Palestine Monetary Authority

Palestine Monetary Authority

Circular No. 29 (2011)
To all banks operating in Palestine
Date: Wednesday, February 23, 2011

Subject: Development of the Borrower Classification System

In the context of the Palestine Monetary Authority's continuous efforts to develop credit risk reduction tools to preserve the quality of the banking facilities portfolio, the Authority has developed the current version of the credit classification system following a review of all related elements determining the risk level, aligned with the Palestinian banking environment.

The following are the main updates made to the developed version of the system:

First: 30-Day Payment Delay

Given the specific characteristics of Palestinian society and the reliance of most of its segments on monthly salaries transferred to banks, which may for some reason be delayed by a few days at the beginning of each month, the current version has been developed so that the risk of payment delay is not weighted for a period not exceeding 30 days, generally for both institutions and individuals.

Second: Classification of Facility Efficiency

Efforts were made to establish a link between guarantees and facilities granted by guarantors, such that the status of the granted facility directly reflects on the guarantor if the borrower delays payment. Consequently, the guarantor's credit risk level increases in case of facility default, leading to the client being assessed with high risk. Additionally, an increase in the number of facilities granted to a single client will also raise the risk level, even if the client consistently pays installments on time.

Third: Utilized Credit Card Limits

To reinforce the Authority's future direction of shifting from cash (paper) usage to plastic cards, including credit cards, the variable has been developed by adjusting risk weights for credit card holders. The risk level has been reduced to the minimum for clients who fully utilize their credit card limits and adhere to scheduled payment deadlines.

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Fourth: Disclosure of Payment Delay Periods

To cover all payment delay periods, whether continuous or intermittent, the version has been developed to include detailed disclosure of payment delay periods for the preceding 24 months.

Fifth: Disclosure of Guarantee Types and Their Risk Levels

The types of guarantees used in the Palestinian banking environment were analyzed based on the credit information system database. Risk weights were assigned to each guarantee based on analysis results and the ease of registration considering the Palestinian legislative environment. Consequently, the primary guarantee securing the facilities and its risk level (low or high) will be disclosed.

Sixth: Outstanding Balance Exposed to Default Risk

The outstanding balances of facilities exposed to default risk were analyzed in two parts: the first part covers the valuation estimate for amounts equal to or exceeding $10,000, and the second part covers amounts below that threshold.

Seventh: Disclosure of Economic Sector

To assist credit analysts and decision-makers, and to identify borrowing risks at the economic sector level for the facility under review, the risk weights of granted facilities were analyzed and these sectors were weighted. This information will be disclosed in the inquiry response based on evaluation results.

Eighth: Classification Grades on the Repeated Networks System

Given the short period since the launch of the Repeated Networks System, which is insufficient to determine a variable for weighting the risk of clients classified on this system, this version considers that clients classified as (E and B) on the system will have low risk, unlike clients classified as (D and C), who are assigned high risk. Classification risk on the system will be more effectively determined in the subsequent developed version after the system has operated for a sufficient period to extract the actual variable for evaluating the risk of classified clients.

Ninth: Modification of the Risk Grade Table

Based on the results of analyzing the studied data sample and determining risk grades for variables related to identifying borrower risks and their efficiency, the risk grade table has been modified into five main groups, each with a specific range for the probability of default over the next 12 months, as follows:

Risk Grade	Probability of Default
A	Probability of default within the next 12 months between 0% and 4.08%
B	Probability of default within the next 12 months between 4.09% and 7.61%
C	Probability of default within the next 12 months between 7.62% and 18.38%
D	Probability of default within the next 12 months between 18.39% and 61.07%
E	Probability of default within the next 12 months between 61.08% and 100.00%

Additionally, to clarify the reading of the groups and their risk levels for individuals and companies compared to the credit risk rate of the banking sector, a user guide has been added so that this table appears automatically when obtaining an inquiry response.

Green Group	Grey Group	Red Group
Individuals: Score >= 309	Individuals: 248 <= Score < 309	Individuals: Score < 248
Companies: Score >= 295	Companies: 215 <= Score < 295	Companies: Score < 215

All bank administrations are requested to disseminate the contents of this circular to users of the credit information system. Please note that the developed version of the credit classification system will take effect starting Tuesday morning, March 1, 2011.

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Dr. Rifat Al-Hashash
General Presidency
Palestine Monetary Authority

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Ramallah - Al Bireh P.O.Box 452 - Tel: 02-2409920 - Fax: 02-2409922 Gaza - P.O.Box 4026 - Tel: 08-2825713 - Fax: 08-2844487 E-mail: info@pma.ps www.pma.ps

Ramallah - Al Bireh P.O.Box: 452 - Tel: 02-2409920 - Fax: 02-2409922 Gaza - P.O.Box: 4026 - Tel: 08-2844487 - Fax: 08-2825713