Document ID: chunk:federal_register_of_legislation:F2022L01576:body:0:p9
Version: federal_register_of_legislation:F2022L01576
Segment Type: other
Provision Reference: 
Character Range: 23122–26374

a borrower.
44.         An ADI must give due consideration to the integrity and reputation of the borrower as well as its legal capacity to assume liability.

Exposures to individuals
45.         For exposures to individuals, an ADI's credit assessment must include consideration of the following criteria, where relevant:
       (a)          the purpose and structure of the exposure and sources of repayment, including making reasonable inquiries and taking reasonable steps to verify income or cash flows;
       (b)          the current risk profile of the borrower, including making reasonable inquiries and taking reasonable steps to verify commitments and total indebtedness;
       (c)          the borrower's repayment history and capacity, assessed under various scenarios such as:
(i)            an increase in interest rates;
(ii)         a change from a fixed-rate to a floating interest rate (and vice versa);
(iii)       a decrease in income or cash flows, particularly for less stable income or cash flow sources; and
(iv)        for exposures with an interest-only period that subsequently converts to principal and interest payments, on a principal and interest basis of repayment;
       (d)          the borrower's expenses, including the collection of reasonable estimates. Expense benchmarks must not be used as a substitute for an ADI making reasonable enquiries of a borrower's expenses;
       (e)          the proposed terms and conditions of the exposure, including covenants designed to limit the ADI's exposure to changes in the future risk profile of the borrower to an acceptable level to the ADI; and
       (f)           where applicable, the adequacy and enforceability of collateral, guarantees and other risk mitigants, including under various scenarios.

Exposures other than to individuals
46.         For exposures other than to individuals, in addition to paragraphs 45(a), 45(b), 45(c), 45(e) and 45(f), an ADI's credit assessment must also include consideration of the following criteria, where relevant:
       (a)          the borrower's business expertise, economic or industry sector and its position within that sector;
       (b)          the borrower's historical financial and future cash flows;
       (c)          the borrower's equity capital invested in the business; and
       (d)          the availability and enforceability of risk mitigants other than collateral, such as hedging and insurance.

Collateral and guarantees
47.         An ADI must have prudent credit risk policies covering the acceptability of various forms of collateral, appropriate processes for the valuation of such collateral (including the valuation of collateral prior to entering into an exposure and the ongoing valuation of collateral, where appropriate), and an appropriate process to ensure that collateral is, and continues to be, enforceable and realisable (refer to Attachment A to this Prudential Standard).
48.         An ADI must ensure all valuations are appraised independently from the ADI's credit origination, credit assessment and approval process.
49.         The valuation of collateral must reflect fair values, taking into account prevailing market conditions such as time taken for the liquidation