Classification and Provisioning of Loans Directives 2020

# The Banking and Financial Services Act, 2017
(Act No.7 of 2017)

## The Banking and Financial Services (Classification and Provisioning of Loans) Directives, 2020

IN EXERCISE of the powers contained in section 167 of the Banking and Financial Services Act, 2017, the following Directives are made:

### PART I
#### PRELIMINARY

**Title**

1. These Directives may be cited as the Banking and Financial Services (Classification and Provisioning of Loans) Directives, 2020, and shall come into operation on the date of publication of the Gazette.

**Interpretation**

2. In these Directives, unless the context otherwise requires—

“allowance for loan losses account” means a balance sheet valuation account established through charges to the income statement, to absorb anticipated losses in respect of a bank or a financial institution’s on-balance sheet and off-balance sheet exposures.

“capitalised interest” means accrued but uncollected interest which has been added to the unpaid principal balance of a loan at a payment date or at maturity. Capitalised interest also includes unpaid interest which is refinanced or rolled-over into a new loan.

“credit facility” has the meaning assigned in the Banking and Financial Services Act;

“loan or extension of credit” means:

(i) any direct or indirect advance of funds, including obligations as maker or endorser arising from discounting of commercial or business paper, whether secured or unsecured, made on the basis of any obligation of the recipient or on the recipient’s behalf to repay the funds; or

(ii) leasing, and all credit risks, arising from actual claims and potential claims of all kinds, overdrafts, credit substitutes or commitments to extend credit and to acquire a debt security or other right of payment of a sum of money.

“credit risk” means the amount that a borrower or counterparty may fail to meet its obligations in accordance with agreed terms.

“fair value” means the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction or, in the absence of an active market, by using an appropriate valuation technique to establish what the transaction price would have been in an arm’s length transaction;

“hard-core balance” means an outstanding debit balance on an overdraft account or other credit facility without fixed repayment dates, that shows no fluctuations for a period of ninety days or more in line with the cash flow cycle of the borrower;

“homogeneous risk group” means a class of risks that have similar characteristics.

“non-performing loan” has the meaning assigned in the Banking and Financial Services Act;

“overdraft” means a short-term revolving facility which:

(i) has a pre-agreed limit that allows payments to be made where there are insufficient funds in a current account;

(ii) allows in and out payments to be made at any time; and

(iii) has no fixed repayment date, although customers are expected to ensure that the account operates in line with the cash flow cycle of the borrower.

“provision for loan losses” means a charge against income which is added to the Allowance for the Loan Losses Account to ensure that the account is maintained at an adequate level in order to cover all anticipated loan losses, after taking into account any write off or recoveries of specific loans.

“restructured loans” are credit facilities whose originally agreed terms and conditions have been modified or renegotiated.

**Application**

3. These Directives shall apply to all financial service providers licensed under the Banking and Financial Services Act.

### PART II
#### CREDIT RISK MANAGEMENT

**General principles for the assessment, monitoring and control of credit risk**

4. (1) A financial service provider shall have policies for the assessment, monitoring and control of credit risk, that require:

(a) utmost care and diligence in the assessment of the credit risk associated with its credit facilities, not only at the time of granting the facilities but also throughout the period that the facilities remain outstanding;

(b) maintaining a database of transactions to enable proper assessment, monitoring and control of credit risk, and the preparation of reports and other timely and comprehensive documentation for management and to inform third parties or respond to requests from the Bank;

(c) the reclassification and corresponding provisioning of credit facilities as soon as the deterioration of credit risk becomes apparent; and

(d) an adequate line of communication with the board of directors.

(2) These policies shall be implemented through methods, procedures and practices, that specify, among other things, the characteristics which the financial service provider’s database should comply with, including the following requirements:

(a) depth and breadth, in that they cover all the significant risk factors;

(b) accuracy, integrity, reliability and timely provision of up-to-date data;

(c) consistency, such that the data is based on common sources of information and uniform definitions of the concepts used for credit risk management; and

(d) traceability, such that the source of information can be identified.

**General principles for estimating the allowance for loan losses**

5. A financial service provider shall be guided by the following principles when estimating the allowance for loan losses.

(1) Governance and integration in management, which entail approval by the board of directors of the policies for estimating the allowance for loan losses and their periodic monitoring, and their continuous integration in the various credit risk management processes;

(2) Have an up-to-date knowledge of the relevant information on the credit risk assumed;

(3) The various internal control functions shall review, at least annually, the methods and procedures for estimating the allowance for loan losses, seeking at all times to ensure they are observed, and reporting on such observance to the board of directors;

(4) The review required in sub-directive (3) must also cover, the suitability of the information systems and the database used for the estimation of the allowance for loan losses;

(5) The methods and processes for monitoring and updating estimates of the allowance for loan losses must ensure, at all times, that the results obtained are attuned to the reality of the transactions, the prevailing economic climate, and the forward looking information available;

(6) Estimates must be based on adequately substantiated assumptions that are consistent over time;

(7) The methods for estimating the allowance for loan losses should be comprehensible to users and, in any event, ensure that the results obtained do not contradict the underlying economic and financial logic of the various risk factors;

(8) Ensuring consistent treatment of the different categories into which credit facilities may be classified, such that, the level of the allowance for loan losses estimated for a credit facility shall be higher than the level of the allowance for loan losses that would apply to it if it were classified in another category with lower credit risk;

(9) Establishing and documenting the periodic procedures for checking the reliability and consistency of its loan classifications and its estimates of the allowance for loan losses over the course of the various stages of the credit risk management cycle; and

(10) A detailed and up-to-date documentation on all the methods, procedures and criteria for the assessment, monitoring and control of credit risk, including those relating to estimates of the allowance for loan losses, such that a third party could understand and replicate the calculations made.

**Credit review system**

6. (1) The board of directors shall establish a formal credit review system which shall ensure that:

(a) credit exposures are timely and correctly classified on the basis of credit risk;

(b) there is a sound and documented loan loss provisioning methodology, which addresses credit risk assessment policies, procedures and controls for assessing credit risk, identifying problem loans and determining loan loss provisions in a timely manner;

(c) the aggregate amount of individual and collectively assessed loan loss provisions are adequate to absorb estimated credit losses in the loan portfolio;

(d) there is adequate information about the credit risk in the credit portfolio at all times;

(e) credit exposures are properly identified and timely classified and placed on non-accrual status, in accordance with these Directives;

(f) timely, appropriate provisions and write-offs of identified losses are made to the Allowance for Loan Losses Account, so as to maintain the account at levels which will

i. accurately reflect the fair and realisable value of the loans in the balance sheet; and

ii. meet the overall minimum provisioning levels specified in these Directives;

(g) Allowances and provisions are properly reflected in the financial service provider’s financial statements.

(2) Every review of overdrafts and other credit facilities without fixed repayment dates, shall be supported by an analysis for each account, showing monthly balances and a summary of movements on the account which shall include:

i. the total value of deposits and withdrawals; and

ii. accruals and repayments of interest charges.

(3) The credit review system referred to in sub-directive (1) shall be reviewed, at least once every year, and shall be submitted to the board for approval.

### PART III
#### DETERMINATION AND TREATMENT OF NON-ACCRUAL LOANS RELATED ACCOUNTS

**Past due loans, overdrafts and credit facilities**

7. (1) A financial service provider shall have a Loans Review Committee which shall be composed of, not less than three non-executive directors.

(2) A financial service provider shall, through the Loans Review Committee, and at least on a quarterly basis, cause a review to be made of the quality and collectibility of all credit facilities in its portfolio, including any accrued and unpaid interest.

(3) The Loans Review Committee shall, immediately after reviews referred to in sub-directive (2), make a detailed written report directly to the board, and the board shall take appropriate action on the report.

(4) A financial service provider shall at all times maintain records in support of such reviews and related records and shall make the review reports available for inspection as and when requested by the Bank.

8. (1) A loan shall be past due when any portion of principal or interest that is contractually due remains unpaid for a period of thirty days or more.

(2) An overdraft or credit facility without fixed repayment dates shall be considered past due when any of the following conditions exist:

(a) the debt exceeds the approved limit for thirty consecutive days or more; or

(b) the borrowing line has expired for a period of thirty days or more; or

(c) any portion of principal or interest that is contractually due remains unpaid for thirty days or more.

**Conditions for placing a loan in non-accrual status**

9. (1) A loan or an overdraft shall be placed in non-accrual status when:

(a) it is non-performing; or

(b) deposits are insufficient to cover the interest that was capitalised for ninety consecutive days; or

(c) the credit line has expired, or has been inactive, for ninety days or more.

(2) A financial service provider shall place a loan in non-accrual status, notwithstanding the fact that, there is collateral held against it, if:

(a) there is reasonable doubt about the ultimate collectibility of the principal or the interest; and

(b) a provision for loan losses has already been raised against that specific loan.

(3) Any determination that a loan is ultimately not collectible shall be supported by a current documented credit evaluation report of the borrower’s financial condition which shows that:

(a) prospects for repayment are assessed to be weak; and

(b) historical repayment performance is unsatisfactory.

**Treatment of income on non-accrual loans**

10. Where a loan is placed in non-accrual status under these Directives:

(a) a financial service provider shall cease reflecting the accrued interest in its income statement; and

(b) all previously accrued, but unpaid interest, shall be subjected to the loan loss provisioning requirements under these Directives.

**Treatment of cash payments on non-accrual loans**

11. (1) Subject to the provisions of section 110 of the Banking and Financial Services Act:

(a) where a loan is placed in non-accrual status, any cash payments received shall first be applied to reduce the principal amount due;

(b) where the principal amount due on the loan has been fully recovered, any excess payments may be taken to the income statement, provided the amount of income recognised is limited to the amount which would have been due to the financial service provider if the loan had been current at its contractual rate; and

(c) any further excess payments after providing for the payment in paragraph (b) shall be applied against the outstanding principal amount.

(2) Where a loan is restructured, payments shall be taken to income on the basis of the revised terms of the loan agreement.

**Restoration to accrual status**

12. (1) A non-accrual loan shall only be restored to accrual status when:

(a) all payments of the principal and interest become fully current and is deemed to be fully collectible in accordance with the terms of the contract and the borrower has resumed paying the full amount of the scheduled contractual principal and interest payments for at least one hundred and eighty days, and all the remaining contractual payments, including compensation for past due payments, are deemed to be collectible; or

(b) a determination that a loan is ultimately collectible is made and such determination shall be supported by a current, documented credit evaluation report of the borrower’s financial condition which shows that prospects for repayment are strong.

(2) Until a loan is restored to accrual status, any cash payments received shall be treated in accordance with the provisions of Directive 11.

**Restructured loans**

13. (1) Where a financial service provider restructures a credit facility, such restructured facility shall be supported by documentary evidence as to the collectibility of future repayments.

(2) A restructured loan, which was in non-accrual status, shall return to performing status:

(a) when the rate of interest charged for the loan or advance is equivalent to the rate of interest that would be charged on a new loan or advance of similar merit; and

(b) when one of the following conditions is satisfied:

(i) all past due principal and interest payments are current; or

(ii) where interest has been capitalised, the principal and interest payments are made in accordance with the modified repayment terms for a period of at least one hundred and eighty days from the date of restructuring.

(3) A non-accrual loan that has been restructured more than twice over its lifetime, shall remain in non-accrual status and shall be treated in accordance with the provisions of Directives 10 and 11.

(4) Where a loan is reclassified from non-accrual to accrual status, all specific provisions previously made shall be reversed.

**Treatment of multiple credit facilities to one borrower**

14. (1) Where a financial service provider has a number of credit facilities outstanding to a single borrower, and one of those facilities meets the criteria for non-accrual status, a financial service provider shall, where appropriate, place one or more of such other loans in non-accrual status upon:

(a) evaluating and documenting the financial standing of the borrower; and

(b) evaluating and documenting the performance of all other credit facilities to that borrower.

(2) Notwithstanding sub-directive (1), all loans to the same borrower shall be deemed non-accrual where the multiple loans and advances referred to are being financed from a single source of cash flows, and one of those credit facilities meets the criteria for non-accrual status.

### PART IV
#### CLASSIFICATION OF CREDIT FACILITIES

**Classification of credit facilities**

15. (1) A financial service provider’s credit facilities shall be classified as pass, special mention, substandard, doubtful or loss, according to the criteria outlined in sub-directives (3) to (11).

(2) Notwithstanding sub-directive (1), an adverse classification may be warranted and appropriate where:

(a) a significant departure from the intended source of repayment develops even if the credit facility is current and supported by the underlying collateral value; or

(b) a delinquency has been cured by restructuring, refinancing, or additional advances.

(3) A loan shall be classified as “pass”:

(a) if it is current and performing in accordance with its contractual terms and is expected to continue doing so; and

(b) where the financial condition and paying capacity of the borrower is sound.

(4) An overdraft or credit facility without fixed repayment date shall be classified as “pass” if:

(a) it is operating within the limit of an approved and unexpired credit line;

(b) interest charges for the period are covered by the deposits; and

(c) it is not a hard-core balance.

(5) A loan shall be classified as “special mention” where:

(a) ultimate loss is not expected, but the borrower is experiencing difficulties that may jeopardise the orderly repayment, such as, the following:

(i) there are early signs of liquidity problems, as shown, for example by delays in repayments;

(ii) there is slowdown in business activity or an adverse trend in the borrower’s operations that signals a potential weakness in the financial strength of the borrower;

(iii) volatility in economic or market conditions that may affect the borrower negatively in future; or

(iv) there is poor performance in the industry in which the borrower conducts business.

(b) if it is in arrears as to the principal or interest for sixty days or more, but less than ninety days.

(6) An overdraft or credit facility without fixed repayment dates shall be classified as “special mention” if:

(a) the approved limit has been exceeded for sixty consecutive days, but less than ninety days; or

(b) the credit line has expired for thirty consecutive days, but less than ninety days; or

(c) interest charge remains outstanding for thirty consecutive days, but less than ninety days.

(7) A loan shall—

(a) be classified as “substandard”:

(i) where the financial condition and paying capacity of the borrower is not sound; or

(ii) if it has a well-defined weakness or weaknesses that jeopardise the liquidation of the loan.

(b) at a minimum, be classified as “substandard” if it is in arrears as to principal or interest payment for ninety days or more, but less than one hundred and eighty days.

(8) An overdraft or credit facility without fixed repayment dates shall be classified as “substandard” if:

(a) the approved limit has been exceeded for ninety consecutive days, but less than one hundred and eighty consecutive days; or

(b) the credit line has expired for ninety consecutive days, but less than one hundred and eighty consecutive days; or

(c) interest charge for ninety consecutive days, but less than one hundred and eighty consecutive days, has not been covered by deposits; or

(d) it is a hard-core balance.

(9) A loan shall be classified as “doubtful” if:

(a) i. it is considered to have all the weaknesses inherent in a substandard loan;

ii. collection or orderly repayment in full, on the basis of currently existing facts, conditions and values, is highly questionable;

(b) at a minimum, it is in arrears as to principal or interest payment for a period of one hundred and eighty days or more, but less than three hundred and sixty-five days.

(10) An overdraft or credit facility without fixed repayment dates shall be classified as “doubtful” if:

(a) the approved limit has been exceeded for one hundred and eighty consecutive days or more, but less than three hundred and sixty-five days; or

(b) the credit line has expired for one hundred and eighty consecutive days or more; but less than three hundred and sixty-five days;

(c) interest charge for a period of one hundred and eighty consecutive days or more, but less than three hundred and sixty-five days, has not been covered by deposits; or

(d) it is a hard-core balance.

(11) A loan, overdraft or credit facility without fixed repayment dates shall be classified as “loss”:

(a) at a time it is considered uncollectible or of such low value that its continuance as a bankable asset is not justified, although there may be some salvage or recovery value; or

(b) a loan, overdraft or credit facility without fixed repayment dates, which meets the criteria in sub-directives (9) or (10), but on which principal or interest remains in arrears, or where the credit facility has expired, for a period of three hundred and sixty-five days or more.

### PART V
#### DETERMINATION OF THE LOAN LOSS ALLOWANCES

**Determination of the amount of the loan loss allowance**

16. (1) In determining the amount of loan loss allowance related to individual credit facilities and to the aggregate of the loans portfolio of a financial service provider, the factors to be considered shall include those set out in the First Schedule.

(2) Notwithstanding sub-directive (1), the Bank shall consider the following in determining the amount of the loan loss allowance related to individual credit facilities and to the aggregate of the credit portfolio of a financial service provider:

(a) the effectiveness of the financial service provider’s lending policies and collection procedures; and

(b) the timeliness and accuracy of the financial service provider’s credit review function.

**Allowance for loan losses account**

17. (1) A financial service provider shall at all times maintain a balance on the Allowance for Loan Losses Account that represents the best possible estimate of the probable credit related losses existing in the portfolio of on- and off-balance sheet exposures in light of the current conditions.

(2) The Allowance for Loan Losses Account shall:

(a) in the case of balance sheet assets, appear as deduction from the applicable asset; and

(b) in the case of off-balance sheet exposures appear as a separate line item within other liabilities.

**Requirements for individual estimation of the allowance for loan losses**

18. (1) A financial service provider shall develop methods for the estimation of the allowance for loan losses relating to non-performing or special mention loans, which are subject to individual estimation.

(2) The allowance for loan losses for the following must be estimated on an individual basis:

(a) non-performing or special mention loans that a financial service provider considers to be significant. For this purpose, a financial service provider must have duly documented policies, procedures and practices which specify, inter alia, the absolute and relative quantitative thresholds for considering a loan to be significant. A financial service provider may consider all transactions with a borrower to be significant when the sum of all loans with that borrower exceeds this threshold; and

(b) non-performing or special mention loans which do not belong to a homogeneous risk group, and, therefore, for which a financial service provider cannot develop internal methods for collective estimation of the allowance for loan losses.

(3) For the purposes of these Directives, a loan shall be considered significant, if at least, it is five percent of the financial service provider’s primary capital.

**Requirements for collective estimation of allowance for loan losses**

19. (1) Collective estimation shall be applied to calculate the allowance for loan losses for all loans for which an individualised estimate does not have to be made. The allowance for loan losses for the following loans shall be calculated by collective estimation:

(a) loans classified as non-performing that are not considered to be significant; and

(b) loans classified as non-performing or under special mention because they belong to a group of credit facilities with similar risk characteristics or a homogeneous risk group.

(2) Internal methods for collective estimations must comply with the general principles set out in these Directives, and with all the specific requirements for collective estimates set out below:

(a) a financial service provider shall have formal written procedures describing the criteria used to identify and group transactions with similar risk characteristics and the factors and parameters that, in each case, determine this estimation. The financial service provider shall periodically review how well the homogeneous risk groups used match the reality of its operations and the economic environment; and

(b) estimates must be based on each financial service provider’s historical experience of observed losses, which, if necessary, will be adjusted to take into account the prevailing economic conditions and other current circumstances known at the time of the estimate.

**Additions and reductions to the allowance for loan losses account**

20. (1) Any additions to, or deductions from the Allowance for Loan Losses Account shall be made through charges or credits to the Provision for Loan Losses Account in the income statement, and all loan write-offs or Additions and reductions to the allowance for loan losses account recoveries shall be charged or credited directly to the Allowance for Loan Losses Account.

(2) A loan loss or recovery shall not be charged or credited directly to retained earnings or to any other capital related account, except as provided for under Directive 25 sub-directive (1).

**Provision for loan losses**

21. (1) The amount of the provision for loan losses that is charged to the income statement shall be the amount that is required to establish a balance in the Allowance for Loan Losses Account, which management considers adequate to absorb all credit related losses in its portfolio of on- and off-balance sheet exposures, and which at a minimum, meets the provisioning requirements specified in these Directives except as provided for in Directive 25 sub-directive (2).

(2) All loans are written off shall be charged directly to the Allowance for Loan Losses Account.

(3) Where there are no provisions in respect of a loan to be written off, a provision shall be made in an amount sufficient to cover the loan amount that is to be written off and shall be written off against the Allowance for Loan Losses Account.

**Allowance for loan losses for non-performing loans**

22. (1) A financial service provider shall evaluate loans classified as non-performing in order to estimate the allowance for loan losses, taking into account the number of days’ past-due, the recoverable amount of the effective collateral held, and the economic situation of the borrower and guarantors.

(2) The allowance for loan losses relating to non-performing loans shall be calculated by individual or collective estimation in accordance with Directives 18 and 19.

(3) When estimating the allowance for loan losses, the recoverable amount of effective collateral held shall be estimated by applying to its reference value, determined in accordance with Directives 28 and 29, the discounts needed to adequately capture the uncertainty of the estimate and consequent possible falls in value up to the time of foreclosure and sale, plus foreclosure costs, maintenance costs and costs to sell.

(4) At a minimum, the discounts to be applied to the reference value referred to in sub-directive (3) shall be as those provided in Part 1 of the Second Schedule.

(5) Where the recoverable amount of effective collateral held is greater than the outstanding amount of a credit facility, no provision for loan losses shall be required on that credit facility.

(6) Any amount of the credit facility which is not covered by the recoverable amount of the effective collateral held, shall be provided for based on the minimum percentages set out in Part 2 of the Second Schedule, based on the corresponding number of days past due.

(7) Notwithstanding sub-directive (1), a credit facility which has remained a non-performing loan for more than five years shall be fully provisioned, irrespective of the recoverable amount of the effective collateral held.

**Provisioning for the loss category**

23. Any loan or a portion thereof which is assigned a “loss” classification shall be fully provisioned, after taking into account the recoverable amount of effective collateral held if any, at the time the loss is identified.

**Allowance for loan losses for performing loans and loans under special mention**

24. (1) The allowance for loan losses for performing loans shall be estimated collectively, and those for performing loans under the special mention category, shall be estimated individually or collectively, in accordance with Directives 18 and 19.

(2) The estimation of the allowance for loan losses for performing loans and performing loans under special mention shall be based on the recoverable amount of the effective collateral held as set out in these Directives, and management shall determine the discounts which are needed to adequately capture the uncertainty of the estimate and consequent possible falls in value of the collateral held, up to the time of foreclosure and sale, foreclosure costs, maintenance costs and costs to sell.

(3) The amount of the credit facility which is not covered by the recoverable amount of the effective collateral held, shall be provided for as set out in Part 3 of the Second Schedule.

**Provisions for loan losses under accounting standards**

25. (1) If the provision for loan losses computed in line with the accounting standards that are officially recognised by the Zambia Institute of Chartered Accountants are lower than the minimum provision for loan losses required under these Directives, the difference shall be treated as appropriations of retained earnings, by creating a non-distributable regulatory loan loss reserve, and not charged as an expense to the income statement. Similarly, any credits resulting from the reduction of such amounts shall result in an increase in retained earnings, and shall not be included in the determination of profit or loss for the period.

(2) Where the provisions for loan losses computed in line with the accounting standards that are officially recognised by the Zambia Institute of Chartered Accountants are higher than the minimum required under these Directives, such provisions for loan losses shall be considered as the required minimum under these Directives.

(3) For capital adequacy purposes, the regulatory loan loss reserve referred to under sub-directive (1) shall not be included as part of regulatory capital, whereas any excess of the accounting provisions under sub-directive (2) shall be treated as a general loan loss reserve.

**Additional provisions required by the Bank**

26. Where the Bank has determined that the classification and provisioning practices applied by a financial service provider are inadequate, the Bank may:

(a) direct the financial service provider to categorise the credit facilities into the appropriate classification categories; and

(b) require the financial service provider to raise a specified amount as a provision for loan losses.

### PART VI
#### THE TREATMENT OF COLLATERAL IN THE COMPUTATION OF THE ALLOWANCE FOR LOAN LOSSES

**Effectiveness of collateral**

27. (1) A financial service provider shall have methods to enable it to analyse the effectiveness of the collateral and determine the discounts necessary to estimate the recoverable amount of effective collateral held, for the purposes of calculating the allowance for loan losses under these Directives.

(2) The recoverable amount of effective collateral held shall be estimated from the applicable reference value specified in Directive 28 sub-directive (7), after subtracting the adjustments needed to reflect adequately the uncertainty of the estimate and how it affects the potential fall in value up to the time of foreclosure and sale, plus foreclosure costs, maintenance costs and costs to sell. When estimating the recoverable amount of effective collateral held, a financial service provider’s ability to realise the collateral, once foreclosed, must be taken into account.

(3) For the purposes of these Directives, collateral must meet the criteria laid down in Directives 28 and 29, in order to be considered effective. The analysis of the effectiveness of collateral shall take into account, among others, the time needed to realise it and the financial service provider’s ability to do so. This analysis must be more rigorous in the case of collateral for performing loans under special mention and non-performing loans, for which there is a greater likelihood that their foreclosure may become the main means of recovering the credit facility.

(4) Any collateral, whose effectiveness depends substantially upon the credit quality of the borrower or of any group to which the borrower may belong, shall not be admissible as effective collateral, as an adverse correlation exist for the financial service provider between the effectiveness of the collateral and the credit quality of the borrower, such as in the following cases:

(a) when shares or other negotiable securities in the borrower, or in any group to which it may belong, are encumbered by a security interest.

(b) when the value of the collateral is highly conditional upon the continued operation of the party giving the guarantee.

(c) in the case of cross guarantees, in which the guarantor in one transaction is, in turn, guaranteed by the borrower in another transaction.