As regards the management of credit granting and monitoring, the content of the Guidance is to be assessed positively. The aforementioned aspects are important from the perspective of risk management and capital adequacy and they build on the EBA Guidelines on internal governance. The implementation of the Guidelines will be challenging, as it will require a review of the entire credit process. Some elements may be new for banks (Technology-enabled innovation for credit granting as well as Environmental factors and green lending), but many of them already exist, which will require banks to verify them thoroughly.

The requirements of Guidelines Section 76 properly address the minimum risk management standard and are consistent with the applicable recommendations of national regulators and the practice of the Polish banking sector.
The concept for the organisation of the risk management function and internal control system presented in the Guidelines is, with respect to this function, consistent with the existing external regulations. In consequence, its full implementation will not require banks to undertake significant adjustment efforts.
We support the view as regards the need to maintain the independence of a risk management unit that does not directly benefit from decisions to extend the credit.
There may be some concerns as regards the content of paragraphs:
• 76 (g) – pointing to the need for the credit risk management system to include “providing independent/second opinion to the creditworthiness assessment and credit risk analysis”. Such provisions may exclude a credit risk management system where creditworthiness assessment is performed only by an employee of an independent risk unit, and as a result there is no second opinion. Therefore, the provisions concerning the second opinion should not be strictly applied to short-term, low-value and secured lending.
• 76 (i) – pointing to the need for the credit risk management system to cover the development of new credit products, which is a function of a business / individual business line.
• 76 (e) – pointing to the need for the credit risk management system to cover the function of “commercial planning in line with the overall business strategy and credit risk appetite, including cascading them down the organisational commercial and risk objectives”, which is the responsibility of either the bank’s controlling services, or the business.
It seems advisable for the Guidelines to address the location of the collection function (soft and hard collection), because the current wording of Section 4.5 does not mention this function, and some local banking laws explicitly state that this function is a bank’s risk domain.

The scope of information which, according to the draft Guidelines, is to be collected for creditworthiness assessment purposes is very broad and covers exhaustively all items that may be useful for assessing a client’s creditworthiness. The fact that this part of the Guidelines takes such a broad perspective in itself deserves high appreciation. Nevertheless, it is appropriate to highlight two points.
Throughout Section 5, there are several lists of documents and information which a bank is to request when processing a credit application. The phrase ‘at least’ is used there, suggesting that the bank should require every item from a list, and that it may also require some additional materials. At the same time, paragraphs 86, 144, 155 and 186 contain a rational and direct reference to the principle of proportionality. This way an ambiguity is created, as on the one hand, the bank is expected to behave proportionally to its risks, products, and clients, and on the other hand, it is expected to request all items listed in a relevant paragraph of the Guidelines, as a minimum. This leads to a contradiction that would be best avoided by writing where relevant, or where applicable instead of at least.
However, it is known that the principle of proportionality, although very useful, is often abused and serves to circumvent legitimate requirements. It is unlikely that a small entrepreneur who applies for a low-value loan will present all the documents required under paragraph 93, as the full list provided in that paragraph is more relevant to larger clients and higher amounts. On the other hand, referring only to the principle of proportionality could lead to circumvention of the Guidelines. Therefore, two ways of proceeding could be worth considering. Firstly, like in the CRR, loans below a certain amount extended to entrepreneurs with an annual turnover below a certain threshold (which does not have to coincide with the CRR amounts) could be treated as consumer loans. Secondly, it could be expressly stated that national supervisory authorities can exclude certain documents from the list if an entrepreneur applies for a loan which is small in relation to the scale of his or her business. However, the bank could always request any additional documents.
Institutions should be free to define the scope of information necessary for the assessment of credit risk based on the principle of proportionality, due diligence and prudential requirements in the credit risk management process. The detailed lists of documents provided in the guidelines should be treated as an indication or optional recommendations, rather than a mandatory set of documents in each case.
For example, the requirement to provide a business plan and financial projections (paragraph 93 (e) and paragraph 93 (f)) will impose a disproportionate bureaucratic burden on banks regardless of exposure sizes, which will not add value, will not improve the quality of loan portfolios, and will only slow down processes and inflate the cost of credit processes instead. In the case of short-term working capital financing and/or a client with a stable financial situation operating on a relatively stable market, the delivery of projections should not be obligatory, neither should be the preparation of internal counter-projections by the bank. They should be used if they add value to the assessment of client creditworthiness, in accordance with the principle of matching analysis intensity to the type, scale and complexity of lending requested. Therefore, ‘where applicable’ should be inserted in paragraphs 93 (e) and 93 (f). This relaxation is particularly important, because the Guidelines repeatedly refer to the examination of future cash flows (in paragraphs 125, 127, 132 (a)). Despite the admission of the principle of proportionality, it may be difficult for banks to defend following these requirements only for certain transaction types.
Banks should be able to differentiate their requirements for collection of information and documentation for the purposes of creditworthiness assessment of entrepreneurs, for example depending on the entrepreneur’s business scale, the scope of accounting records that he or she is required to keep under the laws applicable in his or her jurisdiction, the risk of the product requested and the bank’s exposure relative to capital – this rule is not covered by the document. In the micro-enterprise segment, assessment of creditworthiness largely depends on the form of tax reporting. A vast majority of entrepreneurs use simplified forms of accounting, such as the tax card, lump sum tax on registered revenue or the revenue and expense ledger. Moreover, the Polish market has a large share of self-employed people, who carry out their activities in a form that is very similar to an employment contract. Such businesses have a single client to whom they provide 100% of their services. For them, the basic documents include revenue and expense records or tax returns. They do not file any documents such as balance sheets or income statements. The scope of documentation required should be adapted to what the company has available and to the kind of financing requested. The ‘professionals’ category is therefore too broad (being defined as non-consumer) and should be made more specific.
Additionally, please note that the verification of authenticity of all client-provided information in the credit process for retail clients is essentially impossible. For individual borrowers, most decisions are automated and based on simple, basic documents that confirm the client’s income level. Other data is collected according to a client’s declaration and is verified, as far as possible, against internal and external data sources.
The applicability of guidance on the scope of data verification will significantly complicate credit processes and considerably restrict the possibility of selling loans via remote channels (which conflicts with the process of digitising all business processes in the banking sector and beyond, but is what clients expect). In addition, it may encourage clients to seek out businesses which are not covered by banking regulations (lending companies, fintechs). Additionally, the Guidelines undermine the concept of processing applications in line with simplified creditworthiness assessment principles (Recommendation T of the Polish Financial Supervision Authority).
The data structure, mainly in terms of business activity, is not adequate for a simple CF process. An in-depth analysis of the borrower’s related entities (e.g. within a single company) is not warranted, as a borrower financing his or her personal needs is liable for the repayment of the loan with their entire property.
The requirement to collect and document income information arising from Section 5.1.2, paragraph 91 of the draft Guidelines and its related Annex 2 could mean a significant change for credit institutions operating in Poland. For retail clients in Poland who meet the criteria of Recommendation T, there is a possibility to carry out a simplified assessment of creditworthiness and rely on the client’s income and expense declarations, in which case the amount of income can be established based on the account history.

The answer to question 5 is valid here as well. The Guidelines contain a very detailed list of steps to be taken by a bank in assessing a client’s application and creditworthiness. However, the Guidelines as they now stand add much less value than what could be achieved and, more importantly, than what the credit market needs today. It is not enough to include a list of required steps broken down by credit category only. This section needs to be made much more specific. Suffice to say, each credit category includes loans ranging from very low to very large amounts, with maturities from a few months to as much as 25 or 30 years. For instance, creditworthiness assessments would be different for a natural person buying a TV, a car, and an apartment. A loan for a small business buying a small machine would differ from a loan for a large property development project. Certainly, just like we proposed in our reply to Question 5, national supervisory authorities could be made responsible for adding more detail. This would make sense, as individual home markets and their respective actors are very different. But even in that case, Section 5 of the Guidelines needs considerable improvement.
The requirements described in Section 5.2 seem adequate for large and significant credit exposures. For smaller exposures and clients, banks should be able to adapt the scope of analysis on a case-by-case basis. When extending credit risk-bearing products, a bank always assesses the prospective creditworthiness (a prerequisite under the Banking Law), which does not mean, however, that the client always needs to provide the Bank with its, for example, cash flow (because cash flow estimates can be prepared by the bank), sensitivity analysis, financial projections, etc. In addition, some clients, by reason of their business scale and the standard reporting requirements they are subject to, would not be able to deliver the scope of data required by the Guidelines. Banks individually define the scope of and approach to creditworthiness assessment considering the specificity of the client, funding amount, risk of the credit transaction and the internal decision-making process to which the client will be assigned.
We would like to draw your attention to paragraph 112, which seems to be very restrictive. In particular, it seems appropriate to limit these requirements to situations where the rental income is significant in the context of creditworthiness assessment. However, even if that were the case, the analysis of the ability to obtain permits (item (d)) combined with the analysis of the ability of achieving the assumed revenue should be sufficient. In addition, it is not entirely clear why the guidance on other secured lending to consumers (5.2.3) does not refer in practice to the examination of the client’s ability to repay, regardless of credit security. The guidance on unsecured lending, on the other hand, overlaps with certain items from the guidance on lending relating to residential immovable property, for example it seems that paragraphs 105 and 118 could be moved to the general guidance on assessment of consumer’s creditworthiness.

The asset classes referenced in the guidelines – lending to consumers: mortgage lending, other secured, unsecured; lending to professionals: corporate financing, commercial real estate, shipping finance, finance of infrastructure projects – support a sufficiently different approach to each of the aforementioned client segments.

It seems advisable to clarify which specific metrics should be taken into account for given types and volumes of exposures.
A full implementation of these requirements would require banks to use relatively advanced management accounting methods in the context of internal capital and cost allocation. This could pose a huge challenge (in terms of organisation, cost and time) for many smaller banks, undermining their performance.
Banks expect to experience difficulties in the estimation of the value referred to in paragraph 187 (c) operating and administrative costs resulting from cost allocation processes that involve all group entities. Banks are already following the guidance, but at the aggregate level of a business line or product, and they do not have any methodology that would enable them to allocate these costs after the transaction. The same applies to paragraph 189, which refers to banks having cost allocation frameworks, implicitly allowing for disaggregation once a contract ends.

The requirements apply to all movables and immovables, which seems to be too rigorous an approach. The requirements of Section 7 should only apply to eligible collateral reducing capital requirements under the CRR, which should be incorporated in the Guidelines in relation to all of Section 7.
Paragraphs 196, 207 (b), 208 (b) and 208 (c) should be deleted. Even the CRR, which sets out requirements for monitoring of immovable property values in the case of eligible collateral reducing capital requirements, does not include any requirements related to deterioration of the client’s situation, LTV level or transaction value. The aforesaid paragraphs impose additional obligations on banks in this respect, requiring them to incur additional costs.
Does paragraph 197 refer to a closed list of persons who are permitted to deliver valuations? Credit processes use a list of licensed individuals who are authorised to perform collateral valuations. To the best of our knowledge, any list of a bank’s preferred valuers (a closed list of valuers) would be inconsistent with the national laws, in particular with the recommendations of the Office of Competition and Consumer Protection (UOKiK), Poland’s competition authority.
We suggest an extension of the catalogue of tools serving to determine the market value of collateral (movable property). For many credit transactions, means such as invoices, purchase contracts, indices, industry price lists such as: Skocenbud, Eurotax, etc. or in-house valuations delivered by bank’s employees or related companies specialising in specific asset financing (such as leasing companies) are considered sufficient for the verification of collateral value.
Institutions should have some leeway in their choice of data sources and tools to establish the value of movables. The external valuation requirement should be limited to individually significant exposures or transactions involving elevated credit risk, e.g. by analogy to immovable property, as referred to in the Regulation (EU) No 575/2013 of the European Parliament and of the Council, Article 208(3b) (EUR 3 million or 5% of own funds).

With respect to the proposed requirements for the monitoring framework (Section 8), the Guidelines correspond to the standard used by Polish banks. In our opinion, the proposed scope is sufficient.
All credit exposures are monitored throughout the period of credit to enable adequate anticipatory and early warning measures to be taken.
The provisions of Section 8 concerning the monitoring framework can be supplemented by consumer monitoring-related considerations. It should follow clearly from the Guidelines that with respect to consumers, the bank needs not require them to submit documents confirming current income levels, and monitoring can be based on the bank’s own information and information retrieved from external databases. Similarly, in the case of exposures to SMEs, it should be possible to monitor clients with the use of behavioural analysis, information retrieved from external databases, etc. without requiring clients to provide detailed information about their financial situation.