Back Custom print Link Text Only Rich Text Print

  • CM-4 CM-4 Provisioning

    • CM-4.1 CM-4.1 Overview

      • CM-4.1.1

        Credit rating (see section CM-2.2) provides a basis for determining an adequate level of provisions for possible loan losses. The loss potential within specific credits will have to be determined on a case by case basis after all credit and collateral factors have been evaluated. Such potential losses, together with a general provision for the remainder of the portfolio where specific risks have not been identified, form the basis for establishing an adequate level of provisions.

      • CM-4.1.2

        For the purpose of this chapter, 'Non-performing loans' are those on which payments of interest or repayments of principal are 90 days or more past due.

    • CM-4.2 CM-4.2 Implications of IAS 39

      • Interest in suspense

        • CM-4.2.1

          Banks should suspend interest on loans and advances which are 90 days or more past due.

      • IAS 39 transitional adjustments for provisions

        • CM-4.2.2

          All IAS 39 transitional provisions must be routed through the retained earnings account with the exception of provisions.

        • CM-4.2.3

          Under the IAS 39, as of 31 December 2000, the banks will have two options for the treatment of general provisions after considering the pooled general and specific provisions and interest in suspense balances in comparison to the estimated provisions resulting from the discounting of future cash flows. These options are:

          (a) Any excess general provisions balance brought forward over and above the newly estimated figure may be transferred directly to general reserves, or
          (b) Where provisions (or impairment allowances) relate to a portfolio of homogeneous loans (e.g. consumer loans) then such excess provisions may continue to be treated as a general provision for capital adequacy purposes (see Module CA).

    • CM-4.3 CM-4.3 Provisioning policies of branches of Foreign Banks in Bahrain

      • CM-4.3.1

        The Agency has, for some time, been monitoring the practices adopted by branches of foreign banks in Bahrain with regard to the making and maintaining of provisions against bad and doubtful debts in their books in Bahrain. The Agency is aware that it is the policy of some foreign banks in Bahrain to maintain provisions at their head offices, and not in their books in Bahrain. In the interests of prudence, the Agency has reviewed this matter and issues this Regulation to reflect its requirements in this area.

      • CM-4.3.2

        Specific provisions for the bad and doubtful debts (as well as any other non-performing assets) of branch(es) of foreign banks in Bahrain are expected to be maintained in the books of Bahrain branch(es).

      • CM-4.3.3

        If the bank is not able to meet this requirement in paragraph CM-4.3.2 above, then the bank's head office should advise the Agency, on an annual basis and in writing, of the amount of provisions set aside for the Bahrain branch(es)'s bad debts (and any other non-performing assets).

      • CM-4.3.4

        In addition, the Agency may contact the bank's parent supervisor, on a regular or ad hoc basis, in order to obtain information about the adequacy of the provisioning for such assets.

    • CM-4.4 CM-4.4 Provisions against sovereign debt

      • CM-4.4.1

        The Agency has consistently encouraged banks to maintain adequate provisions against loans to borrowers experiencing difficulties and against loans for countries with current or potential debt servicing difficulties.

      • CM-4.4.2

        In all cases the assessment of loans — and decisions regarding adequate provisions — are assisted by the categorization of loans as defined by the Agency in section CM-2.2. In addition, with regard to "sovereign debt" it is particularly important that the size of the provisions made should be based on the identification and objective assessment of the nature and extent of difficulties being experienced by particular countries and reflect as near as possible deterioration in the prospects for recovering debts. With these objectives in mind, the Sovereign Debt Provisioning Matrix (see Appendix CM 1) contains a list of measurements which have been designed to help identify those borrowers and countries with payment difficulties and to decide what would constitute adequate provisions.

      • CM-4.4.3

        It is emphasized that this section and the Sovereign Debt Provisioning Matrix (see Appendix CM 1) are merely a general framework for assessing degrees of provisions. They should not be regarded as an exhaustive or definitive framework. Nevertheless, the Agency does intend to include the results of banks' calculations in its discussions with them, and to establish that adequate provisions are being made.

      • Implications of International Accounting Standard (IAS) no. 39 on the provisions assessed through Sovereign Debt Provisioning Matrix

        • CM-4.4.4

          The banks should continue to apply the Sovereign Debt Provisioning Matrix (see Appendix CM 1) as a benchmark for estimating future recoverable cash receipts. However, if a lower provisioning amount is determined, i.e. lower than the amount identified through the matrix, and the bank intends to book the lower amount, then a meeting must be arranged with the Agency to discuss the issues before booking such provisions.