management of banks - copy

7/31/2019 Management of Banks - Copy

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COMMERCIAL BANKS

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A commercial bank accepts deposits

from customers and in turn makes

loans, even in excess of the deposits; aprocess known as fractional-reserve

banking. Some banks (called Banks of

issue) issue banknotes as legal tender.

Commercial Bank


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A commercial bank is usually defined

as an institution that both acceptsdeposits and makes loans; there are

also financial institutions that provide

selected banking services without

meeting the legal definition of a bank.


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Many banks offer ancillary financialservices to make additional profit; for

example, most banks also rent safe

deposit boxes in their branches.


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Currently in most jurisdictionscommercial banks are regulated &require permission to operate.Operational authority is granted bybank regulatory authorities which

provides rights to conduct the mostfundamental banking services such asaccepting deposits and making loans.


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Banks have influenced economies &

politics for centuries. Historically, the

primary purpose of a bank was to provide

loans to trading companies. Banks

provided funds to allow businesses to

purchase inventory, and collected those

funds back with interest when the goods

were sold.


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Commercial Lending


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For centuries, the banking industryonly dealt with businesses, notconsumers. Commercial lending todayis a very intense activity, with bankscarefully analyzing the financialcondition of their business clients todetermine the level of risk in each loantransaction.


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Banking Services


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A bank generates a profit from the

differential between the level ofinterest it pays for deposits and other

sources of funds, and the level of

interest it charges in its lending

activities.


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This difference is referred to as the

spreadbetween the cost of funds andthe loan interest rate. Historically,

profitability from lending activities has

been cyclic and dependent on theneeds and strengths of loan customers.


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In recent history, investors have

demanded a more stable revenue

stream and banks have therefore

placed more emphasis on transaction

fees, primarily loan fees but alsoincluding service charges on array of

deposit activities and


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ancillary services (international

banking, foreign exchange, insurance,

investments, wire transfers, etc.).

However, lending activities still provide

the bulk of a commercial bank'sincome.


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Services TypicallyOffered by Banks


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MANAGEMENT OF BANKS


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LICENSING OF NEW BANKS

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Authorization

Section 33(4) of the Banking Act empowers

the Central Bank of Kenya to issue guidelines

to be adhered to by institutions in order to

maintain a stable and efficient banking andfinancial system.

Applies to all investors wishing to be licensed

to conduct banking.

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Definitions

Shell bank- A company which exists only onpaper with no physical presence and does notapparently trade or operate.

Significant shareholder- A person, other than theGovernment or a public entity, who holds,directly or indirectly or otherwise has a beneficialinterest in more than five per cent of the share

capital of an institution or if it is proposed thatsuch a person shall so hold or have such abeneficial interest.

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APPLICATION PROCEDURES

Approval of Proposed Name

Every investor seeking to conduct the business of an institution willfirst be required to submit the proposed name to Central Bank ofKenya for approval.

Incorporation

Once the name intended for use has been approved, the promoterswill ascertain with the Registrar of Companies that the nameselected is available and should proceed to incorporate thecompany.

Forwarding of Application

The applicants will complete An Application for a License toConduct the Business of an Institution form together with the Fitand Proper forms for proposed directors, Fit and Proper formsand schedule for significant shareholders will then be submitted tothe Director, Bank Supervision Department, Central Bank of Kenya

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INFORMATION REQUIRED

Every applicant will be required to submit the following additionalinformation.

A copy of the certificate of incorporation of the institution from theRegistrar of Companies.

Memorandum and Articles of Association of the institution and that

of a corporate body that proposes to have a significant shareholdingin the institution.

The latest audited Statement of Financial position and Statement ofIncome for each of the three years preceding the date of theapplication if the applicant has been operating in any activity underany name and laws or in cases where any of the shareholders is a

corporate body. Where the stakeholders are individual natural persons, personal

statement of affairs for the past three years should be submitted.

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APPROVAL AND LICENSING

Processing of Application

On receipt of application forms together with

the attachments, CBK will appraise the

application and make appropriate

recommendations to the Minister for Finance.

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Inspection of Premises and Policy

Manuals

CBK will visit the institution and carry out an

on-site inspection on the following areas:

Confirm existence of comprehensive risk

management policies and operating manuals.

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Non-Executive Director means an individual not

involved in the day-to-day management and not a

full time salaried employee of a banking institutionor of its subsidiaries.

An individual in the full time employment of the

banks holding company or its subsidiaries, other

than the institution concerned, would also beconsidered to be a non-executive director of the

institution concerned, unless such individual, by his

conduct or executive authority, could be construed

to be directing the day to day management of the

institution and its subsidiaries.

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has no personal service contract(s) with the

institution, or a member of the institutions

senior management; is not a member of the family of any person

described above; or

has not had any of the relationships describedabove with any affiliate of the institution.

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Purpose

To provide the minimum standards required

from directors, CEOs and management of

institution so as to promote proper standards

of conduct and sound banking practices, aswell as ensure that they exercise their duties

and responsibilities with clarity, assurance and

effectiveness.

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SPECIFIC REQUIREMENTS

SHAREHOLDERS

Shareholders of banking institutions shall

jointly and severally protect, preserve and

actively exercise the supreme authority of the

institution in general meetings. They have a

duty, jointly and severally, to exercise that

supreme authority:

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Shareholders are expected to ensure that the

institution applies to CBK for approval in the

following circumstances, with respect toshareholding of financial institutions:

Transfer of existing shareholding in excess of

5% of an institutions share capital; Acquisition of more than 5% of the share

capital of an institution where there is fresh

capital injection, or from existingshareholders.

It is similarly the institutions responsibility to ensure that the above approvals

relating to significant shareholders are obtained from the CBK, before

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DIRECTORS

No director shall take up his/her position prior

to being cleared by the Central Bank.

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DUTIES AND RESPONSIBILITIES

Regulating the manner in which the business

is conducted.

Ensure banking institution has adequate systemsto identify, measure, monitor and manage key

risks facing it

Adopt and follow sound policies and objectives

which have been fully deliberated.

Provide clear objectives and policies within which

senior executive officers are to operate.

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DUTIES AND RESPONSIBILITIESDuties and Responsibilities:

Directors


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Duties and Responsibilities: Directors

Corporate planning

Formulate the future direction of the institution of

which planning, organizing, and controlling, are

three fundamental functions. Sound planning Such projections/targets must be periodically

reviewed and amended as circumstances dictate.

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Establish and ensure the effective functioning

of Board and Management Committees in

key areas

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Set-up an effective internal audit department

staffed with qualified personnel to perform

internal audit functions, covering the traditional

function of financial audit as well as the functionof management audit.

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Set-up an independent Compliance Function

Approve the banks compliance policy including a

charter of other formal documents. At least once a year, review the banks compliance

policy and ongoing implementation to assess the

extent to which the bank is managing its

compliance risk effectively.

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Maintain adequate capital base

Responsibility of ensuring that, the institution

maintains adequate level of capital at all times

with respect to the requirements of the BankingAct and the business operations.

Duty of directors to inform the shareholders of

capital adequacy and advice on the appropriate

manner of recapitalizing the institutions

operations.

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Appoint, dismiss and define the duties of

management

Define the duties of management and appointthose persons who are competent, qualified and

experienced to administer the institutions affairs

effectively and soundly.

It is also the responsibility of the Board to

dispense with the services of staff considered

undesirable.

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[other requirements]

Board Composition

Companies Act (Cap 486) of the Laws of Kenya

provides for appointment of a minimum of 2directors for every company incorporated under

the Act.

the CBK requires all institutions licensed under the

Banking Act, to have at least 5 directors, at leastthree-fifths of whom should be Non-Executive

Directors.

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Multiple Directorships

No person shall be permitted to hold the position

of a director in more than two institutionslicensed under the Banking Act unless the said

institutions are subsidiaries or holding companies.

This rule shall not apply to government bodies

represented in institutions boards by virtue oftheir position as government bodies.

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Appointment of the Chairman of the Board of

Directors

Chairman of the Board of Directors shall always be

a Non-Executive Director.

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Resignation / Removal of Directors

Responsibility of the Board of Directors to report

to the Central Bank of Kenya, the resignation and/

or removal of any of its members within sevendays;

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[Board committees]

Board committees assist board and its directors in

discharging the duties and responsibilities,

however the board remains accountable.

There should be a formal procedure for certain

functions of the board to be delegated, describing

the extent of such delegation, to enable the board

to properly discharge its duties andresponsibilities and to effectively execute its

decision making process.

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Board committees with formally determined

terms of reference, life span, role and function

constitute an important element of the processand should be established with clearly agreed

upon reporting procedures and written scope of

authority.

Non-executive directors must play important rolein board committees.

All board committees shall be chaired by an

independent non-executive director. Theexception should be a board committee fulfilling

an executive function.

Board committees should be free to take

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Duties and Responsibilities: Chief Executive

Officers

Be wholly responsible to the Board for the day

to day running of the institution. Major

responsibilities the CEO are to: Ensure that policies spelt out by the board in the

institutions overall corporate strategy of the

institution are implemented;

Identify and recommend to the board competent

officers to manage the operations of the

institution.

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Co-ordinate the operations of the various

departments within the institution;

Establish and maintain efficient and adequate

internal control systems; Design and implement the necessary

management information systems in order to

facilitate efficient and effective communication

within the institution;

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Duties and Responsibilities: Chief Executive

Officers

Approval by the CBK

No chief executive officer shall take up his position

prior to being cleared by the CBK CBK can disqualify any CEO if adverse information

is later revealed or if he/she acts in any manner

contrary to or not in compliance with the

requirements of the Banking Act or any guidelinemade thereunder, or in any manner detrimental to

or not in the best interest of the depositors and

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Duties and Responsibilities: Management

Primary responsibility of management is tooperate and administer institution on a day-today basis paying attention to the following:

Implementation and adherence to thepolicies, practices and standards as laid downby Board of Directors;

Systems that have been established tofacilitate efficient operations andcommunications;

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The planning process that has been developed

to facilitate achievement of targets and

objectives;

All staff matters, particularly human resource

development and training;

Adherence to the established code of conduct

and with all the relevant banking laws and CBK

guidelines; and

Maintain adequate records to comply with allthe reporting requirements.

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CODE OF CONDUCT

APPLICABILITY

Code of conduct contained in this guideline is

applicable to directors, chief executive officers

and management of institutions licensed

under the Banking Act (Cap. 488).

Board of Directors to ensure that all officers

adhere to the prescribed code of conduct.

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PRESCRIBED CODE OF CONDUCT

1. Conflict of Interest

Directors, chief executive officers and managementshould not engage directly or indirectly in any

business activity that competes or conflicts with theinstitutions interest. These include:

Outside Financial Interest

Other Business Interests

Other Employment

Corporate Directorship

Trusteeships7/6/2012 85


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2. Misuse of Position

Directors, chief executive officers and management mustnot use the institutions name or facilities for personal

advantage in political, investment or retail purchasingtransactions, or in similar types of activities.

Directors, chief executive officers and management mustnot solicit or otherwise accept inducements either directlyor indirectly whether in cash or in kind in order to provide

any favors to a customer in the provision of loans,acceptance of deposits or any other conduct of thebusiness of the institution to which they are entrustedeither jointly or individually.

Further, directors, chief executive officers and management

must not use the institutions facilities and influence forspeculating in commodities, gold, silver, foreign exchangeor securities, whether acting personally or on behalf offriends or relatives.

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3. Misuse of Information

Directors, chief executive officers and management shouldnot deal in the securities of any company listed or pendinglisting on a stock exchange at any time when in possessionof information, obtained by virtue of employment orconnection with the institution, which is not generallyavailable to shareholders of that company and the public,and which, if it were so available, would likely bring amaterial change in the market price of the shares or other

securities of the company concerned. Insider dealing asthis is called, is a crime.

Directors, chief executive officers and management whopossess insider information are also prohibited frominfluencing any other person to deal in the securities

concerned or communicating such information to any otherperson, including other members of staff who do notrequire such information in discharging their duty.

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4. Integrity of Records and Transactions

Accounting records and reports must be complete andaccurate.

Directors, chief executive officers and managementshould never make entries or allow entries to bemade for any account, record or document of theinstitution that are false and would obscure thetrue nature of the transaction, as well as to

mislead the true authorization limits or approvalauthority of such transactions.

All records and computer files or programmes of theinstitution, including personnel files, financial

statements and customer information must beaccessed and used only for management purposes forwhich they were originally intended.

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5. Confidentiality

Confidentiality of relations and dealings between theinstitution and its customers is paramount in

maintaining the institutions reputation. Thus directors,chief executive officers and management must takeprecaution to protect the confidentiality of customerinformation and transactions. No employee or directorshall in any way use information so obtained for

financial gain. Business and financial information about any customer

may be used or made available to third parties onlywith prior written consent of the customer or inaccordance with the arrangements for the properinterchange of information between institutions aboutcredit risks, or when disclosure is required by law.

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6. Fair and Equitable Treatment

All business dealing on behalf of the institutionwith the current potential customers, with othermembers of staff and with those who may havecause to rely upon the institution, should beconducted fairly and equitably.

Such decisions must be made on a strictly arms-

length business basis. All preferential transactionswith insiders or related interests should beavoided. If transacted, such dealings should be infull compliance with the law, judged on normal

business criteria basis and fully documented andduly authorized by the Board of Directors or anyother independent party.

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7. Insider Loans

Directors, chief executive officers and

management should not use their positions to

further their personal interests.

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CAPITAL ADEQUACY

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Definitions

CoreCapital (Tier 1) permanent shareholders equity(issued and fully paid-up ordinary shares and perpetualnon-cumulative preference shares), disclosed reservessuch as share premium, retained earnings and 50% un-audited after tax profits less investments in subsidiariesconducting banking business, investment in equityinstruments of other institutions, intangible assets(excluding computer software) and goodwill. (The currentyear to date 50% un-audited after tax profits will qualifyas part of core capital, if and only if, the institution hasmade adequate provisions for loans and advances,proposed dividends and other appropriations have beendeducted).

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SupplementaryCapital (Tier 2) includes 25%

of asset revaluation reserves which have

received prior Central Banks approval,subordinated debt, hybrid (debt equity) capital

instruments or any other capital instrument

approved by Central Bank. Supplementarycapital must not exceed core capital.

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Total Capital - means core capital plus

supplementary capital.

Core and supplementary capital should

exclude cumulative unrealized gains andlosses on financial instruments.

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Minimum Capital Requirements

Minimum Ratios Unless a higher minimum ratio has been set by CBK for

an individual institution, every institution shall, at alltimes, maintain:

A core capital of not less than 8% of total risk weightedassets plus risk weighted off -SFP items;

A core capital of not less than 8% of its total depositliabilities;

A total capital of not less than 12% of its total risk

weighted assets plus risk weighted off- SFP items. The above ratios are subject to review and may be

changed from time to time.

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Minimum Core Capital Minimum core capital for banks, mortgage

finance companies and financial institutions is asstated below: Banks and Mortgage Finance Companies - Kes. 250 m. Non-Bank Financial Institutions - Kes. 200 m.

Institutions minimum core capital levels will bemonitored on a continuous basis by the CBK.

These levels will apply to all institutions and maybe reviewed from time to time.

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Criteria for Higher Minimum Capital


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Criteria for Higher Minimum Capital

Ratios

The Central Bank may require higher minimumcapital ratios for an individual institution basedon, but not limited to any one or more of the

following criteria: a) The institution has incurred or is expected to

incur losses resulting in a capital deficiency;

b) The institution has significant exposure to risk,

whether credit, concentrations of credit, market,interest rate, liquidity, operational, or from othernon-traditional activities;

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c) The institution has a high or particularly severe


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c) The institution has a high or particularly severevolume of poor quality assets;

d) The institution is growing rapidly eitherinternally or through acquisitions;

e) The institution is adversely affected by theactivities or condition of its holding company,

associates or subsidiaries; or f) The institution has deficiencies in ownership

management (i.e. shareholding structure;composition or qualifications of directors or

senior officers; risk management policies andprocedures).

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Risk Weights


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Risk Weights

Risk based approach to capital adequacymeasurement applies to both on and off SFP

items. The focus of this framework is credit risk,namely the potential risk of counter partydefault.

Apart from the credit risk, there are other

significant risks which institutions should guardagainst. In particular, these include interest raterisk, market risk, operational risk, concentrationrisk and even underlying collateral risk.

Institutions must assess and provide for theserisks in the evaluation of their respective capitaladequacy levels.

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On-SFP Items This framework uses only four weights, i.e. 0%, 20%, 50% and

100%. Credit exposures are risk weighted and classified into thefour categories according to their relative risk.

a) Zero % Weight

The on-SFP sheet assets which have been assigned a 0%weight include: cash (both domestic and foreign); loans andadvances secured by cash; balances with the CBK(including repo purchase transactions); claims on the KenyaGovernment by way of Government securities; and loans dulyguaranteed by the Government of Kenya.

Such Government guarantees should have beenapproved by the appropriate authorities in accordance withapplicable laws and Government procedures

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20% Weight

The 20% weight will be assigned to deposits andbalances due from commercial banks, financialinstitutions mortgage finance and building societies inKenya. They should also include securities issued byforeign governments and banks and balances due fromforeign banks (including banks in the group); claims

(loans and advances) guaranteed by the followingMulti-Lateral Development Banks (MDBs):- (i) The International Bank for Reconstruction and

Development

(ii) The Inter-American Development Bank

(iii) The Asian Development Bank (iv) The African Development Bank

(v) The European Investment Bank

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100% W i h


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100% Weight

The on-balance sheet items assigned the

100% weight are all other claims on the publicand private sector which are not covered

under the other categories, including deposits

in institutions under statutory management,balances from other foreign entities other

than banks, premises and other fixed assets,

loans and advances, bills discounted and all

other assets of the institution.

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Off- SFP exposures

Off SFP items shall be converted to credit risk

equivalents by multiplying the nominal principal

amounts by a credit conversion factor. The resulting amounts will then be weighted

depending on the nature of counterparty. For

example, if the counterparty is a local bank, thenthe resulting amount shall be multiplied by a risk

weight of 20%.

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) % i f


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a) Zero % conversion factor

Short-term commitments with an original

maturity of up to one year and cancellableunconditionally at any time e.g. bills for collectionand any other contingent liability fully secured bycash.

b) 20% conversion factor Short-term self-liquidating trade related

contingencies arising from the movement ofgoods e.g. documentary credit collateralized byunderlying shipments, and guarantees by Multi-lateral Development Banks specified above.

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) 50% i f


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c) 50% conversion factor

Transactions related to contingent items and

other commitments with an original maturityexceeding one year e.g. performance bonds, bidbonds and standby letters of credit relating to aparticular transaction.

d) 100% conversion factor These are off- SFP sheet items, which are

substitutes for loans, e.g. letters of guarantee,bank acceptances and standby letters of creditserving as financial guarantees for loans andsecurities.

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REMEDIAL MEASURES

Central Bank may pursue any or all remedial

actions as provided under Sections 33, 34 and

55 of the Banking Act.

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d) Suspension of lending investment and credit


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d) Suspension of lending, investment, and credit

extension operations;

e) Prohibition from acquiring, through purchase or

lease, additional fixed assets;

f) Prohibition from accepting further deposits or

other lines of credit;

g) Prohibition from declaring or paying bonuses,salary incentives, severance packages,

management fees or other discretionary

compensation to directors or officers.

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RISK CLASSIFICATION OF ASSETSAND PROVISIONING

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Central Bank of Kenya is authorized under

Section 20 of the Banking Act to prescribe

guidelines and ensure institutions maintain

adequate provisions for bad and doubtfuldebts prior to declaring profits or dividends.

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Definitions

loans and loans and advances - may beused interchangeably to include any loan,

discount, advance, overdraft, export bills

purchased, other bills receivable orpurchased, import bills, customers liability on

off-SFP items or any other credit facilities

extended to the customer of an institution;

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non-performing loan - means that a loan is no longer generating income


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or when it comes to the institutions knowledge that a credit facility will no

longer generate income. Loans are non-performing when:

principal or interest is due and unpaid for 90 days or more; or

interest payments for 90 days or more have been re-financed, or

rolled-over into a new loan.

Current accounts (overdrafts) and other credit extensions not having pre-

established repayment programs are considered non-performing when

any of the following conditions exist:

balance exceeds the customers approved limit for more than 90

consecutive days;

customers borrowing line has expired for more than 90 days;

interest is due and unpaid for more than 90 days;

the account has been inactive for more than 90 days, or credits areinsufficient to cover the outstanding interest during the period.

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Other Provisions - means a SFP valuation


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Other Provisions - means a SFP valuationaccount established through charges toprovision expense in the statement of incomein order to reflect erosion in the value of anyother assets being held by the institution.

Renegotiated loan may be used

interchangeably with restructured loan tomean any loan that has been rescheduled orrefinanced in accordance with an agreementsetting forth a new repayment plan on a periodic

basis occasioned by weaknesses in theborrowers financial condition and/or inability torepay the loan as originally agreed;

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Well secured means that a credit facilityhas sufficient collateral to cover both principal

and interest.

Such security is perfected in all respects andhas no prior encumbrances that could impair

its value or otherwise prevent obtaining clear

title.

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Scope


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p

Applies to all assets held or reflected in aninstitutions books, including off SFP items.

Responsibility

The Board of Directors of each institution shallbe responsible for establishing an asset review

system, which is consistent with this guideline,which accurately identifies risk, assures theadequacy of the provisions for non-

performing assets, and properly reflects suchresults in the financial statements of theinstitution.

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BOD of every institution shall prescribe in writing:


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a) Credit policy specifying the criteria and procedures in

the evaluation, processing, approval, documentation, and

disbursement of credits. Such policy should includeprocedures for loan administration and recovery, recording

of transactions and maintenance of appropriate credit and

document files.

b) System of reviewing the entire asset portfolio includingcontingent accounts or off SFP items and adequate

provisioning for losses at periodic quarterly intervals.

c) System of review of each extension or renewal of credit,

identifying, and classifying troubled credits as weaknesses

become evident without waiting for the scheduled

periodic review.

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SPECIFIC REQUIREMENTS FOR LOANS


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Q

AND ADVANCES

Loan Review (a) Objectives.

Each institutions loan review function shall ensure that: loan portfolio and lending function conforms to a sound and

written lending policy which has been adopted and approved by

the board of directors; executive management and the board of directors are

adequately informed regarding portfolio risk;

problem accounts are timely and properly identified andinternally classified as necessary, in accordance with the

classification criteria as given in this guideline as a minimum; appropriate and adequate level of provisions for potential loss

are made and maintained at all times;

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(b) Frequency and reporting

The management of each institution shall

ensure that a review of its loan portfolio is

made at least on a quarterly basis. Suchreports shall provide sufficient information

that will enable the board to deliberate and

direct management to take timely andnecessary remedial action within a specified

time frame.

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Classification of Loans


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Classification of Loans

(a) Criteria for classification In the determination of the classification for loans and

advances, performance will be the primaryconsideration. The performance will generally show

the repayment capability of the borrower. All loansshall be classified into the five categories:

Normal

Watch

Sub-standard Doubtful

Loss

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(b) Adverse Classification

A significant departure from the primary

source of repayment may warrant adverse

classification even when a loan is current or issupported by an underlying collateral value.

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(c) Central Banks Classification

Upon completion of an on-site examination,

the Central Bank of Kenya will provide a list of

reclassified accounts, some of which will bedowngraded from categories earlier classified

by the institution. No account from this list

will be upgraded by the institution withoutsufficient justification.

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Classification Categories


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Classification Categories

(a) Normal. These are well-documented facilities granted to

financially sound customers where no weaknessesexist. All such loans must be performing in accordance

with the contractual terms and are expected tocontinue doing so. Loans in this category are normallyfully protected by the current sound net worth andpaying capacity of the borrower.

Performance [term loans] Up to date repayments;

Operates within limit and receiving sufficient credits each monthto cover interest.

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(b) Watch


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Loans in this category may be currently protected andmay not be past due but exhibit potential weaknesses

which may, if not corrected, weaken the asset orinadequately protect the institutions position at somefuture date. Examples of such weaknesses include, butare not limited to:

inability to properly supervise the debt due to an

inadequate loan agreement; deteriorating condition orcontrol of collateral; deteriorating economic conditionsor adverse trends in the borrowers financial positionwhich may, if not checked, jeopardize repaymentcapacity, risk potential is greater than when the loan

was originally granted. This category should not beused as a compromise between Normal andSubstandard.

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Performance [term loans]


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These are loans, which display one or all of the followingcharacteristics: principal or interest is due and unpaid for 30 to 90 days

Interest payments are outstanding for 30 to 90 days or have beenrefinanced, or rolled over.

Current accounts (overdrafts) and other credit extensions areconsidered Watch when any of the conditions below exist:

overdraft exceeds the customers approved limit for more than 30 to90 consecutive days.

the customers credit line has expired and has not been renewed formore than 30 to 90 days from the date of expiry.

interest is due and unpaid for more than 30 to 90 days

the account has been inactive for more than 30 to 90 days or credits

are inadequate to meet all the outstanding interest during the period.

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(c) Substandard


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( )

Loans in this category are not adequatelyprotected by the current sound net worth andpaying capacity of the borrower. In essence, theprimary sources of repayment are not sufficientto service the debt and the institution must look

to secondary sources such as collateral, sale offixed assets, refinancing, or additional capitalinjections for repayment.

Any loan, which is past due for more than 90 days

but less than 180 days shall be classified asSubstandard, at a minimum.

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Performance [Term loan]P i i l i t t i d d id f th 90 d t


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Principal or interest is due and unpaid for more than 90 days to180 days

Interest payments for more than 90 days to 180 days have been

re-financed, or rolled-over into a new loan. Current accounts (overdrafts)

Current accounts (overdrafts) and other credit extensionsare considered Substandard when any of the followingconditions exist: debt exceeds the customers approved limit for more than 90

days to 180 consecutive days.

the customers credit line has expired for more than 90 days to180 days.

interest is due and unpaid for more than 90 days to 180 days

the account has been inactive for more than 90 days to 180 daysand credits are insufficient to cover all the outstanding interestduring the period.

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(e) Loss


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Loans, which are considered uncollectible or ofsuch little value that their continuance

recognition as bankable assets is not warrantedshall be classified Loss. Losses shall be taken inthe period in which they are identified.

Any loan, which is under doubtful category wherethe security has either been sold or discounted tozero value, shall be classified as loss unless thedebt is in the process of collection e.g. in due

course or through legal action or any othermeans expected to result in repayment of thedebt or in its restoration to current status.

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(f) Classification of Multiple facilities


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If an institution has granted multiple facilities to asingle borrower, and any one of them is non-

performing, then the institution shall evaluateevery other loan to that borrower and place suchloans on non-performing status. Provisions willbe made against that facility to fairly state the

banks financial position. Apportionment of joint collateral should be

prorated for purposes of provisioning based oncurrent exposure, unless the institution has

formulated an alternative acceptable allocationmechanism of the collateral value to theindividual non performing facility.

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Classification of Renegotiated Loans


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Classification of Renegotiated Loans

A renegotiated loan in the Substandard category will normally continue tobe classifiedSubstandard unless:

(i) all past due principal and interest is repaid in full at the time of

renegotiation, in which case it may revert to Normal classification or

(ii) all past due interest is repaid in full at the time of renegotiation in

which case it may revert to Watch classification or

(iii) a sustained record of performance under a realistic repayment

program has been maintained. A sustained record of performance

means that all principal and interest payments are made according to

the modified repayment schedule.

A renegotiated loan which meets condition (ii) above may be reclassifiedas Normalif a sustained record of performance is maintained for six (6)

months from the date of renegotiation.

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A renegotiated loan which meets condition (ii) above maybe reclassified Watch if a sustained record of performance


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be reclassified Watch if a sustained record of performanceis maintained for a least six (6) months and Normal if asustained record of performance is maintained for at least

twelve (12) months. A renegotiated loan in the Doubtful category, which

meets condition (iii) above can be classified asSubstandard if the sustained record of performance ismaintained for at least six (6) months from the

renegotiated date. It may however qualify for Watchclassification if the sustained record of performance ismaintained for at least twelve (12) months from therenegotiated date, and Normal if the sustained record ofperformance is maintained for at least eighteen (18)

months. If after a formal restructuring, a loan deterioratesit must revert to a non-performing classification status andbe classified accordingly

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Provisioning Requirements


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Provisioning Requirements

Suspension of Interest

All interest on non-performing loans and

advances will be suspended in accordance

with the criteria set out and should not betreated as income.

Interest in suspense shall be taken into

account in the computation of provisions fornon-performing accounts.

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Minimum provisioning allocations.

In determining the amount of potential loss in specific loans or in the


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aggregate loan portfolio, all relevant factors shall be considered including,

but not limited to: historical loan loss experience, current economic

conditions, delinquency trends, the effectiveness of the institutionslending policies and collection procedures, and the timeliness and

accuracy of its loan review function.

The following minimum percentage amounts for provisioning are to be

maintained according to assigned classifications. Where reliable

information suggests that losses are likely to be more than these minimum

amounts, larger provisions shall be made.

i) For loans classified Normal 1%

ii) For loans classified Watch 3%

iii) For loans classified Substandard 20%

iv) For loans classified Doubtful 100%

v) For loans classified Loss 100%

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In the case of the first two categories theabove percentages shall be applied against the

gross balance of a loan regardless of whether

the loan is analyzed individually or as part of apool of loans. For nonperforming categories

the percentages will be applied to the net

balances after deduction of realizable value of

security and interest in suspense.

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Treatment of Collateral


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Treatment of Collateral

General Classification ratings of loans do not depend on

the amount or quality of collateral pledged.

Collateral is regarded as a secondary source ofrepayment, and therefore is only used inassessing the amount of loan loss provisionrequired for non-performing loans. This is

especially true where the validity, value andability to realize collateral is subject to significantdoubt.

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