Credit underwriting standards need to be improved.
Spurred on by years of record-low interest rates, some banks in Singapore have engaged in “undesirable” credit underwriting practices, the Monetary Authority of Singapore (MAS) revealed.
Overall underwriting standards and practices remained robust despite these isolated cases, the central bank said in a thematic report.
“Banks generally had sound underwriting policies and procedures in place to assess the creditworthiness and repayment capability of borrowers. Nevertheless, there were areas where some banks could strengthen their underwriting practices,” the MAS said.
Banks could strengthen their underwriting practices by establishing clear risk acceptance criteria, improving credit assessments, and enhancing the monitoring of loans priced below hurdle rates and other credit policy deviations.
“The protracted low interest rate environment and increased level of liquidity over the past years have resulted in a very competitive market and compressed interest margins for banks. In this environment, some banks may relax loan structures and covenants, and under-price risks in their corporate lending activities,” the MAS said.
The report stressed that banks are expected to actively manage their credit risks to ensure that their credit portfolio remains resilient. It also noted that banks should be watchful of emerging trends such as the substitution of trade finance facilities with working capital and other short term credit facilities, inappropriate granting of bullet loans, and loans priced below hurdle rate.
“It is important that banks maintain sound credit underwriting standards, policies and processes as well as uphold prudent lending practices to avoid severe asset quality issues,” the report noted.
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