Credit Management : Regulators Perspective

Dirgha Rawal BFIRD, NRB

Meaning
Credit (function) can be defined as the channelization of the fund from the people/entities that have excess fund to the people/entities that have deficit (of fund).
Technically, Credit can be defined as: A contractual agreement in which a borrower receives something of a value with the explicit agreement to repay the lender at some date in future. The borrower pays interest as compensation (to the lender) for allowing the use of fund

What is Credit Risk ?

Credit risk is defined as the potential that a banks borrower or counter party will fail to meet its obligation in accordance with the agreed terms.

Credit Risk Management

Identify, measure, monitor and control

Supervisors must be satisfied that banks have a credit risk management process that takes into account the risk profile of the institution, with prudent policies and processes to identify, measure, monitor and control credit risk (including counter party risk). This would include granting, evaluating and on going management of the loan and investment portfolio.

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 all credit portfolio exposures should be risk weighted net of specific provisions.

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

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, who fulfill 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 ECA rating of 0-1 and 2 respectively.

Risk Weighted Exposure For Credit Risk

Rs. A. Balance Sheet Exposures Book Value a Specific Provision b Eligible CRM c Net Value d=a-b-c Risk Weight e Risk Weighted Exposures f=d*e

B. Off Balance Sheet Exposures

Total

Directive 2

Loan Classification and Provisioning

Classification of Loan & Advances Category Pass Substandard Doubtful Loss Past Dues 0-3 Months 3-6 Months 6Month-1 Year >1Year

1.

2.
3. 4.

Performing Loan- Pass Loan Non Performing Loan- Other than Pass Category

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 are

classified as pass after renewal of the loan. No restriction in classifying the loans & advances from low risk to high risk category Loans & advances includes Bills Purchases and Discounted

Additional Arrangement in respect of Loss Loan

1. 2.

3.
4.

5.

6.
7. 8. 9. 10.

If the Security is Inadequate(Market price of the security) The borrower has been declared bankrupt The borrower is absconding or cannot be found Purchased or discounted bills are not realized and LC or Gtee (non funded fund) that has been converted into funded fund and are not realized within 90 days The credit when misused. Owing to the non recovery, initiation as to auctioning of the collateral has passed six months and if the recovery process is under litigation Loan provided to the borrower blacklisted by Credit Information Centre If the project or business is not in a position of operation or not operating If the credit card is not realized within 90 days from due date Other loans are disbursed to settle the TR Loan(without pre-approval during LC opening).

Arrangement in respect of Term Loan

In respect of Term Loans, the classification shall

be made against the entire outstanding loan on the basis 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 loan shall be classified as loss. Term Loan is defined as the loan having more than one year maturity.

Gold/Silver Loan
BFIs can lend against gold and silver after

complying following conditions;

The provision should be included in the policy/bylaws Sufficient security, valuation, insurance and tester Annual study on feasibility and profitability of such loan and monitoring from BoD

Prohibition to recover Principal & Interest by overdrawing the current account and exceeding overdraft limit
However, this arrangement shall not be construed as prohibitive for recovering the principal & interest by debiting the customers account having sufficient balance
such overdrawn principal amount shall be downgraded by one step from its 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 approving authority with adequate justification)

Rescheduling & Restructuring of Loan

Licensed Institutions can Reschedule or Restructure the loans if they are confident of following points and upon receipt of a written Plan of Action from the borrower
1.
2.

Evidence of adequate loan documents and existence of collateral

If the licensed Institutions are confident that the Rescheduled & Restructured loan will be recovered At least 25 percent of total accrued interest up to the date of Rescheduling or Restructuring should have been collected Rescheduling and Restructuring is not allowed in case of Margin Lending.

3.

4.

Loan Loss Provisioning

Classification of Loan
Pass Substandard Doubtful Loss

Loan Loss Provision

1Percent (GLLP) 25 Percent (SLLP) 50 Percent (SLLP) 100 Percent (SLLP)

In case of Rescheduled & Restructured loans minimum of

12.50% loan loss provision should be provided. In case of insured loan 25% of the above mentioned provisioning rate .

In case of Personal Gtee Loans

Where the loan is extended only against personal Gtee, a statement of the assets not claimable by any other, shall be obtained. Such loans shall be classified as above
An additional provision by 20 percent point shall also be provided. (But this additional provision is not required in Deprived sector Lending and education loan)

Adjustment in Provisioning
Except in the following cases banks are prohibited from making any adjustments in their loan loss provision amount
1.
2.

3.

4.

If the loan is fully written off If the loan is repaid in installment or partially, at the time of providing loan loss provisioning as required per the classification, the provision amount may be written back upto the extend of repaid amount If the payment of interest & principal of Rescheduled & Restructured loan is regular upto 2 years Separate statement should be prepared for such loans.

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)

Non Banking Assets

100% provision
Borrowers should be black listed while acquiring NBA in case of

the loan outstanding is more than 25 lacs Assets should be Valued by independent valuators Clear provision should be made in the Financial byrules regarding NBA 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

Credit Sale/Purchase/Re-purchase and Takeover

Capital inadequate banks cant go for CS,CP,RP&TO

without prior approval of NRB. Banks should be capital adequate Such provision should be clearly mentioned in the banks credit policy Cant be done during the last month of FY Half Yearly reporting to NRB 50% Risk Wt in Contingent liability

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 cant be 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 only maximum 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 cant borrow other than education loan, Hire purchase loan, Home loan and household purpose.

Directive 3

Single Borrowers Limit (SOL)

NRB guidelines on Limits

The Single Obligor Limit is 25% of the Certified core capital of

the preceding quarter end . (Funded & Non funded facility) Similarly, NRB has prescribed two ceilings for exposure on specific 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 also has 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, Cement Industry, Iron Industry and Productive Sectors.

Constituents of a Group
Both companies where one company holds at least 25% of another

company. 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.

Waiver in Single Obligor Limits

Banks are allowed to extend facilities in excess of their

limits to Nepal Oil Corporation and Nepal Khadya Sansthan. Similarly, the restriction is not applicable in loans secured by Fixed Deposits, Govt. and NRB Bond, unconditional guarantee of Multilateral Development Banks (IMF, MDB etc.) and Internationally Rated Banks (Top 1000 Banks as per Banker of July)

Lending in excess of SOL

Where the bank has extended loans and advances to a

group of borrower in excess of the single obligor limit, the Bank is required to create 100% loan loss provision in the excess amount.

Hydropower Projects/Transmission Line and Cable Car

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

Capital Power purchase agreement is required to go beyond 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.

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 in the above limit)

Productive Sector Loan

20% of total loan to the productive sector

loan(within 3 years) Annual Plan should be formulated; half yearly target. BoD should review half yearly 10% of total loan in Agriculture and Energy sectors. (by 2071)

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>10m DBR

Who is blacklisted?
Borrowers/defaulters - overdue loan of one year.

(BoD can add 3 months time) Misuse of loan/facility Misuse of collateral Absconding borrower Bankrupt borrower BFI files the case in a court Files the case in DRT

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 issued cheques Penalised under NRB Acts 2058, BAFIA and Directives