Palestine Monetary Authority

Palestine Monetary Authority

Circular No. (154/2013)

To all banks operating in Palestine
Date: Wednesday, December 04, 2013

Subject: Update of the Borrower Classification System - Version 3 (Version 3)

In the context of the PMA's continuous efforts to develop credit risk reduction tools to preserve the quality of the banking facilities portfolio, and in reference to our Circular No. (2011/29) dated February 23, 2011 regarding the development of the second version of the credit classification system, the PMA has developed the current version of the system after reviewing all related elements determining the risk grade to align with the Palestinian banking environment, taking into account user feedback on the matter. Below, you will find the main key amendments made to the developed third version of the system (Version 3):

First: Customer Classification on the Bounced Cheques System

Given that three years have passed since the launch of the automated bounced cheques system, the conversion weights for the variable reflecting the customer's status on the bounced cheques system have been amended. Classified customers who failed to settle their bounced cheques within the legal payment period will be assessed as C(O) and D(R), accompanied by a re-evaluation of customers classified from grade E-A. This will make the risk assessment for classified customers on the cheques system more predictive according to the classification risk grade.

Second: Corporate Evaluation

To reduce the risks associated with corporate evaluation and make it less stringent and conservative towards corporate borrowers, thereby reducing obstacles faced by companies when applying for credit facilities (which serves their financial and commercial transactions on one hand and enhances their commitment to repaying their credit facilities on the other), the following has been implemented:

• Reduction of the conversion weights for risks arising from companies obtaining multiple facilities from more than one source, taking into account the volume of corporate commercial transactions which necessitate companies seeking multiple facilities from multiple sources.
• Addition of a specific metric to measure the ratio of corporate commitments to authorized capital on the credit information system, serving as an indicator to measure corporate risks and the extent of exposure to credit risk. Exceeding a company's debt by 60% of its total capital is considered an indicator of high corporate risk and an elevated default grade.

Third: Customer Status on the Blacklist and Restricted Persons System

Given that the legal voting period for listing on the lists (which was considered when launching the bounced cheques system) has ended, the distinction regarding the customer's status on the blacklist and restricted persons system has been eliminated.

Fourth: Collateral Evaluation

To reduce the strictness in evaluating borrowers, whether individuals or companies, the distinction regarding the type of collateral provided for higher-value facilities and the concealment in evaluating collateral provided for facilities when evaluating borrowers has been eliminated.

Fifth: 30-Day Payment Delay for Public Sector Employees

Given the specificity of Palestinian society and the reliance of most of its segments on monthly salaries transferred to banks, which may be delayed by a few days upon disbursement, and considering that the risk of payment delay not exceeding 30 days is not highly probable, a specific evaluation interpretation has been added for public sector employees who receive a customer status evaluation of 2 (customer delayed in payment for 30 days) to infer and clarify the borrower's status. This helps reduce credit risk when making credit decisions.

Sixth: Amendment of the Risk Grades Table

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

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

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Public Relations and Market Regulation Department Palestine Monetary Authority

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