Banks Act, 1990 (Act No. 94 of 1990)RegulationsRegulations relating to BanksChapter II : Financial, Risk-based and other related Returns and Instructions, Directives and Interpretations relating to the completion thereof23. Credit risk: monthly returnDirectives and interpretations for completion of monthly return concerning credit risk (Form BA 200)Subregulation (11) Method 1 : Calculation of credit risk exposure in terms of the foundation IRB approachSubregulation (11)(c) Categorisation of exposures |
| (c) | Categorisation of exposures |
A bank that adopted the IRB approach for the measurement of the bank's exposure to credit risk shall categorise its banking book exposures into one and apply the IRB approach in respect of all material asset categories specified below:
| (i) | Corporate exposure |
When a bank is engaged in specialised lending activities the bank shall subdivide any corporate exposure resulting from such specialised lending activities into one of the categories specified below:
| (A) | Project finance |
Normally project finance relates to the provision of funds to a special-purpose institution for the acquisition or construction of large and complex installations such as power plants, mines or chemical processing plants, the repayment of which funds is based solely or almost exclusively on the funds generated by the relevant project and the collateral value of the project's assets, that is, the borrower of the funds has no or little independent capacity to repay the obligations arising from the borrowed funds, and in respect of which specialised lending agreement the reporting bank has a substantial degree of control over the said asset and the income produced by that asset.
| (B) | Object finance |
Normally object finance relates to the provision of funds to a special–purpose institution for the acquisition of physical assets such as ships or aircrafts, the repayment of which funds is based solely or almost exclusively on the cash flows generated by the relevant asset and which assets are usually pledged as security to the lending bank, that is, the borrower of the funds has no or little independent capacity to repay the obligations arising from the borrowed funds, and in respect of which specialised lending agreement the reporting bank has a substantial degree of control over the said asset and the income produced by that asset.
| (C) | Commodity finance |
Normally commodity finance relates to the provision of funds in respect of structured short-term lending in order to finance, for example, inventories or receivables from exchange-traded commodities such as crude oil, metals or crops, the repayment of which funds is based solely or almost exclusively on the proceeds derived from the sale of the commodity, that is, the borrower of the funds has no or little independent capacity to repay the obligations arising from the borrowed funds and the exposure's rating reflects its self-liquidating nature.
| (D) | Income-producing real estate |
Normally income-producing real estate relates to the provision of funds for real estate such as office buildings to let, multifamily residential buildings, industrial or warehouse space and hotels, the repayment of which funds is based solely or almost exclusively on the cash flows generated by the asset, such as lease or rental payments, or the sale of the asset, that is, there is a strong positive correlation between the prospects for the repayment of the exposure and the prospects for the recovery in the event of default, with both events being materially dependent upon the cash flows generated by the relevant property.
| (E) | High-volatility commercial real estate |
For the purposes of these Regulations, a bank shall classify any funding provided in respect of commercial real estate that exhibits higher loss rate volatility, that is, higher asset correlation, than other types of specialised lending as a high-volatility commercial real estate exposure, including—
| (i) | exposures in respect of commercial real estate in respect of which the sources of repayment are uncertain on the date of origination of the exposure, such as the future uncertain sale of the property; |
| (ii) | such exposures relating to commercial real estate as may be specified in writing by the Registrar. |
When the repayment of a debt obligation of a corporation, partnership or proprietorship is not solely or almost exclusively based on the cash flows envisaged in items (A) to (E) above and the bank is able to rate the credit quality of the obligor based on the obligor's broader ongoing operations and independent capacity to repay its debt obligations, the bank shall classify the said exposure as a corporate exposure instead of one of the subcategories envisaged in items (A) to (E) above.
| (ii) | Sovereign exposure |
A bank shall include in the category of sovereign exposure all exposures that qualify as sovereign exposure in terms of the provisions of the standardised approach envisaged in subregulation (5) read with subregulations (6) and (8), including—
| (A) | the Central Government of a particular country; |
| (B) | the Central Bank of a particular country; |
| (C) | the Central Government of the RSA; |
| (D) | the Central Bank of the RSA; |
| (E) | the multilateral development banks that qualify for a zero per cent risk weight; |
| (F) | the Bank for International Settlements (BIS); |
| (G) | the International Monetary Fund (IMF); |
| (H) | the European Central Bank (ECB). |
| (iii) | Bank exposure |
A bank shall include in this category all relevant exposures to banks, including—
| (A) | exposures to securities firms and public-sector bodies that are treated in a manner similar to exposures to banks in terms of the provisions of the standardised approach, in subregulation (5) read with the provisions of subregulations (6) and (8); |
| (B) | banks in the RSA; |
| (C) | multilateral development banks that do not qualify for a zero per cent risk weight in terms of the provisions of the standardised approach, in subregulation (5) read with the provisions of subregulations (6) and (8) above. |
| (iv) | Retail exposure |
A bank—
| (A) | shall not classify an exposure as a retail exposure unless the relevant exposure complies with the relevant requirements specified in subitems (i) to (iii) below and in all cases with the requirements specified in sub-item (iv) below: |
| (i) | Exposure to an individual |
The exposure shall be to an individual and shall relate to revolving credit or a line of credit such as a credit card receivable, an overdraft facility, a personal term loan or lease, instalment finance, a loan or lease in respect of a vehicle, a student or educational loan, personal finance, or other exposures with similar characteristics, regardless of the extent of the exposure provided that the Registrar may specify specific thresholds in order to distinguish between retail and corporate exposures.
| (ii) | Residential mortgage loans or exposure |
The exposure shall be secured by mortgage in respect of residential property as envisaged in subregulation (6)(c) above, including first and subsequent liens, term loans and revolving home equity lines of credit, regardless of the extent of the exposure, provided that the Registrar may specify limits in respect of the maximum number of housing units per exposure or persons other than individuals to which the exposure relates.
| (iii) | Loans or lending extended to small businesses and managed as retail exposure |
The exposure—
| (aa) | shall be in the form of lending extended to a small business or a small business loan extended or guaranteed by an individual; |
| (bb) | shall be managed by the bank as a retail exposure, that is, the exposure, for example, shall be originated in a manner similar to other retail exposures; |
| (cc) | shall be managed on a portfolio basis and not individually in a manner comparable to corporate exposure, |
provided that—
| (i) | the total exposure of the reporting banking group to the said small business borrower, which shall be determined or calculated on a consolidated basis, shall at no time exceed an amount as may be specified in writing by the Registrar from time to time; |
[Proviso of regulation 23(11)(c)(iii)(A) substituted by regulation 6(p) of Notice No. R. 297, GG 40002, dated 20 May 2016]
| (iv) | Large number of exposures |
The exposure shall be one of a large pool of exposures, which exposures shall be managed by the bank on a pooled basis, that is, exposures shall be managed as part of a portfolio segment or pool of exposures with similar risk characteristics.
[Regulation 23(11)(c)(iv)(A)(iv) substituted by regulation 6(q) of Notice No. R. 297, GG 40002, dated 20 May 2016]
| (B) | shall subdivide all the relevant exposures that meet the requirements specified in item (A) above into one of the three retail subcategories specified in this item (B), that is, each exposure that meets the requirements specified in item (A) above shall be assigned to one of the three pools of exposure specified below: |
| (i) | Exposures secured by residential property |
A bank shall include in this pool of exposures only those exposures that comply with the requirements specified in item (A)(ii) above.
| (ii) | Qualifying revolving retail exposures |
In order for a portfolio of exposures to be classified as qualifying revolving retail exposures, the exposures—
| (aa) | shall be revolving in nature, that is, based on the decision of the relevant obligor to borrow or repay funds within a predetermined limit approved by the bank the outstanding balance of the relevant exposure is permitted to fluctuate; |
| (bb) | shall be unsecured; |
| (cc) | shall be revocable, that is, an uncommitted facility, both contractually and in practice; |
| (dd) | shall be to individuals and the maximum exposure to a single individual counterparty or obligor in the subportfolio shall not exceed an amount as may be specified in writing by the Registrar from time to time; |
[Regulation 23(11)(c)(iv)(B)(ii)(dd) substituted by regulation 6(r) of Notice No. R. 297, GG 40002, dated 20 May 2016]
| (ee) | shall exhibit low volatility in loss rates relative to their average level of loss rates, especially in the low PD bands. |
[Regulation 23(11)(c)(iv)(B)(ii) substituted by regulation 2(s) of Notice No. R. 261, GG 38616, dated 27 March 2015]
| (iii) | Other retail exposures |
A bank shall classify all exposures that qualify as retail exposures, other than exposures secured by residential property or qualifying revolving retail exposures, as other retail exposures.
| (C) | shall, when the bank assigns an exposure to a particular pool, consider— |
| (i) | the risk characteristics relating to the borrower, such as the borrower type or demographics such as age or occupation; |
| (ii) | the risk characteristics relating to the transaction, including product and/or collateral types such as the loan or lending-to-value measures, seasoning, guarantees and seniority; |
| (iii) | the delinquency of the exposure, that is, the bank shall distinguish between exposures that are delinquent and those exposures that are not delinquent. |
| (v) | Equity exposure |
Based on—
| (A) | the relevant requirements specified in regulation 31; |
| (B) | the economic substance and not the legal form of an instrument, |
a bank shall categorise its equity exposures or instruments held in the bank's banking book.
| (vi) | Purchased receivables |
Based on the relevant criteria specified in this paragraph (c), a bank shall subdivide its purchased receivables between retail receivables and corporate receivables.
| (vii) | Cash and cash equivalent items |
This category of exposure shall include all cash and cash equivalent amounts.
For the purposes of this subregulation (11)(c), cash equivalent amounts shall include any amount relating to gold bullion.
| (viii) | Securitisation or resecuritisation exposures |
This category of exposure shall include any exposure relating to a securitisation scheme or resecuritisation exposure, including asset-backed securities, mortgage-backed securities, credit enhancement, liquidity facilities and relevant interest-rate swaps or currency swaps.
| (ix) | Other exposures |
A bank shall classify all exposures other than the exposures envisaged in subparagraphs (i) to (viii) above as other exposures.