BANQUE DE LA REPUBLIQUE DU BURUNDI

LE GOUVERNEUR

CIRCULAIRE N° 12/2018 ON RISK CLASSIFICATION AND PROVISIONING FOR CREDIT INSTITUTIONS ISSUED PURSUANT TO LAW NO. 1/17 OF AUGUST 22, 2017 GOVERNING BANKING ACTIVITIES

Having regard to Law No. 1/34 of December 2, 2008 establishing the Statutes of the Banque de la République du Burundi, particularly Articles 7 (paragraphs 4 and 6) and 8;

Having regard to Law No. 1/17 of August 22, 2017 governing banking activities, particularly Articles 3, 48, 49 (paragraph 8), 50, 51 (paragraph 1), 52, 53 and 63;

Having reviewed Circular No. 12/2013 on risk classification and provisioning for banks and financial institutions;

The Banque de la République du Burundi, hereinafter referred to as the "Central Bank", hereby enacts:

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CHAPTER I: GENERAL PROVISIONS

Article 1: Object

This circular aims to establish the minimum rules for classifying exposures and establishing related provisions, applicable to credit institutions.

Article 2: Definitions

In the sense of this circular, the following terms mean:

exposures, the aggregate risks incurred by a credit institution on an counterparty (natural or legal person) in the form of:

• disbursed loans regardless of their nature, form and term;
• signed commitments given (such as guarantees, aval endorsements, irrevocable financing undertakings, etc.);
• debt securities issued by the counterparty and subscribed to by the institution when these are classified as loans and advances or available-for-sale assets;
• hire-purchase/leasing;

non-performing exposures (NPEs), the aggregate of pre-doubtful, doubtful and compromised exposures;

overdue exposure, any exposure showing at least one unpaid maturity;

frozen current account, a current account operating in a debit position that has not recorded, during a quarter, deposits covering at least the interest and fees (overdraft charges) calculated for that quarter;

clearing period for the debit balance of a frozen current account, the period obtained according to the following formula: (Debit Balance x 90) / Sum of credited movements already recorded on this exposure.

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CHAPTER II: CLASSIFICATION OF EXPOSURES

Article 3: Categories of Exposures

Exposures shall be classified into five categories:

• performing exposures;
• exposures under surveillance;
• pre-doubtful exposures;
• doubtful exposures;
• compromised exposures.

Article 4: Performing Exposures

The following are considered performing exposures:

• loan balances, with or without an established amortization schedule, whose full repayment of principal and/or interest shows no delay relative to contractual conditions and terms;
• debit balances of current accounts that record significant credited movements and are not yet frozen;
• debt securities issued by a counterparty whose full repayment of principal and/or interest shows no delay relative to contractual conditions and terms;
• loan/leasing balances whose full rental payment shows no delay relative to contractual conditions and terms.

To be eligible for this category, regardless of the absence of payment delays, an exposure must be held against a counterparty whose capacity to honor its obligations in full and on time raises no cause for concern from the lending institution.

Article 5: Exposures Under Surveillance

The following are considered "exposures under surveillance":

• loan balances with an established amortization schedule that have not been extended or renewed, where one or more maturities remain unpaid, in whole or in part, for a period of less than 90 days after the contractual maturity date;
• loan balances without an established amortization schedule and not extended or renewed, which remain unpaid, in whole or in part, for a period of less than 90 days after their contractual maturity date;
• debit balances of frozen current accounts:
  • whose clearing period is less than 90 days;
  • which record overdrawn amounts relative to authorized credit limits and are not regularized within a period of less than 90 days;
• debt securities issued by the counterparty whose repayment of principal and/or interest shows a delay of less than 90 days after the maturity date;
• loan/leasing balances that have not been extended or renewed, whose rental payment shows a delay of less than 90 days after the maturity date;
• exposures without overdue payments held against counterparties whose capacity to repay their obligations in full and on time gives rise to concern. The reasons for this concern may include:
  • the occurrence of internal and/or external events such as a trend toward deterioration in the client's financial situation, notably decreased cash flow, unexplained decrease in working capital, and extended supplier payment terms;
  • difficulties within the client's business sector;
  • a downward trend in the market value of securities issued by the counterparty not justified by general interest rate levels;
  • indicators of depreciation of collateral received to cover the exposure;
  • etc.

Article 6: Pre-Doubtful Exposures

The following are considered pre-doubtful exposures:

• loan balances with an established amortization schedule where one or more maturities remain unpaid for a period ranging from 90 to 179 days;
• loan balances without an established amortization schedule, which remain unpaid for a period ranging from 90 to 179 days after their contractual maturity date, without the loan being extended or renewed;
• overdrawn amounts relative to authorized credit limits, recorded on loans in the form of current account advances, which are not regularized within a period ranging from 90 to 179 days;
• debit balances of frozen current accounts whose clearing period, calculated according to the formula provided in Article 2 (5th bullet), falls between 90 and 179 days;
• debt securities issued by the counterparty whose repayment of principal and/or interest shows a delay ranging from 90 to 179 days after the maturity date;
• loan/leasing balances whose rental payment shows a delay ranging from 90 to 179 days after the maturity date and which have not been extended or renewed;
• loan balances whose full and timely repayment is, regardless of any payment delay, uncertain due to:
  • elements intrinsic to the counterparty (persistent imbalance in financial situation, excessive indebtedness, significant decrease in turnover, etc.);
  • downgrade of the rating assigned to the counterparty by a rating agency;
  • failure by the counterparty to transmit necessary financial documents for assessing its solvency;
  • occurrence of internal (management issues, shareholder disputes, etc.) or external difficulties (persistent sectoral challenges, substantial decline in stock market price of securities issued by the counterparty, etc.).

Article 7: Doubtful Exposures

The following are considered doubtful exposures:

• loan balances with an established amortization schedule and not extended or renewed, where one or more maturities remain unpaid for a period between 180 and 359 days;
• loan balances without an established amortization schedule and not extended or renewed, where one or more maturities remain unpaid for a period between 180 and 359 days;
• overdrawn amounts relative to authorized credit limits, recorded on loans in the form of current account advances, which are not regularized within a period between 180 and 359 days;
• debit balances of frozen current accounts whose clearing period, calculated according to the formula provided in Article 2 (5th bullet), falls between 180 and 359 days;
• debt securities issued by the counterparty whose repayment of principal and/or interest shows a delay for a period equal to or greater than 180 days, but not exceeding 359 days, after their maturity date;
• loan/leasing balances not renewed, whose rental payment shows a delay of at least 180 days and up to 359 days after the maturity date;
• loan balances whose repayment is, regardless of any payment delay, unlikely due to the following elements:
  • intrinsic elements to the counterparty (persistent imbalance in financial situation, excessive indebtedness, significant decrease in turnover, etc.);
  • downgrade of the rating assigned to the counterparty by a rating agency;
  • failure by the counterparty to transmit necessary financial documents for assessing its solvency;
  • occurrence of internal (management issues, shareholder disputes, etc.) or external difficulties (persistent sectoral challenges, substantial decline in stock market price of securities issued by the counterparty, etc.);
  • severe deterioration in the financial situation of the counterparty (e.g., loss of a significant proportion of capital);
  • existence of litigation likely to compromise compliance with contractual terms;
  • persistent sectoral difficulties;
  • etc.

Article 8: Compromised Exposures

The following are considered compromised exposures:

• loan balances with an established amortization schedule and not renewed, where one or more maturities remain unpaid for a period of 360 days or more;
• loan balances without an established amortization schedule and not renewed, which remain unpaid for a period of 360 days or more after their contractual maturity date;
• overdrawn amounts relative to authorized credit limits, recorded on loans in the form of current account advances, which are not regularized within a period of 360 days or more;
• debit balances of frozen current accounts whose clearing period, calculated according to the formula provided in Article 2 (5th bullet), is equal to or greater than 360 days;
• debt securities issued by the counterparty whose repayment of principal and/or interest shows a delay for a period of 360 days or more after the maturity date;
• loan/leasing balances not renewed, whose rental payment shows a delay of 360 days or more after the maturity date;
• loan balances whose repayment is unlikely even without payment delay, considering:
  • severe deterioration in the financial situation of the counterparty (e.g., loss of a significant proportion of capital);
  • existence of litigation likely to compromise compliance with contractual terms;
  • cessation of activities or liquidation of the counterparty;
  • persistent sectoral difficulties;
  • etc.

Classifying an exposure in the "compromised exposures" category results in transferring all exposures held against the concerned counterparty and related parties to this category.

The credit institution must establish provisions covering the total balance of these exposures, net of deductible collateral.

Article 9: Downgrading Exposures to Lower Categories

The criteria set forth in this circular for classifying exposures into any of the exposure categories constitute minimum criteria. Credit institutions may classify their exposures into a lower category if they deem it necessary based on available information.

The Central Bank may require downgrading disbursed and/or signed loan balances granted to a given counterparty to a lower category and establishing appropriate provisions when deemed necessary.

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CHAPTER III: RESCHEDULING OR RESTRUCTURING AN EXPOSURE

Article 10: Limits on Rescheduling or Restructuring Overdue Exposures

A credit institution may agree on new repayment terms with a client whose exposures are classified as overdue. However, such exposures may be rescheduled or restructured no more than three times and by express decision of the institution's competent body.

Article 11: Observation Period for a Rescheduled or Restructured Loan

A rescheduled or restructured loan must remain in the category it occupied prior to rescheduling or restructuring during an observation period of 90 days.

Article 12: Reclassification of Rescheduled or Restructured Loans

Rescheduled or restructured loans are reclassified into:

• the performing exposures category, when repayment occurs during the observation period stipulated in the preceding article, in accordance with the newly agreed terms;
• a lower risk quality category than the original one prior to rescheduling or restructuring, when they record a payment incident during the observation period.

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CHAPTER IV: ESTABLISHMENT OF PROVISIONS

Article 13: Provisioning Rates

Exposures must be covered by provisions amounting to at least:

• 1%, for performing exposures;
• 3%, for exposures under surveillance;
• 20%, for pre-doubtful exposures;
• 50%, for doubtful exposures;
• 100%, for compromised exposures.

Provisions related to performing exposures are taken into account in supplementary own funds.

Article 14: Calculation Basis for Required Provisions

Provision calculation is based on the total balance of each exposure category, less the following collateral:

• guarantees received from the Public Treasury;
• pledge of securities issued or guaranteed by the Public Treasury;
• cash pledges (security deposits);
• guarantees received from international organizations or financial institutions amounting to 80%, subject to Central Bank approval;
• pledge of time accounts opened with the credit institution itself, or negotiable debt securities issued by it;
• pledge of treasury bills or debt securities issued by Burundese credit institutions amounting to 80%;
• guarantees provided within the framework of money market commitments;
• guarantee from a top-tier international bank other than the parent or affiliated entity, unless exempted by the Central Bank.

Article 15: Characteristics of Deductible Collateral

To be deductible, the collateral provided in the preceding article must:

• be formalized in writing, drawn up and registered in compliance with applicable legal and regulatory provisions;
• be callable on first demand without possibility of dispute;
• have a maturity at least equal to that of the covered loan.

Collateral may only be deducted up to the covered portion of the loan, considering its value.

Article 16: Provisioning of Rescheduled or Restructured Exposures

Provisions established for rescheduled or restructured exposures may only be released when these exposures are reclassified into the performing exposures category in accordance with Article 12.

Article 17: Accounting for Interest and Fees Associated with Overdue Exposures

When accrued, interest and fees associated with overdue exposures must be recorded in a specific asset account "suspended interest". Consequently, a related provision must be established in a liability account "reserved overdraft charges".

Interest may only be recognized as income when actually collected.

Article 18: Treatment of Impairments Determined According to IFRS/IAS Standards

The amount of provisions required under this circular constitutes a regulatory minimum. If the impairment amount determined according to IFRS/IAS standards is lower than the provisions required by this circular, the shortfall is deducted from earnings and placed in a non-distributable reserve account titled "regulatory reserves for credit risks" which cannot be included in the calculation of prudential own funds.

When the impairment amount determined according to IFRS/IAS standards is equal to or greater than the provisions required by this circular, these impairments are considered adequate.

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CHAPTER V: WRITE-OFF OF COMPROMISED EXPOSURES

Article 19: Write-Off Obligation for Compromised Exposures

Credit institutions must write off fully provisioned compromised exposures meeting the following conditions:

• loan balances with an established amortization schedule and not renewed, where one or more maturities remain unpaid for a period of 24 months or more;
• loan balances without an established amortization schedule and not renewed, which remain unpaid for a period of 24 months or more after their contractual maturity date;
• overdrawn amounts relative to authorized credit limits, recorded on loans in the form of current account advances, which are not regularized within a period of 24 months or more;
• debit balances of frozen current accounts whose clearing period, calculated according to the formula provided in point 2 of this circular, is equal to or greater than 24 months;
• debt securities issued by the counterparty whose repayment of principal and/or interest shows a delay for a period of 24 months or more after the maturity date;
• loan/leasing balances not renewed, whose rental payment shows a delay of 24 months or more after the maturity date.

However, credit institutions may write off any other fully provisioned exposure deemed irrecoverable.

Furthermore, credit institutions must monitor written-off exposures off-balance sheet.

Article 20: Write-Off of Exposures on Counterparties Related to the Institution

Prior approval from the Central Bank is required for any write-off of exposures held against counterparties related to the credit institution.

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CHAPTER VI: FINAL PROVISIONS

Article 21: Declaration to the Central Bank

Credit institutions must transmit monthly to the Central Bank:

• the balance of their exposures by beneficiary, classified by category as well as related provisions according to forms in Annexes 1 to 4;
• the list of loans rescheduled or restructured during the month, specifying the dates of the 1st, 2nd and/or 3rd restructuring/rescheduling according to the form in Annex 5;
• a report on written-off exposures and the related recovery status according to forms in Annexes 6 and 7.

Article 22: Information Available at All Times

Credit institutions must have at all times information on the number and amount of exposures granted during each financial year. They must also hold data on the number and amount of exposures that have become overdue among said exposures.

Article 23: Entry into Force

This circular replaces Circular No. 12/2013 of April 26, 2013 and enters into force on the day of its publication on the Central Bank's website and in the Official Gazette of Burundi.

Fait à Bujumbura, le 17/08/2018

Jean CIZA
Gouverneur.

1, Avenue du Gouvernement - B.P. 705 BUJUMBURA - Tél : (257) 22-20 40 00 / 22 22 27 44 - Fax : (257) 223128 - Courriel brb@brb.bi

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Annexes

Annex 1 to Circular No. 12/2018

Credit Institution:
Document: Provisions for Performing and Surveillance Exposures
Period:
Frequency: Monthly

Libellé	Montant des encours	Montant des garanties déductibles	Montant net	Taux de provision	Montant des provisions
Provisions pour créances saines
Provisions pour créances à surveiller
Total

In thousands of Burundian Francs (BIF)

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Annex 2 to Circular No. 12/2018

Credit Institution:
Document: Provisions for Pre-Doubtful Exposures
Period:
Frequency: Monthly

Nom du client	Date de naissance	Carte d'identité	Registre de commerce	Profession	Identifiant unique du service des impôts	Encours du crédit	Montant des garanties déductibles	Montant net	Nbre de jours retard de paiement	Taux de provision en %	Provision constituée
TOTAL

In thousands of Burundian Francs (BIF)

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Annex 3 to Circular No. 12/2018

Credit Institution:
Document: Provisions for Pre-Doubtful Exposures
Period:
Frequency: Monthly

| Nom du client | Date de naissance | Carte d'identité | Registre de commerce | Profession | Identifiant unique du service des impôts | Encours du crédit | Montant des garanties déductibles | Montant net | Nbre de jours retard de paiement | Taux de provision en % | Provision constituée | |---------------|-------------------|------------------|----------------------|------------|------------------------------------------|------------------