Credit Risk
Domain focus
Credit risk questions test BNM's credit risk management expectations, credit approval and monitoring, credit risk mitigation (CRM), MFRS 9 expected credit losses (ECL), concentration and related-party limits.
Core rules
- BNM's Guidelines on Credit Risk Management require a board-approved credit risk strategy, independent credit review, separation of marketing from credit approval, and problem-loan management.
- Repayment capacity drives approval; collateral is a secondary source of repayment and must be legally enforceable, valued and haircut.
- MFRS 9 uses a three-stage ECL model. Stage 1: 12-month ECL. Stage 2: lifetime ECL after a significant increase in credit risk (SICR), with 30 days past due as a rebuttable presumption. Stage 3: credit-impaired.
- ECL = PD × LGD × EAD, probability-weighted across forward-looking scenarios.
- Single-counterparty exposures are capped (generally 25% of total capital) and connected parties are aggregated.
Worked example
Exposure RM10m, PD 1%, LGD 45%: 12-month ECL = 10m × 1% × 45% = RM45,000. The borrower then triggers SICR; lifetime PD rises to 5%, so ECL = 10m × 5% × 45% = RM225,000. The RM180,000 increase is the Stage 2 provision, not a new loan loss.
Traps
Do not let collateral replace repayment capacity. Do not use collateral value without haircuts. Do not ignore forward-looking scenarios. Do not aggregate related parties incorrectly. Do not treat 30 days past due as an absolute rule - it is rebuttable.