Instruction No. 16 (Modification 3) on Prudential Rules for the Classification and Provisioning of Claims

BANQUE CENTRALE DU CONGO

THE GOVERNOR

INSTRUCTION NO. 16 TO CREDIT INSTITUTIONS
(Modification 3)

Concerning: Prudential rules relating to the classification and provisioning of claims

The Central Bank of Congo,

Having regard to Law No. 005/2002 of May 7, 2002, relating to the constitution, organization, and functioning of the Central Bank of Congo;

Having regard to Law No. 003/2002 of February 2, 2002, relating to the activity and control of Credit Institutions;

Decrees the following provisions:

CHAPTER 1: OBJECT AND SCOPE

Article 1
This Instruction aims to establish the rules applicable regarding the classification and provisioning of claims held on any counterparty.

Article 2
This Instruction applies to banks, savings banks, specialized financial institutions, and financial companies, hereinafter collectively referred to as "Subject Institutions."

It does not apply to Savings and Credit Cooperatives and Microfinance Institutions, which remain governed by specific regulations.

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CHAPTER 2: DEFINITIONS

Article 3
For the purposes of this Instruction, the following terms are understood as:

(i) claims: the set of risks incurred by a subject institution on a counterparty (natural or legal person) in the following forms:

• cash credits or account advances, whatever their nature, form, and term;
• movable or immovable leasing;
• irrevocable guarantee commitments (such as guarantees, avals, financing commitments, etc.) made in favor of the counterparty;
• debt securities issued by the counterparty and held by the subject institution;

(ii) rescheduling: the practice by which a debtor, foreseeing that they will no longer be able to pay future installments of their debt under the initially agreed conditions, obtains from their creditor consent to reduce the amount of each and extend the duration of their repayment;

(iii) counterparty: any natural or legal person, public or private, beneficiary of disbursement credits or signature commitments from a subject institution or issuer of debt securities held by such an institution.

Article 4
The following are considered related persons to a subject institution:

• the institution's subsidiaries, affiliated companies, and any party (including its subsidiaries, affiliated companies, and special purpose vehicles) over which the bank exercises control or which exercises control over it;

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• legal persons in which the bank holds participations;
• shareholders, directors, senior management, executive managers, their direct or indirect interests, their close relatives (ascendants and descendants in the first degree), as well as corresponding persons in affiliated institutions, and the legal persons they control;
• non-banking natural or legal persons linked to the bank by cross-guarantee contracts or business contracts, namely subcontracting or franchise contracts.

Article 5
The following are considered persons linked to the counterparty:

• natural or legal persons who have capital links such that one of them exercises, directly or indirectly, exclusive or joint control power or significant influence over the others, or who are subject to common de facto management;
• natural or legal persons who are linked in such a way that the financial difficulties encountered by one or some of them would necessarily lead to serious financial difficulties for the other or all others.

Such links may notably exist between two or more natural or legal persons in any of the following cases:

• natural persons who are related up to the second degree;
• legal persons that are subsidiaries of the same parent company;
• persons who are subject to common de facto management;

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• legal persons, namely public institutions and establishments as well as public enterprises, which have financial dependency links between themselves or with the Central Government, Provinces, or Decentralized Territorial Entities;
• persons who are linked by cross-guarantee contracts or who maintain predominant business relations between themselves, notably when they are linked by subcontracting or franchise contracts.

CHAPTER 3: CLASSIFICATION OF CLAIMS

Article 6
The claims of subject institutions held in portfolio are divided into two classes:
(1) healthy claims;
(2) troubled claims.

The classification of claims into the appropriate categories is carried out independently of the guarantees covering them.

Article 7
The following are considered healthy claims:

• claims whose full repayment of principal and/or interest is carried out in accordance with contractual provisions and which are held on counterparties whose ability to honor all their current and future commitments raises no cause for concern on the part of the subject institution (solid financial situation, quality shareholding, satisfactory situation and prospects of the business sector, etc.);
• discounted and unmatured values (commercial effects, mobilization of claims abroad, etc.), accepted by the drawee and whose successful completion raises no cause for concern.

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Article 8
The following are considered troubled claims: claims whose collections are not carried out in accordance with contractual provisions or which are held on counterparties whose ability to honor all their current and future commitments raises causes for concern.

Article 9
Troubled claims are subdivided into two categories:
(i) claims to be monitored;
(ii) non-performing claims.

Article 10
The following are considered claims to be monitored:

• credit balances accompanied by an established amortization plan and not having been subject to an extension or renewal of terms, of which one or more installments remain unpaid, in whole or in part, for a period of less than 90 days after the contractual due date;
• credit balances not accompanied by an established amortization plan and not having been subject to an extension or renewal of terms, which remain unpaid, in whole or in part, for a period of less than 90 days after their contractual due date;
• overdrafts relative to authorized credit limits, both in terms of validity duration and amount, recorded on credits in the form of current account advances, and which are not regularized within a period of less than 90 days;

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• debit balances of frozen current accounts, whose clearance period calculated according to the formula provided in Article 16, is less than 90 days;
• debt securities issued by the counterparty whose repayment of principal and/or interest records a delay of less than 90 days after the due date;
• movable or immovable leasing credit balances that have not been subject to an extension or renewal of terms, of which rents remain unpaid for a period of less than 90 days after the due date;
• irrevocable signature commitments given in favor of counterparties classified in this category or whose financial situation raises causes for concern;
• claims held on counterparties that, despite any non-payment, raise causes for concern regarding their current and/or future ability to repay their commitments in accordance with contractual provisions.

The causes for this concern may be linked to the occurrence of internal and/or external events, notably:
(i) the trend towards deterioration of the counterparty's financial situation; (ii) difficulties at the level of the counterparty's business sector; (iii) the trend towards a decrease in the market value of securities issued by the counterparty, not justified by the general level of interest rates; (iv) indices of depreciation of guarantees received to cover the claim.

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Article 11
Non-performing claims are divided into three categories:

• pre-doubtful claims;
• doubtful claims;
• compromised claims.

Article 12
The following are considered pre-doubtful claims:

• credit balances accompanied by an established amortization plan and not having been subject to an extension or renewal of terms, of which one or more installments remain unpaid for a period ranging from 90 to 179 days after their contractual due date;
• credit balances not accompanied by an established amortization plan and not having been subject to an extension or renewal of terms, which remain unpaid for a period ranging from 90 to 179 days, after their contractual due date;
• overdrafts relative to authorized credit limits (both in validity duration and amount) recorded on credits in the form of current account advances, which are not regularized within a period of 90 to 179 days;
• debit balances of frozen current accounts whose clearance period, calculated according to the formula provided in Article 21, stands between 90 and 179 days, after the due date;
• debt securities issued by the counterparty whose repayment of principal and/or interest records a delay standing between 90 and 179 days, after the due date;
• movable or immovable leasing credit balances whose rents remain unpaid for a period situated between 90

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and 179 days, after the due date and which have not been subject to extension or renewal of terms;

• irrevocable signature commitments, in favor of counterparties whose facilities are classified as pre-doubtful or who present a probable risk of partial or total default;
• credit balances whose full and timely repayment is uncertain due to:
  (i) elements intrinsic to the counterparty (persistent imbalance of the financial situation, excessive indebtedness, significant drop in turnover, etc.); (ii) the downgrade of the rating assigned to the counterparty by an external rating agency (see Annex 1); (iii) the non-transmission by the counterparty of the necessary certified financial documents to assess its solvency; (iv) the occurrence of internal difficulties (management problems, disputes between shareholders, etc.) or external difficulties (persistent sectoral difficulties, substantial drop in the stock market price of securities issued by the counterparty).

Article 13
The following are considered doubtful claims:

• credit balances accompanied by an established amortization plan and not having been subject to extension or renewal of terms, of which one or more installments remain unpaid for a period of 180 to 359 days after the due date;
• credit balances not accompanied by an established amortization plan and not having been subject to extension or renewal of terms which remain unpaid for a period of 180 to 359 days after the due date;
• overdrafts relative to authorized credit limits, both in validity duration and amount, recorded on credits under

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the form of current account advances, which are not regularized within a period of 180 to 359 days;

• debit balances of frozen current accounts whose clearance period, calculated according to the formula provided in Article 21, stands between 180 and 359 days;
• debt securities issued by the counterparty whose repayment of principal and/or interest records a delay for a period equal to or greater than 180 days, without however exceeding 359 days, after their due date;
• movable and immovable leasing credit balances not having been subject to renewal of terms and whose rent payment records a delay of 180 days to 359 days, after the due date;
• irrevocable signature commitments, in favor of counterparties whose facilities are classified as doubtful or who present a probable risk of partial or total default;
• credit balances whose repayment, despite any payment delay, is unlikely due to the deterioration of the financial situation caused by the persistence and/or aggravation:
  (i) of elements intrinsic to the counterparty (persistent imbalance of the financial situation, excessive indebtedness, significant drop in turnover, etc.); (ii) of the downgrade of the rating assigned to the counterparty by an external rating agency (see Annex 1); (iii) of the non-transmission by the counterparty of the necessary certified financial documents to assess its solvency; (iv) of the occurrence of internal difficulties (management problems, disputes between shareholders, etc.) or external difficulties (persistent sectoral difficulties, substantial drop in the stock market price of securities issued by the counterparty, etc.).

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Article 14
The following are considered compromised claims:

• credit balances accompanied by an established amortization plan and not having been subject to renewal of terms, of which one or more installments remain unpaid for a period equal to or greater than 360 days, after their due date;
• credit balances not accompanied by an established amortization plan and not having been subject to extension or renewal of terms, remaining unpaid for a period equal to or greater than 360 days, after their due date;
• overdrafts relative to authorized credit limits (both in validity duration and amount), recorded on credits in the form of current account advances, and which are not regularized within a period equal to or greater than 360 days;
• debit balances of frozen current accounts whose clearance period calculated according to the formula provided in Article 21, is equal to or greater than 360 days;
• debt securities issued by the counterparty whose repayment of principal and/or interest records a delay for a period equal to or greater than 360 days, after the due date;
• movable or immovable leasing credit balances not having been subject to renewal of terms, whose rent payment records a delay equal to or greater than 360 days, after the due date;
• irrevocable signature commitments, in favor of counterparties whose facilities are classified as compromised or who present a certain risk of partial or total default;
• claims subject to forfeiture of term;

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• credit balances whose repayment is improbable, for reasons linked notably to:
  (i) the strong deterioration of the counterparty's financial situation (for example, the loss of a significant capital extension); (ii) the existence of a dispute likely to compromise the respect of the contract terms; (iii) the cessation of activities or the liquidation of the counterparty.

Article 15
The classification of a claim into the "compromised claims" category entails the transfer, into this category, of all claims held on the concerned counterparty and persons linked to it.

Such links may notably exist between two or more natural or legal persons in any of the following cases:

• persons are related up to the second degree;
• persons are subsidiaries of the same parent company;
• persons are subject to common de facto management;
• persons are territorial collectivities or Public Establishments and have financial dependency links between themselves;
• persons who are linked by cross-guarantee contracts or who maintain predominant business relations between themselves, notably when they are linked by subcontracting or franchise contracts.

The subject institution must constitute provisions covering the global balance of compromised claims.

Article 16
A subject institution may agree on new repayment terms with a counterparty.

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Article 17
The following are considered restructured claims: claims held on counterparties presenting financial difficulties that have forced the credit institution to modify the initial characteristics, notably the principal, duration, and interest rate, in order to allow counterparties to honor the payment of their commitments at each due date.

Article 18
Claims may only be rescheduled or restructured once and subject to express decision by the competent body of the subject institution, when the restructuring operation is justified by considerations related to the counterparty's financial situation or to difficulties at the level of its business sector.

Restructuring may also occur in the case where the debtor, who is eager to amortize their debt quickly, agrees with their creditor that the latter accepts that they pay a portion of the sums not yet due against a rearrangement of installments. In this case, either the amount of each is reduced while the originally fixed installments are maintained, or the most distant installments are cancelled to the extent necessary and the duration of the debt amortization is shortened accordingly.

Article 19
A rescheduled or restructured credit must remain in the category where it was before the rescheduling or restructuring during an observation period of 90 days.

Article 20
Rescheduled or restructured credits are reclassified into:

• the healthy claims category, when repayment is carried out, during the observation period provided for in Article 19, in accordance with the new agreed provisions;

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• the risk category of lower quality than the original one before rescheduling or restructuring, when they record a payment incident during the observation period.

Any subsequent default after the observation period entails the reclassification of the claim into the initial category.

Article 21
A current account is said to be frozen or inactive when operating in a debit line, it has not recorded, during a quarter, deposits covering at least the interest and commissions due for said quarter.

The clearance period of the debit balance of a frozen current account is obtained according to the following formula:
(Debit Balance X 90) / Sum of credit movements recorded during said quarter.

CHAPTER 4: PROVISIONING OF CLAIMS AND RISK MITIGATION

Article 22
Subject institutions constitute provisions to cover their claims up to the minimum levels below:

Claims	Provision Proportion
Healthy claims	1 %
Claims to be monitored	3 %
Pre-doubtful claims	20 %
Doubtful claims	50 %
Compromised claims	100 %

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Article 23
Provisions constituted relating to rescheduled or restructured claims may only be reversed when these claims are reclassified into the healthy claims category in accordance with the provisions of Article 20.

Article 24
The calculation of provisions is carried out based on the total of balances of each category of claims, less eligible guarantees, within the limits of the quotas below:

(i) Guarantees deductible up to 100% of their value

• the pledge of deposits and/or time accounts constituted with the subject institution, denominated in the same currency as the facilities they guarantee;
• the pledge of deposit certificates or assimilated securities, denominated in the same currency as the facilities they guarantee, issued by the subject institution and deposited with itself;
• the pledge of bonds issued by the Central Bank (BCC Bonds).
• movable property covered by "all risk" insurance subject to leasing

(ii) Guarantees deductible up to 80% of their value

• pledges of deposits and time accounts constituted with the subject institution, denominated in a currency other than that of the facilities they guarantee;
• bank counter-guarantees emanating from credit institutions rated AAA to AA- (or an equivalent rating) by international agencies;
• bank counter-guarantees emanating from national credit institutions;

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• bank counter-guarantees emanating from international cooperation financial institutions or Regional Development Banks.

(iii) Guarantees deductible up to 50% of their value

• bank counter-guarantees emanating from credit institutions rated A+ to BBB- (or an equivalent rating) by international agencies;
• first-ranking mortgages on a residential property that will be occupied or rented out by the counterparty.

(iv) Guarantees deductible up to 30% of their value

• insured movable property subject to leasing

(v) Guarantees deductible up to 25% of their value

• first-ranking mortgages on a property intended entirely for productive activities.

(vi) Guarantees deductible up to 20% of their value

• uninsured movable property subject to leasing.

Article 25
To be deductible, the guarantees provided for in Article 24 must:

• be formalized in writing established and registered in compliance with the legal and regulatory provisions in force;
• be mobilizable at first request and without possibility of contestation;
• have a maturity at least equal to that of the covered credit;
• cover at least 80% of the claim.

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Article 26
Mortgages must be registered with the Land Titles Conservator. The credit agreement must stipulate that the regulated institution will become the owner of the mortgaged property through payment in kind in accordance with legal provisions.

The value of mortgages must be subject to independent and qualified appraisal.

Article 27
Unpaid interest on non-performing claims is recorded off-balance sheet.

Article 28
The Central Bank may require the reclassification, into a lower category, of credit exposures disbursed and/or guaranteed for a given counterparty, and the establishment of appropriate provisions, when it deems necessary.

Article 29
The criteria provided for by this Instruction for the classification of claims into one or other of the categories of non-performing claims constitute minimum criteria. Regulated establishments have the latitude to classify their claims into a lower category, if they deem it necessary based on information available to them.

Article 30
The amount of provisions required under this Instruction constitutes a regulatory minimum.

When the amount of depreciation recognized under IAS/IFRS standards is lower than the amount of provisions required by this Instruction, the shortfall is deducted from the core capital of the regulated establishment.

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When the amount of depreciation recognized under IAS/IFRS standards is equal to or greater than the amount of provisions required by this Instruction, these depreciations are considered adequate.

Article 31
Regulated establishments must remove from their balance sheet compromised claims that are fully provided for and considered unrecoverable. However, they must maintain off-balance sheet monitoring of these claims. The removal of these claims from the balance sheet occurs no later than one year after their registration in the category of compromised claims. Provisions established to cover claims removed from the balance sheet can only be reversed in the event of the definitive abandonment of said claims.

Prior approval from the Central Bank is required for any write-off of claims held on counterparties related to the establishment.

Regulated establishments submit monthly to the Central Bank a report detailing the evolution of claims removed from the balance sheet and the status of their recovery, as well as that of definitively abandoned claims, according to the models in annexes 2 to 3.

CHAPTER 5: SANCTIONS

Article 32
Non-compliance with the provisions of this Instruction exposes the regulated establishment to sanctions provided for by Law n° 003/2002 of February 2, 2002, relating to the activity and control of Credit Institutions, and Instruction n° 23 relating to the exercise of the disciplinary power of the Central Bank of Congo.

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CHAPTER 6: MISCELLANEOUS PROVISIONS

Article 33
Regulated establishments must declare monthly to the Central Bank of Congo, the outstanding amount of their performing and non-performing claims by beneficiary and by sector of activity, classified by category, as well as the associated depreciation, according to the models in annexes 4 to 8.

Furthermore, they must transmit monthly to the Central Bank, the list of claims rescheduled or restructured during the month under review according to the model in annex 9.

Article 34
Regulated establishments must have a credit policy, validated by the Board of Directors, indicating the modalities, conditions, and procedures for:

• granting, recording, monitoring, and recovering credits;
• analyzing the credit portfolio, including off-balance sheet commitments, in order to detect in advance and classify counterparties presenting, or likely to present, financial or other fragilities that could compromise their immediate or future solvency;
• establishing appropriate specific provisions to cover their credit risks;
• extending or renewing the terms of credits requiring restructuring or rescheduling.

The Board of Directors must ensure the effectiveness of the recovery of non-performing claims.

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Article 35
Regulated establishments must have at all times information on the number and amount of claims downgraded to non-performing claims during each fiscal year.

CHAPTER 7: TRANSITIONAL AND FINAL PROVISIONS

Article 36
The amounts of general provisions on performing credit exposures appearing in the balance sheets of regulated establishments before the application of this Instruction must be transferred to a non-distributable reserve account to strengthen their capital during the migration to the IFRS framework.

Article 37
This Instruction repeals all prior contrary provisions and enters into force on December 31, 2014.

Done in Kinshasa, on 29 NOV 2018
Déogratias MUTOMBO MWANA NYEMBO
Governor