TABLE OF CONTENTS

1.CREDIT AND LENDING RISK – KEY PRINCIPLES

2.CONSIDERATIONS PRIOR TO THE ASSUMPTION OF CREDIT AND LENDING RISK

2.1.Formal sign off of a new risk based business activity

2.2.New credit and lending risk product development

2.3.Underlying business strategies and plans to support new credit and lending products

2.4.Responsibility for the quality of potential business introduced

2.5.Underlying measurement, management, monitoring, reporting, and system support for new credit and lending products

3.FINANCING ELIGIBILITY CRITERIA

3.1.Requirements for a credit risk framework fit including exclusions

4.KEY ELIGIBILITY CRITERIA AND CONNECTED PRINCIPLES

4.1.Mandate and strategic fit

4.2.Transactions with Politically Exposed Persons, Family member of sefa employee or board member

4.3.Alignment with business plans

4.4.Development impact

4.5.Risk acceptance criteria

4.6.Risk and reward relationship

5.TYPES OF FACILITIES

5.1.Wholesale lending products

5.1.1.Business loans

5.1.2.Credit Indemnity Scheme

5.1.3.Land Reform Empowerment Facility

5.1.4.Joint Ventures and funds

5.2.Direct lending products

5.2.1.Working capital facilities

5.2.2.Asset finance

5.2.3.Term loans

5.2.4.Revolving loan

5.2.5.Bridging loan

6.APPLICATION PROCESS – NEW CLIENT RELATIONSHIPS

6.1.Overview

6.2.Application framework

6.3.Key requirements for credit and/or lending applications

6.4.Aggregation of exposures and commitments

6.5.Know your client (KYC) process

7.DUE DILIGENCE

7.1.Appeals to the Credit Committees

7.2.Independent assessment of application by Credit Risk Unit

7.3.Term sheet / Facilities Letters covering terms, conditions, covenants and collaterals

7.4.Other key documents to accompany application for facilities

7.5.Facility terms and conditions/covenants

7.5.1.Terms and conditions

7.5.2.Covenants

7.5.3.Tenor

7.5.4.Interest rates

7.5.5.Grace period/Moratorium

8.MANAGEMENT OF COLLATERAL

8.1.Overview

8.2.Key principles

8.3.Origination of collateral

8.4.Eligibility and kind of collateral

8.5.Perfection of collateral

8.6.Valuation of collateral

8.7.Considerations relating to Sureties

8.8.Monitoring and reporting of collateral

9.APPLICATION OF CREDIT RISK RATINGS

9.1.Overview

9.2.Annual reviews of credit risk ratings

10.APPROVAL AUTHORITIES

10.1.1.Signing of facility agreements

10.1.2.Validity periods

11.DISBURSEMENT OF FUNDS ON LOAN ACCOUNTS

11.1.Overview

11.2.Key principles

11.3.Raising of upfront fees

11.4.Efficiency of the disbursement process

12.ONGOING MONITORING AND REVIEW

12.1.Overview

12.1.1.Facility availability period

13.FORMAL ANNUAL REVIEWS

13.1.The formal annual review process

13.1.1.Annual review submissions to be timely

13.1.2.The waiving of a formal annual review

13.1.3.Requirements for a development impact assessment at formal review

13.2.Documentation to be submitted for a formal annual review process in the case of a distressed client include:

14.REPORTING OF CREDIT AND EQUITY PORTFOLIOS (INCLUDING DEVELOPMENT IMPACT ASSESSMENT)

14.1.Overview – purpose of process

14.2.Divisional reporting framework

15.MANAGING PROBLEMATIC EXPOSURES – WORKOUT AND RESTRUCTURING

15.1.Overview

15.2.Procedure regarding the nature, extent and timing of WRU’s involvement in clients

15.3.Formal process for handover to WRU

15.4.Procedure regarding transfer of assets back from WRU to business support coordinators

15.4.1.Transfer back criteria

15.5.Post-mortem analysis and evaluation by WRU

16.CREDIT POLICY IMPLEMENTATION – ACCOUNTABILITY AND CONSEQUENCES OF MISCONDUCT

16.1.Credit management capability

16.2.Accountability by line management

16.3.Risk and talent management

16.4.Compliance with policy and consequence of misconduct

17.CREDIT POLICY OWNERSHIP, DEVELOPMENT AND MAINTENANCE PROCEDURES AND RESPONSIBILITIES

17.1.Overview

17.2.The risk division’s roles and responsibilities in respect of this policy directive

1. CREDIT AND LENDING RISK – KEY PRINCIPLES

The Risk Division is responsible for developing Credit policies and procedures and to convey minimum standards and key approaches to identify, measure, monitor and control credit and lending risks at both the individual obligor and at portfolio levels. All business and lending policies and procedures should be in line with the credit policies and procedures.

Line of business management, at all levels of operation, as well as their credit and lending risk officials, are responsible for implementing the credit and lending policies and procedures approved by the Board. Furthermore, lines of business (Direct and Wholesale Lending) are required to ensure alignment with the minimum standards and key directives set out in this policy and where necessary entrench and operationalise these instructions within their own divisional routines, processes and procedures.

This responsibility includes ensuring that there are:

  • Clear division of lines of authority and responsibility for managing credit and lending risk and there is a functional segregation of roles and responsibilities between the deal origination and risk management operatives. Additionally, the process of credit risk recovery shall be performed independently of individuals involved in the origination of transactions;
  • Adequate and effective operational procedures, internal controls and systems for identifying, measuring, monitoring and controlling credit and lending risk are in place to implement the credit and lending policies and standards approved by Board;
  • Effective management information systems and data integrity to ensure timely, accurate and insightful reporting of credit and lending risks at individual, aggregated and portfolio levels of exposure. Additionally, measurement of the composition and concentration of risks, correlated and clusters of exposure expressed in terms of:
  • Limits by obligors, obligor groups, risk ratings distribution, industry sectors, geography or sensitivity to single factors, problem exposures and adequacy of impairment;
  • Applicable Rating Models as part of a well-structured internal risk rating system which provides for sufficient Group gradations to differentiate the degree of credit risk at obligor and portfolio levels;
  • Sufficient resources and competent personnel are allocated to manage and control the daily operations and credit and lending risk functions effectively; and
  • Regular reviews of the procedures which have been put into place to manage credit and lending risk in the light of business positioning strategies, product and service innovation and changing business conditions. Management must ensure that these changes are appropriate, sound and correctly approved and implemented.

A healthy Credit and Lending risk culture is a combination of its risk values, beliefs, practices and management attitudes. These define the organisational risk environment and determine the risk acceptance behavior in line with sefa’s requirements. It fosters the usage of a common risk language throughout the organisation.

At all times this policy shall be read in conjunction with all applicable laws and regulations.

The following represent the best practices in developing and retaining a strong credit and lending risk organizational culture:

  • Management must regularly assess the consistency of credit and lending practices within sefa’s risk appetite, prudential limits and policy and procedures;
  • Management must place high importance on credit and lending quality, and this must resonate throughout sefa, both through communications and actions;
  • There must be strong leadership and a skilled management team within the credit and lending functions;
  • Management accepts responsibility and accountability for credit and lending quality and encourages sound lending practices from all employees within the lending divisions;
  • The credit and lending policy shall be documented in a clear, concise written format and enforced by the Chief Risk Officer;
  • Clear accountability must be established for every employee involved in the management of credit and lending risk. Risk vigilance is a mandatory requirement. Competency must be reflected in the risk takers’ performance evaluation and subject to regular review;
  • Strategic and business plans must embody a risk analysis and evaluation. New areas of business must be selected in conformity with sefa’s Risk Appetite and Prudential Limit directives and Portfolio risk guidelines. Clear credit and lending standards, objectives, measurements, monitoring and reporting must be put into place to underline risk taking aspirations;
  • The communication of credit and lending policy, standards, strategic and business plans, incentive programs must be transparent and consistent to avoid confusion and a conflict of priorities and align with institutional objectives;
  • Policy exceptions should seldom occur. If they do arise, these must be escalated in a timely manner and be supported by proper justifications and documentation and appropriate approvals by authorised bodies;
  • Strong credit and lending procedures, systems and controls in respect of approvals, rating, monitoring, early problem recognition, review, portfolio review and audit must be in place;
  • Regular training on sefa’s credit and lending policy and procedure is important to reinforce required standards and as part of an operative’s ongoing development.

2. CONSIDERATIONS PRIOR TO THE ASSUMPTION OF CREDIT AND LENDING RISK

2.1. Formal sign off of a new risk based business activity

Any new risk based business activity must be approved by the Board of Directors or its appropriate delegated committee before it is implemented.

2.2. New credit and lending risk product development

New products require planning and careful oversight to ensure the risks are appropriately identified and managed. The institution must ensure that the risk of new products and activities are properly mitigated through to adequate procedures and controls before being introduced or undertaken.

2.3. Underlying business strategies and plans to support new credit and lending products

In considering new credit and lending risk products, the institution will expect the business strategies and plans to cover the intended positioning. Furthermore, the assessment of both the development impact and the credit and operational risk inherent in the new product is a requirement. It is also expected that sefa is adequately compensated for the risk inherent in all new products.

2.4. Responsibility for the quality of potential business introduced

Primary responsibility for the quality of potential business introduced together with all information used to assess these prospects is that of the team introducing it. Ultimately, the Executive responsible for the Division is accountable for ensuring this requirement is met and that only quality risk and credible related information is introduced and presented to sefa.

2.5. Underlying measurement, management, monitoring, reporting, and system support for new credit and lending products

All the risks associated with a new credit and lending product are required to be analysed and understood. The assessment of risks inherent in new products must include other risks that might overlap into other risk disciplines. Credit and lending risks must be considered in tandem with other risks that might arise and upon approval, these must be correctly assimilated into the respective scope of functional responsibilities, such as operational or financial risks.

Furthermore, the underlying risks are to be measured and monitored. Effective and efficient systems are to be in place to facilitate the foregoing functions and for reporting purposes.

It is also expected that once a new product is approved and implemented, business will be required to regularly report to the Credit Committee or its delegated committee, the overall risk assessment as well as envisaged development impact of the new product. Portfolio reviews must additionally highlight the performance of new risk-based business positioning, on a basis directed by the Risk Division.

3. FINANCING ELIGIBILITY CRITERIA

3.1. Requirements for a credit risk framework fit including exclusions

In line with the sefa credit risk framework, the Institution will not assume certain defined risk. Client relationship and facilities are, thus, prohibited in the following circumstances and/or to the entities/individuals specifically excluded, as set out in the list below:

  1. Shareholder initiated exclusions, or business whose trade or operations may prejudice the reputation and good standing of sefa;
  2. Speculative real estate;
  3. Speculative trading and hedging for the Institution’s own position;
  4. Political parties or organisations;
  5. Leveraged buy-out funds or listed companies;
  6. Loans to refinance existing debts;
  7. People under debt review, or unrehabilitated insolvents, as well as businesses under business rescue or liquidation;
  8. Business relationships and transactions with entities and individuals that contravene, in any way, the provisions of the following legislation:
  • The Prevention of Organised Crime Act No. 121 of 1998 (POCA);
  • The Financial Intelligence Centre Act 38 of 2001 (FICA); and
  • The Protection of Constitutional Democracy against Terrorist and Related Activities Act No 33 of 2004 (POCDATARA)

(See Annexure A for brief summary of the above)

  1. Entities/individuals whose primary business involves arms related transactions ;
  2. Religious entities and any other activities which could cause a moral dilemma for sefa;
  3. Companies involved with child labour;
  4. Transactions that do not contribute positively to development impact, or ventures inconsistent with the mandate of sefa;
  5. Companies whose primary business involves gaming and gambling, or “morally harmful” industries – tobacco, liquor, sex trade;
  6. Business relationships/transactions that transgress tax, accounting, regulatory requirements as well as societal norms and environmental legislation;
  7. Any business relationships/transactions that may have the potential to threaten or damage sefa’s reputation or cause a breakdown in trust and confidence in the Institution;
  8. Primary Agriculture, except for cash crops;
  9. Entities where sefa employee or board member has a financial interest;
  10. Individuals and entities listed on the IDC Delinquency register; and
  11. Immediate family members of a sefa employee or a Board member, which includes life partners, parents and children.

4. KEY ELIGIBILITY CRITERIA AND CONNECTED PRINCIPLES

4.1. Mandate and strategic fit

sefa was established to meet key government priorities as set out in the medium term strategic framework (MTSF) particularly in respect of outcome 4, being to create decent employment through inclusive growth. This outcome recognizes that survivalist, micro, small and medium enterprises (SMME’s) present an important vehicle to address the issues of employment creation, poverty alleviation and economic growth to redress equality imbalances that presently exist in the country. sefa also endeavours to meet the National Development Plan’s Vision 2030, which promotes social equity through growing the economy, eliminating poverty and reducing inequality. By addressing the market failures in serving the SMME market and creating sustainable enterprise development, sefa intends playing a key role in job creation, poverty alleviation and socio-economic development and equality for all.

The development nature of sefa’s lending may therefore result in sefa focusing on higher relative risk than would be found in a commercial organisation.

The following eligibility criteria will apply to both Direct and Wholesale Lending:

  1. Applicants must be South African citizens, with valid South African Identity Documents or legal entities controlled by South African Citizens with a valid South African Identity Documents or permanent residents who hold a valid RSA ID document;
  2. Be legally constituted including sole traders with a fixed physical address;
  3. The financed operations must be conducted within the borders of South Africa, and the controlling interest (>50%) of the business enterprise must be held by a South African Citizens with a valid South African Identity Documents or permanent residents who hold a valid RSA ID document;
  4. If sefa finances transactions that take place outside its borders or of an export nature sefa must be satisfied that the proceeds will be remitted to RSA;
  5. The Enterprise(s) must be compliant with generally accepted corporate governance practices appropriate to the client’s legal status;
  6. The project must demonstrate ability to create new jobs as well as the desired level of development impact and

Wholesale Lending will also have the following extended eligibility criteria;

  • It should have a national or provincial reach.
  • The business model should be sustainable.
  • The company should have a strong SMME focus.
  • The business must have a clearly defined target market in line with sefa’s strategic objectives.
  • It should have a developmental agenda, with a bias towards women, youth and rural development.
  • It must be compliant with generally accepted corporate practices.
  • It must have a business plan that meets the basic criteria set out in sefa’s business plan guidelines.

In approving facilities, consideration will be given to the expected development impact of the project. The integrity and reputation of the project concerned is a principal consideration as well as their legal capacity to assume the liability. Applicants should also provide a written proposal or business plan that meets the requirements of sefa’s loan application criteria.

All transactions must therefore fit the mandate as well as sefa’s strategy. The obligor’s ability to generate sources of repayment or equity value on their own showing is a principal aspect of the Institution’s credit analysis and evaluation.

4.2. Transactions with Politically Exposed Persons

Where a transaction involves financing to a Politically Exposed Persons (PEP), such interest should be immediately declared to ensure transparency and enhancement of the monitoring of the decision process. Such transaction will be dealt with on its merit and at arm’s length at all times and the necessary governance process to deal with such transactions will be followed.

"politically exposed person" (PEP) is a term describing someone who has been entrusted with a prominent public function, or an individual who is closely related to such a person. Most financial institutions view such clients as potential compliance risks and perform enhanced monitoring of accounts that fall within this category.

Although there is no global definition of a PEP, most countries have based their definition on the Financial Action Task Force (FATF) definition:

  • current or former senior official in the executive, legislative, administrative, military, or judicial branch of the government;
  • a senior official of a major political party;
  • a senior executive of a government-owned commercial enterprise, being a corporation, business or other entity formed by or for the benefit of any such individual;
  • an immediate family member of such individual; meaning spouse, parents, siblings, children, and spouse's parents or siblings; and
  • any individual publicly known (or actually known by the relevant financial institution) to be a close personal or professional associate of a PEP.

4.3. Alignment with business plans

All credit and lending activities should be in line with approved business positioning strategies. All business plans within the Institution are required to demonstrate the implications of both credit and lending risks as well as all other associated risks have been considered in the business positioning strategies and tactical plans.