COBAC Regulation R-2018/01 on the Classification, Accounting and Provisioning of Credit Institution Receivables

^ COMMISSION BANCAIRE DE L'AFRIQUE CENTRALE COBAC REGULATION R-2018/01 ON THE CLASSIFICATION, ACCOUNTING AND PROVISIONING OF CREDIT INSTITUTION RECEIVABLES

The Central African Monetary Commission, Having regard to the Convention of 16 October 1990 establishing a Central African Monetary Commission, particularly Article 9 of its Annex; Having regard to the Convention of 17 January 1992 on harmonization of banking regulation in Central African States, particularly Article 32 of its Annex; Having regard to COBAC Regulation R-93/13 on commitments of credit institutions in favor of their shareholders or partners, directors, executives and staff (amended by COBAC Regulation R-2001/05); Having regard to COBAC Regulation R-98/01 of 15 February 1998 on the accounting plan for credit institutions; Having regard to COBAC Regulation R-2010/01 of 22 September 2010 on risk coverage for credit institutions; Having regard to COBAC Regulation R-2010/02 of 22 September 2010 on risk segmentation for credit institutions; Having regard to COBAC Regulation R-2016/03 on net own funds of credit institutions; Having regard to COBAC Regulation R-2016/04 of 8 March 2016 on internal control in credit institutions and financial holdings; Having regard to the OHADA Uniform Act on commercial company law and economic interest groups; Having regard to the OHADA Uniform Act on accounting law and financial information; Having regard to the OHADA Uniform Act on the organization of security interests.

Meeting on 16 January 2018 in Libreville; DECIDES:

Article 1 - The credit institutions referred to in Article 2 of the Annex to the Convention of 16 October 1990 shall perform the classification, accounting and provisioning of their receivables held with customers and any other counterparty under the conditions set out in the Accounting Plan for Credit Institutions (PCEC), this Regulation, and the provisions of COBAC Regulation R-2016/04 of 8 March 2016.

Chapter 1 - DEFINITIONS Article 2 - Credit institutions record their portfolio-held receivables as "healthy receivables", "sensitive receivables" and "troubled receivables". The classification of receivables into the appropriate categories is carried out independently of the guarantees covering them.

Article 3 - For the purposes of this Regulation, "receivable" means all on-balance sheet and off-balance sheet commitments held by a credit institution with a counterparty (natural or legal person) in the form of:

• loans disbursed or current account advances, regardless of their nature, form and term;
• irrevocable signature commitments (such as guarantees, avals, acceptances, irrevocable financing commitments, etc.) granted in favor of the counterparty;
• debt securities issued by the counterparty and held by the institution;
• movable and real estate financial leasing.

A counterparty is considered any natural or legal person benefiting from disbursed loans or signature commitments from a credit institution, or issuing debt securities held by such an institution.

Article 4 - Healthy receivables are those whose repayment is effected in accordance with contractual provisions and which are held with counterparties whose capacity to honor all current and future commitments raises no cause for concern (solid financial situation, quality shareholding, satisfactory sectoral situation and prospects, etc.). Discounted and unmatured instruments (commercial paper, mobilized foreign receivables, etc.) accepted by the drawee and whose final settlement is beyond doubt are also considered healthy receivables.

Article 5 - Sensitive receivables are those whose repayment is effected in accordance with contractual provisions, but whose current and future capacity to repay fully and on time raises cause for concern due to intrinsic factors (signs of deterioration in the client's financial situation, management issues, changes in shareholding, etc.) or external factors (difficulties in the client's sector of activity, downward trend in market value of securities issued by the counterparty not justified by general interest rate levels, etc.). Signature commitments on clients classified in the sensitive receivables category or whose financial situation raises cause for concern are also considered sensitive.

Article 6 - Troubled receivables consist of "immobilized receivables", "unpaid receivables" and "doubtful receivables".

Article 7 - Immobilized receivables are direct receivables on the State or guaranteed by it, advances on public budgets registered in the State budget and pledged, with payments irrevocably domiciled in the books of the credit institution, and advances on securities issued by the State, matured for more than 90 days but whose final repayment, though not compromised, cannot be made immediately by the State or guaranteed debtor. A current or ordinary account debited by the State or guaranteed by it is considered immobilized if, although recovery of the balance is not compromised, no significant credit movements are observed for more than 90 days. Significant credit movements are those recorded on the credit side of a current or ordinary account whose cumulative amount covers at least the interest, commissions and fees charged to that account over the considered period.

Article 8 - Unpaid receivables are amounts not paid at contractual maturity. They notably consist of:

• installments for non-mortgage loans unpaid for a duration less than or equal to 90 days;
• rental fees for simple leasing, lease with purchase option or financial leasing relating to real estate and installments for mortgage loans unpaid for a duration less than or equal to 180 days;
• rental fees for simple leasing, lease with purchase option or financial leasing relating to movable property unpaid for a duration less than or equal to 90 days;
• overdrafts against authorized credit limits (amount and/or validity period) recorded on current accounts, which are not regularized within a duration less than or equal to 90 days;
• interest and/or principal of matured debt securities unpaid for a duration less than or equal to 90 days.

Facilities subject to forfeiture of term for less than 90 days, for any reason other than the occurrence of non-payment or the debtor's inability to repay, are also considered unpaid.

Article 9 - Doubtful receivables are of any nature, even if secured, and present a probable risk of total or partial non-recovery. They notably consist of:

• facilities other than mortgage loans carrying at least one installment unpaid for more than 90 days;
• balances of mortgage loans carrying at least one installment unpaid for more than 180 days;
• balances of simple leasing, lease with purchase option or financial leasing relating to real estate carrying at least one rental fee unpaid for more than 180 days;
• balances of simple leasing, lease with purchase option or financial leasing relating to movable property carrying one rental fee unpaid for more than 90 days;
• debit balances of current or ordinary accounts with no significant credit movement for more than 90 days;
• debit balances of current or ordinary accounts in overdraft against authorized credit limits (amount and/or validity period), which are not regularized within a duration greater than 90 days;
• receivables with a contentious character (facilities subject to judicial recovery, collective proceedings initiated against the debtor - preventive settlement, judicial reorganization, asset liquidation, personal bankruptcy - receivables subject to contentious recovery or arbitration proceedings, termination of the financial leasing contract);
• debt securities matured and unpaid for more than 90 days.

Doubtful receivables also include:

• facilities subject to forfeiture of term for more than 90 days, other than those covered by Article 8;
• irrevocable signature commitments in favor of counterparties presenting a probable or certain risk of partial or total default, or whose facilities are classified as doubtful.

Article 10 - The classification of a fraction of facilities extended by a counterparty as doubtful receivables entails the transfer of all receivables held on that counterparty to doubtful holdings, regardless of any consideration related to possible guarantees (contagion effect). Receivables held on groups or persons linked to the concerned counterparty, considered as a single beneficiary, are also classified as doubtful receivables, as defined in Article 3 of COBAC Regulation R-2010/02 of 22 September 2010 on risk segmentation for credit institutions. The Monetary Commission may extend the scope of linked persons, based on objective elements in its possession, and inform the concerned institution.

Article 11 - Irrecoverable receivables are those whose non-recovery is deemed certain after exhaustion of all amicable or judicial means, or for any other relevant consideration. Doubtful receivables fully provisioned for more than 5 years must be transferred to irrecoverable receivables, subject to compliance with the provisions of Article 28 of this Regulation.

Chapter 3 - TREATMENT OF RESTRUCTURED RECEIVABLES Article 12 - The provisions of this chapter apply to receivables whose initial contractual terms are subject to amendments or novation by new agreements due to the borrower's financial situation, either by extension of their term (so-called matured receivables) or by renegotiation of all initial conditions (restructured receivables).

Article 13 - A credit institution may agree on new repayment terms with a client whose receivables are classified as sensitive, unpaid, immobilized or doubtful. Except for the Board of Directors, the body authorizing the restructuring or maturity operation must be at a hierarchically superior position to that of the person or body that initially authorized the credit. However, such receivables may only be matured or restructured upon explicit decision by the competent credit restoration body, which ensures that the borrower's financial situation allows repayment of the debt under the new terms.

Article 14 - Reclassification of a restructured or matured troubled receivable into healthy holdings may only occur if:

• the counterparty makes a repayment equal to at least the higher of the following amounts:
  1. 20% of the receivable amount determined after negotiation;
  2. the total of arrears included in the initial receivable before negotiation;
• the repayment is funded from the counterparty's own funds. It must not be subject to direct financing by the credit institution, nor to financing by the credit institution in favor of persons considered as a single beneficiary with said counterparty, within the meaning of Article 3 of COBAC Regulation R-2010/02 of 22 September 2010 on risk segmentation for credit institutions.

Failing this, the receivable is maintained in its initial classification category for a period of 180 days, starting from the first installment of the consolidation credit. Its reclassification into healthy receivables may only occur at the end of this probationary period, provided that no non-payment is recorded during this period. Provisions established prior to restructuring or maturity may only be reversed at the end of the probationary period. Except for immobilized receivables, any unpaid installment during the probationary period triggers automatic downgrade of the restructured or matured receivable balance to doubtful receivables. This balance must be fully provisioned. A receivable initially classified as doubtful remains in this category upon occurrence of a non-payment during the probationary period and must also be fully provisioned. A receivable initially classified as immobilized remains in this category upon occurrence of a non-payment during the probationary period.

Chapter 3 - CLASSIFICATION AND ACCOUNTING PROCEDURES FOR RECEIVABLES Article 15 - Sensitive, troubled and irrecoverable receivables are accounted for in accordance with the following principles: a. Sensitive, immobilized and unpaid receivables must be identified in specific accounts with particular identification attributes. b. Subject institutions may, for technical recovery time considerations, downgrade receivables becoming unpaid no later than one month after each relevant maturity. c. Unpaid amounts observed are cleared, in order of age, as they are paid; in any case, if the oldest unpaid amount attributed to the same debtor dates back more than 90 or 180 days depending on the case, they are subject to the treatment applied to doubtful receivables. d. Receivables becoming doubtful leave their original account and are charged to the "doubtful receivables" account relative to each class. e. Matured interest and commissions are recorded in income accounts only if actually received, as follows:

• accounting entries for interest and commissions recorded before downgrade to immobilized, unpaid or doubtful receivables are reversed if the concerned income has not been actually received; such income is then recorded in off-balance sheet accounts;
• interest generated by immobilized, unpaid and doubtful receivables not settled is not accounted for in income accounts; it must be recorded in off-balance sheet accounts. f. Irrecoverable receivables must be written off entirely for their full amount. The total of provisions previously established on these receivables must be reversed if applicable. g. Doubtful signature commitments are tracked in the "doubtful commitments" account of class 9. h. Entries recorded under this Regulation and the provisions of the Accounting Plan for Credit Institutions regarding troubled receivables are a translation of an accounting classification and do not entail novation. i. Subject to compliance with the provisions of Article 14 of this Regulation, consolidated amounts are tracked, depending on the duration of consolidation, in the main accounts "long-term loans", "medium-term loans" and "short-term loans" within sub-accounts "loans moratorium or consolidated on the State" (for the State) and "unallocated loans" (for other clients).

Consolidated amounts are the amounts of restructured or matured receivables as negotiated between the institution and its client.

Chapter 4 - PROVISIONING RULES Article 16 - Credit institutions are required to set up specific provisions and general-purpose provisions to cover their credit risk. General-purpose provisions apply to the global holdings of healthy, sensitive, immobilized and unpaid receivables registered on the balance sheet. Specific provisions are established to cover doubtful receivables.

Article 17 - The minimum annual allocation rate for general-purpose provisions is fixed at 0.5% of the global holdings, whose base is defined in Article 16 above. The amount of general-purpose provisions to be reached is fixed at a minimum of 2% of the gross balance sheet receivables. The annual minimum allocation provided in this article ceases to be mandatory once the 2% threshold is reached. This threshold, once reached, must be maintained permanently.

Article 18 - Provisions for troubled receivables are established in accordance with the following principles:

1. Provisioning is optional for immobilized, unpaid and doubtful receivables on the State or guaranteed by the State.
2. Provisioning of doubtful receivables not covered by State guarantee is effected as follows: a) receivables fully covered by one of the eligible guarantees provided in items 1 and 2 of Article 19 below give rise to no provisioning; b) receivables fully covered by one of the eligible guarantees provided in items 3, 4 and 5 of Article 19 must be fully provisioned within a maximum period of three years. The cumulative provision must cover: at least 25% of the total gross holdings concerned in the first year, 75% in the second year and 100% in the third year; c) receivables not covered by one of the eligible guarantees provided in Article 19 must be fully provisioned within a maximum period of two years. The cumulative provision must cover, at least 50% of gross holdings in the first year and 100% in the second year; d) receivables partially covered by one of the eligible guarantees provided in Article 19 must be provisioned according to item c) above for the amount not covered by the guarantee. The specific provision amount is obtained by multiplying the gross holding of each receivable by the applicable provisioning rate. Provisions must be accounted for no later than the annual account closing date following downgrade to doubtful receivables, according to rate modalities fixed in point 2 of the first paragraph. Doubtful receivables relating to financial leasing and lease with purchase option operations must be subject to provisioning equal to their amount. The treatments provided in this article apply to all receivables registered on the balance sheet, regardless of their date of placement or downgrade to doubtful receivables.

Article 19 - The eligible guarantees referred to in Article 18 are:

1. fiduciary transfers of money and pledges of cash (guarantee deposits, term accounts or treasury bills subscribed with the subject institution itself, or negotiable debt securities);
2. pledge of debt securities issued by the State;
3. counter-guarantees received from a credit institution established in CEMAC, UMOA or OECD countries, as defined by COBAC Regulation R-2010/01 of 22 September 2010 on risk coverage for credit institutions;
4. guarantees received from multilateral development banks, multilateral guarantee bodies, or public financing or guarantee bodies established in CEMAC, UMOA or OECD countries, as defined by COBAC Regulation R-2010/01 on risk coverage for credit institutions;
5. mortgages.

Article 20 - To be taken into account under the provisions of Article 18 above, guarantees must:

• be formalized in writing established and registered in compliance with current legal and regulatory provisions;
• explicitly stipulate that these values are allocated to cover incurred risks;
• have a maturity at least equal to that of the covered credit or signature commitment;
• regarding counter-guarantees received from a credit institution, be stipulated on first demand.

Article 21 - Doubtful receivables relating to financial leasing and lease with purchase option operations must be subject to provisioning in both social accounting and financial accounting based on their respective amounts in these two accountings. Provisioning of these receivables is effected in accordance with the provisions provided in the third paragraph of Article 18 above.

Article 22 - The value of mortgages must represent at least 120% of the credit holding. It must be determined prudently by a court-approved expert and subject to revision at least every 4 years. Failing this, the holding considered as covered by the guarantee under Article 18 of this Regulation equals 80% of the holding. The remainder is considered as uncovered and treated as such. Eligible mortgages are firm first or second rank on real estate. These mortgages must be duly formalized and registered.

Article 23 - Specific provisions are recorded in the accounts provided for this purpose in the appropriate classes of the accounting plan for credit institutions. In particular, provisions relating to doubtful leasing receivables are recorded in the "provisions for doubtful leasing receivables" account. Provisions relating to doubtful signature commitments are recorded, as applicable, in the "provisions for execution of aval and guarantee commitments" account, or, regarding commitments relating to financial leasing or lease with purchase option, in the "provisions for risk of non-collection of rents" account.

Article 24 - Identification as immobilized, unpaid and doubtful receivables is abandoned when payments resume regularly for amounts corresponding to maturities and if arrears are cleared.

Article 25 - Sensitive, immobilized, unpaid and doubtful receivables must be identified in the appropriate rubrics with particular identification attributes of the accounting plan upon occurrence of one of the criteria justifying their classification, and no later than at the end of the month of their observation.

Article 26 - The Monetary Commission may, when it deems justified, require that receivables on a counterparty be classified in a given category and covered by appropriate provisions.

Article 27 - The rules fixed by this Regulation for...