Circular to Banks and Financial Institutions No. 2022-01 of March 1, 2022

Tunis, March 1, 2022 CIRCULAR TO BANKS AND FINANCIAL INSTITUTIONS NO. 2022-01 Subject: Prevention and resolution of non-performing claims. The Governor of the Central Bank of Tunisia, Having regard to Law No. 2016-35 of April 25, 2016 establishing the status of the Central Bank of Tunisia, Having regard to Law No. 2016-48 of July 11, 2016 on banks and financial institutions, Having regard to Circular to Banks and Financial Institutions No. 91-24 of December 17, 1991 on risk division, coverage and monitoring of commitments, as amended and supplemented by subsequent texts, Having regard to Circular to Credit Institutions No. 2006-19 of November 28, 2006 on internal control, Having regard to Circular to Banks and Financial Institutions No. 2016-06 of October 11, 2016 on the internal rating system for counterparties, Having regard to Circular to Banks and Financial Institutions No. 2017-06 of July 31, 2017 on accounting, prudential and statistical reporting to the Central Bank of Tunisia, Having regard to Circular to Banks and Financial Institutions No. 2021-05 of August 19, 2021 on the governance framework for banks and financial institutions, Having regard to the opinion of the Compliance Control Committee No. 2022-01 of February 24, 2022, as provided for in Article 42 of Law No. 2016-35 of April 25, 2016 establishing the status of the Central Bank of Tunisia. Decides:

Chapter 1 General Provisions Article 1 - This circular aims to reduce the level of non-performing claims in the balance sheets of banks and financial institutions through the establishment of a prevention and resolution mechanism. The rules established by this circular constitute minimum requirements to be complied with by banks and financial institutions. Article 2 - For the purposes of this circular, the following terms shall apply: Non-performing claims: claims classified as 2, 3 and 4 under Circular No. 91-24 cited above. Earnings before interest, taxes, depreciation and amortization (EBITDA): Result before interest, taxes, provisions and amortizations. Institution: bank, leasing institution or factoring institution within the meaning of Law No. 2016-48 cited above. Business group: With reference to Article 2 of Circular No. 91-24 cited above, "group" refers to two or more legal entities having interconnections such as:

• common management;
• direct commercial or financial interdependence such that the difficulties of one automatically affect the other;
• direct or indirect shareholdings resulting in a power of control. Administrative body and management body: the bodies and persons covered by Circular No. 2021-05 cited above. Share of gross non-performing commitments in the total commitments of the institution (in %): Claims classified as 2, 3 and 4 / Total commitments. Share of gross non-performing commitments in the total commitments of the institution taking into account commitments sold to debt collection companies (in %): (Claims classified as 2, 3 and 4 of the institution + Commitments sold to collection subsidiaries) / (Total commitments of the institution + Commitments sold to collection subsidiaries). Prevention: early and proactive treatment of claims for which the risk of becoming non-performing is high. Resolution: curative treatment aimed at reducing the level of existing non-performing claims within the institution. Restructuring of claims: any agreement modifying the terms of the initial credit contract to enable the institution to recover its claims (rescheduling, consolidation, conversion, partial or total write-off, granting of new credits, etc.). Debt collection companies: companies within the meaning of Law No. 98-4 of February 2, 1998 on debt collection companies, as amended by subsequent texts. Early warning system: the set of procedures and tools enabling rapid identification of claims likely to become non-performing and adequate response to identified signs of difficulty. Article 3 - Institutions must establish a prevention and resolution mechanism for non-performing claims covering the entire life cycle of the claim, comprising at least the following elements:
• a prevention mechanism for future flows of non-performing claims based on an early warning system;
• a resolution strategy for non-performing claims as defined in Article 10 below;
• an operational implementation plan for the resolution strategy and the necessary resources (budget, expertise, information system, etc.); and
• an appropriate organization and adequate internal control system for the processes.

Article 4 - Without prejudice to the provisions of the circular on the governance framework for banks and financial institutions cited above, the administrative body must in particular:

• approve the mechanism provided for in Article 3 of this circular, review it at least once a year and revise it as appropriate taking into account achievements, the evolution of the institution's situation and the economic and regulatory environment; and
• monitor the application of the mechanism provided for in Article 3 of this circular by ensuring regular monitoring of quantitative and qualitative performance indicators regarding the prevention and resolution of non-performing claims. The risk committee is required to assist the administrative body in designing the prevention and resolution mechanism for non-performing claims and in monitoring its implementation.

Chapter 2 On the prevention mechanism for non-performing claims Article 5 - Without prejudice to the provisions of the circulars on governance, internal control and the internal rating system for counterparties cited above, institutions must establish a clear and formalized prevention mechanism for non-performing claims. This mechanism must be consistent with the institution's strategic directions and its risk appetite policy, and include in particular:

• clear counterparty selection procedures;
• an early warning system as defined in Article 8 of this circular; and
• a formalized and effective recovery process. Article 6 - Institutions must segment their claim portfolio to form homogeneous asset groups to which similar treatments can be applied. Segmentation criteria are determined according to the portfolio's specificities and must be reviewed periodically to verify the homogeneity of groups regarding their reaction to credit risk factors. Article 7 - Throughout the life cycle of the claim, the institution must establish a clear internal approach for assessing the economic and financial viability of debtors in the form of guidelines recorded in a document prepared by the risk management department and approved by the management body. The viability assessment approach must include an economic and financial analysis of the situation of the concerned companies and professionals, based on their business plans, cash flow projections, current overall indebtedness level and assessment of solvency. For debtors whose total commitment to the financial system exceeds 25 million dinars, business plans and cash flow plans must be reviewed by a chartered accountant registered with the Tunisian Order of Chartered Accountants. The viability assessment must be based on audited financial statements for the last three fiscal years and include at minimum an analysis of the following two financial indicators:
• Financial charge coverage ratio: EBITDA / Financial charges.
• Leverage ratio: Debts / EBITDA. To assess the debtor's viability, the institution must determine thresholds for the selected analysis indicators, taking into account sectoral specificities where applicable. This assessment must take into account, where applicable, the financial situation of the business group to which the company belongs, based in particular on audited consolidated financial statements. For individuals and professionals not subject to the obligation to prepare financial statements under applicable legislation, their viability analysis must at least take into account their repayment capacity and their history regarding the settlement of their commitments. Article 8 - Institutions must establish an early warning system on potential debtor difficulties, both individually and for business groups, in order to act and take corrective measures before the situation becomes compromised. To this end, institutions must define, for each portfolio segment, a set of quantitative and qualitative indicators enabling them to timely detect signs of difficulty in the financial situation, activity and conduct of the debtor. The early warning system must take into account both recent information and relevant prospective data, on an individual basis and at the business group level. Article 9 - The institution must establish, referring in particular to the internal counterparty rating system, a list of debtors under surveillance ("watch list") comprising at least claims classified as 1 under Circular No. 91-24 cited above and restructured claims. The institution must clearly define the criteria and duration for inclusion on this list, ruling on whether the debtor's difficulties are temporary or not. The institution must implement an action plan for monitoring and reducing credit risk on debtors listed on this watch list. It must set reasonable deadlines for the envisaged measures and designate persons responsible for their implementation.

Chapter 3 On the resolution mechanism for non-performing claims Article 10 - Institutions whose share of gross non-performing commitments in total commitments on an individual basis is greater than or equal to 7% must develop a written resolution strategy for non-performing claims aimed at reducing these claims in terms of volume, number and age to reach a share below 7%, within a reasonable timeframe not exceeding in any case 5 years from the year 2022. For institutions presenting a share of gross non-performing commitments greater than or equal to 10% taking into account commitments sold to their collection subsidiaries, the aforementioned resolution strategy must enable bringing this share below 10%, within a reasonable timeframe not exceeding in any case 5 years from the year 2022. The implementation period of the strategy provided for in this article must include the year 2022. Article 11 - The development of a resolution strategy for non-performing claims requires prior preparation of an internal report assessing the institution's internal and external operational environment in order to determine potential obstacles and decide on necessary actions for implementation. This report must be validated by the administrative body and include at least the following elements:

• factors that led to the accumulation of non-performing claims, for significant segments;
• nature of resolution measures implemented in the past and their limitations;
• assessment of the institution's operational capacities (credit policies, recovery policies, restructuring policies, claim monitoring mechanism, organization and resources, etc.); and
• identification of aspects to be improved to achieve the objectives for reducing non-performing claims. Article 12 - The resolution strategy for non-performing claims referred to in Article 10 of this circular must in particular:
• include quantitative target objectives for reducing non-performing claims in terms of share, volume, number and age. These objectives must be broken down by time horizon, portfolio segment and implementation measure;
• be consistent with the institution's risk management and capital planning policies;
• include balance sheet clearance policies, claim transfer policies and acquired asset management policies related to debt collection; and
• be broken down into an operational implementation plan defining, according to a precise schedule, the different actions to be taken to achieve the target objectives for reducing non-performing claims and the required investments and resources (information system, organization, staff, etc.). Article 13 - Institutions must determine the resolution measures envisaged within the framework of implementing their resolution strategy. The decided resolution measures must be justified taking into account:
• the debtor's recent financial situation; and
• the trade-off between different resolution measures based on an analysis of the economic benefits and relative costs of each option. In this framework, restructuring measures must target debtors deemed viable and cooperative by the institution. Article 14 - All institutions must write off from their balance sheets claims classified as 4 for 5 years or more that meet the write-off conditions set by applicable tax legislation, and establish an effective recovery and monitoring mechanism for these claims. Article 15 - Institutions must define a formalized and transparent process for managing assets that have become in their possession under the collection modalities permitted by applicable legislation. This process must enable the institution to ensure the protection of these assets and their transfer within reasonable timeframes with maximization of their sale value. Article 16 - Institutions covered by Article 10 of this circular must establish, within their organization, an operational "workout unit" exclusively responsible for the resolution of non-performing claims, under the following conditions:
• be separated from structures responsible for granting credits and have a different hierarchical reporting line from these structures;
• have a sufficiently high hierarchical reporting line conferring specific powers in resolution matters according to a dedicated delegatory scheme;
• be adapted to the volume and specificities of the non-performing claims portfolio and the envisaged resolution measures; and
• permanently possess adequate resources in terms of staff, expertise and information system. The resolution unit must submit quarterly reporting on its activities to the risk committee.

Chapter 4 On the application of the prevention and resolution mechanism for large risks and co-financed debtors Article 17 - In the framework of applying this circular, institutions must ensure consultation and coordination of their actions during prevention and resolution phases for large risks and restructuring operations of commitments by co-financed debtors. By "large risks" is meant debtors or business groups whose total commitment to the financial system exceeds 100 million dinars. Article 18 - Unless otherwise decided in writing by the members of the banking pool or the debtor, the most committed institution must act as the lead bank of the banking pool and oversee the consultation and coordination actions referred to in Article 17. To this end, institutions must, under the auspices of the Tunisian Professional Association of Banks and Financial Institutions, sign a framework convention approved by the Central Bank of Tunisia setting out the obligations and rights of the lead bank and other members of the banking pool. This convention must in particular cover:

• Collection and sharing of relevant information on debtors, including financial statements.
• Monitoring and analysis of debtor situations.
• Consultation for major financings.
• Coordination for recovery and restructuring actions. Article 19 - For large risks, the lead bank is required to demand an annual report on the debtor's governance, activity, performance, liquidity and solvency, and where applicable, relations between business group entities. This report must be reviewed by a chartered accountant registered with the Tunisian Order of Chartered Accountants. This report must also be demanded if the facilities requested are likely to increase the debtor's or business group's total commitment beyond 100 million dinars. The lead bank is also responsible vis-à-vis the Central Bank of Tunisia for:
• communicating the report referred to in the first paragraph of this article;
• communicating by June 30 of each year at the latest an evaluation note by the institution on governance and economic and financial situation, as well as measures taken to control risks for each of the concerned debtors; and
• informing without delay of any event likely to affect the viability of the concerned debtors and any related restructuring operation.

Chapter 5 Miscellaneous Provisions Article 20 - Institutions must adapt their internal control system to ensure compliance with the requirements of this circular and the proper functioning of established mechanisms. The internal audit department is required to evaluate, at least once every two years, the prevention and resolution processes for non-performing claims. Article 21 - Institutions must communicate to the Central Bank of Tunisia:

• a roadmap validated by the administrative body with a precise schedule for compliance with this circular's provisions within three months from the date of publication of this circular;
• the resolution strategy for classified claims and its operational implementation plan validated by their administrative body, for institutions covered by Article 10 at the latest by December 31, 2022. The Central Bank of Tunisia will rule on the sustainability of this strategy;
• an annual report validated by the administrative body on the results of non-performing claim resolution activities, as well as any changes to the resolution strategy, at the latest by end of April of the following year; and
• the approach regarding viability assessment provided for in Article 7 of this circular within six months from its publication. Article 22 - Institutions will be subject to a dedicated monitoring process to ensure they carry out the necessary diligence regarding prevention and resolution of non-performing claims. In case of non-compliance with the requirements of this circular, disciplinary measures may be applied in accordance with applicable legislation. Article 23 - This circular enters into force as of the date of its publication. The Governor, Marouane EL ABASSI