Instruction No. 002/2019-CSBF on Distressed Loans of Microfinance Institutions

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BANKY FOIBEN'I MADAGASIKARA

COMMISSION DE SUPERVISION BANCAIRE ET FINANCIERE

INSTRUCTION NO. 002/2019-CSBF RELATIVE TO DISTRESSED LOANS OF MICROFINANCE INSTITUTIONS

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The Commission de Supervision Bancaire et Financière (CSBF),

Having regard to Law No. 95-030 of February 22, 1996, relating to the activity and control of credit institutions, as amended,

Having regard to Law No. 2017-026 of February 8, 2018, on microfinance,

Having regard to Instruction No. 001/05-CSBF of June 1, 2005, relating to the accounting plan for credit institutions (PCEC),

Having regard to the opinion formulated by the Professional Association of Microfinance Institutions (APIMF),

DECIDES

Article 1 – Purpose

The purpose of this instruction is to:

• define the rules for downgrading loans of microfinance institutions, abbreviated as "MFI", to distressed loans;
• clarify the rules for establishing provisions intended to cover risks on their credit operations;
• set the rules for accounting for these distressed loans.

Article 2 – Definitions

For the purposes of this instruction, the following terms are understood as:

• overdraft: a current account with an authorized debit balance according to the terms agreed between the MFI and the account holder;
• discounted securities: a set of negotiable instruments materializing a claim held by the MFI;
• overdraft rotation period: the number of days that credits charged to an account would require to clear the debit balance of that account, calculated according to the methods provided in Annex 1.

Article 3 – Rules for Downgrading to Distressed Loans

MFIs are required to classify loans and advances to their customers as "healthy loans" and "distressed loans". To this end, they are required to review their credit portfolio at the end of each month.

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All loans and advances presenting the following characteristics must be classified as "distressed loans":

• all claims presenting a risk of non-repayment;
• unpaid claims presenting at least one unpaid installment for thirty (30) days of delay or more;
• restructured claims subject to a restructuring agreement with the customer, by any means whatsoever;
• cash credits which:
  • overdrafts when the rotation rate, determined over six (6) months according to the methods defined in Annex 1, exceeds ninety (90) days;
  • unpaid amounts on discounted securities that could not be charged to the remitter, due to insufficient provision, within a period of thirty (30) days from the detection of the payment default;
  • payments made by the institution on behalf of a customer under a guarantee issued in favor of said customer and not covered by the customer for fifteen (15) days or more.

Distressed loans can no longer be reclassified as healthy loans.

Under the contagion rule, the "distressed loan" status attaches to the person of the debtor. To this end, the MFI proceeds to downgrade all debts of this person vis-à-vis the MFI to distressed loans, including the part not yet due. This "contagion" rule also applies to off-balance sheet commitments.

Article 4 - Provisioning of Distressed Loans

4.1. At each review of the loan and advance portfolio, MFIs establish provisions as follows:

• for unpaid credits:
  • free provision rate for delays between 1 and 30 days, including credits downgraded to distressed loans by application of the contagion rule provided in Article 3, last paragraph. To this end, the MFI indicates in the annex to its financial statements its policy regarding the associated provision;
  • 10% between 31 and 60 days of delay;
  • 20% between 61 and 90 days of delay;
  • 50% between 91 and 180 days of delay;
  • 100% from 181 days of delay;
• for restructured credits:
  • 10% of the remaining capital for those subject to normal repayment;
  • 100% for those presenting at least one unpaid installment at 30 days of delay are fully provisioned;
  • 100% for restructured credits more than once;
• for cash credits presenting the characteristics set out in Article 3 of this instruction:
  • at least 40% when the overdraft rotation period is between 90 and 120 days;

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• at least 60% when the overdraft rotation period is greater than 120 days without exceeding 180 days;
• 100% when the overdraft rotation period exceeds 180 days;
• 100% for other cash credits mentioned in Article 3 of this instruction.

In any case, unpaid installments for more than thirty (30) days must be fully provisioned.

4.2. Provisions are calculated on net balances:

• of security deposits;
• of formalized real guarantees evaluated according to the methods provided in Annex 2.

Article 5 – Accounting for Distressed Loans

5.1. Distressed loans of MFIs are accounted for in item 27 "Doubtful, Litigious and Contentious Loans" of the PCEC.

Credit installments called but not yet charged to customer account debits are accounted for in item 207 "Unallocated Values". The interest corresponding to these installments is recorded as a credit to item 326 "Reserved Products". In case of non-recovery after 30 days of delay, the entire portfolio is downgraded to distressed loans.

Item 26 "Immobile Loans" is not applicable to MFIs.

5.2. At the end of each portfolio review, MFIs record distressed loans and provisions as follows:

Downgrading to distressed loans:

Debit: 27 Doubtful, Litigious and Contentious Loans Credit: 20 Loans and Advances to Customers

Recognition of the provision:

Debit: 6822 Allocations – Value losses operations with customers Credit: 29 Value losses on advances and loans

Adjustment of the provision at the end of each accounting period:

If increase in provision

Debit: 6822 Allocations – Value losses operations with customers Credit: 29 Value losses on advances and loans

If decrease in provision

Debit: 29 Value losses on advances and loans
Credit: 7822 Reversal of provision – Value losses operations with customers

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In case of clearance when the distressed loan has become uncollectable:

Debit: 6411 Losses on advances and loans – Covered by provisions [amount of provisions + reserved products] Debit: 6412 Losses on advances and loans – Not covered by provisions [amount of provisions + reserved products] Credit: 27 Distressed Loans [gross amount]

And

Debit: 29 Value losses on advances and loans [amount of provisions] Debit: 326 Reserved Products [amount of reserved interest] Credit: 7822 Reversal of provisions - operations with customers [amount of provisions + reserved products]

5.3. Except for balances of a modest amount relative to the costs of procedures to be initiated or for restructured loans, the clearance of doubtful, litigious or contentious loans by transfer off-balance sheet is subject to the prior exhaustion of all legal means to which the MFI may resort. The inventory of cleared claims with an amount equal to or greater than 20 million ariary, including claims that have been the subject of a partial waiver, accompanied by a history of each file and the diligence carried out by the MFI, is sent to the General Secretariat of the CSBF, for opinion, within a period of one month before the accounting entry of the operation.

Article 6 – Reporting Obligations

MFIs are required to send to the General Secretariat of the CSBF at the end of each month, within a period of 30 days after the date of the monthly closing, a statement of their risk portfolio (PAR) according to the model fixed in Annex 3.

The CSBF may request, at any time, additional elements to assess the quality of the MFI's portfolio.

Article 7 – Derogatory Provisions

MFIs may, with the authorization of the CSBF, adopt:

• classification rules other than those defined in Article 2 of this instruction;
• provisioning of its credit portfolio according to the rules applicable in banking matters, providing any element likely to justify that the proposed provisioning system is more adapted to the typology of the concerned customer and to the reality of the risk on distressed loans.

In case of CSBF agreement, the MFI details the provisioning policy and the state of the distressed loan portfolio concerned in the annex to its certified annual financial statements.

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An MFI may adopt a provision rate higher than that provided in Article 4 of this instruction. In this case, it indicates in the annex to its financial statements its provisioning policy.

Article 8 – Transitional and Final Provisions

Operational MFIs comply with the requirements of this instruction within a period of twelve (12) months after the entry into force of this instruction. The first declarations under Article 6 are to be communicated:

• based on the situation closed at the end of the month following the expiration of the twelve (12) month period above, for monthly declarations;
• in the annex to the financial statements as of December 31 following the expiration of the twelve (12) month period above, for the annual declaration.

MFIs may request from the President of the CSBF a deadline for compliance with the provisions of this instruction based on the difficulties encountered. They provide the transitional measures and the schedule envisaged to address them.

The provisions of Instruction No. 001/05-CSBF of June 1, 2005, relating to the PCEC, not contrary to this instruction, remain in force for MFIs.

The provisions of Instruction No. 002/2006-CSBF of October 13, 2006, relating to the rules for provisioning counterparty risks of credit institutions, do not apply to MFIs.

This instruction enters into force upon its notification to the Professional Association of MFIs.

The annexes form an integral part of this instruction.

Done in Antananarivo, on 06 SEPT 2019
For the Commission de Supervision Bancaire et Financière, The President,

[SIGNATURE]

Alain H. RASOLOFONDRAIBE
Governor of Banky Foiben'i Madagasikara

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ANNEX 1

Methods for Calculating Overdraft Rotation Periods

I - PRINCIPLES

1. Definition
   The rotation period is the number of days that credits charged to an account would require to clear the debit balance of that account.

2. Calculation Methods
   It is equal to the ratio of the average daily debit balance over a given period to the average daily credit movements over the same period. It is calculated for all ordinary accounts and customer current accounts whose balance has remained constantly debit over six (6) consecutive months.

In the case of multiple accounts of this nature in the name of the same customer, the rotation period is determined based on merged balances.

3. Formula
   The rotation period is calculated both on each of the last six (6) months and on the entire semester considered by applying the following formulas, or any equivalent formula:

Let:
Rotation Period = (Average debit balance of the period) / (Average daily amount of credit movements on the account over the period) = n days

Let:
Rotation Period = (Average debit balance x number of days of the period) / (Total credit movements on the account over the period) = n days

a) Average debit balance
It is equal to the cumulative daily debit balances of the period considered (month or semester) divided by the number of days of the period. The number of days to be retained is:

• the number of calendar days if the database used by the institution allows integrating balances of non-working days (such as interest scale calculation files);
• the number of working days otherwise (calculations performed based on auxiliary accounting files).

b) Average amount of credit movements on the account It is equal to the total credit movements on the account over the period considered, divided by the number of calendar days of the period. Affected institutions must take appropriate measures to neutralize movements that have been subsequently cancelled.

c) Results of the rotation period calculation
They are to be printed on a sheet conforming to the following model, attached to the customer's file:

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	Customer Name and References
	Debit Balance			Movements		Balance	Rotation
Month	Maximum	Minimum	Average	Debit	Credit	End of Month	Period
Previous Semester
m 1
m 2
m 3
m 4
m 5
m 6
Semester

Unless duly justified exceptions, overdrafts whose rotation period on the semester exceeds 180 days are classified as doubtful loans, as well as all other facilities available to the customer, and provisioned if applicable.

II – EXAMPLES (Calculated on a basis of 30 calendar days per month)

Example 1

(millions)	Debit Balance			Movements		Balance	Rotation Period
Month	Maximum	Minimum	Average (1)	Debit	Credit (2)	End of Month	[(1) x 30d / (2)]
carryover						-100
m 1	125	65	92	87	70	-117	39 days
m 2	105	72	94	56	76	-97	37 days
m 3	110	45	72	47	75	-69	29 days
m 4	85	25	40	55	90	-34	13 days
m 5	66	12	27	75	95	-14	9 days
m 6	95	44	50	67	25	-56	60 days
semester	125	12	62.5	387	431	-56	26 days

The rotation period varies from 9 to 60 days and averages 26 days. Flexibly operating account. Heavier in the last month to analyze.

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Example 2

(millions)	Debit Balance			Movements		Balance	Rotation Period
Month	Maximum	Minimum	Average (1)	Debit	Credit (2)	End of Month	[(1) x 30d / (2)]
carryover						-100
m 1	125	100	110	25	5	-120	660 days
m 2	140	121	133	20	2	-138	1995 days
m 3	148	138	143	10	-	-148	infinite
m 4	147	138	142	15	25	-138	170 days
m 5	152	138	145	12	4	-146	1088 days
m 6	153	147	152	5	2	-149	2280 days
semester	153	100	137.5	87	38	-149	651 days

Account almost frozen, despite occasional inflows in m4. To be classified as CDL and provisioned at 100% for the amount not covered by guarantees, unless contrary decision based on objective elements.

Example 3

(millions)	Debit Balance			Movements		Balance	Rotation Period
Month	Maximum	Minimum	Average (1)	Debit	Credit (2)	End of Month	[(1) x 30d / (2)]
carryover						-100
m 1	125	65	92	87	70	-117	39 days
m 2	105	72	94	56	76	-97	37 days
m 3	110	45	72	47	75	-69	29 days
m 4	85	25	40	55	90	-34	13 days
m 5	475	32	270	510	95	449	85 days
m 6	500	449	475	67	25	491	570 days
semester	500	25	187.7	822	431	491	78 days

Normal account but whose situation has strongly degraded from m5 due to significant debits.
Origin and prospects for normalization to be analyzed.

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ANNEX 2

Evaluation of Guarantees Taken into Account to Determine Final Risk on Distressed Loans

The value of guarantees taken into account to determine the final risk incurred on distressed loans is subject to the following deductions in the absence of realization of these guarantees:

• for real estate guarantees: 25% when they have not been realized within a period of 18 months following the downgrading of the distressed loan, 50% when this period reaches 24 months, 100% when this period exceeds 36 months;
• for other guarantees: 25% when they have not been realized within a period of 12 months following the downgrading of the distressed loan, 50% when this period reaches 18 months, 100% when this period exceeds 24 months.

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[ANNEX 3 TABLE]

(The table is a financial reporting grid with the following columns)

DECLARANT CODE
STATEMENT REFERENCE: MFI - Risk Portfolio
PERIODICITY
ACCOUNTING YEAR
PERIOD START
PERIOD END

NUMBER OF DAYS OF DELAY

		1 to 30	31 to 60	61 to 90	91 to 180	181 to 364	365 and more	Total
Gross Credit	Nb	Amount	Nb	Amount	Nb	Amount	Nb	Amount	Nb	Amount	Nb	Amount	Nb	Amount
Short term < 1 year
Medium term 1 to 5 years
Long term > 5 years and more
Total Gross Credit

| Provisions | Nb | Amount | Nb | Amount | Nb | Amount | Nb | Amount | Nb | Amount | Nb | Amount | Nb | Amount |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Short term < 1 year | | | | | | | | | | | | | | |
| Medium term 1 to 5 years | | | | | | | | | | | | | | |
| Long term > 5 years and more | | | | | | | | | | | | | | |
| Total Provisions | | | | | | | | | | | | | | |

NET CREDIT AFTER PROVISION
PAR 30 | PAR 60 | PAR 90