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  • RM-2 RM-2 Credit Risk

    • RM-2.1 RM-2.1 General Requirements

      • RM-2.1.1

        Credit risk is the likelihood that a counterparty of the licensee will not meet its obligations in accordance with the agreed terms. The magnitude of the specific credit risk depends on the likelihood of default by the counterparty, and on the potential value of the licensees' contracts with the customer at the time of default. Credit risk largely arises in assets shown on the balance sheet, but it can also show up off the balance sheet in a variety of contingent obligations.

        July 2014

      • RM-2.1.2

        Exposure to credit risk, notably in the form of traditional and Shari'a compliant financing has historically been the most frequent source of risk.

        July 2014

      • RM-2.1.3

        The lack of continuous credit facility supervision and effective internal controls, and/or the failure to identify the application of effective controls and fraud are also sources of risk.

        July 2014

    • RM-2.2 RM-2.2 Credit Analysis

      • RM-2.2.1

        All licensees which provide credit facilities to resident natural or legal persons in Bahrain must become members of the Credit Reference Bureau (CRB). All requests by residents of Bahrain for new credit facilities must be submitted to the CRB.

        July 2014

      • RM-2.2.2

        All CRB members must implement the requirements of Module BC (Business Conduct), in matters such as the protection of confidential customer data (see Section BC-1.7) and payment of enquiry fees.

        July 2014

    • RM-2.3 RM-2.3 Credit Policy

      • RM-2.3.1

        Licensees must have a properly documented credit framework. The framework must include a board approved policy which is supported by appropriate procedures and practices designed to bring professional discipline to the credit granting activities and ensure that credit facilities are granted based on clear and relevant criteria.

        July 2014

      • RM-2.3.2

        It is prudent to review the credit policy regularly to ensure that once it is established, it remains flexible enough to be current and continues to accomplish its original purpose taking into consideration market developments.

        July 2014

      • RM-2.3.3

        A sound credit policy should consider which types of credit products and borrowers the licensee is prepared to accept and the underwriting standards the licensee will utilise.

        July 2014

      • RM-2.3.4

        A licensee's credit policy should address all credit matters of significance including:

        (a) Objectives of credit monitoring;
        (b) Organisation and reporting structure of the credit department;
        (c) The target economic sectors and products;
        (d) Establishment of a credit limit framework;
        (e) Guidelines for assessment of concentration;
        (f) Authorisation procedures for the advancement of credit;
        (g) Effective oversight and review of all credit facilities;
        (h) Establishment of desirable pricing levels and criteria; and
        (i) Problem credit identification, classification and administration.
        July 2014

    • RM-2.4 RM-2.4 Credit Grading System

      • RM-2.4.1

        Licensees must have in place appropriate credit grading systems (sometimes referred to as credit classification systems) to help assess credit quality.

        July 2014

      • RM-2.4.2

        Each licensee must have a credit grading system and provisioning requirements within its credit policy.

        July 2014

      • RM-2.4.3

        Credit facilities must be classified by licensees on an ongoing basis. The classification framework must, at a minimum, include the categories listed below, and licensees must apply provisions (sometimes referred to as "allowances") at or above the minimum levels specified in Paragraph RM-2.4.4. Licensees are free to classify a credit facility in a category which requires a higher level of provisioning if the licensee has information which gives doubt as to the collectability of the facility, even if the concerned credit facility is performing. These standards must also be applied in the case of the suspension of profit and the classification of other non-financing receivables (e.g. fees):

        (a) 'Standard facilities' are those, which are 'performing' as the contract requires. These facilities are not past due and there is no reason to suspect that the customer's financial condition or the adequacy of collateral has deteriorated in any way;
        (b) 'Watch-list facilities' are those which show some weaknesses in the customer's (or counterparty's) financial condition or creditworthiness, requiring more than normal attention but not necessarily requiring the allocation of specific provisions (or impairment allowances). 'Watch' could include 'performing' facilities which are not regular in repayment or are regular but there is minor deterioration in the financial position of the customer or counterparty or the underlying collateral. 'Watch' must include any facilities which are less than 90 days overdue and which are not (yet) included in 'sub-standard', 'doubtful' or 'loss' (i.e. the facility can be regarded as overdue but not yet 'impaired' according to IFRS);
        (c) 'Sub-standard facilities' are those where interest/profit or principal is 90 days or more overdue (see Paragraph RM-2.4.4 for minimum required provisioning levels). 'Sub-standard facilities' also include those where full repayment (collectability) is in doubt due to inadequate protection by the impaired paying capacity of the customer or by impairment of the collateral pledged. Sub-standard facilities are characterised by the distinct possibility of loss if observed weaknesses are not corrected and may therefore be viewed as 'impaired' or non-performing. Sub-standard may therefore include facilities that are not yet overdue, or are less than 90 days overdue;
        (d) 'Doubtful facilities' are those where interest/profit or principal is 180 days or more overdue (see Paragraph RM-2.4.4 for minimum required provisioning levels). 'Doubtful facilities' have all the weaknesses inherent in a facility classified as 'substandard' with the added characteristic that observed weaknesses make full collection (or liquidation), on the basis of currently existing facts and valuations highly questionable or improbable. The probability of loss is extremely high, but total loss may not necessarily occur because some mitigating factors may strengthen the asset quality; and
        (e) 'Loss facilities' are those where interest/profit or principal is 360 days or more overdue (see Paragraph RM 2.5.6 for minimum required provisioning levels). 'Loss facilities' are considered uncollectible or of such little value that their continuance at any material value is not warranted. The category 'loss' means that it is not considered practical or desirable to give a positive valuation to this facility, even though partial recovery may be effected in the future.
        July 2014

      • RM-2.4.4

        The following categories of credit facilities are defined as 'Non-performing'. Licensees must apply the minimum specific provision levels outlined below:

        Substandard : 10% of the outstanding amount
        Doubtful : 30% of the outstanding amount
        Loss : 100% of the outstanding amount.
        July 2014

      • RM-2.4.5

        The minimum provisioning levels set out above must be taken on the net amount of the outstanding facility after deducting the eligible collateral. If a licensee has collateral but is unprepared to exercise it after a facility becomes non-performing, then the collateral is not providing protection to the licensee and therefore provisions must be taken on the full amount of the outstanding balance until either the facility is repaid, the collateral (or guarantees) exercised or the facility rescheduled or restructured.

        July 2014

    • RM-2.5 RM-2.5 Treatment of Profit/Interest in Suspense and Provisioning

      • Non-accrual of Profit/Interest Income

        • RM-2.5.1

          Licensees are required to place on a non-accrual basis any facility where there is reasonable doubt about the collectability of the receivable irrespective of whether the facility is overdue or not. All accrued profit/interest, including related interest/profit earned but not collected and recognised as income in prior periods, for non-accrual assets identified in Paragraph RM-2.5.2 must be credited to an off-balance sheet special account in the licensee's records under the name 'profit/interest in suspense account' and not to the profit and loss account, i.e. it must not be recognised as income.

          July 2014

        • RM-2.5.2

          For the purpose of this Module, the following 'non-performing' categories of assets must be considered as non-accrual items:

          (a) Substandard;
          (b) Doubtful;
          (c) Loss; and
          (d) Any other credit facilities that are overdue for a period of less than 90 days but the licensee has doubts about their collectability.
          July 2014

      • Treatment of Restructured and Rescheduled Facilities and Facilities Which Cease to be Non-performing

        • RM-2.5.3

          Any facility where principal or profit/interest is 90 days or more overdue must be categorised as 'non-performing'. A facility becomes overdue from the first date that profit/interest or principal is not received.

          July 2014

        • RM-2.5.4

          For purposes of Paragraph RM-2.5.3, if an instalment is missed on 1st March 2010, but payment is made on 1st April 2010 (and the March instalment is still not paid), then the credit facility will become over 90 days overdue by 1st June 2010, even if the April and May instalments are paid on time and in full, and a provision must at least be taken in respect of the overdue amount (but not necessarily the full outstanding amount of the credit facility if other payments were made).

          July 2014

        • RM-2.5.5

          If a non-performing credit facility is formally rescheduled (by way of a written agreement), the rescheduled credit facility may be considered 'performing' again (as 'standard') after a period of one year from the date of rescheduling if all payments have been made on schedule and the concerned provisions and suspended profit/interest may be credited (back) to the profit & loss account.

          July 2014

        • RM-2.5.6

          If a facility ceases to be non-performing (due to full repayment of all arrears on profit/interest and principal) it may be categorised as performing after a period of one year and the concerned provisions and suspended profit/interest may be credited (back) to the profit & loss account.

          July 2014

    • RM-2.6 RM-2.6 Collateral

      • RM-2.6.1

        The extension of credit is sometime supported by collateral provided by the customer or third parties. In the case of a credit facility supported by a guarantee, an assessment of the guarantor must be made by the licensee on at least an annual basis.

        July 2014

    • RM-2.7 RM-2.7 Developing a Sound Credit Culture

      • RM-2.7.1

        Credit culture is defined as the sum total of a licensee's approach to managing credit risk, including business strategy, credit policy, shared assumptions about credit, the effectiveness of communications, and the composition and quality of the resulting loan portfolio.

        July 2014

      • The Role of the Board of Directors

        • RM-2.7.2

          The board must review and reassess the credit policies of the licensee (including collateral, provisioning and concentration policies) on at least an annual basis. The board must also review overdue facilities in terms of performance on a quarterly basis.

          July 2014

      • The Role of Senior Management

        • RM-2.7.3

          Senior management must be involved in the credit review process of existing facilities, including visiting clients, assessing the financial status of the borrower and verifying the appropriateness of collateral.

          July 2014

      • Effective Internal Systems and Controls

        • RM-2.7.4

          Licensees must utilise internal grading systems (as outlined in Paragraph RM-2.4.3) to manage credit risk and to set adequate provisions on a timely basis.

          July 2014

        • RM-2.7.5

          Policies and procedures must include the requirement for a thorough understanding of the customer, the purpose of the credit facility and the source of repayment. This data must be reviewed as part of the risk management framework in any assessment of the customer for risk profiling purposes.

          July 2014

    • RM-2.8 RM-2.8 The CBB's Approach to Microfinance Credit Facilities

      • RM-2.8.1

        Licensees must implement a sound internal controls framework, including an effective credit culture (see Section RM-2.7). Licensees must display and communicate charges and the APR clearly (see Section BC-1.4).

        July 2014

      • RM-2.8.2

        The CBB requires licensees to demonstrate transparency in their dealings with their customers, as regards the costs and terms of their lending.

        July 2014

      • RM-2.8.3

        The measures presented in this Chapter should be viewed as minimum standards, rather than best practice. They are aimed at encouraging prudent lending and full, frank and fair disclosures, rather than dictating comprehensively how licensees should engage in microfinance credit facilities.

        July 2014

    • RM-2.9 RM-2.9 Refunds and Prepayments

      • Refund/Adjustment of Insurance Premium on Loan Prepayments and Top-Ups

        • RM-2.9.1

          Licensees must refund/adjust proportionately the insurance premium charged on individual loans/facilities when the borrower either requests for a top-up or prepayment of the loan/facility as per the prescribed formula below:

          Refund/Adjustment Amount = Remaining Period to Maturity X Premium Paid / Original Maturity
          July 2014

      • Early Repayment Fees/Charges

        • RM-2.9.2

          If early repayment charges are imposed by the licensee, the CBB imposes a ceiling on the early repayment charges on microfinance credit facilities as follows:

          (a) 1% of the outstanding credit facility amount or BD20 whichever is lower;
          (b) The ceilings on the charges have a retroactive effect i.e. covering existing and new credit facilities; and
          (c) Licensees must not charge any remaining interest/profit amount if prepayment is made.
          July 2014