Risk Management Report (continued) Our Principal Risks The table below depicts the principal risks of CFSL including evolution of the risks over the financial year 2024. The description of the principal risks and mitigation strategies is further detailed below. Credit Risk Risk Response Policies and processes: • Robust credit risk policies, standards and prudential limits are in place, including a set of credit risk metrics. • A risk-based approach to credit decision-making, with higher-risk or more complex applications escalated to a higher credit authority for approval, incorporating appropriate pricing and securing collateral where applicable. • Use of risk reduction mechanisms, such as credit insurance, to transfer or offset credit risk. • A provisioning strategy for credit losses is in place, ensuring sufficient funds are set aside to cover potential future defaults, reflecting the Group’s proactive approach. • A diversification strategy spreads credit exposure across various sectors and borrowers’ profiles, minimising dependency on any single segment and enhancing resilience to adverse economic conditions. Performance Reviews and Monitoring: • Effective monitoring controls are in place to oversee credit scorecards and enforce policy rules within our credit decisioning tools. This includes closely tracking credit quality, managing concentration, and identifying any exceptions to established policies. • Ongoing monitoring enables the early identification of potential credit deterioration, allowing for timely interventions. • A Support programme is in place to assist borrowers facing temporary financial difficulties. • Credit scorecards and IFRS 9 Expected Credit Loss (ECL) models are periodically reviewed to ensure their reliability e and alignment with internal risk management goals. • The Debtors Monitoring Committee, the Portfolio & Credit Risk Forum and the Risk Analytics Forum assess credit exposures, identify early warning signs and implement treatment strategies as needed. FINANCIAL RISKS The risk of financial loss arising from a borrower’s or counterparty’s inability to meet contractual obligations as they become due. Model Risk Risk Response Policies and processes: • Various models are leveraged, such as Credit scorecards, Probability of Default, and Loss Given Default to calculate expected credit loss in compliance with IFRS 9 standards. These models play a crucial role in supporting credit decision-making. • Models are reviewed and updated to reflect the latest performance data and latest forward-looking macroeconomic variables. • The Risk Management team independently maintains the IFRS 9 ECL models. Performance Reviews and Monitoring: • The performance of credit scorecards is regularly reviewed and reported at the Risk Analytics Forum. • The performance of the IFRS 9 ECL models is regularly monitored, and issues are reported to the Risk Management Committee for resolution. • Comprehensive model documentation and ECL standards, along with Board-approved governance frameworks, ensure consistency and accountability. FINANCIAL RISKS Potential negative outcomes from decisions based on incorrect or misused model outputs, including design errors and data limitations. 82
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