Decree N 51/04 of the Governor of the National Bank of Georgia
June 17, 2014
Tbilisi
On approving the
Regulation on Assets Classification and the Creation and Use of Reserves
for Losses by Commercial Banks
For the Purpose of assessing possible risks that result from the
deterioration of the quality of assets of commercial banks of Georgia, and in
accordance with the requirements of Paragraph 3 of Article 48 of the Organic Law
on the National Bank of Georgia and Article 21 of the Law of Georgia on Activities
of Commercial Banks, I hereby rule:
1. The attached “Regulation on Assets Classification and the Creation and
Use of Reserves for Losses by Commercial Banks” is approved.
2. Decree N 350 of December 29, 2000 of the Governor of NBG on the
approval of the “Regulation on Assets Classification and the Creation
and Use of Reserves for Losses by Commercial Banks” is void.
3. This decree will enter into force upon its publication.
Deputy Governor of the National Bank of Georgia
Archil Mestvirishvili
Regulation on Assets Classification and the Creation and Use of Reserves
for Losses by Commercial Banks
Article 1. General Provisions
1. The purpose of this Regulation is for commercial banks to ensure the
development and the implementation of internal procedures and reporting
requirements for the classification of their assets and provisioning obligations.
This will facilitate the identification of a commercial bank's realistic financial
condition, and its understanding by the bank's depositors, management,
shareholders, potential investors, the National Bank and other interested parties.
2. This Regulation is binding for commercial banks operating in Georgia, as well
as branches of foreign banks and branches of foreign trusted banks.
3. A commercial bank's financial reporting must present accurate, complete and
up-to-date information on its financial condition, including the quality of its
assets.
4.
The failure of a commercial bank's management to take timely measures
to correct its financial position because the management was unaware of the
existing problems due to the lack of accurate, complete and current information,
will be deemed an unsafe and unsound banking practice, and will result in the
use of supervisory measures against that bank.
5. The principal component of such information is the risk-based classification of
its assets by a commercial bank itself, and the establishment of adequate
reserve accounts to cover possible losses of these assets.
6. In order to conduct the classification according to international standards, and
to create adequate reserve accounts to cover possible losses, each commercial
bank shall be obligated to establish and maintain written policies and procedures
for credit risk management purposes.
7. For the purpose of meeting the requirements of this Regulation, commercial
banks shall develop and implement relevant measures and functions.
8. Each commercial bank shall submit monthly reports to the National Bank of
Georgia, which shall include the classification of the assets in line with this
Regulation, and the possible loss reserves created for each of them.
9. In case commercial banks fail to observe the requirements established by this
Regulation, the National Bank of Georgia shall apply to them the sanctions
established by Article 30 of the Law of Georgia on Activities of Commercial
Banks.
Article 2. Definition of Terms
The terms used in this Regulation shall have the following meanings:
a) "loan" - property transferred by a commercial bank to the possession of a
borrower (with or without appropriate securities) on which the borrower assumes
the liability to return the property according to the conditions defined under the
agreement. This term also implies the extension of a cash advance, as well as a
loan and credit, direct or indirect, by a commercial bank in connection with
economic and banking activities, or a legally binding commitment by a
commercial bank to extend credit in any form, such as an overdraft facility, letter
of credit, a guaranty or other contractual undertaking to extend credit under
specific conditions or any other contingent liabilities of a commercial bank.
b) "past due loan" - a loan, where the repayment of principal (its portion) or
interest, or any installment of either, has remained unpaid for more than 30
calendar days beyond the date agreed in the applicable loan documentation.
c) "fully secured loan" - a loan for which deposits have been placed in the
commercial bank, or asset has been pledged or hypothecated as collateral in
favor of a commercial bank to secure its timely and full repayment and where the
market value of such collateral equals or exceeds the unpaid amount of the loan.
d) "partially secured loan" - a loan the market value of the collateral or hypothec
of which is less than the unpaid amount of the loan.
e) "unsecured loan" - a loan for which no collateral has been pledged or
mortgaged; or, if a collateral or pledge for this loan exists, it has no market
value; or, regardless of its value, it has not been properly registered.
f) "restructured loan" - a loan, on which the commercial bank and the borrower
have agreed to change the repayment terms because of the borrower's legal or
financial difficulties. Restructured loans include all those loans the terms of which
have been changed in any of the following ways:
f.a) A decrease in the interest rate or the waiver of the right to collect accrued
interest;
f.b) Capitalization of accrued interest;
f.c) A reduction of principal or interest (including refinancing) that is not the
result of repayment by the borrower (including those cases when a borrower
paid the interest, or the principal balance through loans granted to him/her or
to other members of the related group);
f.d) An extension of the loan maturity;
f.e) Institution of the concession period on the loans (excluding the cases
involving seasonal businesses);
f.f) Any other rights or privileges granted by the commercial bank to the
borrower that would not ordinarily be provided under normal conditions.
g) “Refinanced loan” – loan, on which the commercial bank and the borrower
have agreed to change the repayment terms, and the change of repayment
terms is not caused by the borrower’s financial difficulties. Such form of
refinancing includes, but is not limited to: decrease of interest rates due to
competition; renewal of the working capital; merging and repayment of existing
loans through additional financing of the borrower, including those cases when
the liabilities of the borrowers are increased for the purpose of financing new
projects, etc. At the time of refinancing, the borrower must fully meet the
conditions of the “standard” category.
h) "adversely classified asset" - an asset classified as Watch, Substandard,
Doubtful and Loss;
i) "collateral" - movable property or intangible assets of any kind used as a
means to fulfill liabilities pledged by a borrower to a lending bank under a
collateral agreement, so that the commercial bank obtains a priority, in
comparison with other creditors, to satisfy the liabilities by the pledged property.
j) "hypothec" - immovable property of any kind used as a means to fulfill
liabilities pledged by a borrower to a lending bank under a registered and
enforceable hypothec agreement so that the commercial bank obtains a priority,
in comparison with other creditors, to satisfy the claim by means of this
property.
k) "provisioning" - in accordance with this Regulation, the setting up of reserves,
general or specific, for the purpose of absorbing anticipated losses associated
with assets that the commercial bank has classified.
l) "reserve for possible asset losses" - a reserve account established against a
commercial bank's assets which represents the amount estimated to cover loan
and non-loan assets and contingent liabilities. This reserve includes both specific
and general reserves.
m) "specific reserve" - a reserve established to cover possible losses against a
specific asset for the purpose of decreasing the asset's value as shown on the
commercial bank's balance sheet. This reserve is directly tied to or corresponds
to a specific, identified asset.
n) "general reserve" - a reserve established to cover possible loan losses without
their specification.
o) "securities" - transferable financial instruments and rights that may be offered
to the public in the form of equity securities or debt securities, that can be
converted into securities, or that carry the right to subscribe for or purchase such
securities.
p) "interbank deposit" - funds placed by a commercial bank in a deposit and
correspondent account at another correspondent bank for certain period of time
and upon demand.
q) "other real estate owned" - immovable property that is taken by a commercial
bank in full or partial coverage of a borrower's indebtedness, as well as
immovable property that was formerly used as commercial bank premises.
r) "repossessed movable property"- movable property to which a bank has taken
title or possession in full or partial coverage of a borrower's indebtedness,
including transport facilities, machinery (which are not integrally affixed to
immovable property), securities, other movable property and financial assets.
s) "market value" - a free market price, which shall be established in the process
of interaction between the demand and the supply of similar goods (work,
service) on a market, as well as on the relevant market of goods (work, service)
on the basis of transactions among those persons who do not represent related
parties.
t) "recorded asset":
t.a) In case of a loan asset - the unpaid principal balance plus accrued interest.
t.b) In case of a non-loan asset - the full acquisition cost.
Article 3. Requirements for Commercial Banks
1.
Commercial banks are required:
a) To classify their assets and create adequate reserves against possible losses in
accordance with the written policies and procedures approved by their
Supervisory Boards and maintained in their credit management files. They shall
be permanently accessible to then investigators of the National Bank of Georgia,
and include the following documents according to the type of loan:
a.a) Application regarding the receipt of a loan;
a.b) The borrower’s financial statement (balance sheet, income statement and
cash flow statement);
a.c) A business plan;
a.d) Legal documentation regarding collateral;
a.e) Loan agreement, the conclusion regarding the extension of the loan and
relevant decision;
a.f) Information regarding the monitoring of the loan, etc.
b) Asset classification shall be applied to all assets formed in all currencies,
including all items on balance sheets, as well as all of those off-balance-sheet
items that are established as such by International Accounting Standards;
c) The management of commercial banks shall determine asset classifications
after taking into consideration all circumstances and foreseen possibilities that
the management considers, as the result of a diligent analysis, shall affect the
quality of the assets;
d) Reserve accounts for losses shall be established to cover assets formed in all
currencies;
e) Reserve accounts for losses shall be created in the national currency of
Georgia;
f) Reserve accounts for asset losses shall be provisioned by commercial banks in
the amounts that will cover possible losses;
g) Reserve created and any subsequent increases therein shall be recorded in a
commercial bank's expenditure side, under the item "Provision for Possible
Losses on the Assets" and shall be shown on its balance sheet under the item
"Reserve on Possible Asset Losses";
h) Necessary reserves, according to asset risk classification, shall be established
regardless of revenues earned during a recording period. However, the written
policy and procedures of asset classification shall be agreed with the National
Bank of Georgia;
i) Develop written policies and procedures describing the basis on which noncollectible assets are recognized as "Loss" and written off the balance sheet;
j) When an asset is classified as "Loss," it shall be written off against the bank's
reserve for possible loan losses.
2. The differences between decisions of the National Bank of Georgia and those
of the classifying commercial bank regarding asset classification may be the
subject for the discussion between the two, but the position of the National Bank
of Georgia shall be decisive for all purposes. The National Bank of Georgia may
request changes in the classification of any asset, and may also require
additional provisioning of the reserve for possible losses, if NBG considers that
such decision is warranted based on following facts and circumstances:
a) Deterioration of the general condition of the commercial bank's loan portfolio;
b) A change in the commercial bank's lending procedures, or lack of adequate
credit risk management policies;
c) The commercial bank's actual losses in the loans for particular sectors,
industries or regions;
d) The inactivity (insufficient activity) of the commercial bank management in
collecting problem loans;
e) Loan concentrations in certain sectors of economy, industries and regions;
f) Negative trends in those sectors of economy, industries or regions where a
commercial bank has large concentration of assets;
g) Other circumstances regarding the financial condition of the debtor or the
commercial bank itself, revealed as a result of an investigation by the National
Bank of Georgia.
Article 4. Asset Classification System
1. An adverse classification of assets shall be based on facts and weaknesses
that are caused by, or contingent on such circumstances, events or conditions,
the diligent analysis and evaluation of which reveals that the asset value is
decreasing.
2. In classifying assets according to categories, a commercial bank shall use its
informed judgment to assess overall circumstances surrounding the asset based
on the standards and components set forth with respect to each such category.
3. When a commercial bank adversely classifies a loan, it shall not grant an
additional loan to the borrower, either in the form of funding a current credit line
or in the form of a new loan, without giving proper consideration to risks
associated with such loan and the possibility of future losses. Where a
commercial bank grants such additional loan, the latter may be classified as
"Standard" if the loan is fully secured by liquid collateral, even when the other
loans of this borrower may be adversely classified.
4. On a monthly basis, each commercial bank shall classify its assets according
to the categories set forth in this Regulation.
5. As a rule, the same category must be assigned to all current loans of a
borrower and the related group. Exceptional cases must be supported by
arguments and fully documented.
Article 5. Loan Classification Categories
Loans shall be classified into five categories, including:
a)
b)
c)
d)
e)
Standard Loans;
Watch Loans;
Substandard Loans;
Doubtful Loans;
Loss Loans.
Article 6. Standard Loans
1) A loan shall be classified as "Standard" if it is paying principal and interest in a
timely manner, and is supported by the sound capital and paying capability of
the borrower. This classification is proper where the borrower is financially strong
and has sufficient capital to cushion unforeseen adverse impacts, is within its
profit targets, and produces cash flows sufficient to satisfy in a timely manner all
liabilities, including the said asset.
2) Collateral or hypothec taken for a loan classified as "Standard" shall serve as
an additional component of safety, but shall nonetheless be properly documented
and registered.
3) In the case of a business loan, in addition to the abovementioned financial
characteristics, the borrower must prove that its business plan is realistic and
feasible and that its core products and marketing strategies are stable and
competitive.
4) A "Standard" loan represents normal performance, but all commercial banks
are nonetheless required to create general reserves for loan losses in the amount
of 2% of the unpaid principal balance of the loan, excluding assets that are
formed as the result of repo transactions, and accounted for as loans, the
maximum amount of which should be the amount accepted by National Bank of
Georgia as collateral with NBG in monetary operations.
Article 7. Watch Loans
1) A loan shall be classified as Watch, if:
a) It is adequately protected, but is potentially weak. Despite the fact that the
borrower had stable financial condition and paying capability at the time of the
loan's origination, certain deficiencies or trends became apparent afterwards. If
not corrected, these deficiencies could cause concerns about the borrower's
ability to continue to service the loan in a timely manner. Such loan constitutes
an unwarranted credit risk but not to the point of requiring a "Substandard"
classification, because the credit risk is minor at a given moment. Examples of
such deficiencies include those situations where credit files or documentation (or
portions of them) are missing, incomplete or out-of-date; where the commercial
bank is unable to properly manage the assets or settle the relationship with the
borrower, or where, in case of a fully secured loan, the collateral or hypothec are
not properly documented, delivered or registered, or where there is information
about the doubtful condition of a collateral or hypothec, or about how they are
being monitored or controlled;
b) Despite repeated requests from the commercial bank, the borrower has failed
to submit financial statements, including a balance sheet or income statement,
or operating or business plan, as agreed;
c) Foreseeable developments or market trends in one or more of the borrower's
principal trade or business lines have rendered the borrower's future earnings or
business likely to become unstable, or subject to significantly deteriorating
conditions;
d) The collateral or hypothec documentation has not been properly formed, or
the collateral or hypothec has not been properly registered, and when either of
these situations is accompanied by the diminished ability of the original
repayment source to properly service the loan;
e) The past due interest on the loan has not been paid and is added to principal;
f) Any agreed payment has been past due for a period of less than 30 days,
however, such delay does not represent the sole or principal reason for such
classification.
2) All commercial banks shall maintain a specific reserve of 10% of the unpaid
principal balance of each of their loans classified as "Watch".
Article 8. Substandard Loans
1) A loan shall be classified as "Substandard", if:
a) It is inadequately protected by the capital and paying capability of the
borrower, or by the value of any supporting collateral or hypothec. A loan
classified as "Substandard" has such weaknesses or problems that jeopardize the
capacity to pay the debt or render full repayment questionable.
b) The primary repayment sources, including capital and earnings, are no longer
sufficient to repay the debt. Therefore, the commercial bank must use other
sources of repayment, such as the sale of collateral or hypothec, the sale of
other assets of the borrower, or the restructuring of other debt(s) of the
borrower. However, there are other significantly negative conditions, such as the
absence of a valuable or marketable collateral or hypothec, or unexplained or
prolonged absence of the borrower or protracted inattention to the business.
2) Unsecured or partially secured loans, in which interest or principal is past due
for at least 30 days or more, must be classified as "Substandard," although such
delay does not represent the sole or principal reason for such classification.
3) A fully secured loan, where the payment of its principal amount or the interest
is past due for at least 60 days or more, must be classified as "Substandard",
although such delay does not represent the sole or principal reason for such
classification.
4) All commercial banks shall maintain a specific reserve of 30% of the unpaid
principal balance of each of their loans classified as "Substandard".
Article 9. Doubtful Loans
1) A loan shall be classified as "Doubtful" if it displays the characteristics inherent
to a "Substandard" classified loan, but if its repayment is rendered doubtful
under existing terms because of any one of the following weaknesses: the
presence of a clear and significant factor, based on which, partial repayment can
be expected in the near term, thus, rendering the classification of the said loan
as “Loss” unnecessary for the present, until certain facts become clearer. The
"clear and significant factors" include such factors as ongoing partial loan
repayment(s), or the commencement of seizure and sale proceedings of the
collateral (hypothec) in the nearest future, as well as the possibility of the pledge
of additional collateral or hypothec, which would render the loan fully secured.
2) An unsecured loan or a partially secured one, if its principal or interest has
been delinquent for at least 90 days or more, shall be classified as "Doubtful"
although such delay does not constitute the sole or principal reason for such
classification.
3) A fully secured loan, if its principal or interest has been delinquent for at least
120 days or more, shall be classified as "Doubtful," although such delay does not
represent the sole or principal reason for such classification.
4) All commercial banks shall maintain a specific reserve of 50% of the unpaid
principal balance of each of their loans classified as "Doubtful."
Article 10. Loss Loans
1)
A loan shall be classified as "Loss" if:
a) It is not collectable due to the borrower's insolvency or if the collectable
amount is so small that it should not remain on the books of the bank.
b) Payment of principal or interest has been delinquent for 150 days despite any
collateral or hypothec.
c) Regardless of being delinquent for less than 150 days, on the basis of
information on a borrower, the loan is either totally non-collectable, or the
anticipated recovered amount does not correspond to the time and costs related
to its collection.
2)
Losses for loans shall be reflected on that reporting period when these
loans were identified as non-collectable. Their accounting shall be discontinued
and they shall be written off the balance sheet for that period.
3)
Commercial banks shall direct all their efforts to the legal collection of
"Loss" loans through respective measures, including the execution of all
procedures foreseen by the legislation relating to the seizure and sale of all
underlying collateral or hypothec.
4)
All commercial banks are required to maintain a specific reserve of 100%
of the unpaid principal balance of each of their loans classified as "Loss".
Article 11. Split Classification
1.
A commercial bank shall have the right, in accordance with the financial
condition of a borrower and the categories’ criteria established in Article 5 of this
Regulation, to classify a loan as partially "Substandard," "Doubtful" or "Loss," in
cases where the said loan is a partially secured loan.
2.
In those cases when the unpaid portion of the loan's principal balance
equals the market value of the collateral or hypothec, the loan may be classified
as "Substandard".
3. In those cases when the unpaid portion of the loan's principal balance exceeds
the market value of the collateral and hypothec, the loan may be classified as
either "Doubtful" or "Loss".
4. In the case of split classification, the classification of the unsecured portion of
the loan as "Doubtful" shall be documented by clear and convincing arguments.
Article 12. Collateral and Hypothec as Important Components in
Classification Decisions
1.
A commercial bank shall not regard collateral and hypothec as the primary
repayment sources for a loan, unless circumstances shall so require.
2.
A commercial bank shall develop and implement policies and procedures,
on the basis of which, a policy will be developed for the assessment of collateral
and hypothec in light of their liquidity value or market value, which is an
important element in loan classification decisions.
3. All collateral and hypothec shall be categorized either as liquid or illiquid
collateral.
4. Liquid Collateral and hypothec shall include:
a) Unconditional guarantees of the Ministry of Finance (or other government
entities foreseen by legislation);
b) Cash deposits in readily convertible currencies pledged and reserved on
the books of the commercial bank;
c) Georgian government securities;
d) Standardized bullions of precious metals actually delivered to the
commercial bank under the agreement on enforceable pledge.
5. Illiquid Collateral and hypothec shall include:
a) Properly documented and registered hypothec on immovable property and
related rights under the current legislation;
b) Mortgage of moveable property and all related rights under the current
legislation;
c) Properly documented and enforceable pledges of securities of privately
held companies or enterprises;
d) Properly documented and enforceable unconditional
irrevocable letters of credit of commercial banks;
e) Properly documented and enforceable unconditional
companies, enterprises and individuals.
guarantees
or
guarantees
of
Article 13. Classification of Restructured Loans
1.
Classification of a restructured loan shall be made with the consideration
of factors listed below: the number of times the original loan has been renewed
or had its maturity extended; changes in terms of interest payments compared
with their initial terms; specific changes in the terms or conditions of the original
loan which have been incorporated into the restructured loan agreement and the
reasons for introducing these changes. Particular emphasis shall be made on any
decreases of interest rates below the market rate, any extensions of the
maturity, and any other factors that the management considered relevant for the
circumstances. The decision on any restructuring/refinancing, made by a
commercial bank, must be based on the borrower’s financial analysis, which
must be fully documented and accessible for the inspectors from the National
Bank.
2.
As a rule, in case of loan restructuring, the loan will be adversely
classified.
3.
Commercial banks may keep a restructured loan in the “Standard”
classification category only in those exceptional cases, when a loan fully and
unconditionally meets the terms of “Standard” loan category.
4.
Classification of a restructured loan shall not be changed if a substitute or
an additional debtor is an insider of a borrower.
5.
When a substituted or additional debtor is granted a restructured,
adversely classified loan, the latter shall not be changed to a less adverse
category excluding those cases, where, in addition to the factors leading to the
decision, the substituted or additional debtor has agreed and has the financial
capacity to provide additional liquid collateral or, in accordance with the credit
risk management standards of the commercial bank, has the financial capability
to repay all amounts of unpaid principal and interest within the time periods
agreed.
6.
Classifications of restructured loans shall be reviewed by the credit
committees of commercial banks (other units of credit management) on a
monthly basis, for the purpose of determining if the classifications should be
downgraded. Particular attention shall be paid to the capability of any substituted
or additional debtor to continue to comply with the terms of the restructuring
agreement in all respects.
7.
It is permissible to remove the loan from the classification of restructured
loans only in those cases when more than one year has passed since loan
restructuring, and in addition, a loan has received a “standard” category during
the last one year.
8.
It is permissible to remove the loan from the classification of refinanced
loans only in those cases when more than one year has passed since loan
refinancing.
Article 14: Improvement of Loan Classification
1.
It is possible to reclassify an adversely classified loan into the improved
category only in those cases when the loan fully and unconditionally meets the
terms of the respective category, and along with this, has completed the last 6
consecutive demonstrated payments. In case of seasonality in income,
reclassification to a less adverse/standard category is permissible with the
consideration of the data of one new cycle/season. Along with this, real
repayment of liabilities must be observable as the result of a new cycle/season.
2.
No preferential terms shall be considered with respect to the 6 consecutive
demonstrated payments mentioned in the first paragraph of this Article, including
such terms that would be acceptable during refinancing.
3.
Any reclassification of a loan (improvement of the category) must be
based on the financial analysis and must be fully documented and accessible for
the inspectors form the National Bank.
4.
Commercial banks are required to ensure the identification of those
Standard loans, which have been reclassified (as “Standard”) for not more than a
one year period.
Article 15. Interbank Deposits and their Classifications
1. Before a commercial bank places an interbank deposit in another bank, it shall
require complete and current financial information from that commercial bank.
After placing the deposit, the placing commercial bank shall require financial
information from the other commercial bank in form of quarterly balance sheets
and income statements, as well as annual reports.
2. Classification of interbank deposits shall depend on financial status of a
correspondent commercial bank and its capability to meet its liabilities in the
manner which is established under the initial agreement between the given
commercial bank and the correspondent commercial bank. In the absence of
other adverse factors, and in the case of problems (delays), the assets shall be
subject to classification.
3. If the receipt of cash from a correspondent bank is delayed for a period of 30
or more days, an interbank deposit shall be classified as "Substandard".
4. If the receipt of cash is delayed for a period of 60 or more days, an interbank
deposit shall be classified as "Doubtful."
5. If the receipt of cash is delayed for a period of more than 90 days, an
interbank deposit shall be classified as "Loss" and shall be written off the balance
sheet of a placing bank.
6. Deposits and other requirements placed in other commercial banks shall be
classified as "Loss" and shall be written off the balance sheet of a placing bank
upon the launch of the procedures related to license revocation in the bank.
Article 16. Classification of and Provisioning for Non-loan Assets and the
Creation and the Use of Reserves for their Possible Losses
1.
Classification of a commercial bank's other real estate and creation of loss
reserves shall be carried out on the basis of the following criteria:
a) Other real estate owned by a commercial bank, regardless of its value,
constitutes an unsound banking asset. Such asset shall immediately be analyzed
and classified by a commercial bank;
b) A commercial bank shall be obliged to not hold any other real estate owned
for more than 3 years from the date of its acquisition, as well as former premises
of the commercial bank that have not been used for banking activities for more
than 3 years from the date of their non-usage for the above purposes. In the
opposite case, appropriate reserves should be established and written off their
balance sheet.
c) Commercial banks, beginning with the date of foreclosure, shall classify and
establish appropriate reserves with respect to other real estate owned, as
follows:
c.a) Amounts up to the market value of the other real estate owned – as
"Substandard";
c.b) Amounts in excess of the market value of the other real estate owned - as
"Loss."
d) One year after such other real estate owned is placed on the commercial
bank's balance sheet, the commercial bank shall classify it as "Doubtful" and
establish an appropriate reserve;
e) All commercial banks shall be obligated to classify other real estate as "Loss"
and write it off from the balance sheet after holding it for 3 years; after this,
other real estate shall be recorded on the relevant off-balance-sheet accounts.
f) Other real estate, owned by the commercial bank, should be accounted
individually, with the value that the asset had on the date of its repossession, or
with its market value, if the latter is less than the value of the asset. The value of
the asset shall be determined by a recognized independent auditing company.
2.
Classification of repossessed movable property and creation of reserve for
possible loss shall be carried out on the basis of the following criteria:
a) Each repossessed movable property shall be analyzed and classified by a
commercial bank on a case-by-case basis.
b) Commercial banks shall do their best not to hold repossessed movable
property for more than 180 days after foreclosure.
c) Commercial banks, beginning with the date on which they take title to a
repossessed movable property, shall classify the said property and shall establish
appropriate reserves with respect to it as follows:
c.a) Amounts up to the market value of the repossessed movable property – as
"Substandard";
c.b) Amounts in excess of the market value of the repossessed movable
property – as "Loss."
d) If a repossessed movable property is still on the commercial bank's balance
sheet after the expiration of the 90-day period, commercial banks shall classify it
as "Doubtful" and the appropriate reserve shall be created.
e) If the repossessed movable property is still on the commercial bank's balance
sheet after the expiration of 180 days, commercial banks shall be obligated to
classify the repossessed movable property as "Loss" and establish the
appropriate reserve, after which, they should be recorded on corresponding offbalance-sheet accounts.
3. In case of adverse classification of loans to a borrower and related group, a
commercial bank is required to take into consideration other risk exposures to
the group (investments, accounts receivable, and other assets).
Article 17. Rules for Creation and Use of Asset Loss Reserves, Accounting and
Write-offs of Loss Assets
1.
Commercial banks shall establish reserves against all loans and other
assets in accordance with this Regulation.
2. A commercial bank's management shall have responsibility for ensuring that
the bank maintains adequate reserves at all times.
3. Each commercial bank shall review the adequacy of the reserves on a monthly
basis, and, if the latter is determined to be deficient after the diligent review of
the assets and their classification, additional reserves shall be allocated by the
management to the reserve for possible losses, which shall be sufficient to cover
anticipated losses.
4. Commercial banks shall enter all new provisions to their accounts for the
creation of adequate reserves for possible loan losses on the expenditure side of
their current income statements.
5. Commercial banks shall be required to carry out the analysis of their loan
portfolio; where the commercial bank identifies excess reserves, it shall
immediately debit the reserves for loan losses account and credit the bank's
account for expenses.
6. When the commercial bank determines that the debt is non-payable and other
assets are non-recoverable, the commercial bank shall write off assets classified
as "Loss," reducing possible loss reserves by debiting them, and crediting the
assets account.
7. Where a commercial bank writes a loan off from its books because of the
inability to pay, the charge-off shall not be recognized as a cancellation of the
debt. The said debt shall continue to be maintained on a special off-balancesheet account for a period of 5 years. The commercial bank shall make diligent
efforts to collect both its past due interest and principal. Interest shall continue
to accrue on such asset on the off-balance sheet account for the purpose of
continuing to maintain a proper record reflecting the continuing liability according
to the judgment of the commercial bank's Supervisory Council.
8. Throughout the 5-year holding period, at least once a month, the commercial
bank shall deliver to the borrower, or his successor or representative, a
statement confirming the unpaid principal balance plus accrued interest, which
shall reflect exactly the balances in the above-mentioned special off-balance
sheet account.
9. Where a debtor repays a loan which has been written-off from the balance
sheet within the period of time established under Article 17 (7), the commercial
bank shall afresh debit the cash account and credit the reserve for possible asset
losses account; after this transaction, the bank shall debit the account reserve
for possible asset losses and credit the account for the commercial bank's
expenses on provisioning.
10. Where a debtor fails to repay a charged-off loan during the 5-year holding
period, the loan, including both principal and interest, shall be removed from the
above-mentioned special off-balance-sheet account through proper entries
pursuant to applicable accounting standards, which does not constitute the
termination of the loan collection procedure.
Article 18: Consideration of the real maturity of loans for the purpose of
liquidity
For the purpose of liquidity, in case of both “restructuring” and
“refinancing,” the loan shall be accounted for in accordance with that maturity
which enables a borrower repaying the loan under the normal course of business.