Credit Management BTC Regulators View[3]

8/21/2019 Credit Management BTC Regulators View[3]

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Credit Management :

Regulators Perspective

Dirgha Rawal

BFIRD, NRB


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Meaning

Credit (function) can be defined as the channelization ofthe fund from the people/entities that have excess fund tothe people/entities that have deficit (of fund).

Technically, Credit can be defined as:

A contractual agreement in which a borrower receivessomething of a value with the explicit agreement to repay

the lender at some date in future. The borrower paysinterest as compensation (to the lender) for allowing theuse of fund

2


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What is Credit Risk ?

Credit risk is defined as the potential that a banks

borrower or counter party will fail to meet itsobligation in accordance with the agreed terms.


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Credit Risk Management

Identify, measure, monitor and control

Supervisors must be satisfied that banks have a creditrisk management process that takes into account the riskprofile of the institution, with prudent policies andprocesses to identify, measure, monitor and control

credit risk (including counter party risk). This wouldinclude granting, evaluating and on going managementof the loan and investment portfolio.


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Simplified Standardized Approach

under Basel II

Capital should be maintained to cover the credit risk,market risk and operational risk. Capital should be

adequate as per prescribed risk weighted assets. For allcredit portfolio exposures should be risk weighted netof specific provisions.


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Categories under SSA

Claims on government and central banks.

Claims on other official entities.

Claims on banks

Claims on corporate & securities firm. Claims on regulatory retail portfolios.

Claims secured by residential property.

Claims secured by commercial real state

Past due claims.

High-risk claims

Other assets

Off-balance sheet items


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Eligible Credit Risk Mitigants

Cash deposit (as well as certificates of deposit or fixed deposits or other deposits)with the bank.

Fixed Deposit Receipts/Certificates of deposits/other deposits of other Banks, whofulfill the capital adequacy requirements, subject to a 20%supervisory haircut.

Gold.

Securities issued by the Government of Nepal and Nepal Rastra Bank. Guarantee of the Government of Nepal Financial guarantee/counter guarantee of domestic banks who meet the minimum

capital adequacy requirements subject to a haircut of 20%. Securities/Financial guarantee/Counter guarantee issued by sovereigns. Securities/Financial guarantee/Counter guarantee issued by MDBs in the list

specified in 3.3 b (3 & 4, CAF) Securities/Financial guarantee/Counter guarantee issued by banks with ECA rating 2

or better. The supervisory haircut shall be 20%and 50%for the banks with ECArating of 0-1 and 2 respectively.


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Risk Weighted Exposure For Credit RiskRs.

A. Balance Sheet Exposures

Book

Value

a

Specific

Provision

b

Eligible

CRM

c

Net Value

d=a-b-c

Risk

Weighte

RiskWeighted

Exposures

f=d*e

B. Off Balance Sheet Exposures

Total


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Directive 2

Loan Classification and

Provisioning


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Classification of Loan & Advances

Category Past Dues

1. Pass 0-3 Months

2. Substandard 3-6 Months

3. Doubtful 6Month-1 Year

4. Loss >1Year

Performing Loan- Pass Loan

Non Performing Loan- Other than Pass Category


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Additional arrangements for Pass

Pass Category

Loan against security of Gold and Silver

Loan against security of Fixed Deposit Reciept

Loan against security of NRB/Govt Securities

Working Capital Loans having one year maturities areclassified as pass after renewal of the loan.

No restriction in classifying the loans & advances fromlow risk to high risk category

Loans & advances includes Bills Purchases andDiscounted


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Additional Arrangement in respect of Loss Loan

1. If the Security is Inadequate(Market price of the security)

2. The borrower has been declared bankrupt

3. The borrower is absconding or cannot be found

4. Purchased or discounted bills are not realized and LC or Gtee(non fundedfund) that has been converted into funded fund and are not realized within90 days

5. The credit when misused.6. Owing to the non recovery, initiation as to auctioning of the collateral has

passed six months and if the recovery process is under litigation

7. Loan provided to the borrower blacklisted by Credit Information Centre

8. If the project or business is not in a position of operation or not operating

9. If the credit card is not realized within 90 days from due date10. Other loans are disbursed to settle the TR Loan(without pre-approval during

LC opening).


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Arrangement in respect of Term Loan

In respect of Term Loans, the classification shallbe made against the entire outstanding loan on thebasis of the past due period of overdue installment.

But FIs having no overdraft facilities. That particular installment is classified as loss.

After one year (nonpayment) full amount of the loanshall be classified as loss.

Term Loan is defined as the loan having more thanone year maturity.


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Gold/Silver Loan

BFIs can lend against gold and silver aftercomplying following conditions;

The provision should be included in thepolicy/bylaws

Sufficient security, valuation, insurance and tester

Annual study on feasibility and profitability of

such loan and monitoring from BoD


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Prohibition to recover Principal & Interest by overdrawing thecurrent account and exceeding overdraft limit

However, this arrangement shall not be construed as prohibitive forrecovering the principal & interest by debiting the customers accounthaving sufficient balance

such overdrawn principal amount shall be downgraded by one step fromits current classification

Grace period : generally not more than 1 year. (if more than one year,

same is to be ratified from the higher authority than the loan approvingauthority with adequate justification)


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Rescheduling & Restructuring of Loan

Licensed Institutions can Reschedule or Restructure the loans if they areconfident of following points and upon receipt of a written Plan ofAction from the borrower

1. Evidence of adequate loan documents and existence of collateral

2. If the licensed Institutions are confident that the Rescheduled &Restructured loan will be recovered

3. At least 25 percent of total accrued interest up to the date ofRescheduling or Restructuring should have been collected

4. Rescheduling and Restructuring is not allowed in case of MarginLending.


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Loan Loss Provisioning

Classification of Loan Loan Loss Provision

Pass 1Percent (GLLP)

Substandard 25 Percent (SLLP)

Doubtful 50 Percent (SLLP)

Loss 100 Percent (SLLP)

In case of Rescheduled & Restructured loans minimum of12.50% loan loss provision should be provided.

In case of insured loan 25% of the above mentionedprovisioning rate .


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In case of Personal Gtee Loans

Where the loan is extended only against personal Gtee, astatement of the assets not claimable by any other, shall beobtained.

Such loans shall be classified as above

An additional provision by 20 percent point shall also beprovided. (But this additional provision is not required inDeprived sector Lending and education loan)


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Adjustment in Provisioning

Except in the following cases banks are prohibited from

making any adjustments in their loan loss provision amount

1. If the loan is fully written off

2. If the loan is repaid in installment or partially, at the time of

providing loan loss provisioning as required per theclassification, the provision amount may be written back uptothe extend of repaid amount

3. If the payment of interest & principal of Rescheduled &Restructured loan is regular upto 2 years

4. Separate statement should be prepared for such loans.


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Third Party Collateral

20% additional Provision.

Third Party is the party other than;

Undevided Family members Proprietor/Partner/family members(in case of

firms)

Promoter, Director and their family members (in

case of companies)


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Non Banking Assets

100% provision

Borrowers should be black listed while acquiring NBA in case ofthe loan outstanding is more than 25 lacs

Assets should be Valued by independent valuators

Clear provision should be made in the Financial byrules regardingNBA auctioning.

Should be disposed at an earliest possible Should be notified to NRB when NBA is used for own purpose

Can be returned to the borrower


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Credit Sale/Purchase/Re-purchase and Takeover

Capital inadequate banks cantgo for CS,CP,RP&TOwithout prior approval of NRB.

Banks should be capital adequate

Such provision should be clearly mentioned in thebankscredit policy

Cantbe done during the last month of FY

Half Yearly reporting to NRB 50% Risk Wt in Contingent liability


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Other provisions

IPO

Lending not allowed for IPO (lending only unsubscribed for seven days,

Margin)

Issue manager is not allowed to lend. Pass or Loss.

Margin Lending

Average price of 180 days or market price whichever is less

Security cantbe revalued for loan enhancement purpose.

Monitoring regularly.

Restrction on lending against the Shares of the co. having inadequate

capital(BFIs), negative networth, delisted from NEPSE, Unaudited since last

one year.

Bank Guarantee Claim; within 7 days, otherwise 200% Risk Weight

Interbank Lending/Borrowing/Investment

For 7 days onlymaximum for 30 days approving from Board

Revolving Person Loans

Overdraft including Revolving Personal Loans upto 10M only.

Renewal till the end of Ashad 2071

Risk Takers

Directors, CEOs or Mgmt Level cantborrow other than education loan, Hirepurchase loan, Home loan and household purpose.


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Directive 3

Single Borrowers Limit (SOL)


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NRB guidelines on Limits

The Single Obligor Limit is 25% of the Certified core capital ofthe preceding quarter end . (Funded & Non funded facility)

Similarly, NRB has prescribed two ceilings for exposure onspecific sectors i.e. between 50% to 100% of core capital and

more than 100% of core capital. Banks are required to monitor the lending in the first tier while in

the latter the Board has to approve the exposure. The Board alsohas to decide whether they wish to continue the exposure in

excess of 100% of core capital on an annual basis. 30% of CC to the Export Sector, SME Industry,

Pharmaceuticals, Agriculture sector, Tourism Sector, CementIndustry, Iron Industry and Productive Sectors.


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Constituents of a Group

Both companies where one company holds at least 25% of anothercompany.

Individual, Directors, Shareholders, Partners, Proprietors and family

members.

Companies where persons as stated in 2. hold more than 25% stake

Companies whose management is controlled by virtue of holding a

position of chairman, Chief Executive or the authority to nominate

more than 25% of the Board of directors.

Companies and individuals where individuals as stated in 2 have

provided guarantee to. Firms, companies and group members affiliated as one group

More than one individuals having same collateral.


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Waiver in Single Obligor Limits

Banks are allowed to extend facilities in excess of theirlimits to Nepal Oil Corporation and Nepal KhadyaSansthan.

Similarly, the restriction is not applicable in loanssecured by Fixed Deposits, Govt. and NRB Bond,unconditional guarantee of Multilateral DevelopmentBanks (IMF, MDB etc.) and Internationally RatedBanks (Top 1000 Banks as per Banker of July)


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Lending in excess of SOL

Where the bank has extended loans and advances to agroup of borrower in excess of the single obligor limit,

the Bank is required to create 100% loan loss provisionin the excess amount.


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Hydropower Projects/Transmission Lineand Cable Car

Funded and Non-funded : up to 50% of CoreCapital

Power purchase agreement is required to gobeyond 25% of core capital

1% or 100%( i.e. Pass or Loss)

Investment: If not listed for 3 years, Investment adjustment

reserve(full amount) should be created.


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Housing and Real Estate

Loan to Value Ratio 60% of FMV

Residential Real Estate 2/3 of the FMV of

land, building /real estate.Total Real Estate Loan 25% of Total

Loan(land purchase and plotting 10%)

150% RW for the loan exceeding the limit

Personal Home Loan Rs 10M (not included inthe above limit)


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Productive Sector Loan

20% of total loan to the productive sectorloan(within 3 years)

Annual Plan should be formulated; half yearlytarget. BoD should review half yearly

10% of total loan in Agriculture and Energysectors. (by 2071)


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Directives NO 12

Credit Information and Black Listing

Credit information is compulsory Quarterly report of lending from banks and financial

institutions to CIC

Customers details more than the lending limits of 10 lacs Process of black listing Provisions for asset valuators (less than 2/3 at auction) Actions on false financial statements approved by auditors

Restriction on lending to blacklisted borrowers Forfeiture of Passport Conditions of inclusion in and removal from black list etc. Membership of CIC

Publication of Names of blacklisted borrowers>10mDBR


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Who is blacklisted?

Borrowers/defaulters - overdue loan of one year.(BoD can add 3 months time)

Misuse of loan/facilityMisuse of collateral

Absconding borrower

Bankrupt borrower BFI files the case in a court

Files the case in DRT


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Who is blacklisted?

Other

Forgery cases; fake cheques/documents

Proved as criminal

Recovery under section 57 of BAFIA

Loan write off

Insufficient Balance in A/C

Closing A/C without making payment of issuedcheques

Penalised under NRB Acts 2058, BAFIA andDirectives


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Credit Management BTC Regulators View[3]

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