Palestine Monetary Authority

Palestine Monetary Authority

Circular No. (2013/155)

To all lending institutions operating in Palestine

Date: Wednesday, December 4, 2013

Subject: Update of the Borrower Classification System - Version 3

In the context of the Palestine Monetary Authority's continuous efforts to develop credit risk reduction tools to preserve the quality of banking facilities portfolios, and in reference to Circular No. (2011/32) dated 24/2/2011 regarding the development of Version 2 of the credit classification system, the Palestine Monetary Authority has developed Version 3 of the system. This was done after reviewing all relevant elements defining the risk rating to align with the Palestinian banking environment, taking into account user feedback regarding the same. Below are the main modifications made to the developed Version 3 of the system:

First: Customer Classification on the Bounced Cheques System

Given that three years have passed since the launch of the automated bounced cheques system, the weights for the variable reflecting the customer's status on the bounced cheques system have been adjusted. Customers classified who have not settled their accounts within the legal period for bounced cheque repayment are now rated D(R) and C(O). This accompanies the re-evaluation of customers classified from grade E-A, making the risk rating on the cheques system more predictive according to the classification risk grade.

Second: Corporate Evaluation

To reduce the valid risks in corporate evaluation so that they become less strict and conservative towards corporate borrowers, thereby reducing obstacles faced by companies when applying for credit facilities—serving their financial and commercial transactions on one hand and reinforcing their commitment to repay credit facilities on the other—the following has been implemented:

• Lowered the risk weights resulting from companies obtaining multiple facilities from multiple sources, taking into account the volume of commercial transactions that require companies to seek facilities from multiple sources.
• Added a specific criterion to measure the ratio of corporate commitments to authorized capital on the credit information system, as an indicator to measure corporate risks and exposure levels.

Third: Customer Status on the Blacklist and Restricted Persons System

Given that the maximum legal period for listing on the blacklist has expired (which was considered when launching the bounced cheques system), the variable regarding the customer's status on the blacklist and restricted persons system has been cancelled.

Fourth: Collateral Evaluation

To reduce strictness in evaluating borrowers, whether individuals or companies, the variable regarding the prominence of the collateral provided for the largest facility value has been cancelled. Evaluation will now be limited to the collateral provided for the specific facility when assessing the borrower.

Fifth: 30-Day Payment Delay for Public Sector Employees

Due to the specificity of Palestinian society and the reliance of most of its segments on monthly salary transfers to banks, which may be delayed by a few days at disbursement dates, and given that the risk of payment delay not exceeding 30 days is not predominant, a special interpretive evaluation has been added for public sector employees who receive a customer status rating of 2 (customer delayed by 30 days in payment) to indicate and refer to the borrower's status. This helps reduce credit risk when making credit decisions.

Sixth: Modification of the Risk Grades Table

Based on the results of analyzing a sample study from banking and lending institutions' facilities portfolios for a specific period, the risk grades table and risk weights have been modified to align with the new changes, reflecting adjustments to the risk grades for related variables, which correspond to the overall facilities portfolio risk in the banking environment.

Accordingly, all institution administrations are requested to circulate this circular to the users of the credit information system regarding its contents. Please note that the updated version of the credit classification system will take effect starting Sunday morning, December 15, 2013.

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Public Relations and Market Officers Department

Palestine Monetary Authority

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