129 I N T E G R A T E D R E P O R T 2 0 2 1 4. FINANCIAL RISK MANAGEMENT (CONT’D) 4.1 Financial risk factors (Cont’d) (d) Credit risk (Cont’d) Impairment assessment (Cont’d) Exposure at Default The exposure at default (EAD) refers to the gross carrying amount of the financial instruments in the event of obligor default. For Stage 1 exposures, the EAD is derived based on possible default events within 12months. For Stage 2 exposures, the exposure at default is considered for events over the lifetime of the instruments. The EAD framework adopted by the Group considers two separate methods dependent on the underlying financial asset; the current exposure method for deposit with banks, leases, hire purchase and other credit agreements, and loan and advances except for revolving facilities such as factoring debtors and off-balance sheet items where the credit conversion factor approach is used. Under the current exposuremethod, the expected outstanding exposure is derived from the expected future cash flows as the best estimate of EAD. The credit conversion factormethod takes into account the sumof the actual outstanding exposure and expected drawdown until default as the best estimate of EAD. Forward looking information Forward-looking economic assumptions are incorporated into ECL models. The Group has taken into account GDP growth rate forecasts when deriving the expected credit losses. This variable was significant in the models that were built. The GDP forecasts are constantly updated with new estimates and are sourced from reputed local and international organisations. Credit quality For stage classification, the Group utilises a combination of quantitative and qualitative factors to determine whether the credit risk of a borrower has increased significantly since initial recognition. Exposures are considered to have resulted in a significant increase in credit risk and are moved to stage 2 when: On a quantitative basis, the days past due (dpd) indicator is employed and exposures above 30 dpd are classified under Stage 2. On a qualitative basis, accounts show signs of deteriorating early warning indicators (such as default on covenants), macroeconomic factors and external market information where relevant. The Group maintains a credit risk rating based on the days past due and the obligor is categorised as follows: Write-offs Financial assets are written off either partially or in their entirety only when there is no reasonable expectation of recovery such as the death or liquidation of a debtor. If the amount to be written off is greater than the accumulated loss allowance, the difference is first treated as an addition to the allowance that is then applied against the gross carrying amount. It constitutes a derecognition event. Any subsequent recoveries are credited to the credit loss expense. Modified loans Sometimes the Group makes concessions or modifications to the original terms of loans as a response to the borrower’s financial difficulties, rather than taking possession or to otherwise enforce disposal/repossession of collateral. Indicators of financial difficulties include default on covenants, bankruptcy, or significant concerns raised. Once the terms have been renegotiated, any impairment is measured using the original interest rates as calculated before the modification of terms. These accounts are classified as high risk and derecognition decisions and classifications between stage 2 and stage 3 are determined on a case-by-case basis. If the accounts were impaired, they will be closely monitored until it is collected or written off. And if the accounts were classified in the underperforming category, the Group will reassess whether there has been a significant increase in credit risk. Once an account has been classified as forborne, it will remain forborne for a minimum probation period of 6 months. In order for the accounts to be reclassified out of the forborne category, the customer has to meet all of the following criteria: • All of its facilities has to be considered performing; • The minimum probation of period of 6 months has passed; and • Regular payments have been made in accordance with the terms and conditions agreed If modifications are substantial either quantitatively or qualitatively, the loan is derecognised as explained under write offs. Risk rating Description Performing None of the facilities of the obligor have been due for more than 30 days. Watchlist Any one of the facilities granted to the obligor has been in arrears for more than 30 days but is not considered to be credit-impaired. Non-performing Any one of the facilities granted to the obligor has been in arrears for more than 90 days or the oblitagor is unlikely to pay its credit obligations in full, without recourse to actions such as realising security. Explanatory Notes 30 SEPTEMBER 2021 E x p l a n a t o r y N o t e s
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