Regulatory Alerts1998-11-10 | 7159Classification of Loan Risks
Banque du Liban issued Basic Decision No. 7159 mandating all Lebanese banks and financial institutions to implement dual debt risk classification systems: a standardized supervisory framework distinguishing performing from non-performing loans, and a customized internal grading system with at least ten risk tiers. The regulation requires institutions to establish robust internal governance, adopt credit rating or scoring methodologies, and conduct comprehensive borrower and facility assessments covering financial, managerial, sectoral, and external risk factors. Compliance is enforced through mandatory quarterly reporting via the eSTR/SEBIL system, alignment mapping between internal and supervisory grades, and administrative penalties for non-compliance, with a six-month implementation grace period.
Old Number 1682 | Text/Section/1 R/58 T-6-30/2016
Basic Circular No. 58 Also addressed to Financial Institutions
We submit herewith a copy of Basic Decision No. 7159 dated 1998/11/10 concerning the classification of debt risks.
Beirut, 1998/11/10 Governor of Banque du Liban Riad Toufic Salamé
Decision No. 7159
Classification of Debt Risks
The Governor of Banque du Liban, Pursuant to the Monetary and Discount Law, particularly Article 174 thereof, And pursuant to the decision taken by the Central Council in its session held on 1998/11/10,
Decides as follows:
Article 1: For the purpose of applying this Decision, the following terms shall have the meanings indicated below: -1 "Retail Loans": Include:
- All consumer loans (including car loans, student loans, education loans, and other consumer loans).
- Revolving Credit lines, including credit cards and loans granted for purely personal or consumer purposes, not related to professional or commercial objectives.
- Residential loans. -2 "Other Loans and Facilities": All types of loans and facilities other than "Retail Loans" (including Corporate loans, Small and Medium Enterprises (SME) loans, etc.).
¹ *Amended by Article 1 of Interim Decision No. 12256 dated 2016/5/4 (Interim Circular No. 422), whose Article 9 stipulates: "Banks and financial institutions are granted a maximum deadline of six months from the date of issuance of this Decision to apply its provisions."
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Article 2: Banks and financial institutions are required to adopt two systems for classifying debt risks:
System 1: Supervisory Debt Risk Classification (Classification Supervisory): Aims to distinguish between performing and non-performing debts, in accordance with Annex No. (1) "Classification of Retail Loan Risks" and Annex No. (2) "Classification of Other Loans and Facilities Risks" attached to this Decision.
System 2: Internal Loan Grading System (System Grading Loan): Aims to assist in managing credit risk within the bank or financial institution, particularly regarding the determination of loan and facility portfolio risks, and is commensurate with the size and complexity of operations in the bank or financial institution. Loans and facilities granted shall be evaluated according to at least ten grades, as stated in Annex No. (3) attached to this Decision, distributed as follows:
- Seven classification grades for performing loans.
- Three classification grades for non-performing loans.
¹ *Amended by Article 2 of Interim Decision No. 12256 dated 2016/5/4 (Interim Circular No. 422), whose Article 9 stipulates: "Banks and financial institutions are granted a maximum deadline of six months from the date of issuance of this Decision to apply its provisions." ² *Added by Article 3 of Interim Decision No. 10711 dated 2011/4/27 (Interim Circular No. 256).
Article 3: In developing their internal classification system, banks and financial institutions shall follow the following steps:
First: Obtain prior approval from the Board of Directors or a specialized committee authorized by the Board for the Internal Loan Grading System.
Second: Include the following core elements in the internal classification system: -1 Determination of responsible parties for: a - Initial loan grade determination. b - Grade review. c - Final approval of the grade. -2 Mechanism for periodic review of credit files. -3 Mechanism for reviewing files of interconnected borrower groups. -4 Mechanism for reviewing the status of economic sectors most impacting the bank's or institution's loan and facility portfolio. -5 Mechanism for determining provisions necessary to cover expected losses. -6 Reports to be prepared, their frequency, and the parties to whom they are submitted.
Third: Determine which debt files are subject to one of the following methodologies: -1 Credit Rating Methodology: Applied to commercial loan files facing different risk characteristics, where each client is evaluated individually based on quantitative and qualitative elements. -2 Credit Scoring Methodology: Applied to retail loans with similar risk characteristics, where the client is evaluated by comparison with a peer group of similar characteristics. This methodology relies primarily on available historical data and quantitative techniques.
Fourth: Develop an internal classification system based on borrower-specific criteria and facility-specific criteria, relying on quantitative elements including the client's financial ratios and sector ratios, and qualitative elements including client evaluation based on prior knowledge and available information, with a minimum of: -1 Analysis of individual or consolidated financial data (where applicable) and evaluation of the client's repayment capacity based on current financial status, past years' status, and future expectations through the following minimum elements: a - Current and projected cash flows (including operational capital investments, sufficiency to cover short and medium-term obligations...) under normal and stressed conditions. b - Sales/Revenues (sales volume and development). c - Profitability (gross margin, return on assets, return on equity...). d - Funding sources: - Leverage ratio (representing the ratio of total debt to equity). - Working capital and the client's ability to collect receivables from customers. e - Asset quality (degree of diversification, liquidity, current ratio = Current Assets / Current Liabilities). f - Financial data transparency (availability of audited financial statements by a statutory auditor, quality of these reports, and existence of sufficient explanations...). -2 Evaluation of client management, particularly by: a - Evaluating the competence, experience, and integrity of management officials. b - Ensuring the availability of a succession plan. c - Evaluating the client's relationship with third parties (reputation and legal risks). d - Reviewing the adopted business strategy (including nature and quality of activities, types of business, and markets operated in...). e - Evaluating future prospects. -3 Analysis of the sector to which the client belongs, particularly: a - Sector profitability and risks, and its linkage and sensitivity to other business sectors. b - Earnings volatility and demand cyclicality. c - Client's market share and position, and information on competitors. -4 Evaluation of the risk of the intended loan through evaluation of: a - Types of facilities requested and their suitability with projected cash flows. b - Contractual covenants. c - Quality of available collateral and/or guarantees. -5 Evaluation of the country risk where the client operates and the impact of political and economic factors on the client's status and repayment capacity, and evaluation of the client's cash flow sources. -6 Evaluation of external elements, particularly: a - Operational risks affecting the client's status that the client cannot control, such as theft incidents, fire, asset damage, natural disasters. b - Regulatory environment in which the client operates.
¹ *Amended by Article 2 of Interim Decision No. 12256 dated 2016/5/4 (Interim Circular No. 422), whose Article 9 stipulates: "Banks and financial institutions are granted a maximum deadline of six months from the date of issuance of this Decision to apply its provisions."
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Article 4: For supervisory purposes, the alignment between the internal classification system and the supervisory classification system shall be adopted according to Annex No. (4) attached to this Decision.
¹ *Added by Interim Decision No. 10711 dated 2011/4/27 (Interim Circular No. 256), then amended by Article 4 of Interim Decision No. 12256 dated 2016/5/4 (Interim Circular No. 422), whose Article 9 stipulates: "Banks and financial institutions are granted a maximum deadline of six months from the date of issuance of this Decision to apply its provisions."
Article 5: The concerned banks and financial institutions shall: -1 Take necessary internal measures to ensure the Board of Supervisors at Banque du Liban has access to documents proving compliance with Article 2 of this Decision. -2 Quarterly, provide the Economics Department at Banque du Liban with the debt classification status by risk and sector according to Forms (-3CR) and (-4CR) attached, within a maximum deadline of 20 days from the end of each quarter, via the eSTR project within the SEBIL system.
¹ *Amended by Interim Decision No. 7796 dated 2001/3/31 (Circular 1902 - Old Numbering), then renumbered to "Sixth" by Interim Decision No. 10711 dated 2011/4/27 (Interim Circular No. 256), then renumbered to "Fifth" by Article 5 of Interim Decision No. 12256 dated 2016/5/4 (Interim Circular No. 422). ² *Last amended by Article 1 of Interim Decision No. 12825 dated 2018/6/1 (Interim Circular No. 497), whose Article 3 stipulates: "Exceptionally, the Statistics and Economic Research Directorate at Banque du Liban shall be provided with data prepared according to Forms (-3CR) and (-4CR) for the First Quarter of 2018 by a maximum deadline of 2018/6/30 and for the Second Quarter by a maximum deadline of 2018/7/31." ³ *Name amended to "Economics Department" instead of "Statistics and Economic Research Directorate" by Decision No. 13779 dated 2025/11/28. ⁴ *Added by Article 7 of Interim Decision No. 12256 dated 2016/5/4 (Interim Circular No. 422), whose Article 9 stipulates: "Banks and financial institutions are granted a maximum deadline of six months from the date of issuance of this Decision to apply its provisions." ⁵ *Renumbered to "Seventh" by Article 2 of Interim Decision No. 10711 dated 2011/4/27 (Interim Circular No. 256). ⁶ *Renumbered to "Eighth" by Article 2 of Interim Decision No. 10711 dated 2011/4/27 (Interim Circular No. 256).
Article 6: Banks and financial institutions violating the provisions of this Decision shall be subject to the administrative penalties stipulated in Article 208 of the Monetary and Discount Law.
Article 7: This Decision shall take effect as of July 1, 1999.
Article 8: This Decision shall be published in the Official Gazette.
Beirut, 1998/11/10 Governor of Banque du Liban Riad Toufic Salamé
Annex No. 1
Supervisory Classification of Retail Loan Risks
| Days Past Due | Loan Classification |
|---|---|
| Up to 30 days | Normal |
| 31-60 days | Under Review |
| 61-90 days | Under Review & Restructuring |
| 91-180 days | Substandard |
| More than 181 days | Doubtful or Loss depending on circumstances |
Note: Compliance with Basic Decision No. 7776 dated 2001/2/21 regarding required provisions for each type of retail loan is mandatory.
¹ *Amended by Article 8 of Interim Decision No. 12256 dated 2016/5/4 (Interim Circular No. 422), whose Article 9 stipulates: "Banks and financial institutions are granted a maximum deadline of six months from the date of issuance of this Decision to apply its provisions."
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Annex No. 2
Supervisory Classification of Other Debt Risks (Non-Retail)
| Classification | Client & Debt Characteristics | Required Actions |
|---|---|---|
| -1 Normal | High capacity to meet obligations (regardless of collateral taken). Debt classified as normal if the following conditions are met:<br>• Complete credit file, especially supporting documents on client activity, clear/accurate facility purpose & repayment sources (even if cash-collateralized).<br>• Loan duration & size proportional to repayment cash flows.<br>• Updated financial data showing: real cash flows exceeding obligations at maturity (principal/interest); good solvency & liquidity; stable/positive growth in business volume & profitability.<br>• Active account movement & facility usage per purpose.<br>• No payment delays on due installments (principal/interest) except justified exceptional cases ≤30 days.<br>• No facility limit overdraws except justified exceptional cases ≤30 days, not exceeding 10% of facilities.<br>• No violations of laws, regulations, or instructions governing facilities & granting conditions. | |
| -2 Under Review | Acceptable capacity to meet obligations (principal/interest). Debt classified as Under Review if indicators include:<br>• Incomplete credit file (missing activity docs, unclear purpose/sources, or file not updated >1 year).<br>• Financial data older than 2 years.<br>• Slowed client activity & declining financial/account indicators.<br>• Payment delays on due installments (principal/interest) between 31-60 days.<br>• Facility limit overdraws for 31-60 days or overdraw volume >10% of granted facilities.<br>• Violations of laws/regulations governing facilities & conditions. | • Complete credit file deficiencies & obtain updated financial data.<br>• Remove violations & overdraws. |
| -3 Under Review & Restructuring | Financial deterioration may negatively impact future repayment capacity (principal/interest) if appropriate measures aren't taken. Debt classified as such if indicators include:<br> • No financial data or inability to update it (last data >3 years old).<br>• Client highly leveraged; available data shows significant activity/financial indicator decline (cash flows, liquidity, solvency, profitability) negatively impacting repayment.<br>• Sector indicators decline, market/economic conditions worsen, negatively impacting repayment.<br>• Client incurred accumulated losses eroding company capital.<br>• Payment delays on due installments (principal/interest) between 60-90 days.<br>• Signs of account movement difficulty (Core Hard) during Cash Conversion Cycle.<br>• Facility limit overdraws for 60-90 days.<br>• Debt restructuring occurred.<br>• Weak/defective company management (if legal entity) or fundamental partner disputes increasing default probability.<br>• Client faces lawsuits potentially causing financial damage & impacting repayment.<br>• Non-performing credit facilities with other institutions. | • Agree with client on a plan to address gaps.<br>• Re-evaluate plan quarterly, adjust classification as applicable. |
| -4 Substandard | Clear weakness in repayment capacity. Repayment relies on significant financial improvement or collateral liquidation. Debt classified as Substandard if indicators include:<br>• Significant decline in current/future cash flows, insufficient to meet obligations.<br>• Payment delays on due installments (principal/interest) between 91-180 days.<br>• Signs of account movement difficulty (Core Hard) during Cash Conversion Cycle, with unpaid balance not converted to a term loan matching client cash flows within 91-180 days.<br>• Facility limit overdraws for 91-180 days.<br>• Unpaid rescheduled installments for 60-90 days.<br>• Interest/fees considered unrealized. Overdue interest on unpaid notes >90 days considered unrealized.<br>• Prepare plan to gradually reduce client debt, refrain from granting additional facilities to limit losses.<br>• Re-evaluate situation quarterly, monitor plan compliance.<br>• Update collateral valuation to ensure market value sufficiency. | • Consider interest/fees as unrealized. Consider overdue interest on unpaid notes >90 days as unrealized.<br>• Prepare plan to gradually reduce client debt, refrain from granting additional facilities to limit losses.<br>• Re-evaluate situation quarterly, monitor plan compliance.<br>• Update collateral valuation to ensure market value sufficiency. |
| -5 Doubtful | Possibility of not recovering part of the debt even after collateral liquidation. Debt classified as Doubtful if indicators include:<br>• Payment delays on due installments (principal/interest) >180 days.<br>• Signs of account movement difficulty (Core Hard) during Cash Conversion Cycle, with unpaid balance not converted to a term loan matching client cash flows >180 days.<br>• Facility limit overdraws >180 days.<br>• Unpaid rescheduled installments >90 days. | • Form partial provision based on IFRS impairment tests.<br>• Consider interest/fees as unrealized. |
| -6 Loss | No possibility of recovering any amount from the debt value. | • Form full provision for debt value.<br>• Consider interest/fees as unrealized.<br>• Stop accruing interest/fees for declared bankruptcy. |
¹ *Amended by Article 8 of Interim Decision No. 12256 dated 2016/5/4 (Interim Circular No. 422), whose Article 9 stipulates: "Banks and financial institutions are granted a maximum deadline of six months from the date of issuance of this Decision to apply its provisions."
Annex No. 3
Internal Loan Grading System
| Grade | Definition |
|---|---|
| 1 Excellent | Virtually no risk. Economic productive purpose. Client's ability/willingness to meet obligations virtually certain, unaffected by economic/sector changes. |
| 2 Strong | Very good quality but higher risk than Grade 1 due to higher risk appetite. Low risk, high repayment capacity, unaffected by foreseeable developments. |
| 3 Good | Moderate risk, slight future sensitivity to economic/sector developments. |
| 4 Satisfactory | Repayment capacity still acceptable but bank's protection margin is modest. Average risk. |
| 5 Adequate | Repayment capacity more affected by significant negative economic/sector developments. Weak protection margin but risk still acceptable. |
| 6 Marginal | Weak quality. Short-term negative impact likely from significant economic/sector downturns. Borderline risk. |
| 7 Vulnerable | Weak quality. Highly exposed to default, high risk. Even minor negative developments may lead to actual default. |
| 8 Substandard | Insufficient current capacity to meet financial obligations. |
| 9 Doubtful | High probability of not recovering full debt (even after collateral liquidation). |
| 10 Loss | No chance of debt recovery. |
¹ *Amended by Article 8 of Interim Decision No. 12256 dated 2016/5/4 (Interim Circular No. 422), whose Article 9 stipulates: "Banks and financial institutions are granted a maximum deadline of six months from the date of issuance of this Decision to apply its provisions."
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Annex No. 4
Alignment between Supervisory Classification System and Internal System
| Supervisory System (Annex 2) | Internal System (Annex 3) |
|---|---|
| Normal (1) | Excellent (1) |
| Under Review (2) | Strong (2) |
| Under Review (3) | Good (3) |
| Under Review & Restructuring (4) | Satisfactory (4) |
| Substandard (5) | Adequate (5) |
| Substandard (6) | Marginal (6) |
| Substandard (7) | Vulnerable (7) |
| Substandard (8) | Substandard (8) |
| Doubtful (9) | Doubtful (9) |
| Loss (10) | Loss (10) |
¹ *Added by Interim Decision No. 12256 dated 2016/5/4 (Interim Circular No. 422), whose Article 9 stipulates: "Banks and financial institutions are granted a maximum deadline of six months from the date of issuance of this Decision to apply its provisions."
Annex 5
Form (-3CR): Classification of Debts by Risk Quarterly Status | Bank Number Basic Circular 58 as of: //_____ | Name Economics Department | Values in millions of Lira
| Code | Item | Total (LBP) | Equivalent (LBP) | Number of Customers | Number of Accounts |
|---|---|---|---|---|---|
| 1000 | Performing loans & facilities that have not or have seen a significant increase in credit risk | ||||
| 1001 | of which: Unsecured | ||||
| 1002 | of which: Accrued but not yet due interest | ||||
| 1003 | of which: Expected credit loss provision on performing loans & facilities | ||||
| 1500 | Collateral on performing loans & facilities | ||||
| 1510 | Cash collateral | ||||
| 1520 | Real estate collateral | ||||
| 1530 | Financial instruments collateral | ||||
| 1540 | Bank guarantees collateral | ||||
| 1550 | Other collateral | ||||
| 2000 | Performing loans & facilities that have not seen a significant increase in credit risk | ||||
| 2001 | of which: Unsecured | ||||
| 2500 | Collateral on performing loans & facilities that have not seen a significant increase in credit risk | ||||
| 2510 | Cash collateral | ||||
| 2520 | Real estate collateral | ||||
| 2530 | Financial instruments collateral | ||||
| 2540 | Bank guarantees collateral | ||||
| 2550 | Other collateral | ||||
| 3000 | Performing loans & facilities that have seen a significant increase in credit risk | ||||
| 3001 | of which: Unsecured | ||||
| 3500 | Collateral on performing loans & facilities that have seen a significant increase in credit risk | ||||
| 3510 | Cash collateral | ||||
| 3520 | Real estate collateral | ||||
| 3530 | Financial instruments collateral | ||||
| 3540 | Bank guarantees collateral | ||||
| 3550 | Other collateral | ||||
| 5000 | Non-performing loans & facilities that have seen a decline in credit value | ||||
| 5001 | of which: Unsecured | ||||
| 5002 | of which: Accrued interest on non-performing debts | ||||
| 5003 | of which: Expected credit loss provision on non-performing loans & facilities | ||||
| 5500 | Collateral on non-performing loans & facilities | ||||
| 5510 | Cash collateral | ||||
| 5520 | Real estate collateral | ||||
| 5530 | Financial instruments collateral | ||||
| 5540 | Bank guarantees collateral | ||||
| 5550 | Other collateral | ||||
| 9000 | Total |
Note: For reconciliation, Lebanon branches status 2010-0 is used if the bank has no foreign branches, and Lebanon & foreign branches status 2010-2 is used if the bank has branches outside Lebanon.
¹ Form (-3CR) replaced Form (-1CR) by Article 2 of Interim Decision No. 12825 dated 2018/6/1 (Interim Circular No. 497).
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Annex 6
Form (-4CR): Classification of Debts by Risk and Sector Quarterly Status | Bank Number Basic Circular 58 as of: //____ | Name Economics Department
| Code | Item | Total | Non-Resident | Resident |
|---|---|---|---|---|
| Amount | Customers | Amount | ||
| 1000 | Agriculture (A) | |||
| 1610 | Performing debts that have not or have seen a significant increase in credit risk | |||
| 1611 | of which: Expected credit loss provision | |||
| 1612 | of which: Accrued but not yet due interest | |||
| 1620 | Non-performing debts that have seen a decline in credit value | |||
| 1621 | of which: Expected credit loss provision | |||
| 1622 | of which: Accrued interest | |||
| 2000 | Electricity, Gas, Oil Industry (BCD) | |||
| 2600 | Industry (BC) | |||
| 3000 | Performing debts that have seen a significant increase in credit risk | |||
| 3500 | Collateral on performing debts that have seen a significant increase in credit risk | |||
| 3510 | Cash collateral | |||
| 3520 | Real estate collateral | |||
| 3530 | Financial instruments collateral | |||
| 3540 | Bank guarantees collateral | |||
| 3550 | Other collateral | |||
| 5000 | Non-performing debts that have seen a decline in credit value | |||
| 5001 | of which: Unsecured | |||
| 5002 | of which: Accrued interest on non-performing debts | |||
| 5003 | of which: Expected credit loss provision on non-performing debts | |||
| 5500 | Collateral on non-performing debts | |||
| 5510 | Cash collateral | |||
| 5520 | Real estate collateral | |||
| 5530 | Financial instruments collateral | |||
| 5540 | Bank guarantees collateral | |||
| 5550 | Other collateral | |||
| 9000 | Total |
Note: For reconciliation, Lebanon branches status 2010-0 is used if the bank has no foreign branches, and Lebanon & foreign branches status 2010-2 is used if the bank has branches outside Lebanon.
¹ Form (-4CR) replaced Form (-2CR) by Article 2 of Interim Decision No. 12825 dated 2018/6/1 (Interim Circular No. 497).