Instruction No. 005_GR_2014 on the Classification of Claims and Provisioning

Nouakchott, on the date of signature
Le Gouverneur
INSTRUCTION N° 005_GR_2014
REGLEMENTANT LA CLASSIFICATION DES CREANCES ET CONSTITUTION DES PROVISIONS

LE GOUVERNEUR DE LA BANQUE CENTRALE
Vu la loi n° 73-118 du 30 mai 1973 portant création de la Banque Centrale de Mauritanie Vu l'ordonnance n° 004/2007 du 12 janvier 2007 portant statut de la Banque Centrale de Mauritanie Vu l'ordonnance n° 020/2007 du 13 mars 2007, relative aux établissements de crédit Vu le décret n° 102/2009 du 13 août 2009 portant nomination du Gouverneur de la Banque Centrale de Mauritanie.

DECIDE:

Chapitre 1: DEFINITION AND CLASSIFICATION
Article 1. This instruction specifies the procedures for classifying and provisioning claims held by credit institutions as defined in Article 2 of Ordinance No. 2007-07.

Article 2. For the purposes of this regulation, the following terms apply:
a) claim: any facility granted to a legal or natural person, regardless of form or duration, whether on or off-balance sheet, and whether denominated in ouguiya or foreign currency; b) counterparty: any natural or legal person benefiting from a credit or commitment by signature; c) credit risk: the existence of potential loss linked to the counterparty's possible default on its commitments; d) interest margin: interest income or expenses recognized in banking operating income and expenses; e) written-off claims: claims removed from the balance sheet after the failure of recovery procedures; f) State, the following institutions:

• Central public administration (ministries, central services);
• The Treasury and secondary accountants;
• Public or social administrative bodies exercising functions related to central government (Social Security).

Article 3. Among their overall credit risks, institutions distinguish healthy claims (Class A) and distressed claims allocated to Classes B, C, or D.
Distressed claims must be identified within the accounting information system according to Classes B, C, or D either by accounting entries in accounts created for this purpose or by means of attributes.

Article 4. Claims are considered distressed when they present a risk of total or partial non-recovery due to the deterioration of the counterparty's immediate or future repayment capacity.
Based on their degree of credit risk, distressed claims are allocated to:

• pre-doubtful claims (Class B);
• doubtful claims (Class C);
• compromised claims (Class D).
  The classification of exposures is performed without considering existing guarantees. It applies to the entire claim, principal and interest.

Article 5. Exposures presenting payment irregularities for the following periods are classified as distressed claims:

• 90 days, exposures are then classified among pre-doubtful claims (Class B);
• 180 days, exposures are then classified among doubtful claims (Class C),
• 360 days, exposures are then classified among compromised claims (Class D).

Article 6. For the application of the preceding article, the period runs from:

• the recognition of an unpaid maturity for amortizable loans;
• the term of amortizable loans repayable in a single installment;
• for authorized overdrafts (overdraft agreement), the absence of credit movements capable of fully compensating the amount of interest payable and other charges;
• for unauthorized overdrafts, since the debtor drew amounts without authorization and the account shows a debit balance.

Article 7. Claims on a counterparty whose situation allows concluding the existence of an assured risk of non-recovery, even in the absence of unpaid amounts exceeding 90 days, are considered distressed, including:

• when the credit institution is aware of the counterparty's deteriorated financial situation;
• when it is aware of events concerning key management or shareholders (death);
• the existence of management problems or disputes between partners;
• if contentious procedures have been initiated between the credit institution and the counterparty, such as:
  a legal action brought against the counterparty for debt recovery; the judicial challenge by the counterparty of all or part of the claims; the cessation of activity, judicial reorganization, or liquidation of the counterparty. The distressed claims referred to in this article are classified into the appropriate category (B, C, or D) based on the degree of non-recovery risk. The Central Bank of Mauritania may require a more unfavorable classification than adopted.

Article 8. Once a claim granted to a legal or natural person is classified in Category C or D, all commitments regarding this client must be recorded among distressed claims.

Article 9. When the counterparty belongs to a group, the credit institution examines the consequences of this client's difficulties on claims related to linked natural or legal persons, as defined in Article 5 of Instruction No. 11/GR/2012 establishing the maximum risk division coefficient and defining notions of control and significant influence. It evaluates which entities' claims present a potential risk of non-recovery, even in the absence of default. All claims on these entities must be classified among distressed claims.

Chapitre 2: PROVISIONS RELATED TO CLAIM RESTRUCTURING
Article 10. A restructured claim refers to a claim for which the institution has agreed to modify initial repayment terms due to the borrower's financial deterioration.

Article 11. Restructuring may cover:

• due and unpaid amounts only;
• the outstanding amount in case of no default;
• all due amounts remaining unpaid and amounts to mature.
  During restructuring, any write-off of principal or interest (due or accrued) is recognized as a loss.

Article 12. Restructuring must meet objective considerations such as the financial soundness of the debtor and/or the strengthening of guarantees to ensure the bank can recover its claim according to the new repayment scheme.

Article 13. Restructured claims with no default are classified among pre-doubtful claims (Class B). When the settlement terms resulting from restructuring are not respected, they are classified among doubtful claims (Class D).
Restructured claims may be reclassified among healthy claims in the absence of any payment default for one year.

Article 14. At the time of restructuring, write-offs of principal and/or interest (due or future) are subject to a discount.

Chapitre 3: RULES RELATED TO THE CONSTITUTION OF PROVISIONS
Article 15. Once an exposure is distressed, the probable loss must be accounted for by means of a depreciation recorded as a deduction from this exposure. Probable losses related to off-balance sheet commitments must be accounted for by provisions listed on the balance sheet liabilities.
The probable loss is determined based on the recoverable amount of the claim, which itself is determined considering the counterparty's financial situation, economic outlook, called or potential guarantees (net of realization costs), and the status of ongoing procedures. In all cases, distressed claims must give rise to provisions equal to at least:
20% for pre-doubtful claims;
50% for doubtful claims;
100% for compromised claims.
The calculation base for the provision corresponds to the total accounting value of the claim, excluding already reserved interest, and after deduction of guarantees referred to in Article 17 below. However, guarantees can no longer be taken into account for provision calculations when claims are classified as compromised for two years or more.

Article 16. In the case of financial leasing and hire purchase, the calculation base for provisions consists of:

• unpaid due rents when the claim is considered pre-doubtful or doubtful;
• the total of due and unpaid rents plus remaining capital, reduced by the market value of the asset, when the claim is classified among compromised claims.

Chapitre 4: RULES RELATED TO THE RATES OF GUARANTEES
Article 17. Guarantees that can be deducted from the calculation base of provisions, and their applicable rates, are detailed below:
g) rate of 100%:

• guarantees received from the State;
• guarantees received from credit institutions of any nationality and having the financial capacity to provide the requested guarantee;
• pledges on time deposits opened with the credit institution itself, treasury bills, or debt securities issued by the institution.
  h) rate of 80%:
• mortgages on real estate, aircraft, or ships duly registered;
• domestic public contracts, subject to the existence of a certificate of compliance and regularity in execution issued by the administration to companies awarded public contracts.

Article 18. Guarantees are taken into account only during their effective duration and up to the amount of initially covered contracts weighted by the rates assigned to the concerned guarantees.

Article 19. The guarantees referred to in Article 17 above must be enforceable on first demand and without possibility of challenge.

Article 20. To be taken into account, mortgages received as cover for disbursed credits and/or commitments must be of first rank and duly registered.
Mortgaged assets must undergo frequent independent valuations.
When the evaluated value of mortgaged assets is lower than the recorded value, the evaluated value must be retained as guarantee under Article 17. The Central Bank of Mauritania (BCM) may require the credit institution at any time to conduct a valuation of these assets, requiring competence and impartiality guarantees for the expertise.

Chapitre 5: ACCOUNTING OF INTERESTS
Article 21. For claims classified B, C, and D, only interest (or income) actually received may be incorporated into the income statement.
Any previously recorded but unpaid interest or income must be deducted from results.

Article 22. When due and unpaid interest/income and accrued but not yet due interest/income relating to assets classified (B, C, and D) are accounted for, they must be fully covered by individual provisions (reserved interest) registered in a separate account within the accounting system.

Chapitre 6: TRANSITION TO LOSS AND WRITE-OFF OF ASSETS
Article 23. Claims must be removed from the balance sheet and subject to off-balance sheet tracking as soon as one of the following conditions is met:

• the claim is written off;
• the recovery prospects of the claim are nil despite, if applicable, the existence of ongoing or pending amicable or judicial actions;
• a period of two years has elapsed since the full provisioning of the claim.
  Claims are removed from the balance sheet at their gross accounting amount against the loss account on irrecoverable claims. Any specific provision previously constituted is reversed to results. Claims removed from the balance sheet are subject to an appropriate management and control method in a dedicated off-balance sheet ledger. Any claim removal from the balance sheet under this article must be previously authorized by the bank's board of directors. Claims removed from the balance sheet must be declared in the frozen claims registry. Institutions must communicate to the BCM, according to procedures established by it, the details of commitments on related parties, as defined by Instruction No. 8/GR/2012, which have been removed from the balance sheet under this article.

Chapitre 7: INFORMATION TO BE PUBLISHED ON CREDIT RISK
Article 24. The institution publishes in the annex to the publishable income statement the following information:

• the amount and variation of depreciation made for credit risk; outstanding at opening, allocations, reversals, outstanding at closing;
• exposures transferred between Classes A, B, C, and D;
• amount of restructured exposures during the fiscal year;
• for assets received as part of guarantee implementation, the amount of assets obtained and that of assets sold during the fiscal year.

Chapitre 8: MISCELLANEOUS PROVISIONS
Article 25. This instruction takes effect from its signature date and annuls all prior contrary provisions.