COBAC Regulation R-98/03 on Accounting and Provisioning of Non-Performing Loans and Doubtful Signature Commitments

COMMISSION BANCAIRE DE L’AFRIQUE CENTRALE COBAC REGULATION R-98/03 RELATING TO THE ACCOUNTING AND PROVISIONING OF NON-PERFORMING LOANS AND DOUBTFUL SIGNATURE COMMITMENTS

The Banking Commission of Central Africa, meeting on November 5, 1998, Having regard to the Convention of October 16, 1990 establishing a Banking Commission of Central Africa; Having regard to Articles 1 and 9 of the Annex to the Convention of October 16, 1990; Having regard to the Convention of January 17, 1992 on the harmonization of banking regulation in the States of Central Africa, Having regard to Article 32 of the Annex to the Convention of January 17, 1992; DECIDES

Article 1 Credit institutions referred to in Article 2 of the Annex to the Convention of October 16, 1990, mentioned above, shall carry out the accounting and provisioning of non-performing loans and doubtful signature commitments, as well as the treatment of uncollectable claims, under the conditions provided for by the chart of accounts for credit institutions and by this Regulation.

CHAPTER I - DEFINITION OF NON-PERFORMING LOANS, DOUBTFUL SIGNATURE COMMITMENTS, AND UNCOLLECTABLE CLAIMS

Article 2 Non-performing loans consist of immobilized claims, unpaid claims, and doubtful claims. For the purposes of this Regulation, significant credit movements recorded on a current or ordinary account are considered to be credit movements whose cumulative amount covers the debit interest chargeable to the account concerned over the period examined.

Article 3 Immobilized claims are claims that have been due for more than three months but whose final recovery, while not compromised, cannot be effected immediately. A debtor current account is considered immobilized if, although the recovery of the balance is not compromised, no significant credit movements are observed for more than three months.

Article 4 Unpaid claims are sums not paid at the normal due date. They consist in particular of:

• simple lease rentals, leases with purchase option, or movable financial leasing rentals, and installments of non-real estate credits unpaid for a period less than or equal to three (3) months;
• immovable simple lease rentals or immovable financial leasing rentals, and installments of real estate credits unpaid for a period less than or equal to six (6) months;

Loans subject to acceleration of term for less than three (3) months, for any reason other than the occurrence of non-payment, are also considered unpaid.

However, installments benefiting from a term extension are excluded from unpaid claims.

Article 5 Doubtful claims are loans of any nature, even secured, which present a probable risk of total or partial non-recovery. They consist in particular of:

• loans with at least one unpaid installment for more than three (3) months or more than six (6) months for real estate credits, whether this installment was previously classified as an unpaid claim or not;
• debtor ordinary accounts (current accounts or others) with no significant credit movement for more than three (3) months;
• claims with a contentious nature (recovery entrusted to the legal department, judicial or arbitral proceedings initiated, bankruptcy, liquidation of assets, judicial settlement);
• due rentals relating to financial leasing, lease with purchase option, or hire-purchase operations, of which at least one installment has been unpaid for more than three (3) months or six (6) months for immovable financial leasing.

The classification of an unpaid portion of loans held by a legal or natural person as doubtful claims entails the transfer of all loans granted by the institution to that person as doubtful outstanding amounts, regardless of any consideration related to any guarantees held (contagion effect).

Article 6 Uncollectable claims are claims whose non-recovery is estimated to be certain after exhaustion of all amicable or judicial means, or for any other relevant consideration.

Article 7 Doubtful signature commitments are off-balance sheet commitments that present a probable or certain risk of partial or total default by the principal upon their realization.

CHAPTER II - ACCOUNTING

Article 8 Non-performing loans, uncollectable claims, and doubtful signature commitments are accounted for in accordance with the following principles:

1. Immobilized claims and unpaid claims are recorded in the accounts provided for by the chart of accounts for credit institutions. However, to take into account technical recovery delays, covered institutions may not proceed with the reclassification of claims becoming unpaid until one month after each relevant due date.

2. Unpaid amounts observed will be cleared as they are paid; in any event, if the oldest unpaid amount attributed to the same debtor dates back more than three months, they will be subject to the treatment applied to doubtful claims.

3. Doubtful claims leave their original account as soon as they are considered doubtful; they are then tracked in the "doubtful claims" account relative to each class.

4. Interest and commissions are only recorded in income accounts if they are actually received, as follows: a) Accounting entries for interest and commissions recorded before reclassification into immobilized claims, unpaid claims, or doubtful claims are reversed if the concerned products have not been actually received; these products are then recorded in off-balance sheet accounts; b) Interest generated by immobilized claims, unpaid claims, and unpaid doubtful claims is not recorded in income accounts; it must be recorded in off-balance sheet accounts; c) Uncollectable claims must be written off as losses for their entire amount. All provisions previously constituted on these claims must be reversed if applicable; d) Signature commitments are removed from their original account as soon as they are considered doubtful; they are then tracked in the "doubtful commitments" account of class 9.

CHAPTER III - PROVISIONS

Article 9 Provisions on non-performing loans are constituted in accordance with the following principles:

1. For immobilized claims, unpaid claims, and doubtful claims guaranteed by the State, the constitution of provisions is optional.

2. For doubtful claims not covered by State guarantee and doubtful signature commitments, provisions are constituted according to the following modalities: a) Full provisioning within a maximum period of three years for risks not covered by real guarantees; the cumulative provision must cover, at least, 25% of the outstanding amounts in the first year and 75% in the second year; b) Full provisioning within a maximum period of four years for risks covered by real guarantees; the cumulative provision must cover, at least, 15% of the total of the concerned risks at the end of the first year, 45% at the end of the second year, and 75% at the end of the third year.

Article 10 Doubtful claims relating to financial leasing and lease with purchase option operations must be subject to provisioning up to their amount.

Article 11 Provisions on non-performing loans are recorded in the accounts provided for this purpose in classes 3, 4, and 5 of the chart of accounts for credit institutions. In particular, provisions relating to doubtful claims on financial leasing are recorded in the account "provisions for doubtful claims on financial leasing".

Provisions relating to doubtful signature commitments are recorded, as the case may be, in the account of "provisions for execution of guarantees and sureties", or, for commitments relating to financial leasing or lease with purchase option, in the account of "provisions for risk of non-collection of rentals".

Article 12 The identification as immobilized claims, unpaid claims, and doubtful claims must be abandoned when payments resume regularly for amounts corresponding to the installments, even if payment delays and the outstanding amount are renegotiated in duration and amount. The consolidated amounts are tracked, depending on the duration of the consolidation, in the main accounts "long-term credits", "medium-term credits", and "short-term credits" within the sub-accounts "moratorium or consolidated credits with the State" for the State and "non-allocable credits" for other clients.

Article 13 Covered credit institutions shall declare the outstanding amount of non-performing loans and the provisions to be constituted for their coverage according to models fixed by instruction.

Article 14 Provisions previously constituted on doubtful claims that exceed the amounts resulting from the application of Article 9 above cannot be subject to provision reversal unless this is justified by an effective improvement in recovery prospects.

CHAPTER IV - FINAL PROVISIONS

Article 15 In the event of non-compliance with the principles set by this Regulation, the Banking Commission may, in application of Article 12 of the Annex to the Convention of October 16, 1990, issue an injunction to the effect of taking, within a determined deadline, all measures likely to bring the concerned institution into compliance with these principles.

If a credit institution has not complied with an injunction or has not taken into account a warning, or has seriously infringed the regulation, it incurs one or more of the disciplinary sanctions provided for in Article 13 of the Annex to the Convention of October 16, 1990.

Article 16 All provisions contrary to those of this Regulation are repealed.

Article 17 This Regulation shall be notified to the Ministers in charge of Currency and Credit as well as to all covered credit institutions and their professional associations.

Article 18 The Secretary General of the Banking Commission of Central Africa is charged with the execution of this Regulation, which enters into application as of July 1, 1999, for covered institutions established in the Republic of Cameroon, and as of January 1, 2000, for other covered institutions.

For the Banking Commission of Central Africa, The President, Jean-Félix MAMALEPOT