COBAC Regulation R-98/03 on Accounting and Provisioning of Non-Performing Loans and Doubtful Signature Commitments

COMMISSION BANCAIRE DE L’AFRIQUE CENTRALE REGLEMENT COBAC R-98/03 ON ACCOUNTING AND PROVISIONING OF DISTRESSED CLAIMS AND DOUBTFUL SIGNATURE COMMITMENTS The Central African Monetary Commission convened on November 5, 1998, Having regard to the Convention of October 16, 1990 establishing a Central African Monetary Commission; Having regard to Articles 1 and 9 of the annex to the Convention of October 16, 1990; Having regard to the Convention of January 17, 1992 on harmonizing banking regulation in the Central African States, Having regard to Article 32 of the annex to the Convention of January 17, 1992; DECIDES

Article 1 Credit institutions referred to in Article 2 of the annex to the aforementioned Convention of October 16, 1990 shall account for and provide for distressed claims and doubtful signature commitments, as well as handle irrecoverable claims, under the conditions set forth in the chart of accounts for credit institutions and this regulation.

CHAPTER I - DEFINITION OF DISTRESSED CLAIMS, DOUBTFUL SIGNATURE COMMITMENTS, AND IRRECOVERABLE CLAIMS Article 2 Distressed claims consist of immobilized claims, unpaid claims, and doubtful claims. For the purposes of this regulation, significant credit movements recorded on a current or ordinary account are considered to be credit movements whose cumulative amount covers the debit interest charged to the relevant account over the period under review.

Article 3 Immobilized claims are claims that have been due for more than three months but whose final recovery, while not compromised, cannot be effected immediately. A debtor current account is considered immobilized if, although the recovery of the balance is not compromised, no significant credit movements are observed in it for more than three months.

Article 4 Unpaid claims are sums not paid at their normal due date. They notably consist of:

• simple lease, hire purchase, or movable financial leasing rents and non-mortgage credit installments unpaid for a period of three (3) months or less;
• real estate simple lease or real estate financial leasing rents and mortgage credit installments unpaid for a period of six (6) months or less; Credit facilities subject to acceleration for less than three (3) months, for any reason other than the occurrence of non-payment, are also considered unpaid. Conversely, installments benefiting from a term extension are excluded from unpaid claims.

Article 5 Doubtful claims are credit facilities of any nature, even if secured, that present a probable risk of total or partial non-recovery. They notably consist of:

• credit facilities bearing at least one unpaid installment for more than three (3) months or more than six (6) months for real estate credits, regardless of whether that installment was previously classified as an unpaid claim;
• debtor ordinary accounts (current or other) without any significant credit movement for more than three (3) months;
• claims with a contentious character (recovery entrusted to the legal department, judicial or arbitral proceedings initiated, bankruptcy, liquidation of assets, judicial settlement);
• due rents related to financial leasing, hire purchase, or lease-sale operations, of which at least one installment has been unpaid for more than three (3) months or six (6) months for real estate financial leasing. The classification of an unpaid portion of credit facilities granted to a legal or natural person as doubtful claims triggers the transfer of all cash-based credit facilities granted to that person into doubtful outstanding amounts, regardless of any consideration related to guarantees potentially held (contagion effect).

Article 6 Irrecoverable claims are claims whose non-recovery is deemed certain after exhaustion of all amicable or judicial avenues and means, or for any other pertinent consideration.

Article 7 Doubtful signature commitments are off-balance sheet commitments that present a probable or certain risk of partial or total default by the principal debtor upon their realization.

CHAPTER II - ACCOUNTING Article 8 Distressed claims, irrecoverable claims, and doubtful signature commitments are accounted for in accordance with the following principles:

1. Immobilized claims and unpaid claims are recorded in the accounts provided for by the chart of accounts for credit institutions. However, to account for technical recovery delays, subject institutions may defer the reclassification of claims becoming unpaid until one month after each relevant due date.
2. Ascertained non-payments will be cleared as they are paid; in any event, if the oldest non-payment attributed to the same debtor dates back more than three months, they shall be subject to the treatment applied to doubtful claims.
3. Doubtful claims leave their original account as soon as they are considered doubtful; they are then tracked in the “doubtful claims” account relative to each class.
4. Interest and commissions are recorded in income accounts only if they are actually received, as follows: a)- Accounting entries for interest and commissions recorded before reclassification into immobilized, unpaid, or doubtful claims are reversed if the relevant income has not been actually received; such income is then recorded in off-balance sheet accounts; b)- Interest generated by immobilized, unpaid, and unsettled doubtful claims is not recorded in income accounts; it must be recorded in off-balance sheet accounts; c)- Irrecoverable claims must be charged to losses for their full amount. The total of provisions previously established on these claims shall be reversed, as applicable; d)- Signature commitments are removed from their original account as soon as they are considered doubtful; they are then tracked in the “doubtful commitments” account of class 9.

CHAPTER III - PROVISIONS Article 9 Provisions on distressed claims are established in accordance with the following principles:

1. For immobilized claims, unpaid claims, and doubtful claims guaranteed by the State, the establishment of provisions is optional.
2. For doubtful claims not covered by State guarantee and doubtful signature commitments, provisions are established according to the following modalities: a)- full provisioning within a maximum period of three years for risks not covered by real guarantees; the cumulative provision must cover, at least 25% of outstanding amounts in the first year and 75% in the second year; b)- full provisioning within a maximum period of four years for risks covered by real guarantees; the cumulative provision must cover, at least 15% of the total relevant risks by the end of the first year, 45% by the end of the second year, and 75% by the end of the third year.

Article 10 Doubtful claims related to financial leasing and hire purchase operations must be subject to provisioning up to their full amount.

Article 11 Provisions on distressed claims are recorded in the accounts provided for this purpose in classes 3, 4, and 5 of the chart of accounts for credit institutions. In particular, provisions relating to doubtful claims on financial leasing are recorded in the “provisions for doubtful claims on financial leasing” account. Provisions relating to doubtful signature commitments are recorded, as applicable, in the “provisions for execution of guarantees and cautions” account, or, regarding commitments related to financial leasing or lease with purchase option, in the “provisions for risk of non-collection of rents” account.

Article 12 The identification as immobilized, unpaid, and doubtful claims shall be abandoned when payments resume regularly for amounts corresponding to the installments, even if payment delays and outstanding amounts are renegotiated in duration and amount. Consolidated amounts are tracked, depending on the consolidation period, in the main accounts “long-term credits”, “medium-term credits”, and “short-term credits” within the sub-accounts “credits moratoriumed or consolidated with the State” regarding the State and “non-allocable credits” for other clients.

Article 13 Subject credit institutions declare the outstanding amount of distressed claims and the provisions to be established for their coverage according to models fixed by instruction.

Article 14 Provisions previously established on doubtful claims that exceed the amounts resulting from the application of Article 9 above may only be subject to provision reversal if justified by an effective improvement in recovery prospects.

CHAPTER IV - FINAL PROVISIONS Article 15 In case of non-compliance with the principles set forth in this regulation, the Commission Bancaire may, pursuant to Article 12 of the annex to the Convention of October 16, 1990, issue an injunction requiring, in particular, the taking within a determined period of all measures necessary to bring the concerned institution into compliance with these principles. If a credit institution fails to comply with an injunction or heed a warning, or seriously breaches the regulation, it incurs one or more of the disciplinary sanctions provided for in Article 13 of the annex to the Convention of October 16, 1990.

Article 16 All provisions contrary to those of this regulation are repealed.

Article 17 This regulation shall be notified to the Ministers in charge of Finance and Credit, as well as to all subject credit institutions and their professional associations.

Article 18 The Secretary General of the Central African Monetary Commission is responsible for executing this regulation, which enters into application as of July 1, 1999, for subject institutions established in the Republic of Cameroon, and as of January 1, 2000, for other subject institutions. For the Central African Monetary Commission, The President, Jean-Félix MAMALEPOT