Article 12: Non-Performing Assets and Write-Off

C 3/2024-STD

Management of Non-Performing Assets

12.1

The Board and Senior Management of an LFI hold responsibility for the asset quality of the LFIs’ credit portfolios and the timely action to address credit-quality deteriorations. The Board must ensure that the LFI, at an early Stage, understands the underlying drivers of rising levels of non-performing assets and takes appropriate management actions in response.

Non-performing assets must be managed by individuals not involved in the origination of that Credit Facility in accordance with the requirements of article 3.14 of these standards.

12.2

At a minimum, the strategy should be based on the following principles:

a.	It should be integrated into the Credit Risk management policy of the LFIs and be reflected into its Risk Appetite.
b.	It should include a plan to manage non-performing assets over the short, medium and long terms, based on the expected flow of new asset migration to Stage 3. The plan should be forward-looking based on future expectations about asset credit worthiness and recoveries.
c.	It should define the conditions and expectations of forbearance.
d.	It should have appropriate methodology and systems to monitor and value collateral in a timely fashion.
e.	It should have appropriate legal expertise to support the recovery process.

12.3

LFIs with elevated Stage 3 exposures will be subject to greater supervisory oversight. When at any time the total amount of Stage 3 exposures as a proportion of the total credit exposure of the LFI exceeds 5%, the Board must:

a.	Formally explain to the CBUAE the underlying causes for the high stock of Stage 3 exposure, and
b.	Approve and implement a comprehensive strategy to reduce the excess within a reasonable timeframe. Such a plan should include a detailed breakdown of Stage 3 exposures and be communicated to the CBUAE semi-annually.

Write-offs and Partial Write-offs of Non-Performing Assets

12.4

When the LFI has no reasonable expectation to recover the full or part of a Credit Facility exposure as per the terms of the legal agreement, then the LFI should undertake a full or partial write-off of the exposure. A write-off constitutes a de-recognition event with the following financial implications: (a) any amounts written-off from the balance sheet must have an equivalent amount of provisions passed through the income statement; and (b) any amounts collected after the write-off must be recognised in the statement of profit and loss.

12.5

Timing: LFIs must ensure that write-offs are timely and reflect realistic Repayment and recovery expectations. For that purpose:

LFI must define the maximum expected recovery time for collateralised and uncollateralised exposures. Beyond such time, write-offs must be implemented. The internally determined write-off period cannot exceed the maximum permissible period set by the CBUAE.

The LFI must not hold a Stage 3 exposure on the balance sheet for more than 5 years since the date of migration to Stage 3. After this time, such exposures must be subject to a full write-off in the accounts. Any exceptions to this should be subject to Board or appropriate Board Committee sign-off and oversight, based upon robust legal or accounting justification at the level of the Credit Facility, and supported by appropriate documentation available for review by the CBUAE. For the avoidance of doubt, such a write-off does not impede or limit the LFI from fully collecting the amounts due.

12.6

Process: LFI must clearly define policies and processes to support write-off actions and the periodic review of Credit Facilities subject to partial write-offs. A write-off decision must include an assessment of legal and accounting consequences. For Islamic financial institutions, it must comply with Shari’ah principles. The ultimate authority for approval of write-offs rests with the Board or an appropriate Board Committee. At a minimum, the following drivers must be included in the LFI’s write-off policy, for the assessment of recoverability and write-offs:

a.	Exposures with prolonged arrears: if the Obligor has been in arrears for a prolonged period of time, full or partial write-off should be performed based on realistic expectation of little recovery.
b.	Exposures under an insolvency procedure: Write-off should be performed if the legal expenses are expected to consume the majority of the recovered amount.
c.	Partial write-off: this may be justified when there is evidence that the Obligor is unable to repay the amount of the exposure in full and there is a reasonable expectation of recovering a part of the exposure.

12.7

Insolvency process: Where a court appoints an administrator/expert to control the business, the LFI must assist in facilitating the recovery of any profitable business component, where applicable. This component may be ring-fenced as a viable business into a new entity to facilitate the recovery of the debt. Such matters must be handled by the function responsible for account remediation and recovery within the LFI.

Recovery of Non-Performing Exposures Post Write-off

12.8

A write-off may take place before legal actions taken against the Obligor to recover the debt have been concluded in full. After any write-off, the LFI in all cases retains the legal right to recover the debt. An LFI’s decision to forfeit the legal claim on the debt is a separate consideration and requires approval from the Board or the relevant authority formally designated by the Board.

12.9

An individual memorandum account must be maintained for every Credit Facility subject to write-off. This must also include accounts written-off on a portfolio-level basis. All recoveries made from the accounts subject to earlier write-off must be recognised in the statement of profit or loss. The summarized records must be maintained for the review of the CBUAE and to support claims in the courts. However, the LFI should close those memorandum accounts in the event of collecting the required amount or following a formal decision to discontinue the claims against these Obligors. The reporting of such accounts to CBUAE and other relevant bodies must be consistent with these requirements