Palestine Monetary Authority

(2010/68) Circular No.

To all banks operating in Palestine

Date: Sunday, July 4, 2010

Subject: Development of the Credit Information System

In the framework of the PMA's efforts to develop the credit information system to include a new borrower classification system, and to meet development requirements, the PMA has added new fields to the inquiry screen and the inquiry response report to meet the disclosure requirements for the new system.

Below are the modifications made to the two Credit Information System screens (Inquiry and Inquiry Response Report), as well as operational guidelines for the borrower classification system.

First: Modifications to the Inquiry and Inquiry Response Report Screens

1. Inquiry Screen

Two mandatory fields have been added to the screen:

a. Reason for Inquiry, divided into two parts:

• New Facility: Selected by the user when the inquiry is for granting a new facility or modifying an existing facility limit.
• Follow-up: Selected by the user when the bank/branch management wishes to follow up on the status of a client granted a facility or a group of existing facilities.

b. Purpose of Inquiry, divided into two parts:

• Borrower: Selected when the inquiry is for granting a new facility or modifying an existing facility limit.
• Guarantor: Selected when the inquiry is regarding a guarantor/guarantee for existing or to-be-granted facilities.

2. Inquiry Response Report Screen

a. A complete field in the borrower classification system has been added, containing the following items:

• Client Evaluation
• Probability of Default within the next 12 months
• Risk Grade
• Evaluation Interpretation Code
• Evaluation Interpretation

The function and concept of each item will be explained in the operational guidelines for the new system in the following part of this circular.

b. Previous Obligations

This field discloses the client's previous facilities that have been paid off, settled, or where claims have been discontinued and are no longer active or outstanding. It discloses a set of important facility items:

• Lending Bank Code
• Lending Branch Code
• Facility Classification
• Facility Type
• Grant Date
• Grant Currency
• Approved Limit
• Utilized Balance
• Unpaid Due Installments
• Periodic Installment Type
• Client Status Evaluation
• Legal Actions Taken

c. Client Status on the Automated Returned Checks System

This field discloses the client's classification grade on the Automated Returned Checks System, as the data is derived directly from that system.

Second: Operational Guidelines for the Borrower Classification System

Initially, this system is a new addition to the credit risk reduction tools used in preparing credit studies. The classification system is based on studying and analyzing the client's paid and outstanding facility data to determine the level of credit risk the client will face in the coming period. The results of the study and analysis are disclosed in a separate section of the inquiry response report, following the client's personal data section. This field consists of the following items:

1. Client Evaluation: Discloses the client's evaluation number, representing their credit risk. Evaluation grades range from 100 to 380 depending on the client's status. Higher evaluation scores indicate lower credit risk, reflecting better quality of the client's facility portfolio, as the relationship between evaluation and risk is inverse. Risk grades D2 (10%) and D3 (15%) represent the risk rates for individuals and companies, respectively, compared to the banking sector's credit portfolio risk rate.

2. Probability of Default: Discloses the percentage probability of the client defaulting or delaying payment of installments and obligations on their due dates within 12 months. A client may delay payment for 60 days or more. Higher probability of default increases the risk grade.

3. Risk Grade: Discloses the client's risk grade code, directly linked to the client evaluation and probability of default. Risk grades range from A1 to E3, where A1 is the lowest risk and E3 is the highest.

4. Evaluation Interpretation: Discloses the interpretation of the client's risk-based evaluation code. It provides up to five interpretations for the client evaluation. No interpretation is shown for risk-reduced marks. During the first phase of the new system's implementation, 35 interpretations for client credit risks will be used, to be developed later to align with changes in the credit facility portfolio database.

Third: Cases Exempt from Evaluation

The client's evaluation does not appear in the following cases:

1. If the inquired client is a guarantor, as guarantors are not evaluated and thus do not receive a risk grade or probability of default. The evaluation interpretation code (EXG) will appear, meaning the inquired client is solely a guarantor without any facilities.

2. If the inquired client has no data in the Credit Bureau database, the evaluation interpretation code EXU will appear, meaning (no data available for the client).

3. If the client has not obtained any type of facility during the last three months, the evaluation interpretation code EXI will appear, meaning (no active facilities for the client during the last three months).

4. Certain official personalities and institutions will not be evaluated and are exempt from the process. The evaluation interpretation code (SSO) will appear, meaning the inquired client is an official personality or institution exempt from evaluation.

Fourth: Inquiry Fees

Based on Article 6, Clause 7 of the Palestine Monetary Authority Law No. (2) of 1997, a fee of $1.90 will be charged for each inquiry that results in an evaluation or risk determination under the new borrower classification system, provided that the bank bears this fee and is not allowed to collect it from clients or guarantors for processing the inquiry. The following cases are exempt from fees:

a. Exceptional cases mentioned in Clause 3 of this circular.

b. Clients classified on the Automated Returned Checks System or listed on the restricted lists without holding banking facilities.

c. Repeated inquiries within 7 working days for the same client by the same inquiring institution will be counted as a single inquiry, not each individual inquiry.

Accordingly, fee collection will commence upon the official launch of the new system. The PMA will provide banks with a monthly report on inquiries processed during the month and their costs. The amount will be debited from the bank's current account at the PMA and officially notified. As for specialized lending institutions, the amount will be collected and deposited into a special PMA account after providing them with the monthly report of processed inquiries.

To facilitate system usage and smooth interaction, two tables related to the evaluation interpretations used in the system, risk grades, and risk percentages are attached. We also recommend reviewing the material distributed during the training workshop to enrich the usage process and facilitate system interaction.

Supervision and Inspection Department

Palestine Monetary Authority

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

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Risk Grade

Probability of Default within the next 12 months	Risk Grade
Between 0% and 0.22%	A1
Between 0.23% and 0.33%	A2
Between 0.34% and 0.49%	A3
Between 0.50% and 0.70%	B1
Between 0.71% and 1.07%	B2
Between 1.08% and 1.59%	B3
Between 1.60% and 1.90%	C1
Between 1.91% and 3.20%	C2
Between 3.21% and 5.35%	C3
Between 5.36% and 7.50%	D1
Between 7.51% and 12.00%	D2
Between 12.01% and 24.00%	D3
Between 24.01% and 50.00%	E1
Between 50.01% and 99.99%	E2
100%	E3

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Reason Codes

Last update 03/05/2010

Reason Code	Reason Statement	Priority	Interpretation	Notes
AM1	Exposure in light arrears is too high	34	Default risk interpretation is linked to the delay level	Delayed balance for a specific period on the evaluation standard
CH0	• Total outstanding balance of all credit facilities currently in arrears (payment manner 2 or worse, but excluding 8) where subject is borrower is 10,000 USD or more. • Check status D (more than 15 returned checks during the last 3 months) • Rating in the returned check system is D.	46	Client classified as grade (D) on the Automated Returned Checks System, all returned on the automated standard, more than 15 delayed checks	Client classified as grade (D) on the Automated Returned Checks System, all returned on the automated standard, more than 15 delayed checks
CH1	• Check status C (6-15 returned checks during the last 3 months) • Rating in the returned check system is C.	44	Client classified as grade (C) on the Automated Returned Checks System, all returned on the automated standard, balance from (15 - 6) delayed checks	Client classified as grade (C) on the Automated Returned Checks System, all returned on the automated standard, balance from (15 - 6) delayed checks
CH2	• There is an active black list record and active restricted list record in parallel. Both black restricted list and active, i.e. both black out date and limited out date are in the future. • Currently in black list and restricted list	43	Client listed on black list and restricted list simultaneously, with an active evaluation on the automated standard	Client listed on black list and restricted list simultaneously, with an active evaluation on the automated standard
CH3	• There is an active black list record, but restricted list record is either not present or not active. Black list is active, i.e. black out date is in the future. • Currently in black list	42	Client listed only on black list, restricted list is absent or inactive, black list is active	Client listed only on black list, restricted list is absent or inactive, black list is active
CH4	• There is an active restricted list record, but black list record is either not present or not active. Restricted list is active, i.e. limited out date is in the future.	41	Client listed only on restricted list, black list is absent or inactive, restricted list is active	Client listed only on restricted list, black list is absent or inactive, restricted list is active
CH5	• There is a historical black list record and historical restricted list record in parallel. Both black list and restricted list are historical, but not older than 3 years, i.e. both black out date and limited out date are in the past but less than 36 months old.	41	Client was listed on black list and restricted list simultaneously in the past, but less than 3 years ago	Client was listed on black list and restricted list simultaneously in the past, but less than 3 years ago
CH6	• There is a historical black list record, but restricted list record is either not present or is active. Black list is historical, i.e. black out date is in the past.	41	Client was listed on black list in the past, but restricted list is absent or active	Client was listed on black list in the past, but restricted list is absent or active
CH7	• There is a historical restricted list record, but black list record is either not present or is active. Restricted list is historical, i.e. limit out date is in the past.	41	Client was listed on restricted list in the past, but black list is absent or active	Client was listed on restricted list in the past, but black list is absent or active
CH8	• Check status E (transition status) • Rating in the returned check system is E.	39	Client classified as grade (E) on the Automated Returned Checks System, all returned on the automated standard	Client classified as grade (E) on the Automated Returned Checks System, all returned on the automated standard

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