CAPITA FINANCIAL SERVICES INC. (ST. LUCIA BRANCH) Notes to the Financial Statements March 31, 2024 (expressed in Eastern Caribbean dollars) 35 20 Financial Risk Management The Branch’s activities expose it to a variety of risks which include credit risk, foreign exchange risk, interest rate risk, liquidity risk and operational risk. The Branch’s risk management policies are designed to identify and analyse these risks, to set appropriate limits and controls, and to monitor the risks and adherence limits by means of reliable and up-to-date information systems. The Branch regularly reviews its risk management policies and systems to reflect changes and emerging best practices. Risk management is carried out by management under policies approved by the Board of Directors. The Board provides written principles and policies for overall risk management. The Branch takes on exposure to credit risk, which is the risk that counterparty will cause a financial loss to the Branch by failing to discharge its obligation. Credit exposures arise principally in lending activities that lead to loans and advances, and investment activities that bring debt securities into the Branch’s asset portfolio. There is also credit risk in off-statement of financial position financial instruments, such as commitments. Credit risk management and control are performed by the credit risk management team of the Branch and reported to the Board of Directors regularly. a) Loans and advances In measuring credit risk of loans and advances to customers, the Branch considers the ‘probability of default’ by the client and the likely recovery ratio on the defaulted obligations (the ‘loss given default’). The Branch assesses the probability of default of individual customers using internal delinquency reports showing loans in arrears. b) Debt securities For debt securities, credit risk exposure is managed by investing in low risk repurchase agreements and monitoring the credit rating of the bonds and the related sovereign. Risk limit control and mitigation policies The Branch manages limits and controls concentrations of credit risk wherever they are identified. The Branch employs a range of policies and practices to mitigate credit risk. Some of which includes the taking of security for funds advanced, which is common practice. The Branch implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are: • Bills of sale over vehicles and equipment; • Mortgages over residential and commercial properties; • Charges over business assets such as premises, inventory and accounts receivable; • Charges over financial instruments such as cash, debt securities and equities.
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