2.1

The Board must regularly review, and approve, the Credit Risk management strategy, framework, significant policies, tolerances/limits and processes for identifying, measuring, evaluating, monitoring, reporting and controlling or mitigating Credit Risk. The Board must also ensure these are consistent with the Risk Appetite and capital strength and other relevant parameters that they set. At a minimum, it must approve the organisation of the LFI’s Credit Risk Management Functions, including the credit underwriting process, the independent review of such underwriting, the portfolio management of credit exposures and the management of distressed assets.
 

2.2

The Board must oversee and ensure that Senior Management is fully capable of managing the Credit Risk bearing activities conducted by the LFI and that such activities are within the Risk Appetite, strategy, policies and tolerances reviewed and approved by the Board. In addition, the Board must oversee and ensure that policies and processes are implemented effectively and fully integrated into the LFI’s overall risk management process.
 

2.3

The Board must ensure the comprehensive inclusion of Credit Risk and credit concentration risk in the stress testing programme for risk management purposes of the LFI.
 

2.4

For LFIs incorporated in the UAE, the aforementioned includes policies and processes that provide a comprehensive group-wide view of significant sources of Credit Risk and concentration risk with appropriate consideration of the LFI’s Risk Profile, nature, and size as well as the complexity of its business and structure.
 

2.5

The Board is responsible for ensuring that the LFI has appropriate processes, methods and systems to identify problem assets and to determine adequate provisions and reserves in accordance with the LFI’s stated policies and procedures, with the applicable accounting framework and in compliance with relevant supervisory regulations and standards.
 

2.6

The Board, not a Board sub-committee, must approve material Facilities including any subsequent write offs. Material Credit Facilities must be approved by the Board at least every three years. The materiality thresholds must be defined by each LFI based on its Risk Appetite and the size and creditworthiness of the facility. At a minimum, material Facilities must include the following:
 

2.7

For Credit Facilities below the materiality threshold defined in Article 2.6.a, the Board may assume the approval authority as outlined below or alternatively, delegate to a Board Credit Committee, which must be distinct and independent from a Board Risk Committee and Board Audit Committee. Such a committee must set appropriate thresholds and criteria for the purpose of identifying and reviewing significant Facilities that may generate a higher level of risk and may not be consistent with the Risk Appetite of the LFI. At a minimum, the approval authority for this committee must include any Credit Facility computed as the lower of the following:
 

2.8

For branches of foreign LFIs operating in the UAE, the requirements in 2.6 and 2.7 must be fulfilled with formal approval from Senior Management or the Board outside of UAE to which the UAE based Senior Management have a formal reporting responsibility.
 

2.9

For Credit Facilities that do not require Board approval, the Board must define and approve a formal delegation matrix that articulates the roles and responsibilities of Senior Management for the approval of these Facilities.
 

2.10

In order to fulfil its oversight role, the Board and Board credit committee, if any, must regularly receive timely and appropriate information on:
 

2.11

The information must include, at a minimum, summary results of the latest asset review process, trends related to problem assets, and measurements of existing or anticipated deterioration in asset quality and expected losses.
 

Senior Management
 

2.12

The business line heads and their direct reports are responsible to ensure robust credit underwriting consistent with the Risk Appetite of the LFI. They must act as the first line of defence against Credit Risk, which requires appropriate identification, allocation and pricing of Credit Risk.
 

2.13

The LFI must ensure that Credit Risk is adequately mitigated by robust underwriting, provisions, reserves and, when possible, by collateral. LFIs must have appropriate policies and processes to ensure that provisions and write-offs are timely and reflect realistic Repayment and recovery expectations, taking into account market and macroeconomic conditions and computed in compliance with the regulations, standards and generally accepted accounting principles. The CRO must form an independent opinion on the appropriateness of provisions and regularly report their view to the Board.
 

2.14

The Senior Management team is responsible and accountable for the implementation of the Board approved strategy and Risk Appetite and is also responsible for the day-to-day management of the LFI. Regarding Credit Risk, this includes:
 

2.15

The Senior Management, including the CEO, the CCO and the CRO are collectively responsible for:
 

 

2.16

Internal Audit: The internal audit function is responsible to review and report on the suitability and efficiency of the implementation of the Credit Risk framework across the entire LFI, in accordance with the strategic direction set by the Board. At a minimum the scope must include the following:
 

2.17

Compliance: The compliance function must ensure that this regulation and these standards are understood, communicated and correctly followed for Credit Risk underwriting and management throughout the LFI. For this purpose, it must implement a process to review the compliance of all the internal parties involved in Credit Risk acquisition and management.
 

2.18

External Audit: External auditors are responsible to review and verify that classifications and provisions are accurate and comply with accounting and regulatory standards.
 

2.19

The LFI must at all times provide full access to all information in the credit and investment portfolios to the LFI officers involved in assuming, managing, controlling and reporting on Credit Risk.
 

3.1

The Credit Risk management framework must be designed to support effectively the acquisition and mitigation of Credit Risk. It must be consistent with the Risk Appetite, Risk Profile, systemic importance and capital strength of the LFI. It must take into consideration the current and forward-looking market factors and macroeconomic environment, with the objective to ensure prudent standards of underwriting, evaluation, administration, monitoring, measurement and control of Credit Risk.
 

3.2

The framework must include key components to be effective including, but not be limited to: the scope of instruments and geographies, Risk Appetite, controls, limits, underwriting process, credit administration process, monitoring, management of Past Due Facilities, remediation, provisioning methods, collateral management, system, models and exception management.
 

3.3

The Credit Risk management framework must enable the LFI to obtain a comprehensive group-wide view of Credit Risk exposures. and significant sources of concentration risk, it must cover the entire organisation and must be comprehensive in terms of products, activities and geographies, as well as including a robust methodology for the early identification and appropriate measurement of credit losses.
 

3.4

Scope: The Credit Risk management framework must enable the LFI to obtain a comprehensive group-wide view of Credit Risk exposures and significant sources of concentration risk, it must cover the entire organisation and must be comprehensive in terms of products, activities and geographies. The Credit Risk management framework must cover all financial instruments generating Credit Risk, including on- and off- balance sheet Facilities, receivables, capital market instruments and derivatives. LFIs must ensure that the risks arising from products or activities new to them are subject to adequate controls before being undertaken, and approved in advance by the Board of directors or its appropriate committee.
 

3.5

Risk Appetite: The Credit Risk management framework must be consistent with the Risk Appetite, Risk Profile, and systemic importance of the LFI. It must take into account market and macroeconomic conditions and result in prudent standards of credit underwriting, evaluation, administration and monitoring. This includes risk management policies and processes that establish thresholds for acceptable concentrations of risk and requirements related to Credit Facility structuring, legal due diligence, product-specific controls and underwriting standards.
 

3.6

Climate-related Credit Risk: The Credit Risk management framework must include prudent policies and processes to identify, measure, monitor, report and mitigate the impacts of material climate- related risk drivers on their Credit Risk exposures (including Counterparty Credit Risk) on a timely basis. LFIs should consider a range of risk mitigation options to control or minimise material climate-related Credit Risks. These options may include adjusting credit underwriting criteria, deploying targeted client engagement, or imposing limitations or restrictions such as shorter-tenor Lending, lower loan-to-value limits or discounted asset valuations. LFIs could also consider setting limits on or applying appropriate alternative risk mitigation techniques to their exposures to companies, economic sectors, geographical regions, or segments of products and services that do not align with their business strategy or Risk Appetite.
 

3.7

Country Risk: LFIs that provide Credit Facilities susceptible to Country Risk must implement adequate policies and processes for the appropriate identification, measurement, evaluation, monitoring, reporting and mitigation of Country Risk, comprehensively addressing the implications on Credit Risk. Exposures to Country Risk must be consistent with the Risk Appetite and risk profile of the LFI. The management and control of Country Risk must be incorporated into the key steps of Credit Risk management, covering the origination, underwriting, monitoring and provisioning processes. Relative to the magnitude of foreign Lending, an LFI must review and establish additional provisioning percentage ranges for each country, considering prevailing conditions that may be applicable to its individual exposures.
 

3.8

At a minimum, the Credit Risk management framework must include the following components: Risk Limits, underwriting process, credit administration, monitoring, measurement of Past Due Facilities including problem assets, remediation process, Counterparty Credit Risk, provisioning methodology, collateral management, information systems, analytical tools, provisioning methodologies as well as exception management. The corresponding minimum requirements are articulated below.
 

Risk Acquisition
 

3.9

Risk Limits: LFIs must implement prudent and appropriate credit limits based on adequate metrics and at a suitable level of segmentation granularity. These limits must be consistent with the Board-approved Risk Appetite statement, Risk Profile and capital strength. Risk Limits should be understood by, and regularly communicated to, relevant staff.
 

3.10

Underwriting process: LFIs must implement a clear credit underwriting framework commensurate with their Risk Appetite and Lending strategy. LFIs must follow the minimum requirements presented in the dedicated section of these standards.
 

Risk Management
 

3.11

Credit administration: LFIs must establish effective credit administration policies and processes to address the operational requirements of Credit Facilities throughout their lifetime. These must support the monitoring process of Credit Risk and mitigate operational risks linked to Credit Risk management and must include at a minimum: continued and forward-looking analysis of a Obligor’s (and potentially, a wider borrowing group’s) ability and willingness to repay under the terms of the financial obligation including but not limited to evaluation of underlying assets, robust data gathering, monitoring of documentation, financing covenants, contractual requirements, collateral and other forms of CRM and an archiving mechanism.
 

3.12

Monitoring: LFIs must have policies and processes to continuously monitor the total indebtedness of Obligors, their financial performance and any risk factors that may result in the increased risk of Default, including significant unhedged foreign exchange risk. The above must incorporate the continuous and forward-looking analysis of each portfolio/Obligor’s ability and willingness to meet its obligations under the terms of its contracts, while taking into account the current and future economic environment. This should include regular reviews of credit exposures (at an individual level or at a portfolio level for credit exposures with homogeneous characteristics) to ensure appropriate classification, detection of deteriorating exposures and early identification of problem exposures. This process must be established at several levels of granularity.
 

3.13

Days-Past-Due: Each LFI must have a clearly documented policy compliant with these standards, addressing the method to count Days-Past-Due. Particular attention must be given to the re-ageing of Facilities, whereby the Days-Past-Due counter is reset at zero. This applies only to non-distressed restructuring as defined in these standards. At a minimum, the re- ageing policy must include:
 

3.14

Remediation: Any Obligor that has triggered the definition of Default must be managed by individuals not involved in the origination of that Credit Facility, including both relationship management and credit approver for that Credit Facility. The provisions related to distressed assets must be decided independently from the underwriting process. Consequently, each LFI must be in a position to demonstrate that (i) it complies with such independence, irrespective of its specific organization circumstances and (ii) management of provisions on distressed assets are determined according to the LFIs delegated authorities with the oversight of the appropriate committee, or for branches of foreign banks the delegated authority from the head office.
 

3.15

Counterparty Credit Risk: The Credit Risk framework must be adequately designed to manage Counterparty Credit Risk (“CCR”) arising from all derivative transactions. At a minimum the following requirements apply.
 

 

3.16

Provisioning methodologies: LFIs must establish robust governance and control framework for the estimation and reporting of provisions, consistent with actual recovery of collateral if any, and must be able to substantiate the recoveries with documented evidence. This framework must include the minimum requirements of these standards and ensure that the LFI can demonstrate prudent and effective estimation and reporting of provisions.
 

3.17

Collateral management: Policies must be in place to determine the preferred type of collateral (at a level of specification relevant to the nature of the collateral) and legal charge.
 

Risk Analytics
 

3.18

Information systems: LFIs must implement effective information systems for the accurate and timely identification, aggregation, data storage and reporting of Credit Risk exposures to Senior Management and the Board on an ongoing basis. Such systems must cover exception tracking, limit breaches and early warning measures to ensure prompt action at the appropriate level of the organisation, when necessary. Processes must be in place to ensure the collection of adequate information on the composition of the credit portfolio, including key financial information, financing metrics and the Repayment history of each Credit Facility and facilitate active management of exposures creating risk concentrations and large exposures to single counterparties or groups of connected counterparties. Credit management systems must be of appropriate sophistication in order to facilitate this data collection and enable appropriate portfolio-level analysis across key risk drivers.
 

3.19

Analytical tools: LFIs must implement analytical tools commensurate with the size and complexity of the organisation to support the measurement and reporting of Credit Risk and provisions. The design, management and validation of these tools must comply with Article 13 on Credit Risk models.
 

 

3.20

Exceptions management: LFIs must implement a clear process to adequately identify and manage exceptions from credit policies and underwriting standards. All exceptions must be reviewed and documented by the CRO. Conclusions and analyses must be supported by clear rationales, prior to submission for approval by the appropriate level of authority within the LFI. Such review and approval must be achieved at Credit Facility level for Wholesale Obligors and at portfolio level for Retail Obligors.
 

4.1

The corresponding Article of the regulation outlines the main principles. Detailed requirements are presented below.
 

 

4.2

Each LFI must have a CCO supported by a Credit Review function or equivalent to fulfil the duties as defined below.
 

4.3

The CCO is required to review Obligors and associated exposures every year. For Wholesale Obligors, this review must take place at Obligor level. For Retail Obligors, this review must take place at portfolio level. This must include an updated risk rating of the Obligor(s) based on recent financials, at a minimum annually. LFIs must set the conditions triggering more frequent risk rating, and the conditions triggering technical amendments to a Facility.
 

4.4

The CCO’s key responsibilities are as follows:
 

 

4.5

In the context of credit acquisition, each LFI must have an independent Credit Risk Management Function within the Risk Management Function headed by the CRO.
 

4.6

The Credit Risk Management Function, must not have a decision-making role in the acquisition of Credit Risk.
 

4.7

The Credit Risk Management Function is responsible to safeguard the LFI from acquiring Credit Risk not consistent with the LFI’s Risk Appetite and/or policies, that may cause a threat to the LFI, in which case he must raise his concerns at the appropriate level.
 

4.8

The Credit Risk Management Function has the responsibility and authority to protect the LFI from Credit Risk, while maintaining an arms-length and independent oversight of Credit Risk acquisition. To perform this duty, the Credit Risk Management Function must have the following powers and responsibilities:
 

4.9

The CRO has the following powers and responsibilities with regard to Credit Risk:
 

4.10

In the case of LFIs offering Islamic Financial Services, the Credit Risk Management Function must discharge its responsibilities in compliance with the Shari’ah rules and principles.
 

5.1

In order to comprehensively address the Risk Profiles of its portfolios, each LFI must operate with a sound and granular credit underwriting policy based on its Lending strategy in accordance with its Board approved Risk Appetite. The Risk Appetite and the credit underwriting policy must incorporate sufficient risk-return discipline, consistent with the LFI’s business model.
 

5.2

The underwriting process must ensure a thorough understanding of the Risk Profile and characteristics of the Obligors and the drivers of their credit performance. For that purpose, the LFI must establish well defined criteria within its policies and processes for approving new Facilities, renewing and refinancing existing Facilities. This decision process must be supported by a clearly defined approval authority based on the size and complexity of the Facilities.
 

5.3

Materiality thresholds must be established to govern decisions surrounding the issuance of each Credit Facility. All financing to existing and new Obligors must be assessed against risk acceptance criteria during the initial credit evaluation process and during the continuous Obligor/portfolio monitoring phase, as per Article 3.12.
 

5.4

LFIs must ensure that the underwriting framework and respective criteria, policies and procedures are implemented effectively and are subject to regular audit reviews.
 

Decision-making process
 

The decision-making process must include the following key elements:
 

5.5

Credit Committee: Decisions to issue Credit Facilities are expected to be governed by a management credit committee or individual(s) with the appropriate sanctioning authority where appropriate. The credit committee is expected to be a forum to analyse and discuss in detail the risk drivers, the pricing and the structure of Credit Facilities or, pools of Credit Facilities. Robust documented evidence must be retained to demonstrate that underwriting decisions are sufficiently challenged. Underwriting decisions must clearly document an appropriate balance between risk and commercial considerations.
 

5.6

Depending on their materiality, their rating and other criteria, some Facilities may be delegated for approval at levels of authority that report to the CCO and are below that of the credit committee. However, those delegations must be clearly documented and approved.
 

5.7

As an alternative to a credit committee, LFIs may structure underwriting approvals through individual delegations, however they must have in place a clearly documented and approved delegation matrix setting out delegations from Board level down to Senior Management (excluding control functions), CCO and individual credit officers.
 

5.8

LFIs must ensure that the approval of Credit Facilities is achieved through a continuous accountability framework for each step of the underwriting process. LFIs must define the roles of executive committees and senior executives involved in the process of underwriting of Credit Facilities.
 

The following principles apply:
 

5.9

LFIs must establish a performance assessment mechanism for all stakeholders involved in the acquisition and the management of Credit Risk which is aligned with the long term sustainability of the LFI. The mechanism must be articulated differently for the business lines and the control functions, based on the following principles:
 

5.10

Independence: All credit decisions must be made free of conflicts of interest and on an arm’s length basis. In particular, Related Party transactions must be governed by internal policies, to prevent potential conflicts of interests. They must be authorised by the Board of the LFI, and regularly monitored. The policies and processes must be articulated so as to prevent persons benefiting from the transaction and/or persons related to such a person from being part of the process of granting and managing the transaction. All Credit Facilities to Related Parties must be formally approved and signed-off by each Board member.
 

 

5.11

The underwriting process must be structured to adequately support the decision-making process for the issuance and the acquisition of Credit Facilities, consistent with the LFI’s Risk Appetite and strategic objectives. The underwriting process must enable the LFI to form a view on the suitability of the Risk Profile of each Credit Facility in light of the associated risk-adjusted return objective of the LFI. Consequently, this process must be clear and comprehensive, fully documented, and enforced in accordance with its internal policy.
 

5.12

In addition, the underwriting process is expected to include the following at a minimum:
 

5.13

Documentation: The credit files must be well documented and include all information necessary to ascertain the current financial condition of the Obligor, including but not limited to the rationale and computations upon which classification and provisioning has been determined. In addition, files must contain sufficient information to track the decisions made and the history of the credit. For example, the credit files should include current financial statements, financial analyses and internal rating documentation, internal memoranda, reference letters, appraisals and forward-looking financial projections. The credit review function must determine that the credit files are complete and that all Credit Facility approvals and other necessary documents have been obtained. Documents must include the evidence of the perfection of the LFI’s legal interest as well as evidence of the ability to collect / exercise their creditor interest in collateral taken in support of the Credit Facility.
 

5.14

Collateral: LFIs must ensure that the collateral used as risk mitigant in the underwriting process is appropriately identified and valued. In addition, LFIs must monitor, control and assess the implications of multiple Lending against the same collateral. For that purpose, the following actions must be undertaken, at a minimum:
 

5.15

Facility structure: LFIs must ensure that amortization schedules and Facility tenors are suitably designed to meet the needs of Obligors and their Repayment abilities. The amortization structure should include the following principles:
 

5.16

Legal due diligence: The LFI must ensure that the legal documentation of the Credit Facility is adequate to support the right of the LFI over the recoverability of the debt, including but not limited to, the liquidation of collateral, enforceability of guarantees, access of overseas assets. In addition, the LFI should review and evaluate the right to use Credit Facilities as collateral to raise liquidity, and ensure the conclusions of such evaluation are reflected in the legal documentation. 
 

6.1

LFIs must employ the criteria presented herein to identify an event of Default. These are applicable to all Credit Facilities and all Obligors, including Retail Obligors and Wholesale Obligors. For Islamic Financial Services, the definition must also comply with Shari’ah requirements including the Shari’ah contract terms and conditions.
 

6.2

In the case of Default measurement, each LFI must monitor and assess the Defaults of Obligors by considering the obligation of a given Obligor across all the legal entities of a banking group incorporated in the UAE and abroad, including the Parent company, its branches and Subsidiaries.
 

6.3

A Default is considered to have occurred with regard to a particular Obligor when either or both of the following events have taken place: non-payment and/or unlikeliness to pay.
 

Non-payment
 

6.4

The Obligor is Past Due for a period greater than 90 days on any material credit obligation to the LFI. In this context, materiality must be measured with respect to the total exposure of the individual Obligor. A Facility or a group of Facilities with an Obligor is considered material if their combined exposure is greater than 5% of the total funded exposure of that Obligor to the LFI. In the case of multiple Credit Facilities, for Wholesale Obligors, the Days-Past-Due (“DPD”) counter must start from date of the first Credit Facility becoming Past Due. In other words, the DPD counter must be computed across Credit Facilities with a consecutive day count.
 

6.5

Overdrafts will be considered Past Due once the Obligor has breached a contracted or internal limit, or been advised of a limit smaller than the current outstanding. In addition, Default must be considered when the outstanding balance is consistently in excess of the agreed upon limit. ‘Consistently’ is defined as a period that exceeds 90 continuous days, in addition, for Wholesale Obligors only, a total of more than 90 days in any 6 months period.
 

 

6.6

The LFI considers that the Obligor is unlikely to pay its credit obligations in full. This evaluation should be based on a holistic evaluation of creditworthiness supported by factual evidence, whereby the LFI must forms a balanced view on the current and future overall performance of the Obligor. The classification of an Obligor as ‘defaulted’, due to a perceived unlikeliness to pay, is not automatic.
 

6.7

For the purpose of the evaluation of the unlikeliness to pay, LFIs must establish a set of criteria, including the requirements provided herein. These criteria would be most applicable to Wholesale Obligors with high Credit Risk, such as Obligors involved in Facilities with Interest only obligations, Obligors that are routinely Past Due with Repayments and/or Obligors with a bullet Repayment at maturity.
 

6.8

Indicators of unlikeliness to pay may include, but are not limited to, the indicators listed below. LFIs must clearly evaluate and document whether any of these situations apply (or others specific to the LFI) prior to forming an overall conclusion on the likeliness to pay of the Obligor:
 

6.9

For Wholesale Obligors in particular, unlikeliness to pay can be indicated by a clear material decline in credit worthiness evidenced by the following circumstances:
 

6.10

For Retail Obligors in particular, the LFI should introduce a process to identify and evaluate Obligors that may be unlikely to pay based on specific circumstances of the Obligor, including, but not limited to, the following:
 

Cross Default
 

6.11

Retail Obligors: The definitions of Default must only apply at Credit Facility level, therefore cross-Default does not apply automatically. The Default of a Credit Facility must neither trigger the Default of the individual Obligor nor the Default of other Credit Facilities granted to the same Obligor unless warranted due to actual Default on each Credit Facility.
 

6.12

Wholesale Obligors: The Default of a material Credit Facility must also trigger the Default of the Obligor. In the context of an economic group composed of multiple legal entities, and in the absence of explicit consideration of cross-Default in the legal documentation of the Facility, then the following principles must apply.
 

7.1

The LFI must assess and document regularly whether the Credit Risk of a financial instrument has increased significantly since its initial recognition. The identification of Significant Increase in Credit Risk (“SICR”) must be done in accordance with accounting standards, the LFI’s internal policy on SICR and must incorporate the requirements presented in these standards. It must be based on all available, reasonable and supportable information; including forward-looking information. The identification of SICR must be employed by LFIs to determine the staging of Obligors and Facilities as explained in Article 9 below on classification and provisioning.
 

7.2

The indicators employed for the identification of a SICR must be regarded as early warning indicators to the identification of the Obligor’s unlikeliness to pay, articulated earlier in this regulation and the these standards. Consequently, for Obligors subject to a SICR, the identification process must also consider the possibility of a further deterioration in credit worthiness leading to unlikeliness to pay. Such analysis must be fully documented. Wholesale Obligors must be considered individually not as a portfolio.
 

7.3

Each LFI must review forward-looking information and determine appropriate indicator to determine if an SICR has occurred. Those indicators must include, but not be limited to, the number of Deferrals granted to the Obligor and the Days-Past-Due.
 

7.4

For each Obligor, LFIs must implement a rigorous process to regularly assess whether a SICR has occurred. This process can be based on information at the level of each Credit Facility or at pool or portfolio level. If an LFI decides to set its SICR criteria threshold at the level of a group of Credit Facilities, the Facilities within that group must have similar Credit Risk drivers.
 

7.5

LFIs must ensure that the assessment of SICR is applied at different levels of granularity for connected financial instruments, e.g. Credit Facility level, Obligor level and/or group level. Such assessment must be documented.
 

7.6

As a precursor to SICR, LFIs should implement a watch list mechanism, employed for forward-looking Credit Risk management, appropriate to the size and complexity of the LFI.
 

7.7

Deferral indicator:
 

7.8

DPD indicator: Credit Facilities with Repayments more than 30 Days-Past-Due must be identified as deteriorating assets and therefore subject to SICR. If the 30 Days-Past-Due presumption is rebutted, this must be fully documented with reasonable and supportable information evidencing that no SICR has occurred.
 

7.9

Other indicators: For all Obligor types, in addition to the Deferral indicator and the DPD indicator, LFIs must review forward-looking information to determine if a SICR has occurred. Such a review must include a comprehensive assessment of quantitative and qualitative drivers of Credit Risk associated with each Obligor. This assessment must be fully documented and retained as evidence. During this assessment, it may not be possible to identify a single discrete event. Instead, the combined effect of several events can cause a SICR.
 

7.10

Exceptions: For a Credit Facility where it has been determined that no SICR has occurred despite being triggered by the indicators above, such evidence must be formally evaluated and agreed upon by the CCO and CRO before being formally approved at the most Senior Management committee.
 

7.11

For Wholesale Obligors, relevant indicators of a SICR may include, but are not limited to those outlined below. LFIs must be in a position to demonstrate that they have analysed these elements:
 

7.12

Economic environment: LFIs must analyse and document the relationship between macroeconomic conditions and Obligors’ Credit Risk drivers for the purpose of SICR assessment. This requirement applies to all types of portfolios. Such analysis can be performed at the level of individual Obligors or pools of Obligors, provided that jointly assessed Obligors share similar risk drivers. LFIs must also demonstrate that adequate economic analysis is performed to support this process. In addition to macroeconomic analysis, the SICR assessment must be supported by industry-level analysis, both current and forward-looking, including implications of any geopolitical, environmental and operating risks.
 

8.1

Article 8 of the Credit Risk Management Regulation requires LFIs to implement an appropriate process to identify, execute and manage Restructured Credit Facilities.
 

8.2

For the purpose of this regulation and these standards, restructuring events are categorised into two distinct groups:
 

8.3

Distressed restructuring: A Credit Facility must be regarded as a distressed restructuring if any of its terms are amended in a context of financial difficulty of the Obligor. This includes restructuring that commences or concludes after a Credit Facility becomes Past Due more than 90 days or falls within the unlikeliness to pay status. The assessment of financial difficulty must incorporate at a minimum the same criteria as outlined in this regulation and these standards for the assessment of SICR, and in particular the number of Deferrals as required by Article 9 on classification and provisioning.
 

8.4

Non-distressed restructuring: A Credit Facility must be regarded as a non-distressed restructuring if any of its terms are formally amended for commercial or regulatory reasons, including the intention to mitigate future financial difficulties, but excluding situations of financial distress at the time of restructuring. Such type of restructuring includes Credit Facilities for which the contractual obligations and Repayments have been made, without any history of Past Dues on the Credit Facility.
 

8.5

Examples of non-distressed restructuring are as follows:
 

8.6

Restructured accounts also include cases where a Credit Facility is fully settled by a simultaneous or subsequent disbursement of a new Credit Facility.
 

8.7

Standstill: In some circumstances, the restructuring process may take time to reach its completion. Such a situation is sometimes referred by LFIs as ‘standstill’. Any type of restructuring that is in standstill for more than 90 days, during which the Obligor is not meeting its financial obligations as per the terms of the original Facility, falls within the definition of Default defined above and, therefore, must be considered a Default event.
 

Restructuring Process
 

8.8

The restructuring process must be defined by LFIs for Retail Obligors and Wholesale Obligors separately. All distressed restructuring must follow the principles described for remediation in Article 3.14. It must follow a rigorous governance with clear accountability and must be subject to annual internal audit review. The approving authorities (whether a committee or individual) of a restructuring must be accountable for ensuring compliance with the LFI’s internal policies and procedures.
 

8.9

Approval process: LFIs must define a clear process to approve Credit Facility restructuring, including a clear delegation of authority to allow terms and conditions beyond the normal course of business. This process must mirror the process employed for issuing new Credit Facilities as articulated in Article 5 on underwriting principles.
 

8.10

Eligibility of restructuring: LFIs must design and document minimum conditions to evaluate the viability of a proposed restructuring taking into consideration the following:
 

8.11

Credit Facility structure: The structure of a new Credit Facility must be designed to (a) maximise the Repayment likelihood from the Obligor while (b) minimizing the losses and expenses incurred by the LFI. LFIs must design and enforce a policy to govern restructuring principles, focusing on the amortization schedule and with adequate controls over unfunded Facilities. In the case of a deterioration in the Obligor’s credit worthiness, the extension of overdraft limits or other similar Facilities for the Obligor to repay existing Facilities should be treated as a strong indicator of distress restructuring.
 

8.12

Viability analysis: For Wholesale Obligors in particular, LFIs must assess the viability of the Obligor upon restructuring by conducting a rigorous forward-looking analysis, based upon both quantitative and qualitative assessments. This must involve a transparent assessment of the economic environment, the state and prospects of the sector in which the Obligor operates, the Obligor’s position in that sector and the business conditions and the specific circumstances of the Obligor. The analysis must also include forecasted cash flows under several economic and business assumptions both baseline and stressed. The results must be presented to the credit committee as part of the decision-making process. The LFI must maintain and perform analysis on the Repayment history of the Credit Facility from inception of the original Facility.
 

8.13

LFIs performing Islamic Financial Services must carry out the structuring process in accordance with Shari’ah rules and principles and take into considerations the controls imposed in doing so.
 

 

9.1

Each LFI must establish a process to assess, monitor and determine a classification to reflect the current and expected credit worthiness of each Credit Facility and/or each portfolio of Facilities, except for those measured at fair value. Upon this classification, LFIs must determine provisions based on the application of this regulation and these standards. This process must be proactive, forward-looking and supported by adequate policies, systems, data, analytical tools and by adequately trained employees.
 

9.2

The classification process must be fully documented based on the provisioning policy approved by the Board, or in the case of foreign entities, the Board of the head office or the Senior Management committee of the branch.
 

9.3

The classification process must be based on the assignment of internal risk ratings. LFIs must develop and utilize internal risk rating systems to manage Credit Risk. Where external credit assessments are used, the LFI must exercise appropriate due diligence to ascertain that the rating reflects the Risk Profile of the Obligor and the Facility. Particular attention must be paid to Credit Facilities that have been restructured and/or for which the outstanding Interest is capitalized. LFIs must be in a position to present evidence of undertaking this classification process to the CBUAE upon request.
 

9.4

At a minimum, this classification process must incorporate the following elements:
 

9.5

LFIs must classify each Facility according to the three Stages and sub-Stages outlined below, inferred from accounting principles, whereby the likelihood of Default increases through the Stages. The classification described in these standards does not preclude LFIs from developing their own more granular and robust grading system, which must be clearly mapped to the categories outlined herein. The onus will be on the LFI to justify their assessment.
 

9.6

LFIs must establish a policy governing the criteria to allow migration between Stages. These must follow accounting principles, the principles articulated in Article 7 dedicated to SICR, and the rules as set out in this Article.
 

9.7

Stage 3 to Stage 2: Credit Facilities must remain in Stage 3 until all arrears are settled. In addition, for Wholesale Obligors, at least 3 instalments must have been made for monthly Repayment schedule, and at least 1 instalment for any other Repayment schedule of longer intervals. Instalments must be composed of principal and/or Interest as per the original applicable Facility agreement, and must not be funded via a new Facility provided by the LFI or other means than the Obligor’s own cash flows.
 

9.8

Stage 2 to Stage 1: For Wholesale Obligors, Credit Facilities must remain in Stage 2 until SICR criteria, as defined in Article 7, are no longer observed. In addition, each financial instrument subject to migration to Stage 2 must be monitored closely and remain in Stage 2 until the following Repayments of principal and/or Interest as per the original applicable Facility agreement have been met. This is referred to as the probation period. After completion of this period, the Facility can return to Stage 1. Interest-only payments are sufficient to migrate back to Stage 1 only if the original Facility agreement provided for a period allowing service of Interest only. The following minimum Repayment frequencies must be applied as from the date of last overdue instalment payment:
 

9.9

For step-up Repayment structures and working capital lines, the LFI must apply the above principles to formulate relevant staging criteria, including at a minimum: (i) longer periods may be considered for step Repayments, and (ii) a revolving working capital line would need to remain as Stage 2 until the renewals have been successfully completed during a minimum period of 12 months. However, in all cases, the LFI must re-evaluate the presence of SICR based on the criteria outlined in Article 7 and determine the staging accordingly.
 

9.10

Where an Obligor or Facility was migrated from Stage 1 to Stage 2 for other reasons than missed instalments, then the minimum Repayment frequencies defined in Article 9.8 above do not apply for a migration from Stage 2 back to Stage 1. Instead, the LFI must methodically re-evaluate the presence of SICR based on the criteria outlined in Article 7 and determine the staging accordingly.
 

9.11

Stage 3 to Stage 1: For Wholesale Obligors, financial instruments subject to SICR and allocated to Stage 3 must not be upgraded from Stage 3 to Stage 1 directly. Instead, the Obligor must be upgraded to Stage 2 initially and be subject to continuous monitoring for a minimum period corresponding to the Repayment intervals defined in Article 9.8.
 

9.12

For Retail Obligors, LFIs must define minimum periods to govern the migrations between Stages for cases where their credit worthiness improves: (a) Stage 3 to Stage 2 (all arrears must be settled), (b) Stage 3 to Stage 1 and (c) Stage 2 to Stage 1. These minimum periods must be documented and justified based on the LFI’s business model.
 

9.13

While the Stage 1, 2 and 3 defined above do not apply to derivatives transactions, LFIs must review and classify derivative transactions according to their associated Counterparty Credit Risk. LFIs must create their own appropriate classification based on counterparties’ credit worthiness and potential exposure. Such classification must enable the LFI to manage CCR in a proactive manner, with adequate early warning to manage credit deterioration.
 

 

9.14

All LFIs must implement a process to estimate and document provisions associated with each Credit Facility in all Stages and in all credit portfolios, in compliance with CBUAE regulations, standards and/or guidance. Such provision must be estimated during the life of the Credit Facility and assessed annually or more frequently in light of new information and the evolution of the economic and business environment. LFIs are required to book provisions in line with these standards and deduct them from the profit and loss account, at least by the end of each quarter and not delay them till the end of the financial year.
 

9.15

Determining provisions in the context of Islamic Financial Services may impact the Investment Account holders’ profit as provisions are deducted from profit. Consequently, LFIs performing Islamic Financial Services must ensure that the Internal Shari’ah Supervision Committee approves the provisioning policies. In addition, the determination of provisions must be approved by the committee responsible for profit and loss allocation in accordance with the Central Bank’s standard regarding profit equalization for Islamic Banks.
 

9.16

The provisioning process must be documented, organised and approved by Senior Management and the Board. At a minimum, it must incorporate the following components:
 

9.17

Retail Obligors: A provision of 100% of the Credit Facility net of collateral is required if the Obligor has permanently left the country where the Credit Facility was issued, without leaving sufficient funds with the LFI available to ensure the Repayment of the total outstanding. The above may not apply automatically and the LFI must evaluate the need for a provision for an Obligor who continues to service the Credit Facility from overseas and is not Past Due.
 

9.18

Off-balance sheet items: For Wholesale Obligors, the LFI must undertake the following process, at a minimum.
 

9.19

Interest and fees in arrears: For all Credit Facilities with any instalments (including principal, Interest and other fees) more than 90 Days-Past-Due, the LFI must immediately set aside full provision at 100% of any Interest and fees not received. The provision must be deducted from current year income and the Interest and fees must not be included in income eligible for distribution. The income not received must be separately tracked and identifiable as a component of the gross outstanding along with the related provisions.
 

9.20

Minimum provision for Stage 1 and 2: LFIs are permitted to estimate expected credit loss (ECL) and provisions via the quantification of probability of Default (PD) and loss given Default (LGD) incorporating CRM as determined by the LFI, but limited to the collateral and associated haircuts listed in the column labelled ‘up to 24 months’ of table 2 in Article 10. The quantification of PD and LGD must reflect the Risk Profile of each Credit Facility and/or portfolio and the experience of the LFI in terms of Default, collateral management and recovery collections. If the LFI incorporates risk mitigation as described in Article 10 for provision estimation, such mitigation must be based on robust and documented methodologies supported by data.
 

9.21

LFIs must ensure that the total provision corresponding to all Stage 1 and Stage 2 Credit Facilities is not less than 1.50% of the LFI’s Credit Risk weighted assets as computed under the CBUAE capital regulations.
 

9.22

The CBUAE may impose a floor higher than that of 1.50% of Credit Risk weighted assets mentioned above at its discretion, for reasons including but not limited to:
 

9.23

Minimum provision for Stage 3 (Wholesale Obligors): LFIs must implement a dedicated process and a methodology for the computation of provisions associated to Facilities allocated in Stage 3. The approach must incorporate the following elements.
 

a.

The LFI must compute provisions after deducting, from the principal amount outstanding, the following items:
 

9.24

Minimum provision for Stage 3 (Retail Obligor): For Retail Obligors as defined in the standards, each LFIs must put in place a dedicated process and a methodology for the estimation of provisions for Facilities allocated in Stage 3. Each LFI must ensure that minimum provision levels are maintained against the principal of each defaulted Facility.
 

Table 3: Stage 3 minimum provision for Retail Obligors net of collateral, as per Article 10
 

 

9.25

If Stage 3 provisions computed under this standard exceed the provision computed under accounting standards, this shortfall in provision is required to be taken against current year income similarly to all other provision requirements in this standard.
 

9.26

Prior to the issuance of this regulation, differences between the CBUAE regulatory provisions and accounting provisions were held in a dedicated reserve (‘impairment reserve – specific’). This methodology is now removed and not permissible. An LFI that has an amount in this reserve upon this regulation coming into force, must recalculate the provisions as per the requirements of this regulation and document for each of the exposures the changes relating to this regulation coming into force. The provisions calculated as per this regulation must then be charged fully through current year income, while simultaneously transferring the full balance of the aforementioned reserve back to retained earnings.
 

 

9.27

LFIs must pay particular attention to the classification of Restructured Credit Facilities as per the additional requirements articulated in the subsequent articles.
 

 

9.28

All distressed Restructured Credit Facilities for which the unlikely to pay criteria have been met, or that are Past Due more than 90 days at the conclusion of the restructuring process must be classified as Stage 3. Subsequently, staging transition rules must be applied as for any other Facilities.
 

9.29

Any Credit Facility that has been restructured 3 times or more in a context of financial difficulty as defined under the SICR section of these standards must be migrated to Stage 3.
 

9.30

All other distressed Restructured Credit Facilities not captured above must be allocated to Stage 2 or Stage 3. These also include Facilities where the restructuring has permitted payment of Interest only, whereby the requirement of principal Repayment has been removed; such Facilities remain as Stage 2 until such time that principal Repayment is resumed.
 

Classification of non-distressed restructuring
 

9.31

All non-distressed Restructured Credit Facilities with a Repayment moratorium exceeding 6 months must be classified as Stage 2, unless the LFI can demonstrate that no SICR has occurred, in which case the same process as outlined under Article 7.10 must be followed. These Facilities must be reviewed annually by the CRO and any necessary action must be documented.
 

9.32

All non-distressed Restructured Credit Facilities greater than 3 years in tenor after the restructuring and with a bullet Repayment, must be classified as Stage 2 at the start of the restructuring period, if any of these features are met:
 

Applicable to all restructuring
 

9.33

Subsequent to all distressed and non-distressed restructuring, the Facility/Obligor must be classified as Stage 3 if the definition of Default explain in these standards is met, at any time until the end of the restructured Facility.
 

 

9.34

Stage 2 to Stage 1: Restructured Credit Facilities are subject to the same rules applicable to any other Credit Facilities for migration from Stage 2 to Stage 1.
 

9.35

Stage 3 to Stage 2: For Restructured Credit Facilities classified in Stage 3, a return to Stage 2 is dependent on the proportion of the bullet Repayment:
 

9.36

The above criteria will apply to every subsequent restructuring.
 

9.37

Particular attention should be paid to Facilities that are “Purchased or Originated Credit Impaired” or “POCI”. This process involves the de-recognition of the original Credit Facility and the recognition of a new Credit Facility, that is now credit-impaired. The new Credit Facility is recognised in the LFI’s financial statements at reduced fair value and routinely monitored for further deterioration in value with appropriate provisions made accordingly.
 

9.38

For any of the cases outlined above, LFIs that extend further Lending/financing to a defaulted restructured Obligor must retain the Stage 3 classification for an additional 12 months to the timeframes outlined above.
 

10.1

LFIs may account for the presence of CRM when determining the appropriate level of provisions, but only to the extent permitted as per these standards. The haircuts applied to collateral are only for the purpose of computing the provision amount; these haircuts have no impact on the legal rights of the LFI with respect to any collateral.
 

10.2

The measurement of CRM must be based on realistic and documented assumptions supported by robust data, in particular for collateral valuation and discounted cash flows. The approach must include at a minimum the eligibility of collateral, recovery cash flows, time to recovery, the cost of recovery and the discounting method. The Credit Risk Management Function must review and form an opinion on the adequacy of the associated provisions from a risk perspective and escalate as appropriate.
 

 

10.3

Where LFIs take into account discounted future cash flows, these must be measured in a conservative manner. For Facilities to Wholesale Obligors in Stage 3 this must be done on a case-by-case basis and only to the extent as set out in the below Articles 10.4 to 10.6.
 

10.4

Future cash flows of high certainty can be considered as forms of risk mitigation provided they meet the requirements herein. All cash flows used for risk mitigation must be discounted to the present and formally validated by external auditors, and hold a formal independent legal opinion to confirm the right of enforcement and ability to obtain those cash flows.
 

10.5

Future rental income under a formal lease agreement, and with the rental income assigned to the LFI from commercial real estate under lien is permitted to be used as risk mitigation when computing the required provision. Other cash flows from defined and distinct sources may be considered within the principles articulated in Article 9.23.
 

10.6

To be eligible for CRM, the future cash flows must not be from the same source as the cash flows expected when the Obligor failed to fulfil its Repayment obligation, unless legal certainty can be established regarding the recovery of such cash flows.
 

Collateral
 

10.7

Collateral is eligible for risk mitigation if the LFI holds the first right of legally enforceable lien and if the collateral meets the minimum requirements presented herein. LFIs must implement processes and systems to identify, store, measure and monitor all collateral and guarantees linked to each financial instrument generating Credit Risk. LFIs must implement rigorous collateral management and valuation policies to ensure a fair assessment of CRM. They must also analyse and report concentration in some types of collateral and their associated Credit Risk, to Senior Management and the Board, as necessary.
 

10.8

The value of the eligible collateral must be based on the net realizable value, market conditions and haircuts reflective of all material uncertainties, including but not limited to liquidation uncertainty, legal uncertainty, valuation uncertainty, costs associated with the liquidation of collateral and time value of money. At a minimum, LFIs must employ the haircuts in the table below for Stage 3 accounts. All items labelled as N/A in the table must be evaluated, documented and concluded upon on a case-by-case basis. This evaluation must rely on the principles above and specific provisions must be computed accordingly. The column labelled ‘up to 24 months’ also applies to Stage 1 and 2 as per Article 9.20.
 

10.9

For Stage 3 classifications made prior to the issuance of these standards, the months should be counted from the date of issuance of these standards and not the original date of Stage 3 classification. In addition, collateral haircuts already applied by the LFI must be retained if they are higher than those specified in the table below. In other words, the LFI may not reduce the haircuts it has already applied prior to issuance of these standards. If the haircuts are lower than those specified below, they must be adjusted to meet these values.
 

Table 4: Minimum collateral haircuts
 

* For Stage 1 and 2, LFIs are expected to have a framework to compute adequate haircuts based on the Risk Profile of their portfolios. The haircuts in the column labelled ‘up to 24 months’ must be applied as minimum floor.
 

** In some circumstances, the haircut can be capped at the values corresponding to ‘from 49 to 60 months’, as per the table above, if the LFI has (i) a formal legal claim with respect to the liquidation of the specific collateral registered with the court, and (ii) an internal legal opinion confirming that the outcome of the legal process is likely to be in the favour of the LFI (i.e. greater chance of recovery than not).
 

10.10

For Islamic LFIs, the collateral must be compliant with Shari’ah rules and principles.
 

10.11

For some collateral types, the valuation method is subject to the following conditions:
 

10.12

Any collateral held in foreign jurisdictions and booked in UAE is also subject to all the above requirements. In addition, to be eligible the following is required:
 

11.1

LFIs must ensure that Credit Risk acquired through underwriting, refinancing and other mechanisms is fully monitored, reported and mitigated when necessary. For that purpose, LFIs must develop and implement comprehensive procedures, methodologies and systems to monitor the credit worthiness of each financial instrument, each Obligor, and relevant segments and portfolios. Such monitoring must cover all financial instruments and portfolios generating Credit Risk.
 

11.2

Portfolio management must be integrated with the underwriting process so that information flows back and forth between the two processes. LFIs must demonstrate that the conclusions of portfolio management are used in the processes of risk acquisition.
 

11.3

LFIs must review the performance of individual Wholesale Credit Facilities at least annually. The rating of all Credit Facilities and Obligors must be reviewed at least on a yearly cycle. More frequent reviews can be necessary depending on the individual circumstances of Obligors and on the economic environment.
 

11.4

The monitoring process must incorporate steps to ensure that funds are used in accordance with the Facility legal agreement of each Obligor. The LFI must track the usage of the borrowed funds/financing proceeds and methodically identify their sources of Repayment. In the case of syndicated Facilities, it is the responsibility of each syndicate Lender/financier to understand the usage of funds via a monitoring process coordinated by the lead arranger.
 

11.5

One of the key objectives of the monitoring process is to identify occurrences of fund diversion; that is situations where the disbursed funds are not used for the purpose originally intended. The monitoring process must incorporate steps to ensure that funds are used in accordance with the Facility legal agreement of each Obligor.
 

11.6

Aggregation: The monitoring process must be performed at several levels of portfolio aggregation, so that segmentation leads to homogeneous pools of Credit Facilities with common risk drivers. LFIs incorporated in the UAE, which have branches and/or Subsidiaries, must capture and consolidate a group-wide view of Credit Risk. LFIs must implement robust systems and methods to aggregate Credit Facilities across the key risk drivers relevant to each LFI’s portfolio, including but not limited to, Obligor segments, rating grades, product types, collateral type, geographies, industries, Credit Facility maturity and Obligor metrics (e.g. LTV, DSCR, gearing, leverage).
 

11.7

Data gathering: LFI must implement reliable and timely data processes to support appropriately portfolio management. At a minimum, LFIs must implement the following:
 

11.8

Analytics: LFI must implement adequate methodologies, models and analytical tools to identify and measure Credit Risk regularly at several levels of aggregation and segmentation. This assessment must rely on Obligors’ probability of Default, loss given Default, the size of their Credit Facility upon Default and the estimation of collateral values.
 

11.9

Reporting: A robust reporting mechanism must be put in place to analyse the characteristics of credit portfolios and to communicate the observations and conclusion of credit reviews and analysis. Management information must be provided on a frequent and timely basis to the Board and Senior Management, in formats suitable for their use and understanding. As part of this the Board must be informed on: the Credit Risk Profile’s trend compared to the previous reporting period; and the change in underwriting standards, either through policy changes or actual practice, over time.
 

11.10

Risk mitigation: Upon the review of the performance of individual credit instruments and portfolios, LFIs must have a robust process to discuss observations, escalate concerns and implement risk mitigating actions and corrective actions, such as an additional collateral request, a rating downgrade, Credit Facility restructuring, liquidation, sell-off, hedging, portfolio rebalancing, or any other action. Such process must be rigorously documented.
 

11.11

Monitoring: LFIs must ensure the monitoring of the performance of each Credit Facility and Obligor upon restructuring. This process must be based on pre-defined indicators and limits specific to each Restructured Credit Facility. All distressed Restructured Credit Facilities must be subject to close monitoring as long as they remain distressed but not less than a minimum period of 12 months, supported by regular analysis and reporting. For Retail Obligors, LFIs can implement such enhanced monitoring of restructured Facilities at portfolio levels.
 

 

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:
 

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:
 

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:
 

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:
 

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
 

13.1

LFIs must have methodologies and analytical solutions to measure, analyse and categorise Credit Risk, and compute the associated provisions. LFIs must be able to analyse Credit Risk at several granularity levels including Credit Facility level, Obligor level, segment level and portfolio level in order to identify credit concentration risk.
 

13.2

Each LFI must operate analytical tools with sophistication appropriate to the complexity of its portfolio, products, industries and other predominant factors. If an LFI does not use models for a given portfolio, then it must document and provide a rationale for such a decision.
 

13.3

Where models are used for decision-making, LFIs must articulate clearly the roles of models for the support of Credit Risk underwriting, monitoring and provisioning. They must define the modelling strategies, the limits and conditions of model usage. Particular attention must be given to any overriding of model outputs. Such practice must be justified, fully documented and reported. High frequency of overrides of model outputs should be remedied by model recalibration or development.
 

13.4

LFIs must establish an appropriate asset grading or classification system for the measurement of Credit Risk. All acquired and existing Credit Facilities must be assigned a rating grade based on robust justification and supported by historical analysis and analytical tools.
 

13.5

When an LFI makes use of models for decision-making for credit purposes, it must also comply with the modelling standards and Guidance issued by CBUAE. In addition, LFIs must ensure the establishment of effective controls (including in respect of the quality, reliability and relevance of data and in respect of validation procedures) around the use of models to identify and measure Credit Risk and set limits. Each LFI must demonstrate that its models are fit for purpose and adequately calibrated to effectively support the associated risk and business decisions.