The Bank continually ensures the soundness of its assets by applying a three-step process to cred-
it, mainly loans extended to various customers. The three steps are (1) assignment of internal rat-
ings, (2) self-assessments and (3) write-offs and reserve provisions.
Framework for Ensuring Asset Soundness
(1) Assignment of Internal Ratings
The Bank assigns an internal rating to each debtor based on comprehensive qualitative and quan-
titative analysis of the debtor’s condition. As part of the assessment process, internal ratings are
reviewed “periodically” based on disclosed financial data and reviewed “as needed” in considera-
tion of a change in the status of a debtor’s creditworthiness.
Internal ratings are a core tool for daily credit management, including serving as the basis for
the establishment of lending frameworks such as spread guidelines and a variety of credit ceilings.
Additionally, by continually compiling statistics on defaults among groups within the same
internal rating, the Bank is able to calculate average default probabilities for each rating and use
this as the base coefficient for quantifying credit risk.
Provisions to the general reserve for possible loan losses based on pro-
jected loss amount, calculated as credit exposure multiplied by the his-
torical loss ratio.
Provisions to the general reserve for possible loan losses based on the
projected loss amount, calculated as credit exposure multiplied by the
historical loss ratio for each group, which are categorized according to
Substandard group further segmented into “other substandard debtors”
and “debtors under requirement of control,” with provisions based on
the discounted cash flow (DCF) method for large loans to debtors, with
additional consideration given to the financial condition and credit sta-
tus of the latter subcategory.
For Category IV loans (portions determined to have zero value and/or be
irrecoverable), the entire amount is basically removed from the b