme circumstances. The allowance methodology, which is based upon IFRS Bank has developed a model based on the Basel III liquidity requirements, the Bank categorises its loan portfolio guidelines. This approach is designed to ensure that the into significant and non-significant loans. Significant funding framework is sufficiently flexible to secure liquidity loans are defined as loans in excess of US$ 1.0 million under a wide range of market conditions. The liquidity and non-significant loans are defined as loans below management framework is reviewed from time to time to US$ 1.0 million. The Credit Risk department makes an ensure it is appropriate to the Bank’s current and planned individual assessment of all defaulted significant loans. activities. Such review encompasses the funding scenarios, Non-defaulted significant loans are given a collective wholesale funding capacity, limit determination and assessment rate. For the purposes of provisioning, all minimum holdings of liquid assets. The liquidity framework loans are divided into different groups (such as mortgage, is reviewed by the ALCO prior to approval by the Bank’s consumer, micro loans). Management Board. In 2004, the Bank, jointly with certain other Georgian The Treasury and Funding departments also undertake an banks and with the CreditInfo hf, an international holding annual funding review that outlines the current funding of credit information bureaus and a provider of credit strategy for the coming year. This review encompasses information solutions, established Credit Information trends in global debt markets, funding alternatives, peer Group (CIG) to serve as a centralised credit bureau analysis, estimation of the Bank’s upcoming funding in Georgia. Most Georgian banks have shared negative requirements, estimated market funding capacity and a customer information since July 2006. Since 2009, funding risk analysis. The annual funding plan is reviewed they also share and contribute positive and negative by the Bank’s Management Board and approved by the customer credit information to CIG. Bank’s Supervisoyoad as part of the annual budget. The Funding and Treasury departments also review, from Effective 1 January 2018, loans up to US$ 1.0 million time to time, different funding options and assess the secured by real estate are subject to a write-off once refinancing risks of such options. overdue for more than 1,460 days. Unsecured loans and loans secured by collateral other than real estate are Mitigation: The Bank’s capability to discharge its subject to a write-off once overdue for more than 150 liabilities is dependent on its ability to realise an equivalent days. Corporate loans and loans above US$ 1.0 million, amount of assets within the same period of time. The secured by real estate, may be written off following an Bank maintains a portfolio of highly marketable and assessment by the Bank’s Deputy CEO, Chief Risk Officer diverse assets that it believes can be easily liquidated in and the Credit Risk department. the event of an unforeseen interruption of cash flow. It also has committed lines of credit that it can access to The Group has completed its IFRS 9 implementation meet its liquidity needs. Such lines of credit are available programme and adopted IFRS 9. Financial Instruments from through the NBG’s refinancing facility. In addition, the 1 January 2018. There were no material changes in credit Bank maintains a cash deposit (obligatory reserve) with risk management practice at the Group as a consequence the NBG, the amount of which depends on the level of of IFRS 9 application. For further information see the customer funds attracted. As of 31 December 2018, in line Consolidated Financial Statements of this Annual Report. with the NBG’s requirements, 25% of customer deposits in foreign currencies were set aside as minimum reserves. Liquidity risk In addition, the Bank maintains a minimum average balance of 5% of its customers’ deposits in Georgian Lari on its Definition: Liquidity risk is the risk that the Bank will be correspondent account at the NBG. For wholesale funding unable to meet its payment obligations when they fall and Certificates of Deposits, the NBG requires the Bank due under normal and stress circumstances. to set aside 25% of its unsubordinated foreign currency wholesale funding for borrowings with a remaining Monitoring: Liquidity risk is managed through the ALCO- maturity of less than one year (which will be gradually approved liquidity framework. Treasury manages liquidity increased to 30% by the end of May 2019, as announced on a daily basis. In order to manage liquidity risk, it by the NBG on 13 March 2019), 10% for borrowings with performs daily monitoring of future expected cash flows a remaining maturity of one to two years (which will on customers’ and banking operations, which is a part of be gradually increased to 15% by the end of May 2019, the assets/liabilities management process. The Finance as announced by the NBG on 13 March 2019) and 5% Annual Report 2018Bank of Georgia Group PLC 57