(b) Credit Monitoring System (3) Framework for Credit Portfolio Management (a) Risk-Taking within the Scope of Capital (b) Controlling Concentration Risk (c) Researching Borrowers More Rigorously and Balancing Risk  and Returns (d) Prevention and Reduction of Non-Performing Loans (e) Toward Active Portfolio Management SMBC makes active use of credit derivatives, loan asset sales, and  other instruments to proactively and flexibly manage its portfolio to  stabilize credit risk. On NPLs and potential NPLs, SMBC carries out regular loan reviews  to clarify handling policies and action plans, enabling it to swiftly  implement measures to prevent deterioration of borrowers’ busi- ness situations, support business recoveries, collect on loans, and  enhance loan security. Against a backdrop of drastic change in the business environ- ment, SMBC rigorously researches borrower companies’ actual  conditions. It runs credit operations on the basic principle of earning  returns that are commensurate with the credit risk involved, and  makes every effort to reduce credit and capital costs as well as  general and administrative expenses. corporate groups by setting guidelines for maximum loan amounts. To manage country risk, SMBC also has credit limit guidelines  based on each country’s creditworthiness. At SMBC, in addition to analyzing loans at the application stage,  the Credit Monitoring System is utilized to reassess obligor grades  and review self-assessment and credit policies so that problems  can be detected at an early stage, and quick and effective action  can be taken. The system includes periodic monitoring carried out  each time an obligor enterprise discloses financial results, as well  as continuous monitoring performed each time credit conditions  change, as indicated in the diagram below. In addition to managing individual loans, SMBC applies the following  basic policies to the management of the entire credit portfolio to  maintain and improve its soundness and profitability over the mid to  long term. To keep credit risk exposure to a permissible level relative to capital,  SMBC sets credit risk capital limits for internal control purposes.  Under these limits, separate guidelines are issued for each business  unit and marketing unit, such as for real estate finance, fund invest- ment, and investment in securitization products. Regular monitoring  is conducted to make sure that these guidelines are being followed,  thus ensuring appropriate overall management of credit risk. Because the concentration of credit risk in an industry or corporate  group has the potential to substantially impair capital, SMBC imple- ments measures to prevent the excessive concentration of loans in  an industry and to control large exposure to individual companies or  Obligor Information  Processing Flow of Obligor Grading/Grading Outlook/Credit Policies/Action Plans/Facility Grading Assignment Not Flagged Self-Assessment  Logic Normal Borrowers Borrowers Requiring Caution Potentially Bankrupt Borrowers Effectively Bankrupt Borrowers  Bankrupt Borrowers Grading Outlook Assessment Performance Trends Qualitative Risk Factors •Positive •Flat •Negative Action Plan Formulation Facility Grading Assignment Determination of Credit Policies Policy for Handling Each Individual Company Credit Policy Segment Flagged Registration of Financial Statements/ Creation and Revision of Corporate  Card Nonconsoli- dated Financial  Grade Consolidated Financial  Grade Effective  Financial  Grade Flagging According to Self- Assessment Criteria Quantitative Assessment Financial Assessment Credit Status Qualitative Assessment Restructuring Feasibility Final Obligor Grade Basic Approach Specific Action Plan + ■ SMBC’s Credit Monitoring System  SMFG  2011 37