DBFIA Practice Direction No. 2: Classification of Loans and Other Assets

DBFIA Practice Direction No. 2
DOMESTIC BANKS AND FINANCIAL INSTITUTIONS ACT
DBFIA Practice Direction No. 2
Classification of Loans & Other Assets
Authority
This Practice Direction is made in exercise of the authority conferred on the Central Bank of Belize (Central Bank) by Section 9 of the Domestic Banks and Financial Institutions Act (DBFIA), 2012 and replaces the previously issued DBFIA Practice Direction No. 2 of 2013. Summary This DBFIA Practice Direction prescribes the methodology for the evaluation and classification of loans and other assets held by licensees, and the procedures for applying this methodology. Definitions

1. Non-performing Loans and Other Interest-bearing Assets are those whose:
   a. principal and/or interest are due and unpaid for ninety (90) days or more based on pre￾established repayment terms; or b. interest payments equal to ninety days interest or more have been capitalized.
2. Overdrafts and other credit facilities without pre-established repayment terms are considered non￾performing when deposits are insufficient to cover the interest capitalized for ninety days or more.
   The principal balance outstanding and not the amount of delinquent payments is used in calculating the aggregate amount of non-performing loans.
3. Restructured Loans and Advances are credit facilities which have been refinanced, rescheduled,
   rolled-over, or otherwise modified under more favorable terms and conditions for the borrower because of weaknesses in the borrower's financial condition and/or repayment ability.
4. Other Assets are overdraft and other credit facilities or any other asset that do not have a pre￾established repayment term.

DBFIA Practice Direction No. 2
REQUIREMENTS
A. Classification System

1. Non-performing Loans and Other Assets:
   Loans and other assets are to be considered non-performing when there are well defined credit weaknesses, such as: when the borrower's cash flow is insufficient to service the debt as arranged; when there are several renewals with capitalization of interest; or when the primary source of repayment is insufficient to service the debt and the bank has to look to secondary sources such as collateral or refinancing for repayment; provided that where full security is in place in the form of cash held with the lending institution or in readily marketable Government securities, loans and other assets may be excluded from being impaired. Additionally, insolvency or bankruptcy of a borrower should immediately trigger a non￾performing classification. Non-performing Loans and Other Assets are to be placed in the following categories according to the specific weaknesses outlined below:
   a) Loans and Other Assets are to be classified as SUBSTANDARD when any one or more of the following conditions exist:
   (i) loans are three and up to six months in arrears; or (ii) interest charges on overdraft facilities have not been covered by deposits for three and up to six months; or (iii) the approved limit on overdraft facilities has been exceeded for six and up to twelve months; or (iv) loans and other assets fully secured by government guarantees are three and up to six months in arrears and the said government guarantees are ruled invalid by a court; or (v) contractual arrangements on other assets are not being met. b) Loans and Other Assets are to be classified as DOUBTFUL when any one or of more of the following conditions exist:
   (i) loans are over six and up to twelve months in arrears; or (ii) interest charges on overdraft facilities have not been covered by deposits for over six and up to twelve months; or (iii) the approved limit on overdraft facilities has been exceeded for twelve and up to

DBFIA Practice Direction No. 2 eighteen months; or (iv) loans and other assets fully secured by government guarantees are over six and up to twelve months in arrears and the said government guarantees are ruled invalid by a court; or (v) collection of other assets under contractual arrangements is highly unlikely. c) Loans and Other Assets are to be classified as LOSS when any one or more of the following conditions exist:
(i) loans are over twelve months in arrears; or (ii) the approved limit on overdraft facilities has been exceeded for over eighteen months; or (iii) interest charges on overdraft facilities have not been covered by deposits for over twelve months; or (iv) loans and other assets fully secured by government guarantees are more than twelve months in arrears and the said government guarantees are ruled invalid by a court; or (v) where other assets under contractual arrangements are considered uncollectible. d) Exception Sectors –The loans and other assets granted to the agriculture and marine sectors are to be classified as:
(i) Substandard - loans are six and up nine months in arrears; (ii) Doubtful – loans are over nine and up to fifteen months in arrears and the approved limit on overdrafts has been exceeded for over eighteen months; and (iii) Loss – loans are over eighteen months in arrears. These exceptions apply only to loans and other assets classified on or after the effective date of 1 November 2018 implementation of this revised Practice Direction.
2. Performing Loans and Other Assets:
Loans and other assets which are performing may, at the discretion of the licensee, be categorized in the manner outlined below:
a) Loans and Other Assets may be classified as SPECIAL MENTION when:
(i) They are in arrears for a period of less than three months; or

DBFIA Practice Direction No. 2
(ii) They are current but the bank is aware of factors which may affect the borrower’s ability to service the loan as agreed, such as when the financial condition of the borrower deteriorates or when market conditions affecting the borrower declines significantly. All loans and other assets which do not fit any of the above-mentioned categories may be classified as PASS. B. Restructured Non-performing Loans Restructured non-performing loans should not be classified as PASS for a minimum of three months following modification of the credit agreement. The provisions that was established for the restructured non-performing loan should remain in place for three months.
C. Frequency and Reporting of Classification

1. Loan classification reviews should be conducted by licensees at least quarterly based
   on the licensee's financial year; and
2. A list of all classified facilities shall be reported by each licensee to the Central Bank
   on a quarterly basis on Bank Return BR8, based on the licensee's financial year. In addition, on a monthly basis, each licensee shall report an aggregate of classified loans to the Central Bank on Bank Return BR8a. D. Relationship to Other DBFIA Practice Directions This DBFIA Practice Direction should be read in conjunction with the companion DBFIA Practice Directions on Treatment of Interest on Loans and Other Interest-Bearing Assets and Loan Loss Provisions and Reserve. 1 November 2018