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2013-03-26

DBFIA Practice Direction No. 3: Loan Loss Reserves

The Central Bank of Belize issued this Practice Direction to prescribe procedures for licensed banks and financial institutions to establish and maintain loan loss reserves. It mandates specific provision rates of 20%, 50%, or 100% for substandard, doubtful, and loss assets respectively, alongside a general reserve of 1% for non-adversely classified loans. The directive further requires quarterly evaluations, defines write-off timelines based on collateral status, and stipulates that write-offs must be charged against specific provisions.

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DBFIA Practice Direction No. 3 DOMESTIC BANKS AND FINANCIAL INSTITUTIONS ACT DBFIA Practice Direction No. 3 Loan Loss Reserves Authority This Practice Direction is made in exercise of the authority conferred on the Central Bank of Belize (CBB) by Section 9 of the Domestic Banks and Financial Institutions Act (DBFIA), 2012 and replaces the previously issued Banks and Financial Institutions Act Circular #3/2011. Summary This DBFIA Practice Direction prescribes procedures for the establishment and maintenance of loan loss reserves for licensed banks and financial institutions. Definitions

  1. Specific Loan Loss Provisions is an account funded through charges to income as a provision expense for charging off loans and other assets or portions of such loans and other assets which have been adversely classified. For reporting purposes, this contra account shall be separately reported on the balance sheet as a deduction from loans.
  2. General Loan Loss Reserves is an account funded through the appropriation of retained earnings. This reserve shall be established as cover for loans that have not been adversely classified. For reporting purposes, this account shall be reported on the balance sheet as an equity account.
  3. Other assets are overdrafts and other credit facilities, or any other asset that does not have a pre-established repayment term. Page 1 of 3

DBFIA Practice Direction No. 3 Page 2 of 3 REQUIREMENTS A. Calculation of Loan Loss Provisions and Reserves for Loans and Other Assets

  1. Specific Loan Loss Provisions SPECIFIC LOAN LOSS PROVISIONS shall be established and maintained by licensees for all loans and other assets which are classified as “substandard", "doubtful" or "loss" in the following manner: (i) For all loans and other assets classified “substandard”, specific provisions equivalent to twenty percent (20%) of such loans and other assets shall be maintained. (ii) For all loans and other assets classified "doubtful", specific provisions equivalent to fifty percent (50%) of such loans and other assets shall be maintained. (iii) For all loans and other assets classified “loss” which are fully unsecured, specific provisions equivalent to one hundred percent (100%) of such loans and other assets shall be maintained. Effective 1 April 2013, all loans and other assets classified “loss” which are fully secured by mortgages, specific provisions equivalent to fifty percent (50%) of the outstanding loan balance shall be maintained. The requirements for the building of Specific Loan Loss Provisions for loans which were classified prior to 1 December 2011 remain in effect. Thereafter, these reserves shall be built as specified under “Definitions”.
  2. General Loan Loss Reserves GENERAL LOAN LOSS RESERVES shall be established and maintained by licensees in an amount equivalent to one percent (1%) of all loans which are not adversely classified. These reserves shall be built as specified under "Definitions".

DBFIA Practice Direction No. 3 Page 3 of 3 B. Frequency and Reporting of Specific Loan Loss Provisions Specific loan loss provisions must be evaluated at least on a quarterly basis concurrent with the quarterly loan classification review and reported to the CBB on the prescribed Bank Return. C. Write-Off of Loans and Other Assets

  1. Loans and other assets which are uncollectible and of such little value that their continued reporting as bankable assets is no longer warranted shall be written off immediately.
  2. Unsecured loans classified "loss" shall be written off within twelve months of the loan being classified as "loss". Licensees may be allowed to defer write off of uncollectible loans over a longer period but this longer period shall not normally exceed twenty-four months.
  3. Loans classified as “loss” which are collateralized by mortgages shall be written off within four years of the loan being classified as “loss”.
  4. Write-offs shall be made against the Specific Loan Loss Provisions account. If the amount of the loan to be charged off exceeds the balance of the Specific Loan Loss Provisions account, additional reserves shall be established to cover the shortfall through charges to income.
  5. Recoveries on loans and other assets previously written off shall be recorded in the financial period during which such recovery occurs. D. Relationship to Other DBFIA Practice Directions This DBFIA Practice Direction should be read in conjunction with the companion DBFIA Practice Directions on Classification of Loans and Other Assets and Treatment of Interest on Loans and Other Interest-Bearing Assets. 1 January 2013
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