Instruction No. 16 to Banks: Prudential Rules on Credit Classification and Provisioning

INSTRUCTION NO. 16 TO BANKS

Modification No. 1, effective on ……….. Concerns: PRUDENTIAL RULES RELATING TO THE CLASSIFICATION AND PROVISIONING OF CREDITS

The Central Bank of Congo, acting in accordance with the provisions of Title Three of Law No. 003/2002 of February 2, 2002, relating to the Activity and Control of Credit Institutions, adopts the following provisions relating to the classification and provisioning of credits.

TITLE I. ON THE DEFINITION AND CLASSIFICATION OF CREDITS

Article 1:

The notion of claim or credit covers the overdue principal, the outstanding principal as well as the accrued interest recorded.

Article 2:

For the purposes of this Instruction, credits are classified as follows:

• Normal (healthy) credits;
• Credits with potential risk (extended);
• Litigious credits (compromised).

Article 3: Normal credits are credits which, without any default, are sufficiently covered by financial guarantees that are easily realizable as well as by the fund-generating capacity of the beneficiaries to constantly meet repayments according to contractual terms.

Article 4: Extended credits are credits whose repayment deadlines have been modified in accordance with the provisions of Instruction No. 9 to Banks.

Article 5: Litigious credits are credits whose recovery cannot be realized in accordance with the contractual conditions due to the certain failure of the beneficiaries, even if accompanied by guarantees. Litigious credits include:

• Unpaid credits;
• Doubtful credits;
• Contentious credits;
• Irrecoverable credits.

Article 6: Credits are deemed unpaid when:

• The installments have remained unpaid for a maximum of two months and have not been subject to an extension of term or renewal;
• Off-balance sheet commitments due and not settled by the client for a maximum of two months have resulted in payment at maturity by the bank.

Article 7: The following are deemed doubtful credits:

• Credits unpaid for more than two to six months;
• Current accounts debited without credit movement for more than three months or without significant credit movements for more than six months. Credit movements are considered insignificant if the cumulative amount over a six-month period does not cover the debtor interest due on this period and relating exclusively to the current account concerned;
• Credits due or not, presenting a certain risk of partial or total non-recovery.

Article 8: When advances to a specific natural or legal person become doubtful, they automatically entail the transfer of all commitments of that same person from the healthy balance headings to the doubtful balance headings. The same applies to persons and companies linked to the client classified as doubtful.

Article 9: Contentious credits are deemed to be doubtful credits whose files are subject to judicial proceedings.

Article 10: Irrecoverable credits are unrecoverable claims after exhaustion of all remedies or arrears of more than 12 months. They are recorded as a loss within a period of one year and tracked off-balance sheet.

TITLE II: ON THE PROVISIONING OF CREDITS

Article 11: Banks are required to set aside provisions on credits within a maximum period of 12 months according to the rates included in the tables below:

Table 1: Credits covered by guarantees

CLASS	TYPES OF CREDITS	RATE OF PROVISIONING ACCORDING TO GUARANTEES
	Financial or immediately realizable guarantees	Real securities
1	Normal or healthy	1
2	Potential risks (Extended)	1
3	Unpaid	1
4	Doubtful	1
5	Contentious	1
6	Irrecoverable	10

Table 2: Overdrafts covered or not covered by guarantees

Unpaid credits / absence of credit movement	Rate of provisioning
3 - 6 months	30
6 - 9 months	50
9 - 12 months	80
> 12 months	100

Title III: ON THE TREATMENT OF INTERESTS ON DOUBTFUL CLAIMS

Article 12: Unsettled interest on distressed credits is recorded in accounting or calculated extra-accountingly. When they are credited to the income statement, they must be obligatorily provisioned to the extent necessary.

If a global provision covering the principal, accrued interest, and overdue interest is made, the latter must be at least equal to the interest included in the income statement.

Title IV: FINAL PROVISIONS

Article 13: Banks are required, in addition to the annexes to credit declarations transmitted to the Central Bank, to communicate to the Direction of Supervision of Financial Intermediaries, in accordance with the provisions of Instruction No. 9 Bis of the Issuing Institute, the table in the annex reproducing the register of credits granted.

Article 14:

Banks that do not respect the levels of provisioning thus determined are subject to a penalty equal to 1% of the insufficiency between the required level and the level observed at the end of each month.

Article 15:

This instruction, which takes effect from December 31, 2003, repeals all prior provisions contrary to it.

Made in Kinshasa, on J-C MASANGU MULONGO, Governor