Basel Framework and Banking Regulations

The Basel Framework

• The Basel Framework is a set of standards for the prudential regulation of banks, set by the Basel Committee on Banking Supervision, the primary global standard setter.

External Laws and Regulations

• External laws and regulations affecting bank credit functions include:
  • Regulations, Guidelines, Notices and Directions Issued by Bank Negara Malaysia
  • Financial Services Act 2013
  • National Land Code Act 828 (for land charges and lien as collateral)

Internal Policies and Guidelines

• The credit policy is a document that outlines guidelines for lending companies to make critical lending decisions.
• The guidelines are important for risk management and provide necessary guidelines for staff to effectively manage clients' portfolios.

Lending Approaches

• Documents required for lending: annual financial statements or the business plan

Rating Process

• A typical rating process consists of two components:
  • Financial Rating (Quantitative Rating)
    • Analysis of financial data available for the credit applicant
    • Focus on debt service capacity
  • Qualitative Rating
    • Assessment of borrower characteristics:
      • Knowledge
      • Experience
      • Past credit conduct
    • Assessment of business characteristics:
      • Profitability
      • Competitiveness
      • Survival

Combining Ratings

• Financial and qualitative ratings are combined using a weighting function
• The resulting rating is referred to as the Base Rating