Principle 4: Banks must operate within sound, well-defined credit-granting criteria. These criteria should include a clear indication of the bank’s target market and a thorough understanding of the borrower or counterparty, as well as the purpose and structure of the credit, and its source of repayment.

27. Establishing sound, well-defined credit-granting criteria is essential to approving credit in a safe and sound manner. The criteria should set out who is eligible for credit and for how much, what types of credit are available, and under what terms and conditions the credits should be granted.

28. Banks must receive sufficient information to enable a comprehensive assessment of the true risk profile of the borrower or counterparty. Depending on the type of credit exposure and the nature of the credit relationship to date, the factors to be considered and documented in approving credits include:

• the purpose of the credit and sources of repayment;

• the current risk profile (including the nature and aggregate amounts of risks) of the borrower or counterparty and collateral and its sensitivity to economic and market developments;

• the borrower’s repayment history and current capacity to repay, based on historical financial trends and future cash flow projections, under various scenarios;

• for commercial credits, the borrower’s business expertise and the status of the borrower’s economic sector and its position within that sector;