Credit risks

Credit risk management is an integral part of the Bank’s activities. The Bank’s credit risk management is defined by the Credit Risk Policy. The main purpose of the policy is to support the implementation of the Bank’s strategy, prevent expected and unexpected losses affecting the Bank’s profit and capital, organize credit risk management, and define its principles and the duties and responsibilities of the relevant structural units.

Credit granting process. The Bank’s credit granting process covers the following areas:

• Assessment of credit applications – The Bank’s criteria for assessing credit applications are determined by the size and term of loans, the level of risks related to them, the borrower’s type of activity and other factors.
• Rules for taking and assessing collateral – The types of collateral accepted by the Bank are those defined by legislation. The value of collateral must be sufficient to protect the Bank from losses on a credit transaction and, at the same time, must not be the only and primary source of loan repayment. Regulatory minimum requirements are taken into account when valuing collateral.
• Credit limits and credit concentration - Internal rules define requirements related to limits, regular monitoring and reporting for all known concentrations of loans, including loan types, related parties, sectors of the economy, geographic zones and other areas.

Credit risk assessment - In accordance with the Bank’s strategy and policy, in addition to financial statement analysis, the Bank uses an internal credit risk rating system to assess credit risk related to the borrower. The credit risk rating system classifies borrowers by risk ratings and makes it possible to determine the overall risk profile of the portfolio. The rating system is defined at the level of economic sectors based on international standards and taking into account local economic conditions. Sector-specific characteristics are considered when calculating the customer’s Probability of Default (PD). The borrower’s risk rating is determined when the credit exposure arises and is reviewed at least once a year. The borrower’s risk rating is reviewed when economic conditions or the borrower’s behavior with respect to the obligation changes. When determining the borrower’s risk rating, financial and qualitative indicators are taken into account, including the sector of activity, business continuity, credit history and other factors.

The Bank applies the IFRS 9 impairment methodology to determine provisions for loans issued to customers.

Stress testing. The Bank conducts stress tests to measure the sensitivity of its credit portfolio to factors related to economic, financial and market risks, including changes in interest rates, exchange rates, liquidity indicators, cyclical/seasonal indicators by economic sectors, and forecasts of price changes.

PASHA Bank uses a number of special lending rules and hedging instruments to protect against foreign currency risks and mitigate risks. These rules and instruments are as follows:

Foreign currency lending rules - Customers’ ability to borrow in foreign currency is determined based on the availability of income in foreign currency. In addition, at the credit assessment stage, devaluation stress tests are performed for different exchange rates, and lending is carried out within the rating and collateral terms according to the customer’s resilience to the stress test.