The Bank of Mauritius Guidelines on Credit Concentration (revised September 2017) restrict the granting of credit facilities to non-financial institutions and other related parties to:

• A maximum exposure to any single customer of 25% of the Bank’s Tier 1 Capital;
• Related group of companies to 40% of the Bank’s Tier 1 Capital; and
• In aggregate, any individual exposure of 10% above of the Bank’s Tier 1 Capital shall not exceed 800% of its Bank’s Tier 1 Capital.

The key focus of the Bank’s macro credit risk management approach is to avoid any undue concentrations in its credit portfolio, whether in terms of counterparty, group, portfolio, product, country, sovereign, or currency. The Bank has always kept its large exposures within these limits. For instance, our concentration ratio of large exposures above 10% was 252% as at 30 June 2019, well within the regulatory limit as shown below:

Comprehensive assessment of the credit risk portfolio for provision is part of ABL’s portfolio management process to mitigate subsequent risk and diversification across numerous geographical frontiers, sectors, segments and products; with the main objective of maximizing shareholder value. Furthermore, economic reports, country and industry analysis are prepared and submitted to the Board Risk Committee to highlight trade developments and risks to the Bank’s credit portfolio. These reports are used to define strategies for both our industry portfolio, and individual counterparties within the portfolio.

Assessment of country risk involves the determination of the nature of risks associated with individual country exposure and the evaluation of country conditions. In this connection, the Bank conducts a thorough evaluation of risks associated with its cross-border operations and which have the potential to adversely affect its risk profile.

The aim is to identify the risk of a shock, such as an economic crisis or a sudden change in the political environment that would affect those conducting business within a country.

The Credit and Risk teams analyse the following elements:

• The short and long term Economic Risk: The aim is to assess the degree to which the country approximates the ideal of non-inflationary growth, contained fiscal and external deficits, and manageable debt ratios. The analysis takes into account GDP growth, unemployment, inflation, real interest rates, exchange rates, the fiscal balance, the current account balance, external debt and a number of other structural factors; and
• The short and long term Political Risk: The political risk assessment compares the state against a theoretical ideal state, essentially a liberal state and a homogenous society in terms of ethnicity and income equality, with the premise that democracies are more able to contain and manage direct threats to the political system and offers template for greater long-term stability.

Country risks also arise where borrowers in a particular country are, or are expected to be, unwilling and unable to fulfil their foreign obligations for reasons beyond the usual risk that arise in relation to lending. Political, social and economic factors may give rise to instability in these markets. Thus, in order to mitigate those risks, a country risk assessment is undertaken by ABL to determine the level of risk on a Case-to-Case basis but within each assigned country limit. The country risk policy is set in line with BOM’s Guidelines for Country Risk Management (April 2010).

According to ABL’s country risk policy, the Board of Directors sets exposure limits for individual countries in order to manage and monitor country risk. Country exposure limits should apply to all on and off balance sheet exposures to foreign borrowers.

Country risk ratings issued by external credit agencies (S&P, Moody’s or BMI research) are also used by the Bank to evaluate the risk exposure of each country. The Bank utilises two other types of approach:

1. A bottom-up approach: analysis of the country risk pertaining in each cross-border credit file, placement, financial product;

2. A top-down approach:

• Analysis of the concentration/diversification of country risk in the Bank’s portfolio; and
• Analysis of the global or regional economic and political movements and their adverse effects on the country risk profiles.

An appropriate structure of limits is set for each individual country exposure. The determination of limits is based on the followingThe overall strategy and commercial opportunities;

• The relation with Bank’s capital base;
• The perceived economic strength and stability of the borrowing country;
• The degree of perceived risk; and
• The diversification of the Bank’s international lending and investment portfolio.

The Board of Directors validates the structure and value of the limits. The Bank’s operations are performed strictly
within the approved limits.