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 thereof24. Credit risk: quarterly returnDirective and interpretations for completion of the quarterly return concerning credit risk (Form BA 210)Subregulation (5) |
| (5) | For purposes of this regulation 24 and the completion of items 43 to 63 of the form BA 210, a bank that adopted the standardised approach for the measurement of the bank's exposure to credit risk shall classify all relevant exposures in accordance with the relevant requirements specified below: |
| (a) | Any credit exposure, including on-balance-sheet items, off-balance-sheet items or credit exposure arising from repo-style transactions or derivative instruments— |
| (i) | shall in the case of exposures other than retail exposures be classified per person and not per account; |
| (ii) | may in the case of retail exposures be classified per account. |
| (b) | Classification of any relevant credit exposure amount shall take into account- |
| (i) | the current financial condition and payment capacity of the relevant obligor; |
| (ii) | the payment record of the relevant obligor; |
| (iii) | the current value of any relevant collateral; and |
| (iv) | other factors that affect the prospects for the collection of principal and interest amounts due. |
| (c) | Classification categories |
(i) Special mention
Included in the category of special mention are credit exposures in respect of which the obligor is experiencing difficulties that may threaten the bank's position. Ultimate loss is not expected, but may occur if adverse conditions persist.
As a minimum, credit exposure that exhibits one or more of the characteristics specified below shall be included in the category of special mention:
| (A) | Early signs of liquidity problems exist, such as delay in the servicing of loans. |
| (B) | Loan information is inadequate or incomplete. For example, the reporting bank is unable to obtain from the relevant obligor annual audited financial statements or such statements are not available. |
| (C) | The condition of and control over collateral is questionable. |
| (D) | The bank fails to obtain proper documentation from or co-operation by the obligor or finds it difficult to maintain contact with the obligor. |
| (E) | There is a slowdown in business activity or an adverse trend in the obligor's operations that signals a potential weakness in the financial strength of the obligor, but which may not necessarily have reached a point that threatens the ongoing servicing of the relevant exposure. |
| (F) | Volatility in economic or market conditions is likely to negatively affect the obligor in the future. |
| (G) | Poor performance persists in the industry in which the obligor conducts business. |
| (H) | The relevant obligor, or, in the case of a corporate borrower, a key executive, is in ill health. |
| (I) | The obligor is subject to litigation that is likely to have a significant impact on the financial position of the said obligor. |
| (J) | The obligor is experiencing difficulty with the servicing of other loans from either the reporting bank or other banks. |
Provided that any relevant credit exposure amount that is overdue for more than 60 days shall as a minimum be classified as special mention.
| (ii) | Substandard |
Any credit exposure that reflects an underlying, well defined weakness that may lead to probable loss if not corrected should be included in the category of substandard. The risk that such credit exposure may become an impaired asset is probable, and the bank is relying, to a large extent, on available security.
The primary sources of repayment are insufficient to service the remaining contractual principal and interest amounts, and the bank has to rely on secondary sources for repayment, which secondary sources may include collateral, the sale of a fixed asset, refinancing and further capital.
Credit exposures classified as substandard are likely to exhibit one or more of the characteristics specified below:
| (A) | Repayment of the principal amount and/or accrued interest has been overdue for more than 90 days, and the net realisable value of security is insufficient to cover the payment of the principal amount and accrued interest. |
| (B) | The principal amount and accrued interest are fully secured, but the repayment of the principal amount and/or accrued interest has been overdue for more than 12 months. |
| (C) | Significant deficiencies exist that threaten the obligor's business, cash flow or payment capability, which deficiencies may include the items specified below: |
| (i) | The credit history or performance record of the obligor is not satisfactory. |
| (ii) | Labour disputes or unresolved management problems may affect the business, production or profitability of the obligor. |
| (iii) | Increased borrowings are not in proportion with the obligor's business. |
| (iv) | The obligor is experiencing difficulty with the repayment of obligations to other creditors. |
| (v) | Construction delays or other unplanned adverse events resulting in cost overruns are likely to require loan restructuring. |
| (vi) | The obligor is unemployed. |
| (iii) | Doubtful |
Credit exposure in the category of doubtful is considered to be impaired, but is not yet considered final loss due to some pending factors, such as a merger, new financing or capital injection, which factors may strengthen the quality of the relevant exposure.
Doubtful credit exposures exhibit not only all the weaknesses inherent in credit exposures classified as substandard but also have the added characteristics that the said exposures are not duly secured. The said weaknesses make collection in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is high, but due to certain important and reasonably specific factors that may strengthen the asset, the classification of the asset as an estimated loss is deferred until a more exact status may be determined.
Credit exposures classified as doubtful exhibit one or more of the characteristics specified below:
| (A) | Repayment of the principal amount and/or accrued interest has been overdue for more than 180 days, and the net realisable value of security is insufficient to cover the payment of the principal amount and accrued interest. |
| (B) | In the case of unsecured or partially secured credit exposures that have been overdue for less than 180 days, other serious deficiencies, such as default, death, bankruptcy or liquidation of the obligor, are detected or the obligor's whereabouts are unknown. |
Credit exposures that have been overdue for 180 days and longer are usually classified as doubtful unless the said exposures are well secured, legal action has actually commenced, and timely realisation of the collateral or enforcement of guarantees obtained will result in the repayment of the relevant principal and interest amounts due, including payments in respect of amounts overdue.
When an account is classified as doubtful, unless particular circumstances pertaining to the relevant obligor dictate otherwise, interest shall no longer be accrued or accrued interest shall be impaired.
| (iv) | Loss |
Credit exposures classified as loss are considered to be uncollectable once collection efforts, such as realisation of collateral and institution of legal proceedings, have been unsuccessful. The relevant exposures are considered of such little value that the said exposures should no longer be included in the net assets of the bank.
This classification does not necessarily mean that the asset has no recovery value. Instead, it is neither practical nor desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future, that is, banks should not retain exposures on their books while attempting long-term recoveries.
Non -performing credit exposures that have been overdue for at least one year shall be classified as loss unless such exposures are well secured, legal action has actually commenced, and timely realisation of the collateral or enforcement of guarantees obtained will result in the repayment of the relevant principal and interest amounts due, including payment in respect of amounts overdue.
When an account is classified as loss, unless particular circumstances pertaining to the relevant obligor dictate otherwise, interest shall no longer be accrued or accrued interest shall be impaired.