Commercial Lending Criteria - osfi-bsif.gc.ca

Role of OSFI · consider requests from institutions with respect to increasing the approved limits on commercial lending or removing such limits;. Skiptomaincontent Skiptosecondarymenu CommercialLendingCriteria PageContent AlternativeFormats PDF,30kB DocumentProperties TypeofPublication:Guideline Date:June1992 No:E-2 Audiences:T&L/Co-op/Life ThisguidelineoutlinestheapproachtheOfficeoftheSuperintendentof FinancialInstitutionsusesinpermittingtrustandloancompanies, Canadianincorporatedlifeinsurancecompaniesandcooperativecredit associationswithcapitalofover$25milliontoholdcommercialloansin excessof5percentofthetotalassetsofthecompanyorassociation ("company"). TableofContents CommercialLending ApprovalProcess RoleofOSFI Criteria CurrentPosition PastExperience EarningsExperience Expertise BusinessPlan RiskManagement CreditGranting,Documentationand Collection CreditMonitoring Commercial Lending TheTrustandLoanCompaniesAct,theInsuranceCompaniesActandthe CooperativeCreditAssociationsAct(referredtohereinaftercollectively as"theActs"orindividuallyas"theAct")providefullcommercial lendingpowerstofederallyregisteredtrustandloancompanies,Canadian incorporatedlifeinsurancecompaniesandcooperativecreditassociations respectively,subjecttocertainconditions.Theseconditionsincludea capitalbaseofatleast$25millionandsupervisoryapprovalbythe SuperintendentofFinancialInstitutions.Companiesthatdonotmeetthese conditionsarelimitedtocommerciallendingactivitiesnotexceeding5 percentoftotalassetsasdefinedbyregulations.Theregulationsdefine "totalassets"toincorporatetheassetsofacompany'sprescribed subsidiaries. SupervisoryapprovalbytheOfficeoftheSuperintendentofFinancial Institutionstoengageincommerciallendingwillbegrantedonlywhen certainestablishedanddefinedcriteriaaremet.Thepurposeofapplying thesecriteriaistoensurethatcompanieshavetheappropriatemechanisms inplacetomake,controlandmonitoracommercialloanportfoliosubject totheprudentpersonapproach. TheActsdefinecommerciallendingforpurposesoftheseexpandedpowers. Theterm"commercialloan"isdefinedtoincludenotonlyloansinthe conventionalsensebutalsocertainloansubstitutesandinvestmentsin debtandequitysecuritiesofcorporationsandunincorporatedentities. Thedefinitiondoes,however,excludeseveralclassesofloansand investmentsthatarenottobeconsideredcommercialloans.Theseinclude: smallloans-lessthan$250,000tonaturalpersons(theseare essentiallyconsumerloansandwillnotbesubjecttoportfoliolimits undertheActs); mortgageloansthatareinsuredormeetcertainrequirementsregarding loan-to-valueratios; certaindepositsbyacompanywithanotherfinancialinstitution; loansandinvestmentsindebtobligationsdirectlyorindirectly backedbytheguaranteeofagovernmentorprescribedinternational agency; loansandinvestmentsindebtobligationseitherdirectlyor indirectlybackedbytheguaranteeofanotherfinancialinstitutionor securedbydepositswithanyfinancialinstitution,includingthe company; investmentsindebtorequitysecuritiesthatarewidelydistributed withinthemeaningoftheregulations;and investmentsinparticipatingshares. Indefiningacommercialloan,theActsdefine"loan"withamodified meaningthatincorporatesclosesubstitutesforloans,suchasacceptances andotherguarantees,financialleases,conditionalsalescontracts, repurchaseagreements,andothersimilararrangements. Approval Process TheOfficeexpectscompaniestofollowsoundriskmanagementpracticesin thecontextofcommerciallendingactivities.Approvalforexpanding commerciallendingbeyondthelimitof5percentoftotalassetsdepends onthecompanydemonstratingcompliancenotonlywiththecriteria establishedwithrespecttocommerciallendingbutwithallprovisionsof theAct,regulations(includingcapitaladequacytests),andOffice guidelinesandrulings. Theapprovalprocesswillencompassthefollowingelements: Allcompaniesnowinexcessofthe5percentlimitorwishingto exceedthe5percentlimitarerequiredtosubmitarequestfor approval.Requestswillbeconsideredonaninstitutionbyinstitution basis. Forthosecompaniesinexcessofthe5percentlimit,transitional arrangementswillbeavailabletoallowcompaniestocontinueto operatependingprocessingofapplications. Approvalswilltaketwoforms;generalapprovalwithoutpredetermined limitsandapprovalwithpredeterminedlimits. Toobtainapprovalforcommerciallendingwithoutapredetermined limit,companieswillneedtohaveastrongcapitalposition,a consistentlysoundrecordofcreditmanagementbasedonasignificant volumeofcommerciallendingbusinessand,throughadescriptionof theircommerciallendingbusinessplan,theircreditriskmanagement programs,theircreditgrantingandmonitoringprocesses,andmatters relatedtotheothercriteriaoutlinedbelow,exhibitastrong capacitytomanagetherisksassociatedwithcommerciallending. Companiesseekingtoobtainapprovalbeyondthe5percentlimitwhich donotmeetalloftheconditionsdescribedin4butwhichexhibitan adequatecapacitytomanagetherisksassociatedwithcommercial lendingusingthecriteriaoutlinedbelowwillbepermittedto increasecommerciallendingactivitiesgradually.Whenpreviously authorizedlimitsareapproachedthesecompaniesmayapplyforfurther increasesinauthorizedlimitsormayseekapprovaltoconduct commerciallendingwithoutpredeterminedlimitiftheymeetallofthe conditionsdescribedin4. Informationcontainedinapplicationswillbeconfirmedbyreference totheOffice'sassessmentofthecompany'sconditionandpast performanceobtainedthroughitssupervisoryactivitiesincluding monitoring,analysisandexaminationprocesses. Undernormalcircumstancespreviouslyauthorizedexpandedcommercial lendingpowerswillnotbewithdrawn.TheOfficewilluseits supervisoryprocessestoensurethatcompaniesfollowsoundrisk managementpracticesastheyrelatetocommerciallending. Roleof OSFI Asregulator,OSFIwill: considerrequestsfrominstitutionswithrespecttoincreasingthe approvedlimitsoncommerciallendingorremovingsuchlimits; establish,maintainandcommunicatethecriteriausedtoconsidersuch requests; uponreview,providewrittenapprovalswhereestablishedcriteriaare met;and review,throughtheexaminationandmonitoringprocess,thecommercial lendingactivitiestoensurecompliancewithestablishedcriteria. Criteria Eachapplicationforapprovalofexpandedcommerciallendingauthorities willbereviewedinlightofthecriteriaoutlinedbelow.Thesecriteria areconsistentwiththosetobeappliedinapprovingsimilarrequestsfrom othertypesofregulatedfinancialinstitutions. Current Position Areviewofthecompany'scurrentpositionwithrespectto: theexistingauthorizedlevelofcommerciallendingactivities; capitaladequacyposition;and compliancewiththeAct,regulations,guidelinesandrulings. Past Experience Ananalysisofpastexperienceincreditmanagementincluding: volumeofcommerciallendingactivityundertakeninthepastfive years; statisticsonnon-performingloans,provisions,write-offs, renegotiatedreducedrateloans,arrears;and otherassetqualityindicatorsforbothcommercialandotherloans. Earnings Experience Ananalysisofannualearningsexperiencesegmentedbysignificanttypeof businessactivity(forexamplethecategoriesusedinregulatoryreports filedwiththeOffice)forthepreviousfiveyearperiod. Expertise Backgroundinformationandbiographiesofkeyseniorcommercialloan officersincludinginformationonpastexperienceandareasof specializationincommerciallending. Business Plan Acomprehensivebusinessplanindicatingthestrategicdirectionof commerciallendingactivities,marketsandmarketsharetargets,forecasts andbudgets. Risk Management Adescriptionofthecreditriskidentificationandmanagementprogram. Thisprogramshouldincludethefollowingessentialelements: creditriskphilosophygoverningtheextenttowhichthecompanyis willingtoassumecreditrisk; roleoftheboardofdirectorsandmanagement; generalareasofcreditinwhichaninstitutionispreparedtoextend credit,typesofcreditfacilities,borrowersandgeographicareas; levelsofdelegationofcreditapproval,andprovisionsorwrite-off authorities; portfolioconcentrationlimitsforthefollowing: asinglecounterparty; agroupofassociatedcounterparties; anindustrialsector; ageographicregion; individualforeigncountryorclassofcountries; onetypeofcreditfacility; aclassofsecurity; (limitsshouldbeprovidedforboththefinancialinstitutionmakingthe applicationand,whereappropriate,onaconsolidatedbasisforthe institutionanditssubsidiaries). portfoliodiversificationpolicies. Credit Granting,DocumentationandCollection Adescriptionofthecreditprocessincluding: evaluatingcreditproposals; creditdocumentationstandards; creditcollectionprocesses. Credit Monitoring Adescriptionofthecreditmonitoringandcontrolpracticesincluding: portfoliocharacteristicsanalysistotracksingleandassociated groupsofcounterparties,typesofcreditfacilities,industriesand geographicregions; creditratingsystemswhichdefineriskratingcriteriaandratesthe institution'srisksaccordinglyincludingtheclassificationof creditsassatisfactory,belowstandardorunsatisfactory; creditreviewprocessoutliningtheregularmonitoringofborrowers andapplicableproceduresforre-evaluationandre-ratingofcredits; internalcreditinspectionandauditprocessesandproceduresto ensurethatcreditprocessesareincompliancewiththeinstitution's policies. 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