Loans should be classified within levels 1 to 5 according to their conditions and the banks own assessment (see the table in 2 below). The onus will be on the bank to justify their assessment to the Central Bank’s satisfaction. This requirement applies to all loans and advances.

The classification described in the circular does not preclude banks from developing their own more granular grading system which in all cases should be clearly mapped to the 5 categories below.

The circular specifies the following minimum provisions for all loans.

It should be noted that for corporate and commercial loans doubtful and loss categories should be determined on a principle basis and not necessarily on a rule, such as number of days delinquent. Provisions for retail exposures should be fully rule based.

For commercial and corporate facilities, the bank is required to use the above classification unless it can demonstrate, based on evidence and sound judgment, that the listed criteria for a specific facility is not the best indication of impairment. In this case, the bank can classify the loan to an alternate category (higher or lower).

This process needs to be well documented, based on the bank’s board approved internal provisioning policy and follow a clear decision making criteria. Particular attention will be paid to restructured facilities or those where outstanding interest has been capitalized. The evidence should be presented to the Central Bank upon request.

If in doubt over the classification of a particular facility, please do not hesitate to contact your Supervisor at the Central Bank.

Specific provision percentages based on the number of days past due has to be followed for retail lending categories (including residential mortgages) as per the below table:

 Note: the percentages in the table are of the net exposure amount (defined below)

Loans are considered past due if any part of the contractual interest and/or principal payment is not met on time. The number of days past due is non cumulative, where the most recent payment cures the earliest contractual breach.

For example if repayments are agreed to be made monthly, and the customer is 30 days late in making the repayment, his next repayment should cover 60 days to cure the arrears. However, If the customer only makes one month payment, the customer cures the past month arrears (30 days) but falls in arrears for the new month (i.e. in arrears for 1 day).

The minimum specific provisions for all loans should be calculated by multiplying the percentages provided in the above table by the net exposure amount. The net exposure amount is defined as the outstanding loan balance less the net realizable value of the collateral held. The collateral should be multiplied by the following discount factors to arrive at the net realizable value.

Where the net collateral value exceeds the outstanding loan amount, the bank is not required to take any provisions. However, the bank is required to continually assess the need to raise a specific provision and raise one should the situation change (e.g. outstanding loan amount exceeds the net realizable collateral or the collateral value deteriorates).

It is a requirement under the circular that interest on loans that have been provisioned or loans where the interest is over due for 90 days or longer should be debited to the loan account and credited to a suspense account and not to the profit and loss account.

The bank, however, can still take the interest to the profit and loss account where the net realizable value of collateral continues to exceed the outstanding balance of the loan. This assessment should be made at least quarterly. Any cash payments made by the customer can also be recognized in Profit and Loss Account only after the overdue principal amount has been satisfied.

Interest suspense account should be clearly documented with clear audit trails showing interest movement. The account will be examined by the Central Bank.

Circular No 28/2010 highlights at least three situations where interest should be suspended on overdrafts. These are:

A – Where there is doubt regarding payment of interest and/or it has not been paid after 90 days of due date.

In this case a specific provision should be raised and interest suspended unless, as described in (3) above, the net realizable collateral value continues to exceed outstanding balance of the facility.

B – When due interest on other accounts of the same customer (or group) other than the overdraft account has been suspended.

Where interest is suspended on an account of a related entity or a member of the same group of entities, the default position is to suspend interest on all group accounts unless the outstanding balance is well covered by the net realizable collateral.

However, the bank can continue to credit the interest on over draft facility to the profit and loss account. Where: -

• •The bank believes that there is low correlation between the entity and other group member(s) that have interest suspended, and
• •All other facilities of the entity are in good standing,
• •There is no guarantee between the borrower and the defaulted entity,

In this case, all group facilities that are not 90 day past due should be migrated to the “watch list” category.

C – When the outstanding balance is consistently in excess of the agreed upon limit or when the account is in debit although there is no sanctioned facility.

“Consistently” is defined as a period that exceeds 60 continuous days or a total of 60 days in any 6 months period.