CM-1.2.4

The Board of Directors of the conventional bank licensee is responsible for ensuring that the licensee has an effective CRMU and for approving and regularly reviewing, at least every two years, its credit risk policies, credit risk appetite and limits framework. Amendments made to such documents must also be approved by the Board. The Board may delegate some of its functions, such as approval of policies, amendments to policies and periodic reviews to a designated Board committee.

CM-1.2.5

Effective credit risk management is imperative to optimise the licensee’s risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. A risk appetite statement is a written articulation of the aggregated level and types of risk exposures that the licensee will accept, or avoid, in order to achieve its business objectives.

CM-1.2.6

The Board must ensure that the credit risk policies cover all activities of the conventional bank licensee in which it incurs credit risk. The Board must also determine that the licensee’s capital level is adequate for the risks assumed throughout the entire organisation or group.

CM-1.2.7

The credit risk policy must document the licensee’s willingness to grant credit based on exposure type (commercial, consumer, real estate etc.), economic sector, geographical location, product, currency, maturity and anticipated profitability. This might also include the identification of target markets and the overall characteristics that the conventional bank licensee would want to achieve in its credit portfolio (including levels of diversification and concentration tolerances).

CM-1.2.8

The Board must ensure that the credit risk appetite framework delineates the delegated powers, lines of responsibility and accountability over credit risk management decisions, and must clearly define authorised instruments, hedging strategies and risk-taking opportunities.

CM-1.2.9

The Board must assess whether the conventional bank licensee is operating within the boundaries of the credit risk appetite and limits framework approved by the Board.

CM-1.2.10

The Board must ensure that it receives adequate management information reports and exception reports to meet its oversight requirements to monitor adherence to the licensee’s risk tolerance/appetite/limits. The Board must regularly evaluate whether it is receiving the right balance of detail and quantitative versus qualitative information.

CM-1.2.11

The Board must approve the structure in which the conventional bank licensee will organise its credit-granting functions, including independent review of the credit granting process and the overall portfolio.

CM-1.2.12

For branches of foreign bank licensees where no Board/Audit Committee exists, all references to the Board/Audit Committee should be interpreted as the Group Chief Risk Officer or equivalent person who has direct access or reports to the Board or Audit Committee of the parent bank, unless alternative structures that satisfy the primary objectives of such oversight are in place.

CM-1.2.13

Senior management of the conventional bank licensee is responsible for developing, implementing and approving sound credit risk procedures in accordance with credit risk policies approved by the Board.

CM-1.2.14

Senior management must determine that the staff involved in any credit relationship, whether established or new, basic or complex, have the necessary knowledge, skill sets, experience and are fully capable of ensuring the relationship meets the highest standards and in compliance with the licensee’s policies and procedures.

CM-1.2.15

Senior management must ensure that risk monitoring systems are in place for effectively undertaking the activities of credit risk management.

CM-1.2.16

A properly documented credit risk policy is an essential element of, and a prerequisite for, the credit risk management process. Consistent with the Board's objectives, it assists licensee’s management in the maintenance of proper credit standards and the avoidance of unnecessary risks. Additionally, periodic internal assessment should be undertaken by the internal audit. In the case of branches of foreign banks, the credit policy, limits and the procedures are normally those that are approved by the Head Office/Regional Office.

CM-1.2.17

Senior management, based on the approved credit risk policy, must develop credit risk procedures for identifying, measuring, monitoring and controlling credit risk. The procedures must address credit risk in all of the conventional bank licensee’s activities, and at both the individual credit and portfolio levels.

CM-1.2.18

Explicit guidelines in the credit risk policy provide the basis for effective credit risk management. A sound credit risk policy should consider which types of credit products and borrowers the licensee is looking for, and the underwriting standards the licensee will utilize.

CM-1.2.19

Conventional bank licensee’s credit risk framework must address all credit and credit risk related activities throughout the credit lifecycle covering matters of significance including, but not limited to:

CM-1.2.20

Conventional bank licensees must operate within sound, well-defined credit-granting criteria. These criteria must include a clear indication of the licensee’s target market and a thorough understanding of the borrower or counterparty, as well as the purpose and structure of the credit and its source of repayment. In addition, the criteria must set out who is eligible for credit and for how much, what types of credit are available, and under what terms and conditions the credit may be granted.

CM-1.2.21

In the case of branches of foreign bank licensees, the credit policies, credit limits and the procedures are those that are approved by the Head Office/Regional office.

CM-1.2.22

An effective internal control system for credit risk assessment and measurement is essential to enable senior management to carry out its duties. An effective internal control system must include:

CM-1.2.23

Conventional bank licensees must ensure that the credit risk policy establishes the objectives that guide the licensee’s credit-granting activities.

CM-1.2.24

The credit risk policy must give recognition to the goals of credit quality, earnings quality and sustainability and growth. Conventional bank licensees, regardless of their size, must determine the acceptable risk/reward trade-off for their activities, factoring in the cost of capital.

CM-1.2.25

The credit risk appetite/limits framework of conventional bank licensees must take into consideration the cyclical aspects of the economy and the resulting shifts in the composition and quality of the overall credit portfolio. The credit granting criteria must be periodically assessed and amended and it must be viable in the long-run and through various economic cycles. The credit risk procedures must be reviewed at least once every three years or more frequently as may be necessary if there are changes in internal or regulatory requirements.

CM-1.2.26

The credit granting criteria must be designed and implemented within the context of internal and external factors, such as the licensee’s market position, trade area, staff capabilities and technology.

CM-1.2.27

Conventional bank licensees must have a clearly defined credit risk appetite statement which is implemented through comprehensive policies and procedures for limiting and controlling credit risk. Conventional bank licensees must also establish credit limits in a meaningful manner for different types of exposures, both on and off-balance sheet.

CM-1.2.28

Bahraini conventional bank licensees must consider the results of stress testing in the overall limit setting and monitoring process. Such stress testing must take into consideration economic cycles, interest rates and other market movements and liquidity conditions.

CM-1.2.29

Conventional bank licensees must set out their policy on country and transfer risks within their Board approved credit risk policy. Such policy must include:

CM-1.2.30

Country risk is the exposure to a loss in cross-border lending, caused by events in the country to which the licensee has exposure and includes all forms of lending whether to the government, a bank, a private enterprise or an individual. Country risk is therefore a broader concept than sovereign risk, which is restricted to the risk of lending to the government of a sovereign nation. Transfer risk, on the other hand, represents the risk of loss due to repatriation or remittance restrictions imposed by a foreign government that make it impossible to remit, fully or partially, the proceeds of debt owed to the licensee.

CM-1.2.31

In the case of exposure to borrowers, conventional bank licensees must examine any associated country and transfer risks keeping in view factors such as domicile of the counterparty, the legal structure of the counterparty, the existence of special purpose vehicles, conduits and/ or other related factors that may affect the transferability of proceeds of repayment.

CM-1.2.32

Branches of foreign bank licensees must satisfy the CBB that equivalent arrangements are in place at the parent entity level, otherwise a policy is required in line with Paragraph CM-1.2.28.

CM-1.2.33

Branches of foreign bank licensees are normally subject to country limits that are set at a global level by the head office or by the regional office. The branch should be able to demonstrate that it is subject to limits imposed on it by the head office or regional office as appropriate.

CM-1.3.13

Conventional bank licensees which provide credit facilities to natural and legal persons in Bahrain must become members of the Bahrain Credit Reference Bureau (‘BCRB’). All enquiries for new or additional credit facilities in Bahrain must be submitted to the BCRB. BCRB members must meet the following requirements and incorporate them into their policies and procedures:

CM-1.3.14

Failure to comply with Article 68 (bis (2)) of the CBB Law and Paragraph CM-1.3.13 may result in an enforcement action taken against the BCRB member, as well as the relevant employee in accordance with CBB Law. Additionally, all BCRB members must abide by the agreed Code of Practice of the BCRB (see Appendix CM-3). Any breaches to the code will be subject to enforcement action by the CBB.

CM-1.3.15

Conventional bank licensees must avoid providing finance to counterparties without collateral or without adequate credit risk analysis performed on the basis of reliable audited financial statements to properly analyse the obligor’s ability to repay.

CM-1.3.16

Some licensees indulge in ‘name-lending’ which refers to the practice of lending to businesses and individuals merely on the basis of their ‘name’ or ‘reputation’ in the market. In such instances, the licensee, typically, does not receive audited financial statements and other relevant information to conduct a proper credit risk analysis, nor does it receive collateral to support the credit granting decision. The CBB prohibits licensees from engaging in such activities in order to minimise their credit risk and reputational risk.

CM-1.4.6

Conventional bank licensees must have in place a Board approved policy to develop, review and implement an internal risk rating system. Such a system must be able to assign a credit risk rating or scoring to obligors that accurately reflects the obligors’ risk profile and likelihood of loss.

CM-1.4.7

Conventional bank licensees must assign risk ratings or scoring in a consistent manner to enable the licensee to classify obligors by risk ratings or scoring and have a clearer understanding of the overall risk profile of its portfolio. The licensee’s credit risk policy must define the various risk grades of its rating system. Criteria for assigning risk grades and the circumstances under which deviations from the criteria are permitted must be set. The credit risk policy must also define the roles of different parties involved in the rating process.

CM-1.4.8

The credit risk rating/scoring process must appropriately group credit exposures on the basis of shared credit risk characteristics.

CM-1.4.9

Conventional bank licensees’ credit exposures must be grouped according to shared credit risk characteristics, so that changes in the level of credit risk respond to the impact of changing conditions on a common range of credit risk drivers. This includes considering the effect on the group’s credit risk in response to changes in forward-looking information, including macroeconomic factors. The licensee must review the appropriateness of the grouping implemented upon initial recognition based on similar credit risk characteristics, at regular intervals, at least annually, to ensure that the relevant characteristics and their impact on the level of credit risk of the different groupings have not changed over time.

CM-1.4.10

Conventional bank licensees must validate their risk rating or scoring system and ascertain its applicability to their portfolio prior to implementation. An external independent party, other than the external auditor, with necessary expertise in model validation, must conduct the validation of the risk rating/scoring and ECL models every three years and upon development of the model, and also when there are material changes to the portfolio, rating/scoring model or model parameters (See also Paragraph CM-1.2.22 (c)).

CM-1.4.11

Conventional bank licensees that use a judgmental rating or scoring system must ensure that each rating is unique, well-defined and distinct from other ratings in the rating scale. The relevant risk factors and weights employed in the rating/scoring methodology must be appropriate for the risk profile of the obligors in different market segments, such as corporations, small and medium-sized enterprises (‘SMEs’), and financial institutions.

CM-1.4.12

Risk ratings must be assigned at the inception of lending and updated at least on an annual basis. Additionally, conventional bank licensee must review the ratings or scoring as and when adverse events occur. Risk ratings or risk scores assigned to various obligors must be reviewed by the licensee’s personnel that are independent of those involved in loan origination. As part of its portfolio monitoring, the licensee must generate reports on credit exposures by risk rating/scores. Trend and migration analysis between risk ratings /scores must also be conducted to detect changes in the credit quality of the portfolio.

CM-1.4.13

The licensee may establish target limits for risk grades to highlight concentration in particular rating bands. The analysis of the portfolio by risk ratings is meaningful only when the licensee’s rating or scoring system is able to consistently assign similar ratings or scores to obligors with similar risk profiles.

CM-1.4.14

After the credit facility has been granted, its performance must be monitored at regular intervals. This includes an appropriate periodic review of financial statements, a reassessment of collateral and update of appraisals, and attentive monitoring of conditions in the borrower's industry. Credit supervision constitutes the first line of detection of difficulties and provides the licensee with an opportunity to address problems before losses are sustained. The loan review must ensure that the credit files are complete and that all loan approvals and other necessary documents relating to the obligor are available.

CM-1.4.15

Conventional bank licensees must perform regular credit reviews. The purpose of a credit review is to verify that credits are granted in accordance with the licensee’s credit risk policy and to provide an independent judgment of asset quality. Conventional bank licensees must conduct credit reviews with updated information on the obligor’s financial and business conditions, as well as the conduct of the account. Exceptions noted must be evaluated for impact on the obligor’s creditworthiness.

CM-1.4.16

Credit reviews must also be conducted on a consolidated group basis to factor in the business connections among connected entities. The performance of the underlying assets in the case of securitisation exposures must also be included in the credit reviews.

CM-1.4.17

Credit reviews must be performed and documented at least once a year other than for facilities subject to collective assessments. For Stage 2 and 3 accounts (See Paragraph CM-1.8.23), however, more frequent reviews must be conducted. Procedures must also be instituted to ensure that reviews are conducted at the appropriate frequency. A process to approve deferment of credit reviews must also be put in place. For consumer loans, annual credit reviews of individual obligors are only needed if significant and a portfolio analysis does not identify credit risk related issues or problems. However, credit exceptions and deterioration must be monitored and reported.

CM-1.4.18

Stress testing must involve identifying possible events or future changes in economic and other conditions that could have unfavourable effects on the conventional bank licensee’s credit exposures and assessing its ability to withstand such changes. Three areas that the licensee could usefully examine are: (i) economic or industry downturns; (ii) market risk events; and (iii) liquidity conditions. Stress testing can range from relatively simple alterations in assumptions about one or more financial, structural or economic variables, to the use of highly sophisticated financial models.

CM-1.4.19

Stress tests are to be performed by adjusting the parameters and then recalculating credit losses, for example:

CM-1.4.20

In undertaking credit risk stress tests, licensees should consider counterparty-based and credit facility-based risk factors and scenarios that help estimate credit losses after modelling a change in probability of default (‘PD’) and/or loss given default (‘LGD’) or exposure at default (‘EAD’). Stress testing programmes should consider:

CM-1.4.21

The approaches towards modelling stress tests include the following elements considered individually and on a combined basis as appropriate and with varying severity:

CM-1.4.22

Additionally, the impact of macroeconomic risk factors such as fluctuations in interest rates and/or exchange rates etc. on the following illustrative general conditions may be considered:

CM-1.4.23

If the licensee uses risk models (such as credit portfolio models or credit pricing models), it is necessary to perform stress tests which show whether the assumptions underlying the risk models will also be fulfilled in crisis situations. Only then will the models be able to provide the appropriate guidance in crisis situations.

CM-1.4.24

Conventional bank licensees should also examine political risk factors when significant parts of the credit portfolio consist of borrowers from politically unstable countries. Due to the complex interrelationships involved, however, developing plausible stress tests for political risk factors involves far more effort than designing tests for macroeconomic risk factors. It is, therefore, advisable to call in specialists to develop stress tests for political risk factors in order to assess the relevant effects on financial and macroeconomic conditions.

CM-1.4.25

The output of the stress tests must be reviewed periodically by senior management and appropriate action taken in cases where the results exceed agreed tolerances. The output must also be incorporated into the process for assigning and updating policy and limits.

CM-1.4.26

Conventional bank licensees must attempt to identify the types of situations, such as economic downturns, both in the whole economy or in particular sectors, higher than expected levels of delinquencies and defaults, or the combinations of credit and market events that could produce substantial losses or liquidity problems.

CM-1.5.6

When the loan decision is primarily based on collateral value, independent and timely appraisals of the collateral by a third party valuation expert must be undertaken, and the licensee must ensure that the collateral value is sufficiently higher than the exposure amount.

CM-1.5.7

The requirement in Paragraph CM-1.5.6 shall not apply to publicly traded instruments that are provided as collateral for which daily fair value is available from independent sources.

CM-1.5.8

Conventional bank licensees can utilise the transaction structure, collateral and guarantees to help mitigate risks (both identified and inherent) in individual credits, but transactions must be entered into primarily on the strength of the borrower’s repayment capacity. Collateral cannot be a substitute for a comprehensive assessment of the borrower or counterparty, nor can it compensate for insufficient information. It must be recognised that any credit enforcement action (e.g. foreclosure proceedings) can eliminate the profit margin on the transaction. In addition, conventional bank licensees need to be mindful that the value of collateral may well be impaired by the factors that have led to the diminished recoverability of the credit. Conventional bank licensees must have a policy covering the acceptability of various forms of collateral, procedures for the ongoing valuation of such collateral, and a process to ensure that the collateral is, and continues to be, enforceable and realisable. With regard to guarantees, conventional bank licensees must evaluate the level of coverage being provided in relation to the credit-quality and legal capacity of the guarantor. Licensees must be careful when making assumptions about implied support from third parties, such as the government.

CM-1.5.9

The value of the collateral must be updated periodically. In adverse market conditions and in the case of collateral that support Stage 2 and 3 credit exposures, the valuations must be conducted at least annually. If the exposure is backed by inventory or goods located in the obligor’s premises, additional measures must be in place to physically inspect and verify the existence and valuation of the collateral.

CM-1.5.10

Since expected credit loss (ECL) provisions are dependent on the recoverable value of collateral held, conventional bank licensees must obtain appropriate valuations of the collateral. The licensee must have a reliable and timely collateral valuation system which must include factors such as the legal enforceability of claims on collateral, ease of realisation of collateral, effects of currency and maturity mismatches, and be based on current market conditions.

CM-1.6.7

Capital levels and their projected trends are important inputs towards determining the scope of NPL reduction actions available to licensees. Conventional bank licensees should dynamically model the capital implications of the different elements of their policy on NPLs, ideally under different economic scenarios. Those implications should also be considered in conjunction with the risk appetite framework as well as the internal capital adequacy assessment process (‘ICAAP’).

CM-1.6.8

Where capital buffers are slim and profitability low, conventional bank licensees must include suitable actions in their capital planning, ICAAP and recovery plans which will enable effective management and sustainable clean-up of NPLs.

CM-1.6.9

Conventional bank licensees should also identify medium and long-term options for NPL reductions.

CM-1.6.10

A strong level of monitoring and oversight by risk management function in respect of the formulation and implementation of the NPL strategy (including the NPL operational plan) must also be ensured.

CM-1.6.11

Conventional bank licensees must write-off loans which are deemed to be uncollectable in a timely manner.

CM-1.8.3

Conventional bank licensees’ Board of Directors (or equivalent) and senior management are responsible for ensuring that the licensee has appropriate credit risk practices, including an effective system of internal control, to consistently determine adequate ECL in accordance with the licensee’s stated policies and procedures, the applicable accounting framework and relevant supervisory guidance.

CM-1.8.4

Conventional bank licensees must adopt, document and adhere to sound policies, procedures and controls for assessing and measuring ECL on all lending exposures. The measurement of allowances must build upon those robust methodologies and result in the appropriate and timely recognition of ECL in accordance with the applicable accounting framework.

CM-1.8.5

Conventional bank licensees must have in place a detailed and clear policy statement pertaining to ECL recognition. The policy statement must be approved by the Board of Directors, including at the time of any periodic changes. The policy statement must be comprehensive and must include, but not be limited to, the following components:

CM-1.8.6

Default for the purpose of this Module and impairment in the context of credit risk exposure of an obligor as per IFRS 9 is considered to have occurred with regard to a particular obligor when either or both of the following events have taken place:

CM-1.8.7

The elements to be taken as indications of unlikeliness to pay must include, but not be limited to, the following:

CM-1.8.8

For the purpose of CM-1.8.7, distressed restructuring refers to situations when a licensee grants a concession that it would not otherwise consider, irrespective of whether the concession is at the discretion of the licensee or otherwise. Forgiveness means reduction in repayment amount or interest. Postponement could include grace periods or changes in instalments leading to delayed maturity.

CM-1.8.9

Non-performing exposures must always be categorised for the whole exposure, including when non-performance relates to only a part of the exposure, for instance, unpaid interest. For off-balance sheet exposures, such as loan commitments or financial guarantees, the whole exposure is the entire uncancellable nominal amount. All non-performing exposures will be classified as Stage 3 for the purpose of ECL calculations.

CM-1.8.10

The following exposures are considered as non-performing:

CM-1.8.11

The existence of collateral or guarantees must have no direct influence on the categorisation of an exposure as non-performing or its past due status, including the counting of past-due days and the determination of the exposure as non-performing, once the overdue days threshold has been met. However, conventional bank licensees may consider the collateral when assessing a borrower’s economic incentive (both positive and negative) to repay under the unlikeliness to repay criteria. Any recourse by the licensee must not be considered in this judgment. When the relevant criteria are met, the exposure must be categorised as non-performing even if the collateral value exceeds the amount of the past-due exposure.

CM-1.8.12

The classification of an exposure as non-performing must be applied as follows:

CM-1.8.13

For the purpose of CM-1.8.12 (a), where a single facility which represents 25% or more of the aggregate exposure to the obligor is non-performing a cross default is deemed to have occurred and, accordingly, all exposures to that obligor will be considered non-performing.

CM-1.8.14

With reference to Sub-Paragraph CM-1.8.12 (b), however, a default by a borrower on one retail obligation may not require the licensee to treat all other obligations to the licensee as defaulted and non-performing. In these cases, conventional bank licensees must carefully consider the categorisation and staging status of other exposures to the same counterparty (i.e. cross-product default). For example, if a customer has a retail personal loan and an auto loan with the licensee, a default on the personal loan must be considered when assessing the stage classification of the auto loan.

CM-1.8.15

A Stage 3 exposure can be moved to Stage 2 or Stage 1 when all the following criteria are met simultaneously:

CM-1.8.15A

Stage 2 exposures can be moved to Stage 1 after the cooling-off period, specified in Appendix CM-6, has passed and the counterparty’s financial situation indicates it to be equivalent to that of a ‘very low credit risk’ exposure.

CM-1.8.16

Conventional bank licensee must clearly articulate and document policies in respect of the counting of days past due, in particular in respect of the re-ageing of the facilities and the granting of extensions, deferrals, renewals and rewrites to existing accounts. At a minimum, the re-ageing policy must include:

CM-1.8.17

For the purpose of CM-1.8.16, re-aging occurs when the licensee changes the tenor or due dates of the credit when rescheduling or restructuring a facility.

CM-1.8.18

Non-performing exposures in the following situations must not be re-categorised as performing without meeting the conditions set forth in CM-1.8.15:

The re-categorisation of a non-performing exposure as performing must be made on the same level (i.e. obligor or transaction approach) as when the exposure was originally categorised as non-performing.

CM-1.8.18A

Non-performing POCI exposures may be re-categorised as performing subject to meeting the conditions stipulated in Paragraphs CM-1.8.15 to CM-1.8.18.

CM-1.8.19

Conventional bank licensees must have the necessary tools to ensure a robust estimate and timely recognition of ECL. Information on historical loss experience or the impact of current conditions may not fully reflect the credit risk in lending exposures. In this context, the licensee must use its experienced credit judgment to thoroughly incorporate the expected impact of all reasonable and supportable forward-looking information, including macroeconomic factors, on its estimate of ECL. The licensee’s use of its experienced credit judgment must be documented in the licensee’s credit risk methodology and subject to appropriate oversight.

CM-1.8.20

Applying the concepts of ECL could vary for each licensee depending on its underwriting criteria, loss history, terms of collateral and a number of other variables, both entity-specific and external. Reasonable and supportable information will not present itself, but would rather require management to determine what is relevant and practical, without undue costs or efforts, to actively gather, analyse and process to make required credit risk assessments to support the ECL process. Licensees will need to adopt an appropriate risk assessment methodology which is commensurate with the size, complexity, structure, economic significance and risk profile of their portfolio. This means that, in general, the larger and more complex a portfolio or institution, the more its risk infrastructure should capture relevant and reliable information and trends that would support the development of a sophisticated approach to determine a risk based ECL. Conversely, for smaller and simpler portfolios or institutions, a less sophisticated approach may be adopted to align with the risk management infrastructure and processes within the licensee.

CM-1.8.21

Regardless of the size of the licensee or prominence of the portfolio, the approach adopted by the licensee should comply with the specific requirements of this section and applicable accounting standards. It is not necessary that every licensee or every portfolio within the bank would apply the same level of sophistication. However, licensees will need to periodically assess whether their approach continues to be appropriate and relevant in light of changing circumstances with the aim of improving its level of estimation over time.

CM-1.8.22

The credit impairment assessment under IFRS 9 is based on an expected loss approach, i.e. it is not necessary for a loss event to occur before an ECL is recognised. As a result, all financial assets are generally expected to attract an ECL. For the purpose of Section CM 1.8, any direct credit exposures to the government of Bahrain (or exposures explicitly guaranteed by the government of Bahrain) are exempted from the application of the expected credit loss model.

CM-1.8.22A

For the purpose of Section CM-1.8, the portion of the exposure that is explicitly guaranteed by Tamkeen is exempted from the application of the expected credit loss model.

CM-1.8.23

IFRS 9 requires a three-stage approach to recognise and measure ECL at each reporting date, which is based on changes observed in credit quality of financial assets since origination. The standards prescribe two measures of ECL to be carried by licensees:

CM-1.8.24

The below staging classification must represent migration in credit quality and dictates the level of ECL to be recognised. The following must be followed:

CM-1.8.25

The staging classification should normally apply to the entire balance of an outstanding facility because if a problem exists with one credit, it normally applies to the whole facility and not just the payment or individual credit which may be overdue. This is a conservative approach, which will alert bank management and the Board to the full extent of a potential problem.

CM-1.8.26

With reference to CM-1.8.24, the ECL provisions assessed on a collective basis (‘CP’) relating to Stage 1 and Stage 2 exposures are used for the purposes of regulatory adjustments under Paragraph CA-2.1.8.

CM-1.8.27

Conventional bank licensees must report restructured accounts to the CBB on a quarterly basis until the satisfactory performance of the account, under revised terms, and the counterparty has resolved its financial difficulty. All NPL accounts restructured must be classified as non-performing and must be subject to the requirements of the Paragraph CM-1.8.15 to CM-1.8.18. A Stage 3 or Stage 2 exposure that is restructured must be re-categorised in accordance with Appendix CM-6.

CM-1.8.28

Forbearance, including synonyms such as ‘restructuring’ occurs when (a) a counterparty is experiencing financial difficulty in meeting its financial commitments; and (b) the licensee grants a concession that it would not otherwise consider, irrespective of whether the concession is at the discretion of the licensee and/or the counterparty. A concession is at the discretion of the counterparty (debtor) when the initial contract allows the counterparty (debtor) to change the terms of the contract in its own favour (embedded forbearance clauses) due to financial difficulty. When such concessions are granted, the facility is ‘restructured’.

CM-1.8.29

The following list provides examples of possible indicators of financial difficulty. In particular, financial difficulty can be identified even in the absence of arrears on an exposure:

CM-1.8.30

Concessions are special contractual terms and conditions that a lender would not extend or consider under normal market conditions.

CM-1.8.31

Licensees should distinguish between restructured loans and rescheduled loans where no concessions have been granted to a performing customer in response to changes in market conditions provided that at the time of rescheduling the loans have been serviced normally, the ability of the borrower to service is not in doubt and where there is reasonable assurance that the borrower will be able to service all future principal and interest payments on the loans in accordance with the revised repayment terms.

CM-1.8.32

Conventional bank licensees must disclose in their public disclosures their policies and definitions that are integral to the estimation of ECL. Quantitative and qualitative disclosures, taken together, must communicate to users the main assumptions/inputs used to develop ECL estimates.