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.

Interest in Suspense

IAS 39 Transitional Adjustments for Provisions

CM-4.3.1

The CBB 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 CBB 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 CBB 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 overseas conventional bank licensees must be maintained in the books of the Bahrain branch(es).

CM-4.3.3

If the bank is not able to meet the requirement in Paragraph CM-4.3.2, the bank's head office must advise the CBB, 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 CBB may contact the bank's home supervisor, on a regular or ad hoc basis, in order to obtain information about the adequacy of the provisioning for such assets.

CM-4.4.1

The CBB 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 CBB 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 CBB 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-4.5.1

The CBB requires all conventional bank licensees to set out their policy on country and transfer risks, including the criteria on downgrading a country exposure from stage 1 to stages 2 or 3, and related provisioning requirements, in a policy statement which must be approved by the CBB.

CM-4.5.2

For the purpose of Paragraph CM-4.5.1, conventional bank licensees, may consider the sovereign risk matrix factors, stipulated in Appendix CM-1 (Sovereign Debt Provision Matrix), and any other factors.

CM-4.5.3

Branches of foreign bank licensees must satisfy the CBB that equivalent arrangements are in place at the parent entity level, otherwise a policy would be required in line with Paragraph CM-4.5.1.

CM-4.5.4

The policy statement set in Paragraph CM-4.5.1 must be implemented with effect from 1st January 2018.