Notice No. 02/GBM/2013: Contingency Plan for Credit Institutions

Banco de Moçambique Governor

NOTICE NO. 02/GBM/2013 Maputo, 29 April 2013

SUBJECT: CONTINGENCY PLAN FOR CREDIT INSTITUTIONS

In view of the need to promote and safeguard the financial solidity, robustness, and resilience of credit institutions, the interests of depositors, and the stability of the banking system, the Bank of Mozambique, using the powers conferred upon it by paragraph d) of Article 37 of Law No. 1/92, of 3 January – Organic Law of the Bank of Mozambique, combined with Article 54 of Law No. 15/99, of 1 November – Law on Credit Institutions and Financial Companies, updated by Law No. 9/2004, of 21 July, approves:

The Contingency Plan for Credit Institutions, hereinafter referred to as the Contingency Plan, which is contained in the annex to this Notice and forms an integral part thereof.

This Notice enters into force on the date of its publication.

Any doubts arising from the interpretation and application of this Notice shall be clarified by the Banking Supervision Department of the Bank of Mozambique.

[Signature] Ernesto Gouveia Gove Governor

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Banco de Moçambique Governor

REGULATION OF THE CONTINGENCY PLAN FOR CREDIT INSTITUTIONS

CHAPTER I GENERAL PROVISIONS

Article 1 (Object and Scope of Application)

This Contingency Plan establishes a set of measures intended to prevent or minimize the occurrence of financial disturbances and/or crises in the banking system, in general, and in authorized credit institutions that collect deposits, in particular, which could condition their functioning.

Article 2 (Definitions)

For the purposes of this Contingency Plan, the following are understood:

a) Emergency Liquidity Assistance – the lender of last resort credit facility, provided by the Bank of Mozambique, intended to support authorized credit institutions that are solvent but have temporary liquidity problems;

b) Non-performing Credit – as defined in the terms of the Notice approving the Regime on Minimum Regulatory Provisions, issued by the Bank of Mozambique;

c) Financial Disturbances or Disturbances – anomalous situations of disruption or turbulence, characterized notably by a lack of liquidity and solvency, which can condition the normal functioning of credit institutions and the banking system in general, whose persistence is likely to lead to a loss of confidence by clients and the general public;

d) Systemic Disturbances or Crises – those resulting from two or more of the following situations:

(i) disturbances occur in one or more institutions that control 4% or more of the total assets of the banking system;

(ii) 4% or more of the total deposits of the banking system have been withdrawn in at least 2 days;

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Banco de Moçambique Governor

(iii) 25% or more of the credit in the banking system is of uncertain collection;

(iv) 25% or more of the institutions in the banking system have requested emergency liquidity assistance;

(v) 25% or more of the institutions in the banking system have been suspended from clearing due to failure to regularize their overdrafts.

e) Own Funds and Core Own Funds – as defined in the terms of the Notice on own funds, issued by the Bank of Mozambique;

f) Adequately Capitalized Institution – the credit institution whose solvency ratio is equal to or greater than 8% and less than 10%;

g) Institution with Very Low Quality Assets – the credit institution that is in at least one of the following situations:

(i) The ratio between uncertain collection credit and total credit is equal to or greater than 10%;

(ii) Exposure to risk with a client or related persons is equal to or greater than 35% of its own funds.

h) Institution with Low Quality Assets – the credit institution that is in any of the following situations:

(i) The ratio between uncertain collection credit and total credit is greater than 5% and less than 10%;

(ii) Exposure to risk with a client or related persons is equal to or greater than 25% and less than 35% of its own funds;

(iii) The aggregate value of large risks assumed exceeds eight times the own funds;

(iv) It has deficient credit management practices, according to the inspection reports of the Bank of Mozambique;

(v) It does not comply with institutional policies regarding credit.

i) Institution with Excessive Growth of Results – the credit institution that is in one of the following situations:

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Banco de Moçambique Governor

(i) Growth of more than 25% in operating revenues compared to the previous period, for more than 3 consecutive months;

(ii) Growth of more than 50% in operating revenues compared to operating expenses during the financial year.

j) Institution with Persistent Computer System Failures – the credit institution that is in one of the following situations:

(i) Computer system failures that hinder client transactions for at least 3 consecutive days;

(ii) Computer system failures that prevent the credit institution from reporting its financial and/or prudential situation to the Bank of Mozambique for more than 3 days for daily reports and more than seven days for monthly reports.

k) Institution with Declining Results – the credit institution that is in one of the following situations:

(i) It has losses during 3 consecutive months;

(ii) It has a drop of at least 20% in operating revenues compared to the previous month;

(iii) It has deficient credit management practices, according to the inspection reports of the Bank of Mozambique.

l) Institution with Inconsistent Results – the credit institution that is in one of the following situations:

(i) It depends persistently on extraordinary results to improve its profits;

(ii) Uncertain and negative forecast of results for the following 12 months.

m) Critically Undercapitalized Institution – the credit institution whose solvency ratio is less than 4%;

n) Critically Illiquid Institution – the credit institution that is in one or more of the following situations:

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Banco de Moçambique Governor

(i) Liability coverage less than 50%, both for demand liabilities or with a residual maturity of up to 30 days and for liabilities with a residual maturity greater than 30 days;

(ii) It is suspended from clearing or has an unregularized overdraft with the Bank of Mozambique for more than 5 consecutive days;

(iii) It is a borrower of loans in the Interbank Money Market (MMI) corresponding to more than 25% of its total deposits for at least 90 consecutive days.

o) Credit Institutions Authorized to Collect Deposits, or abbreviated as Credit Institutions – types of credit institutions that, under the Law on Credit Institutions and Financial Companies, are authorized to collect deposits;

p) Undercapitalized Institution – the credit institution whose solvency ratio is equal to or greater than 6% and less than 8%;

q) Slightly Illiquid Institution – the credit institution that is in one or more of the following situations:

(i) Liability coverage equal to or greater than 75% and less than 100%, both for demand liabilities or with a residual maturity of up to 30 days and for liabilities with a residual maturity greater than 30 days;

(ii) It repeatedly collects public deposits at an interest rate higher than 25% of the average market rate.

r) Institution that Does Not Comply with Established Procedures – the credit institution that does not comply with the procedures and conduct imposed by its respective administration and by the authorities in general;

s) Satisfactorily Capitalized Institution – the credit institution whose solvency ratio is equal to or greater than 10%;

t) Significantly Undercapitalized Institution – the credit institution whose solvency ratio is equal to or greater than 4% and less than 6%;

u) Significantly Illiquid Institution – the credit institution that is in one or more of the following situations:

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Banco de Moçambique Governor

(i) Liability coverage equal to or greater than 50% and less than 75%, both for demand liabilities or with a residual maturity of up to 30 days and for liabilities with a residual maturity greater than 30 days;

(ii) It has an unregularized overdraft with the Bank of Mozambique for two to five consecutive days;

(iii) It is a borrower in the Interbank Money Market, corresponding to up to 25% of its total deposits, for 90 consecutive days;

(iv) It has resorted to emergency liquidity assistance more than twice per semester.

v) Corrective Intervention Measures – is the set of measures recommended or imposed by the Bank of Mozambique, intended to eliminate or minimize the occurrence of financial disturbances in an institution;

w) Preventive Intervention Measures – is the set of measures recommended or imposed by the Bank of Mozambique, intended to prevent the occurrence of financial disturbances in a credit institution;

x) Resolution Measures – is the set of measures and procedures imposed by the Bank of Mozambique aimed at recovering the credit institution when corrective intervention has failed;

y) Contingency Plan for Credit Institutions or Contingency Plan – the set of measures and coordination mechanisms aimed at minimizing the occurrence of disturbances that could condition the normal functioning of credit institutions and the banking system, ultimately aiming to promote their stability and credibility;

z) Temporary Liquidity Problems – those resulting from the inability of a solvent institution to pay, within the established deadlines, its debts with a maturity of up to thirty (30) days.

Article 3 (Purpose)

This Contingency Plan aims to:

a) Mitigate systemic risk;

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Banco de Moçambique Governor

b) Safeguard the financial solidity of credit institutions, the interest of depositors, and the stability of the banking system;

c) Safeguard the interest of taxpayers and the public treasury; and

d) Promote transparency and confidence in the banking system.

Article 4 (General Principles)

1. The application of the measures provided for in this Contingency Plan obeys the principles of adequacy and proportionality, taking into account the risk or degree of non-compliance, by the credit institution, of the legal and regulatory standards governing its activity, as well as the severity of their respective consequences on the financial solidity of the institution in question, the interest of depositors, or the stability of the financial system.

2. In adopting the measures provided for in this Contingency Plan, the Bank of Mozambique is not bound to observe any relationship of precedence, being empowered, according to the requirements of each situation and the principles indicated in the previous article, to combine measures of different nature, without prejudice, in any case, to the verification of their respective application prerequisites.

CHAPTER II MEASURES APPLICABLE TO CREDIT INSTITUTIONS

SECTION I General Provision

Article 5 (General Measures)

When a credit institution fails to comply, or is at risk of failing to comply, with legal or regulatory standards governing its activity, the Bank of Mozambique, taking into account the general principles set out in Article 4 of this Contingency Plan, may determine the application, within the deadline it sets, of one or more of the following measures:

a) Increase own funds to levels higher than the established minimum;

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Banco de Moçambique Governor

b) Reinforce the provisions, processes, mechanisms, and strategies created for corporate governance, internal control, and risk self-assessment purposes;

c) Submission of a recovery and rehabilitation plan;

d) Imposition of the constitution of special provisions;

e) Restrictions on the exercise of certain types of activities;

f) Restrictions on the granting of credit and the application of funds in certain types of assets;

g) Restrictions on the receipt of deposits, depending on their remuneration modalities;

h) Prohibition or limitation of dividend distribution;

i) Prohibition or limitation of the payment of bonuses and salary increases;

j) Subjecting certain operations or acts to prior approval by the Bank of Mozambique;

k) Appointment of provisional administrators;

l) Recommendation of replacement or removal of managers;

m) Revocation of the authorization to exercise activity;

n) Other measures it deems necessary.

SECTION II Preventive Intervention Measures

Article 6 (Capital Adequacy)

When, during off-site supervision or on-site inspection, signs are detected that an Adequately Capitalized Institution is conducting its business imprudently or may incur losses that could render it undercapitalized, the Bank of Mozambique may take one or more of the following measures:

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Banco de Moçambique Governor

a) Send a matrix of recommendations to the credit institution, describing the identified problems, the measures to be taken, and their respective compliance deadlines;

b) Prohibit or limit the declaration and payment of dividends;

c) Recommend the suspension or replacement of the responsible manager;

d) Intensify the prudential supervision of the credit institution;

e) Other measures it deems necessary.

SECTION III Corrective Intervention Measures

Article 7 (Liquidity)

1. When a credit institution becomes slightly illiquid, the Bank of Mozambique may take one or more of the following measures:

a) Request the credit institution to explain the reasons for non-compliance with the liability coverage ratio;

b) Request the credit institution to present a liquidity recovery plan, which must be approved by the Bank of Mozambique;

c) Grant emergency liquidity assistance, at the request of the credit institution;

d) Other measures it deems necessary.

2. When an institution becomes significantly illiquid, in addition to the measures provided for in the previous paragraph, the Bank of Mozambique may also:

a) Request the credit institution to explain the reasons for the non-recovery of liquidity and the actions it will take to reverse the situation;

b) Conduct an “ad-hoc” inspection of the institution;

c) Request the credit institution to intensify actions aimed at recovering risky credit;

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Banco de Moçambique Governor

d) Suspend the credit institution from participating in clearing until the regularization of its overdraft situation.

3. When a credit institution becomes critically illiquid, in addition to the measures provided for in paragraphs 1 and 2 of this article, the Bank of Mozambique may also:

a) Advise the institution to request emergency liquidity assistance;

b) Recommend the suspension or replacement of one, several, or all managers of the credit institution.

Article 8 (Capital Adequacy)

1. When a credit institution becomes undercapitalized, in addition to the measures provided for in Article 6 of this contingency plan, the Bank of Mozambique may also:

a) Prohibit or restrict the credit institution from making investments in subsidiaries and/or related companies;

b) Prohibit or restrict the credit institution from making new investments in fixed assets;

c) Impose that the credit institution reinforce internal control measures and improve risk management systems;

d) Require shareholders to recapitalize the credit institution;

e) Prohibit or limit the declaration and payment of dividends;

f) Recommend the removal of one, several, or all managers of the credit institution;

g) Other measures it deems necessary.

2. When an institution becomes significantly undercapitalized, in addition to the measures provided for in the previous paragraph, the Bank of Mozambique may also:

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Banco de Moçambique Governor

a) Condition the granting of new credits to the repayments received by the credit institution. The granting of new credits will only cover those that, for the purposes of calculating the solvency ratio, are weighted at zero percent;

b) Request the credit institution in question to present a restructuring and rehabilitation plan, which must be approved by the Bank of Mozambique, and which describes:

(i) The actions to be triggered aimed at capital adequacy;

(ii) The manner in which new capital must be injected;

(iii) The capital levels that must be achieved by each quarter of the plan's validity until, at least, the credit institution becomes adequately capitalized again;

c) Require shareholders to find new partners or sell the credit institution within a maximum period of 6 (six) months. New partners or shareholders are subject to prior approval by the Bank of Mozambique.

3. When a credit institution becomes critically undercapitalized, in addition to the measures provided for in paragraphs 1 and 2 of this article, the Bank of Mozambique may also intervene in it, designating one or more provisional administrators.

SECTION IV Other Corrective Intervention Measures

Article 9 (Asset Quality)

1. When a credit institution has low-quality assets, the Bank of Mozambique may take one or more of the following measures:

a) Conduct an “ad-hoc” inspection of the institution, to determine the causes of the increase in non-performing credit;

b) Request the credit institution to present a credit restructuring and rehabilitation plan, which must be approved

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Banco de Moçambique Governor

by the Bank of Mozambique, to resolve the problem within 3 months;

c) Request the credit institution to improve credit administration practices;

d) Request the credit institution to constitute additional credit provisions;

e) Other measures it deems necessary.

2. When a credit institution has very low-quality assets, in addition to the measures referred to in the previous article, the Bank of Mozambique may also take one or more of the following:

a) Oblige the credit institution to request the repayment of credits granted outside the current institutional policy;

b) Prohibit or restrict the granting of credit to subsidiaries and/or related companies and persons;

c) Oblige the credit institution to divest from subsidiaries and/or related companies whose activity may be detrimental to it.

Article 10 (Results)

1. When a credit institution has declining results, the Bank of Mozambique may take one or more of the following measures:

a) Request the credit institution to explain the reasons for the decline in results;

b) Prohibit or restrict the approval of new appointments to positions at the level of the Board of Directors and/or other management bodies;

c) Other measures it deems necessary.

2. When a credit institution has inconsistent results, in addition to the measures provided for in the previous paragraph, the Bank of Mozambique may also take one or more of the following additional measures:

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Banco de Moçambique Governor

a) Request the credit institution to present a business and asset restructuring plan explaining how the institution will proceed to increase results based on its ordinary operations;

b) Prohibit or restrict the payment of dividends and bonuses to shareholders, managers, and employees of the institution.

3. When a credit institution has excessive growth of results, the Bank of Mozambique may take one or more of the following additional measures:

a) Conduct an “ad-hoc” inspection of the credit institution to ascertain the reasons for the excessive growth of results;

b) Verify whether the credit institution complies or not with the current rates and commissions;

c) Request the institution to send its financial projections and justify the significant variations verified in revenues.

Article 11 (Established Procedures)

When a credit institution does not comply with established procedures, the Bank of Mozambique may take one or more of the following measures:

a) Request the written commitment of the credit institution regarding the need to comply with the operations manual;

b) Warn the credit institution if the previously made findings have not been observed;

c) Recommend the removal of one, several, or all managers of the credit institution if the previously made findings have not been corrected;

d) Other measures it deems necessary.

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Banco de Moçambique Governor

Article 12 (Frauds)

When the Bank of Mozambique detects situations of fraud in an institution, it may take one or more of the following measures:

a) Request the credit institution to clarify in writing the reasons for the abnormal increase in fraud cases and present a proposal of corrective measures to be taken;

b) Examine the institution's internal control process and operations manual;

c) Conduct an “ad-hoc” inspection of the credit institution;

d) Other measures it deems necessary.

Article 13

When a credit institution does not implement recommendations from internal and external auditors, or from inspections carried out within the framework of banking supervision, the Bank of Mozambique may take one or more of the following measures:

a) Request the credit institution to implement the recommendations within a maximum period of 3 months;

b) Recommend the removal of one, several, or all managers if the institution has not heeded the request referred to in the previous paragraph;

c) Other measures it deems necessary.

Article 14 (Computer Systems)

When a credit institution has persistent failures in computer systems, the Bank of Mozambique may take one or more of the following measures:

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Banco de Moçambique Governor

a) Conduct an “ad-hoc” inspection to determine the causes of the failures;

b) Proceed to conduct an IT audit;

c) Discuss the problem, if it persists, with the Board of Directors and/or the management body of the credit institution;

d) Other measures it deems necessary.

Section V Resolution Measures

Article 15 (Purpose of Resolution Measures)

The Bank of Mozambique may apply, with regard to credit institutions, the measures provided for in this chapter, with the objective of pursuing any of the following purposes:

a) Ensure the continuation of the provision of essential financial services;

b) Mitigate systemic risk;

c) Safeguard the interests of taxpayers and the public treasury;

d) Safeguard the confidence of depositors.

Article 16 (Principles of Resolution Measures)

1. In the application of resolution measures, it must be ensured that the shareholders and creditors of the credit institution in question assume losses primarily, according to their respective hierarchy and under conditions of equality within each class of creditors.

2. The provisions of the previous paragraph

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