Instruction No. 026-11-2016 on Accounting and Valuation of Non-Performing Commitments

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The Governor of the Central Bank of West African States (BCEAO), Having regard to the Treaty of the West African Monetary Union (UMOA) of 20 January 2007, particularly Article 34; Having regard to the Statutes of the Central Bank of West African States (BCEAO), annexed to the UMOA Treaty of 20 January 2007, particularly Articles 30, 31, 32, 33 and 34; Having regard to the Uniform Act on banking regulation, particularly Articles 50, 51, 52, 53 and 54; Having regard to Decision No. 013/24/06/CM/UMOA of 24 June 2016 establishing the prudential framework applicable to credit institutions and financial companies in the UMOA; Having regard to Decision No. 357-11-2016 of 15 November 2016 establishing the Revised UMOA Banking Accounting Plan and its related annex, particularly Articles 75, 78, 81, 84, 91, 95 and 99, HAS DECIDED:

Chapter 1: General Provisions
Article 1
In application of the provisions of the Revised UMOA Banking Accounting Plan, banks and financial institutions with a banking character, hereinafter referred to as "subjected institutions", account for and depreciate their commitments under the conditions set forth in this Instruction.
Article 2
For the purposes of this Instruction, the following expressions denote:

1. Counterparty: any legal entity benefiting from a loan or commitment signed by the subjected institution, excluding counterparties issuing debt securities which are covered in the Instruction on accounting and valuation of securities held by credit institutions;
2. Effective interest rate: the discount rate that equates the sum of cash outflows and inflows upon granting or acquiring a loan with the present value of contractual flows to be received from the counterparty over the effective life of that exposure. It is determined at origination upon granting or acquiring the loan.

Chapter 2: Rules relating to the accounting of commitments
Article 3
Within their total portfolio of commitments, subjected institutions accountably distinguish healthy loans, non-performing loans, irrecoverable loans, and doubtful commitments.
Article 4
Healthy loans correspond to claims whose settlement normally occurs at maturity and which are held against counterparties whose capacity to honor their immediate and/or future commitments does not present any cause for concern. Unpaid maturities of up to ninety days that have not been subject to term extension or renewal are considered healthy loans. They are recorded in accounts provided for this purpose by the Revised UMOA Banking Accounting Plan.
Article 5
Non-performing loans include restructured loans and doubtful or disputed loans.
Article 6
Loans are considered restructured when they have been subject to renegotiation measures, consisting of concessions granted to a counterparty that is experiencing or about to experience difficulties in honoring its financial commitments. A concession translates into a modification of one or more contract conditions that the counterparty is judged unable to meet due to its financial difficulties and which would not have been accepted had it not experienced such difficulties. Upon restructuring, any waiver of principal or interest, due or accrued, is recognized as a loss. At the time of restructuring, the loan is subject to a discount whose amount equals the difference between the present values, based on the original effective interest rate, of the initially expected contractual flows and the flows expected from the restructuring. The discount, recorded as risk cost, is amortized over the remaining term of the restructured loan.
Article 7
A restructured loan may be reclassified into healthy loans after a one-year period from the first maturity arising from the restructuring terms, provided that this loan or any other exposure of the counterparty has not recorded an unpaid maturity during this period. It is then classified in a specific sub-category for a two-year period. This classification is made through accounting entry. During the three-year period from the first maturity arising from restructuring terms, any new concession or payment delay of more than thirty days on the restructured loan or any other exposure of the counterparty triggers the transfer of all related facilities into doubtful or disputed loans. When restructured loans are transferred to healthy loans, any depreciation previously established outside the discount to cover non-recovery risk is reversed. The amortization of the discount continues until its total clearance.
Article 8
Doubtful or disputed loans are claims, due or not, presenting a probable or certain risk of partial or total non-recovery. They consist of:

1. loans to a counterparty with characteristics such that, regardless of the existence of any default, it is probable that the institution will not collect all or part of the amounts due under the commitments undertaken by the counterparty;
2. loans with at least one maturity remaining unpaid for more than ninety days. For ordinary debit accounts, the age of the default is counted from when:

• the counterparty has exceeded a limit brought to its attention by the subjected institution;
  or
• the counterparty has drawn amounts without overdraft authorization.
  Ordinary debit accounts for which the cumulative amount of credit movements over a ninety-day period does not cover the interest charges during that period are also reclassified as doubtful loans.
  The ninety-day period is extended to one hundred eighty days for exposures to UMOA States, public bodies outside the central administration of UMOA States, as well as financing granted to SMEs/SMIs as mentioned in the Instruction on the definition of attributes.
  Article 9
  The elements below are considered as indicators that it is probable the institution will not collect all or part of the amounts due under commitments undertaken by the counterparty:
  – collective debt-clearing procedures exist against the concerned counterparties, including preventive conciliation procedures, preventive settlement procedures, curative judicial recovery procedures, asset liquidation, or the counterparty is subject to personal bankruptcy; – the counterparty faces management problems or disputes among major partners or shareholders, leading to a deterioration of the financial situation or a risk of non-recovery.
  Article 10
  Doubtful or disputed loans may be reclassified into healthy loans when payments resume regularly over a one-year period, for amounts corresponding to the original contractual maturities or maturities arising from restructuring. They are classified therein, through accounting entry, in a specific sub-category for a two-year period. During this two-year period, any payment delay of more than thirty days, or any concession on the loan or any other exposure of the counterparty, triggers the reclassification of the loan into doubtful or disputed loans.
  Article 11
  The reclassification of a given counterparty's loan into doubtful or disputed loans triggers an identical reclassification of all exposures and off-balance sheet commitments related to that counterparty. This rule does not apply to loans resulting from commercial discounting, nor to exposures held for retail clients as defined by the prudential framework. When the counterparty belongs to a group, the subjected institution examines the consequences of this default at the group level and assesses the need to classify all loans related to entities forming the group as doubtful.
  Article 12
  Unsettled interest on doubtful or disputed loans is recorded in accounting under the sub-accounts provided for this purpose.
  Article 13
  Irrecoverable loans are claims for which the rights of the subjected institution as creditor are legally extinguished.
  Loans classified as doubtful or disputed that remain unrecovered by the end of the fifth financial year following transfer to doubtful loans are also assimilated as irrecoverable loans.
  The transfer of a doubtful loan to an irrecoverable loan does not trigger the transfer into this category of other doubtful exposures related to the concerned counterparty.
  Irrecoverable loans must be written off in full for their entire amount.
  The total of depreciation previously established on these loans must also be reversed, where applicable.
  Irrecoverable loans for which the rights of the subjected institution are not extinguished are subject to off-accounting monitoring and no longer give rise to interest accounting.
  Article 14
  Doubtful off-balance sheet commitments are off-balance sheet commitments that, upon realization, will present a probable or certain risk of partial or total default by the principal.

Chapter 3: Rules relating to depreciation and provisions on non-performing commitments
Article 15
When a loan becomes doubtful, the consequent probable loss is accounted for by means of a depreciation recorded as a deduction from that loan.
Probable losses related to off-balance sheet commitments are accounted for through provisions shown on the liabilities side of the balance sheet.
Article 16
Depreciation on doubtful or disputed loans is established in accordance with the following principles:
– for direct risks on UMOA States, public bodies outside the central administration of UMOA States, as well as risks guaranteed by these same economic agents, depreciation is optional; – for private risks meeting the definition of restructured loans, depreciation, both on principal and interest, is optional; – for uncovered private risks or for the portion of private risks not covered by one of the guarantees provided by the prudential framework and meeting the definition of doubtful or disputed loan, the amount of depreciation must correspond to at least 20% of uncovered exposures on the date of transfer to doubtful loans. It is increased to at least 50% of the uncovered amount three months after transfer to doubtful loans and to 100% nine months after transfer to doubtful loans; – for the portion of private risks covered by one of the guarantees provided by the prudential framework or by first-rank mortgages, and meeting the definition of doubtful or disputed loan, depreciation is optional during the first two years from the date of transfer of the loan. It must cover at least 50% of the total guaranteed doubtful loans from the third year and 100% from the fourth year. Second-rank mortgages are accepted when the first rank is registered in the name of the same subjected institution. Unsettled interest charged to the income statement and relating to doubtful or disputed loans must be fully depreciated, notwithstanding the existence of an eligible guarantee under the prudential framework.
Article 17
Probable losses related to off-balance sheet commitments must be evaluated for the best estimate of the amount necessary to extinguish the obligation undertaken by the subjected institution, after deducting any guarantees possibly received from the counterparty. Any difference between this estimate and the initial commitment given by the subjected institution must be justified. The establishment of provisions for doubtful commitments to UMOA States and public bodies outside the central administration of UMOA States is optional.
Article 18
In the case of finance lease operations, the calculation base for depreciation consists of unpaid due rents.

Chapter 4: Final Provisions
Article 19
This Instruction repeals and replaces all prior provisions dealing with the same subject matter.
It enters into force on 1 January 2018 and shall be published wherever necessary.
Done in Dakar, on 15 November 2016
Tiémoko Meyliet KONE