Guideline on Classification, Provisioning and Write-off of Credit Exposures

BOM/BSD 13/November 2004
BANK OF MAURITIUS
Guideline on Classification,
Provisioning and
Write-off of Credit Exposures
November 2004
Revised June 2005
Revised April 2016
Revised June 2019
Revised December 2023
Revised August 2024

TABLE OF CONTENTS
Introduction........................................................................................................... 1
Purpose.................................................................................................................. 1
Authority................................................................................................................ 1
Scope of application ............................................................................................... 1
Effective Date......................................................................................................... 1
Interpretation ........................................................................................................ 2
PART 1 - Governance and Risk Management Framework........................................ 5
RESPONSIBILITY OF THE BOARD ................................................................................................................................5
DOCUMENTATION......................................................................................................................................................6
APPROVAL AUTHORITIES...........................................................................................................................................6
RESPONSIBILITIES OF THE CHIEF RISK OFFICER.........................................................................................................6
ROLE OF THE CONTROL FUNCTIONS ...........................................................................................................................7
POLICIES FOR CLASSIFICATION AND PROVISIONING OF CREDIT EXPOSURES .............................................................7
EARLY IDENTIFICATION OF PROBLEM EXPOSURES .....................................................................................................8
INFORMATION SYSTEM FOR CREDIT CLASSIFICATION, PROVISIONING AND WRITE-OFFS ..........................................9
Part II - Classification of credit exposures under prudential norms ....................... 9
COMPUTATION OF EXPOSURES ..................................................................................................................................9
NON-PERFORMING CREDIT EXPOSURES ..................................................................................................................10
CLASSIFICATION OF NON-PERFORMING CREDIT EXPOSURES UNDER SPECIFIC CATEGORIES....................................11
PERFORMING EXPOSURES ........................................................................................................................................13
STANDARD EXPOSURES ...........................................................................................................................................13
SPECIAL MENTION ACCOUNTS ................................................................................................................................13
RESTRUCTURED EXPOSURES ...................................................................................................................................13
RESTRUCTURING OF EXPOSURES..............................................................................................................................14
REPEATED RESTRUCTURING ....................................................................................................................................14
RECATEGORISATION OF NON-PERFORMING EXPOSURES AS STANDARD EXPOSURES.................................................14
Part III - Prudential provisioning requirements................................................... 15
PROVISIONING UNDER PRUDENTIAL NORMS.............................................................................................................15
PROVISION ON PERFORMING CREDIT EXPOSURES .....................................................................................................15
MACROPRUDENTIAL PROVISIONS ............................................................................................................................16
SPECIFIC PROVISIONS ..............................................................................................................................................16
Part IV – Exemptions ........................................................................................... 17
Part V - Regulatory Floor...................................................................................... 18
Part V - Capital Treatment of Provisions and Reserves for performing and nonperforming exposures .......................................................................................... 18
Part VI - Security ................................................................................................. 19
ELIGIBLE SECURITY.................................................................................................................................................19
NET REALISABLE VALUE (NRV) OF SECURITY .......................................................................................................19
Part VII - Write-off of Non-Performing exposures ............................................... 20
BROAD WRITE-OFF PRINCIPLES ..............................................................................................................................20
WRITE-OFF REQUIREMENTS FOR NON-PERFORMING EXPOSURES ...........................................................................20
EXEMPTIONS / EXCEPTIONS TO THE RULE ...............................................................................................................21
Part VIII - Reporting Requirements ..................................................................... 22
Annex 1 – Financial Collaterals ............................................................................ 23

Introduction
Inadequate policies and procedures for identification, classification and recognition of a deterioration in credit risk in a timely manner can have serious impact on the safety and soundness of financial institutions. Purpose The purpose of this Guideline is to outline the minimum prudential requirements with regard to asset classification, provisioning and write-off of credit exposures with a view to ensuring comparability across financial institutions. It is intended to complement the requirements under accounting standards by providing a prudential backstop for credit classification and provisioning and ensuring write-off of non-performing exposures in a timely manner. Authority This Guideline is issued under the authority of section 50 of the Bank of Mauritius Act 2004 and 100 of the Banking Act 2004. Scope of application This Guideline (excluding paragraph 59 and Part VII) shall apply to all banks and non-bank deposit-taking financial institutions licensed by the Bank hereinafter referred to as ‘financial institutions’. Paragraph 59 on Macroprudential Provisions and Part VII - Write-off of Non-Performing exposures shall apply to banks only. The Guideline supersedes the Guideline for the write-off of non-performing assets and the Guideline on Credit Impairment Measurement and Income Recognition. Effective Date This Guideline shall come into effect on 30 September 2024.

Interpretation
“Bank” means the Bank of Mauritius established under the Bank of Mauritius Act 2004; “board” means the board of directors of a financial institution except for branches of foreign banks where “board” means the local advisory board/committee. For branches of foreign banks with no local advisory board, the responsibilities assigned to the board shall rest on the Chief Executive Officer of the branch. “concessions” are special or modified contractual terms and conditions provided by a lender to a counterparty facing financial difficulty so that the counterparty can sufficiently service its debt. The main characteristics of these concessions is that a lender would not extend loans or grant commitments to the counterparty or purchase its debt securities on such terms and conditions under normal market conditions. All concessions may not lead to a reduction in the net present value of the loan and therefore a concession may not necessarily lead to the recognition of a loss by the lender. There is no concession when the counterparty is not in financial difficulty. When a counterparty is assessed as experiencing financial difficulty, examples of potential concessions are:
i. extending the tenor of a loan;
ii. rescheduling or deferring the dates for repayment of principal or interest or other
amounts due;
iii. granting new or additional periods of non-payment (grace period or repayment
holiday);
iv. reducing the interest rate or providing facilities below ongoing commercial terms
for similar credit exposure to similar counterparty;
v. capitalising arrears;
vi. forgiving, deferring or postponing principal, interest or other amounts;
vii. changing an amortising loan to an interest payment only;
viii. allowing the conversion of debt to equity of the counterparty;
ix. deferring recovery/collection actions for extended periods of time;
x. easing of covenants;
xi. releasing collateral or accepting lower level of collateral; and
xii. refinancing an existing exposure with a new contract, even if the terms of the new
contract are no more favourable for the borrower than those of the existing transaction. “contractual payment” refers to specified amount of payment(s) which is (are) to be made to the financial institution by a counterparty on a specified date (s) or within a specified period, as set out in the contractual agreement. This includes payment of principal, interest, commission, fees, penalties, amounts for which the repayment dates might not be set in the contract but which might become due based on certain contingencies or any other financial obligations. “control functions” mean those functions that have a responsibility independent from business line management to provide objective assessment, reporting and/or assurance to top management and Board. This includes the risk management function, the compliance function and the internal audit function.

“counterparty” refers to a natural or legal person with whom a financial institution has a financial contract that has given rise or can give rise to an exposure. “credit exposures” refer in this Guideline to loans and advances, leasing facilities, investment in government and central bank securities, balances held with the Bank and other Central Banks, other investments and placements (includes balances with banks), investment in debentures, bonds and fixed dated securities, investment in equity and quasi equity and offbalance sheet exposures that cannot be unilaterally cancelled. Credit exposures includes principal, interest (excluding suspended interest), commission, fees, penalties or any other financial obligations. “financial difficulty” can be identified even in the absence of arrears on an exposure. The following list provides examples of possible indicators of financial difficulty but is not intended to constitute an exhaustive enumeration of financial difficulty indicators:
i. A counterparty is currently past due on any of its material obligation;
ii. A counterparty is not currently past due, but it is probable that the counterparty will
be past due on any of its material exposures in the foreseeable future without the financial institution providing a concession on the existing credit facilities, for instance, when there has been a pattern of delinquency in payments on its material exposures;
iii. A counterparty’s outstanding securities have been delisted, are in the process of
being delisted, or are under threat of being delisted from an exchange due to noncompliance with the listing requirements or for financial reasons;
iv. Financial Analysis on the basis of actual performance, estimates and projections
indicate that the counterparty’s committed/available cash flows will be insufficient to service all of its loans or debt securities (both interest and principal) in accordance with the contractual terms of the existing agreement for the foreseeable future;
v. A counterparty’s existing exposures are categorised as exposures that have already
evidenced difficulty in the counterparty’s ability to repay in accordance with the credit categorisation scheme within a financial institution’s internal credit rating system;
vi. The counterparty is in non-performing status or would be categorised as
nonperforming without the concessions provided by the financial institution; and
vii. The counterparty cannot obtain funds from sources other than the existing financial
institutions at an effective interest rate equal to the current market interest rate for similar loans or debt securities for a non-troubled counterparty. “financial analysis of non-retail counterparties” may include, as appropriate, the following ratios: leverage ratio, debt/EBITDA ratio, interest coverage ratio, current liquidity ratio; or ratio of (operating cash flow + interest expenses)/interest expenses, loan-to-value ratio and any other relevant indicators. “financial analysis of retail counterparties” may include consideration of debt to income ratio, loan-to-value ratio, credit scores and any other relevant indicators.

“independent appraiser” refers to an individual or a firm that is suitably qualified and is recognised by a government, a reputable institute or an appropriate local/ foreign authority for appraisal of properties and has:
i. no direct or indirect interest in the property being appraised, or in the transaction
involving the financial institution in respect of that property;
ii. no credit granting or investment decision-making authority within the financial
institution; and
iii. no conflict of interest which may affect the valuation.
“material obligation”: Financial institutions shall establish board approved criteria for material obligation which should not be higher than 20% of the financial institution’s exposure to the counterparty. “non-accrual status” refers an account where the financial institution is no longer accruing interest. “past due” refers to a contractual payment (interest, principal, fee or other amount) which has not been made as of its due date. In this respect, a credit exposure would become ‘past due’ from the first day when, in the case of:

A revolving credit facility, such as an overdraft or a credit card where the financial
institution has granted an approved limit,
(i) the outstanding amount, including interest, breaches the approved limit; (ii) counterparty has been advised of a limit smaller than current outstanding or the approved limit has lapsed; or (iii)for credit cards, the minimum amount due is not paid on the payment due date.
A current account, when the account becomes overdrawn.
A credit facility with periodic contractual payments, the amount due and payable
(interest and/or instalment of principal and/or fees) is not paid in full by the due date;
A facility that has been allowed to a customer without the approval of the designated
authority; and
Any other financial obligations, where the amounts due are not settled by their due
dates.
“Restructuring” refers, in this Guideline, to a distressed restructuring, which occurs when a counterparty is experiencing financial difficulty in meeting its financial commitments and the financial institution grants a concession that it would not otherwise consider whether or not the concession is at the discretion of the financial institution and/or the counterparty. A concession is at the discretion of the counterparty (debtor) when the initial contract allows the counterparty (debtor) to change the terms of the contract in its own favour (embedded concession clauses) due to financial difficulty. Restructuring includes concessions that are granted due to the counterparty’s financial difficulty on any exposure regardless of the measurement method for accounting purposes. Restructuring is identified at the individual facility level to which concessions are granted due to financial difficulty of the counterparty.

“Retail counterparties” refer to natural persons and small businesses with an annual turnover of not more than MUR 50 million. “Significant exposure”: Financial institutions shall establish board approved criteria, including thresholds, for identifying significant exposures for retail and non-retail counterparties, such that aggregate significant exposures constitute at least 75% of the respective total credit exposures.
PART 1 - Governance and Risk Management Framework
Responsibility of the Board

The board shall approve and periodically (at least annually) review policies relating to
classification and provisioning of credit exposures and write-off of non-performing credit exposures that ensure early identification and management of deteriorating asset quality, and efficient management of non-performing exposures (NPEs), including recovery in written-off exposures.
The board shall approve the delegation of approval authorities for classification, provisioning
and write-off of credit exposures and ensure that there is no conflict of interest.
The board shall ensure that it receives timely and appropriate information, at least on a quarterly
basis, from the Risk Management Committee regarding classification, provisioning, restructuring, recovery and write-off of credit exposures. Such information shall, inter alia, cover:
i. details on the number and value of (a) Non-Performing Exposures, (b)
restructured exposures, (c) repossessed assets and (d) exposures which have been written off, on an aggregate basis and by economic sectors and by country;
ii. details of the movement in (a) non-performing exposures (within nonperforming categories, and between performing and non-performing), (b)
restructured exposures, (c) repossessed assets, (d) provisions held for nonperforming exposures and (e) write-offs;
iii. an assessment of the quality of the credit exposures, with relevant details on the
proportion and trend of non-performing exposures and the quality of the underlying collaterals;
iv. forecast of the expected deterioration in the quality of credit exposures, losses
expected to be incurred, and assessment of the adequacy of current provisions and reserves held against these estimated losses;
v. information on significant exposures that are either non-performing or are likely
to become non-performing; and
vi. an assessment of the impact of various stress scenarios on the credit exposures
to determine expected credit losses and adequacy of provisions.
The board shall exercise adequate oversight on classification, provisioning and write-off of
credit exposures. In this respect minutes of Board meetings should document in reasonable details the discussion to reflect Board members’ views and concerns on the level and direction of credit exposure quality, adequacy of provisions held, pace of recoveries and write-offs. The minutes of board meeting with respect to the review of policies relating to classification and provisioning of credit exposures shall document how the lessons learnt from observed

impairment, defaults and write-offs may be reflected in financial institution’s business strategy, credit risk appetite, credit risk management, collateral management, provisioning, credit risk rating and risk pricing.
5. The board shall ensure appropriate oversight and coverage by the control functions taking into
consideration the requirements of this Guideline.
6. The board shall ensure that there are appropriate policies and procedures to validate models
and assumptions used to determine provision for incurred and expected credit losses. The board shall also ensure that such models are robust and take into consideration the effect of changes in historical, current, reasonable and supportable forward-looking information and macroeconomic factors.
7. The board shall ensure that the Risk Management Committee promptly apprises it of any
development that could have a material impact on the quality of the financial institutions’ credit exposures and expected or incurred credit losses. Documentation
8. Financial institutions shall have clear policies and procedures for the determination of asset
classification, accounting provisioning requirements, prudential provisioning requirements and should document the actual assessments as well as the actual computation and supporting evidence/assumptions in sufficient granularity. Approval Authorities
9. Financial institutions shall ensure that the approvals for classification of exposures,
provisioning requirements and write-off of credit exposures are duly documented and are in line with the delegated authority set by the board.
10. Financial institutions shall implement adequate and clear segregation of duties to avoid any
potential conflict of interest/responsibilities with respect to approval of credit facilities, their classification, provisioning, repossession, recovery and write-offs and the evaluation of the effectiveness of the related policies, systems, processes and procedures. Responsibilities of the Chief Risk Officer
11. The Chief Risk Officer shall be responsible for the following:
i. establishing and maintaining the board approved policies;
ii. ensuring the development of relevant systems, processes and procedures for
implementing the board approved policies for classification, provisioning, recovery and write-off of credit exposures;
iii. ongoing monitoring of credit risk exposures and timely identification and
reporting of non-performing credit exposures to the Risk Management Committee;

iv. submitting quarterly reports to the Risk Management Committee and promptly
notifying it of any material change in status of significant exposures, including their level, classification, provisioning, repossession, recovery and write-offs;
v. ensuring that classification, provisioning and write-offs are appropriate, timely
and adequate and are based on relevant, reasonable and supportable information and include forward-looking information and macroeconomic indicators; and
vi. ensuring periodic validation of the methodology used for the determination of
Net Realisable Value (NRV) of securities.
Role of the control functions
12. Financial institutions should ensure that the appropriateness and effectiveness of the framework
for credit exposure classification, provisioning, repossession, recovery and write-offs are reviewed at least annually.
13. Financial institutions shall ensure that such reviews are undertaken by an independent function
or persons unconnected with the origination and administration of the credit exposure and possessing adequate credit risk management experience and judgement.
14. The compliance function shall periodically assess compliance with requirements of this
guideline.
15. The internal audit and credit risk management function shall evaluate the effectiveness and
adequacy of policies, procedures, systems and processes for review, classification, provisioning, repossession, recovery and write-off of credit exposure on a periodic basis. Policies for Classification and Provisioning of Credit Exposures
16. Financial institutions shall establish a comprehensive board-approved policy for Classification
and Provisioning of Credit Exposures, either as a stand-alone document or integrated within relevant existing policies.
17. The policy shall be risk-based and shall, as a minimum, take into consideration the
requirements stipulated in this Guideline.
18. The policy shall be reviewed at least on an annual basis or at such higher frequency as may be
required in anticipation of or subsequent to material events.
19. The polices should be commensurate to the financial institution’s risk profile and systemic
importance.
20. The policies shall inter alia cover the following:
i. criteria for classification of credit exposures based on their credit quality and for
computation of accounting and prudential provisions;

ii. measures to ensure that provisions and write-offs are timely and reflect realistic
repayment and recovery expectations, taking into account market and macroeconomic conditions;
iii. criteria for identifying eligible counterparties for granting moratorium and for
restructuring of credit exposures;
iv. measures to ensure timely identification, classification provisioning and
management of problem exposures;
v. reporting lines for timely (at least quarterly) reporting of information and for
escalation of significant matters to Chief Risk Officer, the Risk Management Committee and to the board, as relevant;
vi. criteria for assessment and determination of NRV of eligible collaterals; and
vii. safeguards for prevention of any circumvention of the classification and
provisioning standards.
Early Identification of problem exposures
21. Financial institutions shall establish internal policies and procedures to monitor and identify
indicators of financial difficulty, promptly classify credit exposures into relevant classification category and determine and raise the required level of provisions.
22. The policies and procedures should ensure that
i. all significant performing exposures are subject to monitoring and identification
of indicators of financial difficulty on a quarterly basis at counterparty level;
ii. all other performing exposures are subject to monitoring and identification of
indicators of financial difficulty on a quarterly basis at portfolio level comprising of exposures with homogenous characteristics; and
iii. all non-performing and Special Mention Accounts (defined in paragraphs 39-41)
are subject to quarterly reviews at counterparty level.
23. Financial institutions should, upon identification of indicators of financial difficulty promptly
conduct an assessment to determine the classification category and provisioning requirement. The results of the assessments should be duly documented and approved according to the approval authority set by the board of directors. The assessment should be conducted at an individual obligor level for significant exposures.
24. Between quarterly reviews, if a financial institution gains knowledge of any adverse change in
the quality of a credit exposure, the credit exposure must be promptly assigned to the new classification category that properly reflects its status.
25. These reviews shall also include an assessment of the NRV of the collaterals.

Information System for Credit Classification, Provisioning and Write-offs
26. The internal information systems should ensure timely identification, recognition,
classification and write-offs of non-performing exposures and should, among others, be capable of:
i. determining the prudential asset quality classification on an ongoing basis based
on number of days the credit exposures are past due and other relevant indicators;
ii. eliminating the scope to delay or postpone the identification and write-off of nonperforming exposures (NPEs);
iii. identifying and aggregating exposures to the same counterparty across the
financial institution, including off-balance sheet exposures and determining the prudential asset quality classification and accounting classification at the level of each counterparty;
iv. identifying and aggregating asset quality classification and accounting
classification by economic sector;
v. identifying and compiling details of restructuring at the level of each counterparty
and exposure type, including details of repeated restructuring;
vi. identifying and compiling details of repossessed assets by type of assets;
vii. identifying and compiling the details and valuation of security available to the
financial institution at the level of each counterparty and exposure type;
viii. identifying and compiling the details of prudential provisions/ reserves and
accounting provisions held at the level of each counterparty and exposure type; and
ix. compilation of key risk management metrics such as default rates by type of
borrowers, by types of exposures, by economic sectors, by geographic regions, by internal ratings and by external ratings.
Part II - Classification of credit exposures under prudential norms
Computation of Exposures
27. For regulatory reporting and disclosures of credit exposures, at the level of individual
counterparty and at the aggregate level, financial institutions should reckon the gross exposures that is:

i. the entire exposure amount and not just the overdue or risky portion, without
deducting the value of security available to the financial institution and the specific provisions held against these exposures;
ii. including the entire uncancellable nominal amount of off-balance sheet
commitments for non-performing exposures and Special Mention Accounts; and
iii. including the credit exposure equivalents through the use of credit conversion
factors (CCFs) for standard exposures. The CCFs set out in the Guideline on Standardised Approach to Credit Risk must be applied to the notional amount of such exposures, subject to a floor of 10%. Non-Performing Credit Exposures
28. A financial institution shall classify any credit exposure past due by more than 90 days or
considered as Stage 3 under IFRS 9 as Non-Performing Exposure (NPE).
29. A financial institution shall classify a credit card as NPE if the minimum amount due is not
paid fully within 90 days from the payment due date.
30. A financial institution shall classify other revolving credit facilities, such as an overdraft, as
NPE where:
i. the exposure has been past due for more than 90 days, or
ii. the credits in the account are lower than the debits representing interest and other
charges due to the financial institution for more than 90 days.
31. The availability of security or net worth of borrower/guarantor should not be taken into account
for the purpose of classifying a credit facility as NPE or otherwise.
32. A non-performing exposure need not go through each sub-category. In cases of serious credit
impairment, a credit exposure should be straightaway graded as doubtful or loss as appropriate. Classification of Aggregate Exposures to a Counterparty
33. A financial institution shall classify the aggregate credit exposure to a counterparty as NPE
where any one of the following is determined:
i. The counterparty is past due by more than 90 days or considered as Stage 3 on
any material obligation. If the counterparty has more than one credit exposures with the financial institution, the materiality threshold needs to be considered on an aggregated basis.
ii. Any material credit obligation is on non-accrued status.
iii. A write-off or account-specific provision is made as a result of a significant
perceived decline in credit quality subsequent to the financial institution taking on any credit exposure to the borrower.

iv. Any credit obligation is sold at a material credit-related economic loss.
v. A distressed restructuring of any credit obligation is agreed by the financial
institution where this is likely to result in a diminished financial obligation caused by the material forgiveness, or postponement, of principal, interest or (where relevant) fees.
vi. The counterparty’s bankruptcy or a similar order in respect of any of the
borrower’s credit obligations to the financial institution has been filed.
vii. The counterparty has sought or has been placed in bankruptcy or similar
protection where this would avoid or delay repayment of any of the credit obligations to the financial institution.
viii. The counterparty has exposures that are credit-impaired (in the meaning of
exposures having experienced a downward adjustment to their valuation due to deterioration of their credit-worthiness) according to the applicable accounting framework.
ix. Any other situation where the financial institution considers that the obligor is
unlikely to pay its credit obligations in full, without recourse by the financial institution to actions such as repossessing, realising security (if held), distressed restructuring or other risk mitigants. Classification of Counterparties Belonging to a Group
34. When a counterparty belongs to a group, designating the credit exposures to the counterparty
as NPE does not mandatorily lead to designating credit exposures to the other entities from the same group as NPEs. However, designating credit exposures to one of the entities in the group as NPE should be one of the inputs, along with the respective financial situation of other entities in the group, which should also be taken into account while assessing the creditworthiness and determining the performing or non-performing status of credit exposure to the other entities in the group.
35. Counterparties which form part of a group and which are connected by economic
interdependencies shall be classified into same worst classification category. For counterparties which form part of a group but are not connected by economic interdependencies, financial institutions shall assess and document rationale for any different classification. Classification of Non-Performing Credit Exposures under specific categories
36. Financial institutions are required to classify NPEs further into following three categories based
on any one of the quantitative or qualitative criteria specified for each sub-category:

Category Criteria and description
Sub-standard A credit exposure where there are well-defined credit weaknesses in respect of the business, cash flow or financial position of the counterparty which may lead to the financial institution sustaining losses thereon, if the deficiencies are not corrected. A credit exposure which is past due by more than 90 days but not more than 180 days. An exposure classified as ‘special mention account’ which is restructured for the first time. A repeated structuring of a performing exposure. An exposure which would been categorised as non-performing in the ‘sub-standard’ category at the time of restructuring, had the restructuring not occurred. Doubtful A credit exposure where there are weaknesses inherent in a substandard credit exposure as well as supplementary weaknesses that make the prospect of full recovery of the credit exposure questionable without having recourse to the collateral and loss thereon highly likely. The credit exposure is past due by more than 180 days but not more than 360 days. An exposure which would have been categorised as non-performing in the ‘Doubtful’ category at the time of restructuring, had the restructuring not occurred. Loss The credit exposure is considered uncollectible and of such little value that maintaining it as a bankable asset is not warranted although there may be some salvage or recovery value from the security available (i.e. recoverable value of security is less than 10 per cent of total credit exposure). A credit exposure should, as a minimum, be classified as loss when:
(i) The exposure is past due by more than 360 days; or (ii) The loss status has been identified by the financial institution, its internal auditor or external auditor or the Bank of Mauritius. (iii)The exposure would have been categorised as nonperforming in the ‘Loss’ category at the time of restructuring, had the restructuring not occurred.

Performing exposures
37. All credit exposures which are not classified as sub-standard, doubtful and loss, should be
classified as performing exposures. This includes standard exposures and special mention accounts. Standard Exposures
38. All performing credit exposures which are not classified as special mention accounts, should
be classified as standard exposures. Credit exposures which are classified under this category do not exhibit any actual or potential weakness in repayment capability, business, cash flow or financial position. Special Mention Accounts
39. These exposures exhibit potential weaknesses that, if not corrected in a timely manner, may
adversely affect repayment by the borrower at a future date, and warrant close attention by the financial institution.
40. Characteristics of Special Mention Accounts include the following:
i. a declining trend in the operations of the borrower that signals a potential
weakness in the financial position of the borrower, but not to the point that repayment is jeopardised; and
ii. economic and market conditions that may unfavourably affect the profitability
and business of the borrower in the future.
41. Financial institutions should identify the stress in performing exposures, immediately after past
due status of 30 days, but before classifying these in non-performing categories by classifying these exposures as Special Mention Accounts (SMAs). This will facilitate early identification of stress, deteriorating asset quality, and timely resolution as per the board approved policy of each financial institution. The SMAs shall be sub-categorised as under:
SMA Sub-Category Basis for Classification - Past due status SMA-1 31-60 days SMA-2 61-90 days A credit exposure classified as Stage 2 under IFRS 9 A restructured ‘standard’ exposure should as a minimum be classified as SMA-2 (see paragraph 46) Restructured Exposures
42. Financial institutions should maintain proper documentation for all restructuring, including
those which are not considered distressed restructuring, along with detailed rationale.

A restructured standard exposure should continue to be designated as a restructured exposure
until it performs satisfactorily for a continuous period of at least 12 months (i.e. interest, principal and other amounts due on all exposures to the counterparty are paid in full and on time as per the exposures’ new terms of payment).
Other restructured exposures should continue to be designated as a restructured exposure until
at least 12 months after these are re-classified as “standard” exposure.
Restructuring of exposures
The financial institution should assess whether the exposure meets the non-performing criteria,
even if the restructuring resulted in a new exposure.
A standard exposure shall be classified to at least as SMA 2 upon first restructuring. It shall
continue to be classified as SMA-2 until it performs satisfactorily for a period of 3 months.
An SMA-2 exposure shall be classified to at least sub-standard upon first restructuring.
When the original exposure would have been categorised as non-performing in ‘sub-standard’,
‘doubtful’ or ‘loss’ category at the time of restructuring, had the restructuring not occurred, the new exposure and the current exposure should be classified in that non-performing category. Repeated restructuring
An exposure which has been restructured more than once shall be treated as repeated
restructuring.
The repeated restructuring of an exposure classified as performing exposure should
immediately lead to its re-classification in at least the ‘sub-standard’ category.
When the original exposure would have been categorised as non-performing in the ‘doubtful’
or ‘loss’ category at the time of restructuring, had the restructuring not occurred, the new exposure and the current exposure should be classified in that non-performing category. Recategorisation of non-performing exposures as standard exposures
A non-performing exposure should be upgraded to a standard exposure when:
i. all arrears of interest and principal are paid by the counterparty in full and the
customer meets the terms and conditions of the existing loan for a continuous ‘observation’ period as specified in the table below:
ii. the counterparty has resolved its financial difficulty such that full repayment is
expected according to original or modified terms; and
iii. the reduction in credit risk is considered sustainable.

Type of Exposure Observation Period
Non-performing exposure 3 months
Restructured (included repeated restructuring) non-performing exposure 6 months Non-performing bullet facility 12 months
53. Reduction in credit risk should be considered as sustainable when the counterparty’s financial
position and projected cashflows indicate that the counterparty will be able to meet the scheduled payments in full and on time.
54. The following situations will not lead to recategorisation of non-performing exposure as
performing exposure:
i. partial write-off of an existing non-performing exposure (i.e. when a financial
institution writes off part of non-performing exposure that it deems to be uncollectible).
ii. repossession of collateral on a non-performing exposure until the collateral is
disposed of and the financial institution realises the proceeds and has fully recovered all amounts due from the counterparty; (i.e. when the exposure is retained on the balance sheet, it should continue to be categorized as nonperforming).
Part III - Prudential provisioning requirements
Provisioning under prudential norms
55. Provision under prudential norms shall consist of General provisions and Specific provisions
as outlined below.
56. Specific provisions shall apply on the credit exposures less the NRV of the security. The NRV
of the security shall be computed in line with the requirements under Part VI.
57. General Provisions shall consist of provision on performing credit exposures.
Provision on performing credit exposures
58. A financial institution shall maintain the following minimum level of general provisioning on
performing credit exposures:

Exposure type Prudential
General
Provisions
Exposures with bullet repayment with remaining maturity of more than 2 years (other than those to sovereigns, central banks, Multilateral Development Banks and banks) 1.5% Exposures to or guaranteed by counterparties whose rating is investment grade or better* 0.5% All other performing exposures 1%

The ratings should be issued by an Eligible External Credit Assessment Institution (ECAI) as
per the Guideline on the Recognition and Use of External Credit Assessment Institutions. The guarantee should meet the minimum requirements stipulated in the Guideline on Standardised Approach to Credit Risk. Macroprudential Provisions

In addition to General Provisions for performing exposures, banks are also required to make
provisioning for exposures to certain sectors, as decided from time to time, as a macroprudential measure as set out in the Guideline on Additional Macroprudential Measures for the Banking Sector. At present, banks shall make Macroprudential Provisions for exposures to the following sectors in Mauritius:
Type of Facility Macroprudential Provision
Household - Housing 0.5%
Household - other than Housing 0.75%
Accommodation 1.0%
Construction (including commercial real estates) 1.0% Specific Provisions
Specific Provisions shall consist of:
i. Provision on NPE;
ii. Provision on interest income recognised on NPEs but not received; and
iii. Provision for restructured exposures as required under paragraph 63.

(a) Provision on NPE
61. A financial institution shall maintain a minimum level of provisioning on NPEs with regard to
the prudential classification categories as follows:
Classification category Prudential Provisions (Applicable on Credit exposures less the Net Realisable Value of the security) Sub-standard 25% Doubtful 50% Loss

NPE less than 4 years
NPE more than 4 years
75%
100%
(b) Provision on interest accrued on NPEs but not received

Financial institutions shall maintain a prudential provision of 100 per cent on any amount of
accrued interest on NPEs that is recognised as income but not actually received. (c) Provision for restructured exposures
While restructuring a credit exposure, the financial institution should, among others, estimate
the impact of the restructuring on the present value of the exposure. Where the present value of the restructured exposure is lower than the book value, the difference should be written off. Where the financial institutions do not write-off such difference, it shall maintain a provision for any diminution in fair value caused by the restructuring of the exposure.
Part IV – Exemptions
No provision would be required on:
(i) an exposure to a counterparty eligible for a risk weight of 0 per cent in the Guideline on Standardised Approach to Credit Risk respectively. (ii) the portion of exposures fully covered by:

a collateral eligible for a risk weight of 0 per cent in the Guideline on
Standardised Approach to Credit Risk;
a guarantee from a counterparty eligible for a risk weight of 0 per cent
in the Guideline on Standardised Approach to Credit Risk; or
the estimated recoverable amount, i.e., after application of a discounted
value as determined by the financial institution, from a credit insurance representing a direct, explicit, irrecoverable and legally enforceable guarantee to effect due in case of default by the counterparty from a Credit Insurance Company with an external rating investment grade or better.

Financial institutions shall ensure compliance with requirements of paragraph 76 for
determining the NRV of the collateral.
Part V - Regulatory Floor
All financial institutions shall, over and above the requirement to comply with IFRS 9, also
independently assess provision for performing and non-performing exposures under the prudential norms, as set out in Part III of this Guideline.
When accounting provisions are less than the regulatory floors, the shortfall shall be met
through:
i. additional accounting provisions; or
ii. appropriation of profits to separate ‘reserves for performing exposures’ and
‘reserves for non-performing exposures’ (non-distributable reserve) as relevant.
Financial institutions shall comply with the above to be eligible to declare dividend or any other
transfers from profits in line with the Guideline on Payment of Dividend.
Determination of the regulatory floor should be made at the following two levels:
Prudential classification for provision Accounting classification Standard (including Macroprudential) Stage 1 and Stage 2 Non-performing Stage 3
Determination of the regulatory floor should be made at exposure level for non-performing
exposures.
The Bank may require higher rates of general or specific provisioning based on the gaps,
weaknesses and inadequacies in the systems, processes, and practices in individual financial institutions.
Part V - Capital Treatment of Provisions and Reserves for performing and nonperforming exposures
In line with the Guideline on Scope of Application of Basel III and Eligible Capital, provisions
held by financial institutions for performing credit exposures shall be reckoned as General Provisions and will qualify for inclusion within Tier 2 capital, subject to a maximum of
1.25 percentage points of risk-weighted assets for credit risk calculated under the standardised
approach. Both general provisions and macroprudential provision shall qualify for inclusion in Tier 2 Capital.
The reserves held by financial institutions for performing credit exposures and non-performing
credit exposures to comply with the regulatory floor requirement shall not be eligible for inclusion in Tier 1 capital.
The reserves held by financial institutions for performing credit exposures to comply with the
regulatory floor requirement shall be reckoned as part of General Provisions for inclusion within Tier 2 capital, subject to the prudential limits specified in paragraph 72.
Part VI - Security
Eligible Security
Financial institutions should have a clear policy on acceptable security, including the
requirements with respect to the determination and periodic assessment of the NRV. Net Realisable Value (NRV) of Security
The following conditions shall be met in determining the NRV of security for NPEs:
i. The NRV of a security should be appraised on a comprehensive and regular basis.
The appraisal should be based on a conservative view of current market prices, suitably discounted for price volatility, the lack of ready market for the security, realization costs and the time required to realise the security. All realisation costs, including legal costs, must be taken into account. The rationale for the NRV should be well documented.
ii. The NRV of financial collaterals included under item A of Annex 1 should be
appraised at least once a calendar quarter based on the most recent available market prices. Where the most recent market price is more than one-month old, the financial institution shall apply a minimum discount factor as follows:
Time Since Last Valuation Minimum Discount Factor >1 month up to 3 months 25%

3 months 50%
iii. The NRV of commercial and residential real estate properties provided as
security for NPEs should be based on a valuation by an independent appraiser. The valuation should be reasonably comprehensive and up-to-date.
iv. The NRV of security that is commercial or residential real estate should be
appraised when there is significant reduction in relevant real estate prices and when there is any idiosyncratic event that has adverse material impact on its resale value.
v. The current market prices of securities other than those under item A of Annex 1
should be discounted by at least 50 per cent. The lower of the Forced Sale Value and the discounted market price shall be considered as the NRV for the exposures in the Loss category.
vi. Financial institutions shall apply an appropriate additional haircut for foreign
currency fluctuation to the realizable value of collaterals denominated in a currency other than the currency of exposure.

In case of pari-passu or subordinated charges over the security, the extent of availability of
security to a financial institution, should be well documented and supported by legal opinion.
If the Bank deems it necessary, it may require the financial institution to have the appraisal of
a security carried out, at the expense of the financial institution, by another independent appraiser.
Part VII - Write-off of Non-Performing exposures
Broad Write-Off Principles
A write-off can occur before legal efforts to recover the debt have been concluded. A write-off
does not signify the bank forfeiting its legal right to claim its dues. The write-off will merely shift the non-performing exposure to a memorandum account from the balance sheet of the bank.
The memorandum account for the written-off amount should be created at the general ledger
level and used for monitoring and reporting purposes. When it is determined that no recovery is forthcoming, the removal of the entry from the memorandum account should be as per the bank’s own board approved write-off policy.
Once an amount has been written-off from the balance sheet, there can be no write-back /
reverse adjustments. In the event that there is any recovery on the account, it would be directly recognised in the income statement for the year. Write-Off Requirements for Non-Performing exposures
All banks shall devise an internal write-off policy with clear guidance on the timeliness of
write-offs, which should be duly approved and reviewed at least annually by their respective board of directors.
The write-off policy should be appropriate to the bank’s circumstances and to the different
types of assets it holds in its asset portfolio.
The write-off policy of a bank shall, as a minimum, set forth:
i. regular conduct of the recovery analysis and review of the write-off policy at least
annually based on findings of time taken for material recovery for different types of non-performing assets;
ii. details on pre-defined roles, responsibilities and procedures in the write-off
process, together with a chart of the delegated authorities and thresholds for sanctioning write-offs;
iii. the principle that the write-off should normally be done at one level higher than
the sanctioning authority and not by the same officer who approved the exposure;

iv. policy for related party exposures, in line with the Guideline on Related Party
Transactions which stipulates that write-offs of related party credit exposures shall be subject to the prior approval of the board of directors;
v. policy for different categories of assets such as secured / unsecured facilities,
retail loans (excluding mortgages), mortgage loans, corporate loans, as per the requirement;
vi. suitable maximum time periods for the write-off of different categories of nonperforming exposures, which shall be based on individual banks’ recovery
experience. However, as per the recovery data obtained from banks in Mauritius, the maximum time for the full write-off of exposures towards corporate and retail (including mortgages) should not exceed 7 years and 5 years respectively;
vii. notwithstanding the above specified periods, the requirement for a prompt writeoff where there is no realistic prospect of further recoveries and in case of
insolvency or fraudulent loans where recovery is bleak;
viii. the requirement for an examination of the accountability of the staff, including an
examination of staff performance in complying with extant guidelines and controls for material non-performing assets in the event of an impairment or a write-off, on a case-by-case basis. The documentation on lessons learnt, identification of gaps, and corrective measures, if any, should also be part of the write-off process;
ix. the obligation for submission of information on written-off accounts with all
relevant details, beyond a threshold, to the board at periodic interval for its information / observation / guidance;
x. the requirement for the disclosure of written-off amounts in the bank’s audited
financial statements, in accordance with existing accounting standards; and
xi. emphasis on pursuing recovery efforts for written-off credit facilities.
Exemptions / Exceptions to the Rule
85. It will be at the discretion of banks to write-off non-performing loans falling under the
Borrower Protection Act. (In the case of loan syndication and consortium lending, the decision for writing-off may be determined through consultation among participating banks / financial institutions.)
86. Any other relevant cases, where there is some specific statutory / legal impediment towards
write-off, banks should be guided by the relevant statutes / legal requirement.

Part VIII - Reporting Requirements
87. Financial institutions shall provide information to the Bank on classification of credit
exposures, restructured exposures, provisioning, and reserves for performing and non-performing exposures, collateral, repossessed assets, recovery and write-offs in such form and manner prescribed by the Bank. Bank of Mauritius 20 August 2024

Annex 1 – Financial Collaterals
(i) Gold.
(ii) Debt securities rated by a recognised External Credit Assessment Institution (ECAI) with external rating grade of 3 or above as per the Guideline on Standardised Approach to Credit Risk. (iii) Debt securities not rated by a recognised ECAI where these are:

issued by a bank;
listed on a recognised exchange;
classified as senior debt;
all rated issues of the same seniority by the issuing bank have external rating
grade of 3 or above as per the Guideline on Standardised Approach to Credit Risk; and
the bank holding the securities as collateral has no information to suggest
that the issue justifies an external rating grade below 3 (as applicable). (iv) Equity securities that are included in a main index or which are listed on a recognised security exchange; (v) Investments in collective investment schemes (CIS) and mutual funds where:
the price for a unit is publicly quoted daily; and
the CIS or mutual fund is limited to investing in the instruments listed in the
financial collaterals listed above.

Guideline on Classification, Provisioning and Write-off of Credit Exposures

Lineage: In force