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.