Circular 83-5 Provisions on Credit Risk Concentration

Bank of the Republic of Haiti
CIRCULAR
No. 83-5
TO FINANCIAL INSTITUTIONS

Pursuant to Articles 84, 161, and 166 of the Law of May 14, 2012 on banks and other financial institutions, the financial institutions referred to in Article 2 of the Law, with the exception of money transfer houses, investment promotion companies, trust companies, and currency exchange offices, are required to comply with the following provisions on credit risk concentration limits.

1. Definitions
   a) Counterparty: any natural or legal person whose default exposes the institution to a risk of loss on its assets, due to transactions of any nature carried out with that person (interbank deposits and loans, credit operations, investments, participations, other balance sheet assets, off-balance sheet operations). b) Exposure: total book value of asset items and off-balance sheet commitments relating to the same counterparty. c) Own Funds: regulatory own funds, subdivided into core own funds (Category 1) and supplementary own funds (Category 2), as defined by the circular on minimum capital requirements regarding risk coverage. d) Large Exposures: exposure to a counterparty or group of counterparties equal to or greater than 10% of core own funds (Category 1). e) Group of Related Counterparties: considered to constitute a group of related counterparties:

   1. persons who have capital links such that one of them exercises, directly or indirectly, exclusive or joint control or significant influence over the others, within the meaning of the provisions of the Law of May 14, 2012 and the international accounting consolidation standards published by the International Accounting Standards Board (IASB);
   2. persons who are linked in such a way that financial difficulties encountered by one or some of them would necessarily lead to serious financial difficulties in the other or all others. Such links are presumed to exist between two or more natural or legal persons in the following cases:
   • one of them has the right or power vis-à-vis the others to appoint or remove the majority of the members of the management or supervisory bodies;
   • their administrative, management, or supervisory bodies are composed predominantly of the same persons or they are under single management, by contract, statutory clauses, or in fact;
   • one of them has the right or power vis-à-vis the others:
     • to exercise dominant influence pursuant to a contract or provisions of agreements or articles of association,
     • to decide on their strategy or direct their activities, coordinate their management, or decide on crucial transactions, such as the transfer of profits or losses;
   • these persons have financial dependency links, such as the existence of inter-company accounts, guarantees, or sureties issued by one of them in favor of another;
   • these persons maintain predominant business relations among themselves, notably through subcontracting or franchise agreements;
   • these persons are local authorities or public establishments and have financial dependency links among themselves.
     f) Persons Related to the Financial Institution: considered as persons related to the financial institution:
   1. natural or legal persons who directly or indirectly hold 10% or more of the institution's capital or voting rights;
   2. any holder of financial instruments, other than capital, included in the calculation of the institution's regulatory own funds according to the circular on minimum capital requirements, and holding in total, in this form and in capital, a share of 10% or more of the total amount of the institution's regulatory own funds;
   3. any entity in which the persons referred to in the two preceding subparagraphs directly or indirectly hold a participation of 10% or more of the capital;
   4. the directors and senior management, within the meaning of the circular on Governance, of the institution as well as of entities over which it exercises exclusive or joint control or significant influence within the meaning of international accounting consolidation standards;
   5. the entities in which the institution directly or indirectly holds 10% or more of the capital or voting rights;
   6. natural persons (related) who, with the shareholders holding 10% or more of the capital of the financial institution, the directors or senior management referred to in this definition, have relationships of spouse, parent, son, or daughter.
      g) Related Party Risk: exposure of a financial institution towards a person related to the institution. The following shall be considered as the same related party risk:
      a. risks on a group of related counterparties including a person related to the institution, b. risks on a group of natural persons related to the institution as well as on the legal persons linked to them. h) Credit Risk: risk incurred by a financial institution in the event of default by a counterparty or a group of related counterparties. The risks incurred include the following elements:
      a. Claims held on other financial institutions, in the form of account balances, loans, or various receivables, b. Customer credits and various receivables thereon,
      c. Investments in securities and in any other form,
      d. Leased fixed assets under credit lease operations and receivables related to these operations, e. Other receivables from third parties, f. Off-balance sheet items carrying credit risk (commitments to finance and guarantee in favor of customers or other financial institutions, irrevocable agreements to purchase loans, securities, or other asset items). i) Unrelated Risk: exposure of a financial institution towards an isolated natural and/or legal person or a group of related counterparties, other than persons related to the institution. j) Housing Loans: loans and advances granted by a financial institution for the acquisition, construction, repair, or improvement of a residential real estate property. They concern the following residential real estate properties: single-family residences, multi-unit housing of any type, mixed-use buildings where more than half of the area is used for residential housing, land intended for residential construction. k) Commercial Loans: credit granted to a natural or legal person for business purposes. These credits include loans and credit card advances to a company, debt securities, acceptances, letters of credit, guarantees, substitute loan securities, and credit lease contracts. Loans to financial intermediaries, loans to the State, public enterprises, and local authorities, as well as commercial real estate loans, fall into this category. Commercial real estate loans include all credits granted to a natural or legal person for the acquisition, construction, repair, or improvement of a commercial real estate property. They concern the following buildings: agricultural buildings, office buildings, commercial buildings and shopping centers, industrial buildings, hotels/motels, mixed-use buildings where more than half of the area is used for commercial or industrial operations, land intended for commercial or industrial construction. l) Consumer Loans: all loans and advances granted by a financial institution for the acquisition of consumer goods or for the payment of services. Credit card advances are included in this category.

2. Individual and Cumulative Concentration Risk Limits
   2.1. Individual Limit
   Every financial institution is required to comply at all times with:
   § a maximum ratio of 25% between the total credit risks incurred from its operations with an Unrelated Risk and the amount of its core own funds; § a maximum ratio of 10% between the total credit risks incurred from its operations with a Related Party Risk and the amount of its core own funds.

2.2. Cumulative Limit
Every financial institution is required to comply at all times with:
§ a maximum ratio of 500% between the total amount of credit risks incurred on all Unrelated Large Exposures and the amount of its core own funds; § a maximum ratio of 50% between the total amount of credit risks incurred on all Related Party Risks and the amount of its core own funds. The implementation of this limit will be carried out in accordance with Section 7 of this circular.

2.3. Common Provisions
The individual and cumulative limits do not apply to exposures of any nature, direct and indirect, on the Haitian State and on the BRH.
An identification form for the affiliation of an individual counterparty to a group must be established, following the model presented in Annex 4, for persons included in the consolidation perimeter of a group and any other client whose credit risk, determined under the conditions defined below, represents 5% or more of the institution's core own funds. The form must be filed in the credit file and updated once a year, and during the year in case of a change in circumstances affecting the evaluation criteria. The BRH may authorize a financial institution to exclude a person from a group of related counterparties and/or from persons related to the institution if the latter submits a request supported by sufficient justifications to legitimize this exclusion. The BRH reserves the right to request, by reasoned decision, the inclusion of a counterparty in a group of related counterparties and/or in the persons related to the institution, provided that the institution in question requests, if necessary, the maintenance of its exclusion by justifying the absence of effective group or related links of said counterparty with all sufficiently probative elements. The individual and cumulative concentration risk limits must be applied by financial institutions on an individual basis as well as, where applicable, on a consolidated basis. In case of application on a consolidated basis, the consolidating entity encompasses all subsidiaries that must be consolidated in accordance with international accounting standards. Credit risks are determined under the following conditions:

• Balance sheet exposures are taken at their book value;
• Off-balance sheet exposures are taken into account at their credit equivalent amount determined by applying the conversion factors set by the circular on capital requirements;
• Specific provisions for doubtful receivables related, where applicable, to balance sheet and off-balance sheet exposures are deducted from the book value of the relevant exposures;
• Eligible guarantees under the circular on capital requirements are deducted from the exposures to which they relate, by applying to the exposures covered by these guarantees the risk weighting factors set by the aforementioned circular. The uncovered fraction is taken into account at its book value for balance sheet exposures and at its credit equivalent amount for off-balance sheet exposures. Also deductible, under the same conditions, are amounts covered by guarantee instruments set up and managed, under their responsibility:
  • by multilateral development banks listed in Annex II of the aforementioned circular;
  • by bilateral development aid public agencies, with prior approval of the BRH.
    Amounts deducted from exposures to a counterparty in application of the provisions relating to eligible guarantees are to be considered as exposures to the guarantor or the concerned third party and taken into account, where applicable, in the determination and reporting of large exposures under this circular.

3. Sectoral Limit
   The total credit risks towards one of the activity sectors defined in Annex 3 of this circular may not exceed 25% of the total credit risks of the financial institution. Financial institutions must establish the ratios defined in Annex 3 based on the classifications provided in Appendices I and II of said annex. As an exception, the 25% limit applies to each of the activities included in the "wholesale trade" and "retail trade" activity sectors. For credit card companies, the 25% limit applies to advances granted to businesses. Credit amounts related to credit cards granted to individuals must be reported at Annex 3 (3 of 3) as consumer loans. These limits must be respected on an individual basis as well as, where applicable, on a consolidated basis. The calculation is performed based on the net book balances of specific provisions established, where applicable, on non-performing receivables in accordance with the circular on the classification and provisioning of credit risks. The basis for allocating receivables among activity sectors is the credit allocation, i.e., the sector for which the financing is actually used. As an exception, a BRH authorization may be granted to a financial institution to exceed the 25% limit. The authorization request must be accompanied by the following information: activity sector, names and balances of current and future borrowers, current and future concentration ratio, duration of the exceedance, and justifications for the reasons motivating the authorization request.

4. Availability of Information for the BRH
   Financial institutions must keep the following information available to the BRH:

• all working files related to the preparation of the reports required under this circular;
• the procedures and identification files for "groups of related counterparties" and "persons related to the financial institution" justifying the accomplishment, with due diligence, of the necessary searches with clients to produce reliable and materially important information in all respects.

5. Compliance Reports
   Financial institutions must submit to the BRH, in electronic format via the BSA application or Application Programming Interfaces (API), the following reports:

• Quarterly Report on Unrelated Large Exposures (Annex 1)
  Submission deadline: 28 days following the end of the quarter.
• Quarterly Report on Related Party Risks (Annex 2)
  Submission deadline: 28 days following the end of the quarter.
• Quarterly Report on Credit Risks by Activity Sector (Annex 3)
  Submission deadline: 28 days following the end of the quarter.

6. Sanctions
   In case of non-compliance with the obligations defined in this circular, a financial institution is subject to the following penalties:
   a) Information Reliability
   At all times, the amounts declared in the reports provided for in Section 5 must be those appearing in the accounting and auxiliary books of the financial institution.
   Failing to comply with this directive, the BRH may, after investigating the circumstances and nature of the violation, impose a penalty of 10% of the difference between the amounts declared in the reports and the amounts appearing in the accounting and auxiliary books of the financial institution. b) Exceedance of Regulatory Concentration Risk Limits Any exceedance of the individual, cumulative, or sectoral concentration risk limits is subject to a penalty, per day of violation, corresponding to 0.1% of the amount of own funds necessary to bring the ratio within the set limit. The penalty application period begins on the report date where the violation is observed and ends on the compliance report date showing the regularization of the situation. In case of simultaneous exceedances, the penalty applies to each of the exceedances. c) Calculation Discrepancies of Concentration Risk Limits Observed During BRH Inspection Missions Calculation discrepancies of concentration risk limits may be observed during BRH inspection missions compared to the declarations made by the financial institution. Inspection missions evaluate the constituent elements of own funds and the risk related to balance sheet and off-balance sheet asset items and compare them to the declarations transmitted by the financial institution. At the end of this exercise and after discussion with the institution's management, a discrepancy may arise. A period of thirty (30) days is granted to the financial institution to correct the discrepancy. After the thirty (30) day period, a penalty of fifty thousand gourdes (HTG 50,000.00) per day of violation applies until the discrepancy is regularized, and a warning letter is notified to the concerned institution. d) Availability of Information Failing to provide the information stated in Section 4 of this circular, the financial institution is subject to a penalty of fifty thousand gourdes (HTG 50,000.00) per day of violation. The penalty period extends from the day of the violation (date for submitting information set by the BRH) until the day the information is provided to the BRH. e) Late Submission of Compliance Reports Failing to provide, within the required timeframe, the compliance reports provided for in Section 5 of this circular, the financial institution is subject to a penalty of fifty thousand gourdes (HTG 50,000.00) per day of violation. The penalty period extends from the day of the violation until the date of actual transmission of the reports to the BRH. Any penalty under the provisions of this section will be debited to one of the accounts of the defaulting institution at the BRH.

7. Transitional Provisions
   For the implementation of the cumulative limit, the limits of the maximum ratio between the total amount of credit risks on all Related Parties and the amount of core own funds will be phased in as follows:

• 200% during the 2023-2024 fiscal year;
• 150% from October 1, 2024;
• 100% from October 1, 2025;
• 50% from October 1, 2026.

8. Repeal and Entry into Force
   The provisions of this circular replace those of Circular No. 83-4 of September 18, 2000, and enter into force on April 1, 2024.
   Port-au-Prince, September 1, 2023
   Jean Baden Dubois
   Governor

List of Annexes and Appendices

1. Quarterly Report on Unrelated Large Exposures.
2. Quarterly Report on Related Party Risks.
3. Quarterly Report on Credit Risks by Activity Sector.
   Appendix I Classification of economic activity branches by institutional sectors inspired by the International Standard Industrial Classification (ISIC)
   Appendix II Correspondence table of activity sectors to be transmitted under Circular 83-5 with the classification of economic activity branches by institutional sectors (based on ISIC)
   Appendix III Correspondence table of activity sectors to be transmitted to the BIC with the classification of economic activity branches by institutional sectors (based on ISIC)
4. Client Group Affiliation Identification Form

Annex 1
(1 of 3)
Financial Institution: _____________________
UNRELATED LARGE EXPOSURES
Quarterly report as at: _______________________ (In thousands of gourdes) On an individual / consolidated basis¹ Inventory of Unrelated Large Exposures: Each counterparty or group of related counterparties but not related to the reporting financial institution whose total exposure to the institution reaches or exceeds 10% of the institution's core own funds, before taking into account eligible guarantees, shall be listed in this report. I – LIMITS OF UNRELATED LARGE EXPOSURES Amount Core own funds (Category 1)² Large exposure threshold (10% of COF) Individual limit for Unrelated Large Exposures (25% of COF) Cumulative limit for Unrelated Large Exposures (500% of COF) II - SYNTHESIS OF UNRELATED LARGE EXPOSURES Name | Net balance sheet exposure³ (1) | Off-balance sheet risk⁴ (2) | Total credit risk (1) + (2) | Credit risk as a % of COF Unrelated Large Exposure 1 | | | | Unrelated Large Exposure 2 | | | | Unrelated Large Exposure 3 | | | | … | | | | TOTAL | | | | ¹ Strike out the unnecessary mention ² According to the circular on capital requirements ³ Carry forward the total, for each unrelated large exposure, from the last column of the calculation sheet page 2 of this annex. ⁴ Carry forward the total, for each unrelated large exposure, from the last column of the calculation sheet page 3 of this annex.

Annex 1
(2 of 3)
III – CALCULATION STATEMENTS FOR UNRELATED LARGE EXPOSURES A - Unrelated Risks on Balance Sheet Total exposures to a counterparty or group of related counterparties, not related to the institution, appearing in balance sheet assets in all forms (interbank deposits and loans, credit and credit lease operations, investments, participations, other assets). Exposures to such counterparties as guarantors or third parties of eligible guarantees deducted from exposures to the direct counterparty of balance sheet assets are also to be included. Book Balance | Specific Provisions | 100% Deductible Guarantees (1) | 80% Deductible Guarantees (2) | Exposure as Guarantor | Net Balance Sheet Exposure (1) (2) (3) (4) (5) (5) = (1)-(2)-(3)-((4)*0.8)+5 Unrelated Risk 1 Counterparty A Counterparty B Counterparty C Total Unrelated Risk 1 Unrelated Risk 2 Counterparty A Counterparty B Counterparty C Total Unrelated Risk 2 Unrelated Risk 3 Counterparty A Counterparty B Counterparty C Total Unrelated Risk 3 ……. | ……. | ……. | ……. | …… (1) Eligible guarantees with a risk weighting factor of 0% according to the circular on capital requirements (2) Eligible guarantees with a risk weighting factor of 20% according to the circular on capital requirements

Annex 1
(3 of 3)
B - Unrelated Risks Off Balance Sheet
Total exposures to a c