Circular 87-1 Loan Classification

Central Bank of Haiti
CIRCULAR

CIR. : BRH/BK-IFC/2026/87-1

TO FINANCIAL INSTITUTIONS

Pursuant to the Law of May 14, 2012 on banks and other financial institutions, banks, development finance companies, credit card companies, factoring companies, and any other financial institution carrying out operations equivalent to credit operations as defined in Article 2, paragraph 6 of said Law, are required to comply with the provisions of this circular regarding the classification, accounting, and provisioning of their credit risk exposures.

1. Definitions

a) Counterparty: any natural or legal person whose default exposes the institution to a risk of loss on its assets, due to operations of any nature conducted with that person.

b) Exposure: total book value of asset items and off-balance sheet commitments relating to the same counterparty.

c) Credit risk: risk incurred by a financial institution on its assets and off-balance sheet commitments in the event of default by a counterparty or a group of related counterparties.

The risks incurred include the following elements:

• claims held on other financial institutions, in the form of account balances, loans, or other receivables;
• retail loans and other receivables owed by retail clients;
• investments in securities and in any other form;
• leased fixed assets under leasing operations, and receivables related to these operations;
• other receivables from third parties;
• off-balance sheet items carrying credit risk (irrevocable financing and guarantee commitments to retail clients or other financial institutions, irrevocable agreements to purchase loans, securities, or other asset items).

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d) Receivable: assets carrying a right to reimbursement of a sum of money by a third party based on a deposit or loan of funds, credit operations, movable or immovable leasing, and similar operations, investments in securities, and any other operation generating such a right for the institution. For leasing operations, the term receivable refers to the principal outstanding by the beneficiary of the operation and the overdue rents to be collected.

e) Overdue receivable: receivable whose principal and/or interest are due and unpaid. Overdrafts and credit advances not subject to any pre-established principal repayment schedule are considered overdue under the following circumstances:

• the debit position has not been formally authorized or the borrower's credit line has expired,
• the account rotation period for accounts showing a debit position, determined over six months according to the methods defined in Annex I, exceeds 90 days, unless a justified and motivated exception applies;

f) Performing receivable: receivable classified in the "Performing" or "To Be Monitored" categories in accordance with the rules defined by this circular.

g) Non-performing receivable: receivable classified in the "Substandard", "Doubtful", or "Loss" categories in accordance with the rules defined by this circular.

h) Written-off receivable: receivable deemed uncollectible after exhausting all collection avenues, removed from the balance sheet through recognition as a loss in the income statement.

i) Restructured receivable: receivable whose initial contractual terms are subject to an amendment or novation due to deterioration in the borrower's financial situation, resulting in an extension of their duration, rescheduling of the repayment schedule, revision of the interest rate, and/or modification of other initial conditions.

j) Microcredit: loan with an amount below a threshold set by the BRH, pursuant to the decree on the organization and operation of microfinance institutions, granted to natural or legal persons who cannot access standard bank loans.

k) Consumer loans: all loans and advances granted by a financial institution for the acquisition of consumer goods or payment for services. Credit card advances are included in this category.

l) 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 floor area is used for residential housing, land intended for residential construction.

m) 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, loan substitute securities, and leasing contracts. Loans to financial enterprises, loans to the State, public enterprises, and local authorities, as well as commercial real estate loans, belong to this category.

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Commercial real estate loans include all credit 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 floor area is used for commercial or industrial operations, land intended for commercial or industrial construction.

n) Non-possessory pledge: contract by which a debtor grants its creditor a real right on present or future movable assets as security for an obligation, under the conditions set by the decree of April 9, 2020 reforming Haitian security law.

2. Classification of On-Balance Sheet Receivables

The receivables of financial institutions must be classified according to the following categories:

• Performing (C)
• To Be Monitored (AS)
• Substandard (F)
• Doubtful (D)
• Loss (P)

Classification rules apply to the total amount of each receivable, namely the principal of the receivable and other receivables related to it (overdue installments, accrued and unpaid interest, accrued and unpaid interest, commissions, and other products to be collected).

Classification is based on actual or anticipated repayment risks of the receivables, without taking into account any collateral they may be secured by.

2.1. Performing Receivables

Performing receivables are receivables whose repayment is carried out in accordance with contractual provisions and are held on counterparties whose ability to honor all their commitments raises no cause for concern (solid financial situation, quality shareholding, satisfactory situation and prospects of the business sector). Also classified as performing receivables are:

• overdrafts and credit advances
  i. subject to a valid formal authorization or expired for no more than 60 days, provided in this case that a written request for renewal or extension is under review by the competent decision-making body;
  ii. or having been used permanently over the past three months without the rotation period of the concerned account exceeding 30 days;

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• discounted and unmatured values accepted by the drawee and whose final settlement raises no doubt.

2.2. Receivables To Be Monitored

Receivables to be monitored are receivables for which the current and future ability of the counterparty to repay its commitments in full and on time raises cause for concern, due to the existence of isolated payment incidents, early warning signs of difficulties (deterioration of the debtor's financial situation, poor commercial performance, management problems, change in shareholding, etc.), or unfavorable market or business sector prospects. Also classified as receivables to be monitored are:

• credits of any nature and receivables under leasing operations carrying overdue installments for more than 30 days and up to a maximum of 90 days;
• overdrafts and credit advances
  i. without authorization for up to 90 days,
  ii. or whose authorization has expired for 60 days up to a maximum of 90 days if a written proposal for renewal or extension is under review by the competent decision-making body,
  iii. or whose authorization has expired for 30 to 90 days maximum without being subject to a proposal for extension or renewal,
  iv. or having been subject to permanent use, authorized or not, over the past three months resulting in a rotation period of the concerned account exceeding 30 days and up to a maximum of 90 days;
• credit card advances overdue for up to 30 days maximum;
• microcredits overdue for up to 30 days maximum;
• any other receivable not showing overdue installments or carrying overdue installments of a duration shorter than the criteria defined above, but whose repayment raises cause for concern due to recurring payment difficulties or strong uncertainties regarding the counterparty's future repayment capacity.

2.3. Substandard Receivables

Substandard receivables are receivables presenting the following characteristics:

• credits of any nature and receivables under leasing operations carrying overdue installments for more than 90 days and less than 180 days;
• overdrafts and credit advances
  i. without authorization or whose authorization has expired for more than 90 days and less than 180 days;

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ii. or having been subject to permanent use, authorized or not, over the past three months resulting in a rotation period of the concerned account exceeding 90 days and less than 180 days;  

• credit card advances overdue for more than 30 days to less than 90 days;
• microcredits overdue for more than 30 days to less than 90 days;
• any other receivable not carrying overdue installments meeting the criteria defined above, but presenting significant risk factors without meeting the conditions for classification as "Doubtful Receivables".

2.4. Doubtful Receivables

Doubtful receivables are receivables of any nature presenting a high risk of total or partial non-recovery. Also classified in this category are:

• credits of any nature, other than housing loans, and receivables under movable leasing operations carrying overdue installments dating from 180 days to less than 270 days;
• housing loans and receivables under immovable leasing operations carrying overdue installments dating from 180 days to less than 360 days;
• overdrafts and credit advances
  i. without authorization or whose authorization has expired for 180 days to less than 270 days;
  ii. or having been subject to permanent use, authorized or not, over the past three months resulting in a rotation period of the concerned account ranging from 180 days to less than 360 days;
• credit card advances overdue for 90 days to less than 180 days;
• microcredits overdue for 90 days to less than 180 days;
• restructured receivables, in accordance with the provisions of Section 9 of this circular;
• any other receivable from a counterparty presenting a high risk of non-repayment due to serious weaknesses compromising the fulfillment of its commitments (negative equity, suspension of credit by suppliers, restructuring actions initiated at the request of creditors, etc.), without meeting the conditions for classification as "Loss".

2.5. Loss Receivables

Receivables to be classified as Loss are receivables of any nature presenting a very high or certain risk of total or partial non-recovery. Also classified in this category are:

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• credits of any nature, other than housing loans, and receivables under movable leasing operations, carrying overdue installments for 270 days or more;
• housing loans and receivables under immovable leasing operations carrying overdue installments for 360 days or more;
• overdrafts and credit advances:
  i. without authorization or whose authorization has expired for 270 days or more;
  ii. or having been subject to permanent use, authorized or not, over the past three months resulting in a rotation period of the concerned account of 360 days or more;
• credit card advances overdue for 180 days or more;
• microcredits overdue for 180 days or more;
• receivables subject to a legal collection procedure;
• receivables from counterparties that have openly declared bankruptcy.

3. Classification of Off-Balance Sheet Commitments

Off-balance sheet commitments carrying a probable or certain risk of being drawn upon, due to a high probability of default by the beneficiary of these commitments, are to be classified in a specific off-balance sheet account heading "Doubtful Off-Balance Sheet Commitments". Also to be recorded in this heading are:

• irrevocable financing or guarantee commitments in favor of counterparties on which the institution carries non-performing receivables on its balance sheet;
• irrevocable signature commitments in favor of third parties and presenting a probable or certain risk of the guarantee given by the financial institution being drawn upon (notably in cases of information leading to consider as certain or probable the drawing upon, by the third party, of the guarantee given by the institution).

4. Contagion Classification Principle

The classification of a receivable into the "To Be Monitored", "Substandard", "Doubtful", or "Loss" category entails the transfer of all receivables on the same counterparty into the category of the worst-classified receivable on that counterparty.

The contagion principle does not apply when the default is not attributable to the debtor but relates to an operational risk of the payment system or the financial institution, or when the unpaid amount must be covered by a third party (insurer, for example). In this case, the default is classified as a technical default. The institution may choose not to apply the contagion principle below a materiality threshold specified in its credit policies. This threshold is defined in absolute value

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and in relative value, by the ratio of defaulted exposures to total exposures. The absolute value of this threshold cannot exceed two hundred thousand gourdes (200,000.00 HTG) and the relative value 5%, the lowest criterion being retained. In the event of applying a materiality threshold, all receivables on the same counterparty are to be classified in the risk category where the cumulative amount of the worst-classified receivables reaches the set threshold.

When the counterparty belongs to a group, the institution examines the consequences of its default at the group level and assesses,