Notice No. 11/2014, 17 December: Specific Requirements for Credit Operations

Published in the Official Gazette, First Series, No. 221, of December 17

NOTICE NO. 11/2014

SUBJECT: SPECIFIC REQUIREMENTS FOR CREDIT OPERATIONS

Given the need to review the regulation regarding the granting, classification, and treatment of credit operations by financial institutions authorized to operate by the Bank of Angola;

Under these terms and pursuant to the combined provisions of the letter f) of Article 21 and Article 51, both of Law No. 16/10 of July 15 – Law of the Bank of Angola, and Article 77 of Law No. 15/05 of September 30 - Law of Financial Institutions;

I DETERMINE:

Article 1.
(Object)
This Notice establishes specific requirements for credit operations carried out by the entities referred to in the following article.

Article 2.
(Scope)

1. This Notice applies to financial institutions authorized by the Bank of Angola or that, under the terms and conditions provided for in the Law of Financial Institutions, are under its supervision, hereinafter briefly designated as institutions.

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2. The institutions referred to in the previous paragraph must implement the rules defined in this Notice starting from January 1, 2016.

Article 3.
(Definitions)
Without prejudice to the definitions established in the Law of Financial Institutions, for the purposes of this Notice, the following are understood:

1. Impairment: Negative impact, reliably estimable, on future cash flows associated with the risk position, resulting from objective evidence of one or more events occurring after the initial accounting recognition of the risk position. An exposure is considered impaired based, inter alia, on the following indicators:
   a) Evident financial difficulty of the borrower; b) Existence of delays in the fulfillment of capital or interest installments contractually foreseen, observed in the institution itself or in the information provided to the Credit Risk Information Center (CIRC), regarding the borrower or entities belonging to the same economic group, in the last 6 (six) months; c) Relevant probability of the borrower entering bankruptcy or a financial reorganization process; d) Disappearance or significant breakage in a relevant market for the borrower; e) Objective data pointing to a measurable decrease in the estimate of future cash flows, associated with an exposure or group of exposures.

Restrictions on the liquidation of operations resulting from any rejections, by the competent authorities of the borrower's country of origin, are not considered for the purposes of identifying impairment, as they do not relate to the borrower's financial capacity. For this, it is necessary for the creditor financial institution to possess documentary evidence of the payment of contractually foreseen installments by the borrower.

2. Financial Group: a set of resident and non-resident companies possessing the nature of banking and non-banking financial institutions, with the exception of financial institutions linked to insurance and social security activities, in which there is a relationship of control by a parent company supervised by the Bank of Angola over the other companies comprising it.

3. Fair Value: the price that would be received to sell an asset or paid to transfer a liability, i.e., the price of a regular transaction between market participants, on the measurement date.

4. Risk Position: exposure related to an asset, an off-balance sheet item, or a financial derivative instrument, plus income of any nature not received that are reflected accounting-wise as amounts receivable, regardless of whether they are due or overdue, in accordance with the criteria of the Chart of Accounts Manual for Financial Institutions (CONTIF).

5. Present Value of Credit: Sum of capital and interest owed to a certain date, plus any accrued interest up to that same date.

Article 4.
(Classification of Credits)

1. Institutions must classify the risk positions mentioned in Article 1 of this Notice, according to specific regulation on methodologies for the constitution of provisions, in increasing order of risk, at the following levels:

Risk Level
Minimum A
Very Low B
Low C
Moderate D

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High E
Very High F
Maximum G

2. In the individual classification of the risk position, the characteristics and risks of the operation and the borrower must be taken into account, observing at least:
   a) The application given to the resources, by type or modality of operation; b) The predominant activity of the debtor; c) The linkage or not to passive operations; d) The guarantees received from the debtor; e) The currency, the index, and the term of the operation; f) The complete and precise identification of the credit taker and the economic group to which they belong.

3. The individual classification of the risk position at the corresponding risk level is the responsibility of the institution holding the credit and must be carried out based on an estimate of possible loss, calculated by using consistent and verifiable criteria, as well as supported by internal and external information, contemplating at least the following aspects:
   a) Regarding the debtor and its guarantors:
   i. Economic-financial situation;
   ii. Management capacity and quality of internal controls;
   iii. History of punctuality and delays in payments;
   iv. Contingencies;
   v. Economic activity sector;
   vi. Geographic area of operation;
   vii. Credit limit.
   b) Regarding the operation:
   i. Nature and purpose of the transaction;
   ii. Characteristics of the guarantees, particularly regarding sufficiency and liquidity;
   iii. Value.

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c) Regarding the guarantees received, the requirements established in Notice No. 10/2014, on guarantees for prudential purposes.

4. Institutions must ensure the adequate formalization of the methodologies and processes applied for the determination of the individual classification of risk positions at the risk levels.

Article 5.
(Minimum Risk Level)

1. Risk positions that are:
   a) Assumed by the Angolan State, including its central and provincial administrations; b) Assumed by central administrations or central banks of countries included in group 1, international organizations, or multilateral development banks, according to specific regulation on country classification, multilateral development banks, and international organizations; c) Fully guaranteed by cash deposits or deposit certificates constituted or issued by the lending institution or by institutions in a relationship of control or group with the lending institution and having headquarters in Angola or a country included in group 1, according to specific regulation on country classification, multilateral development banks, and international organizations, provided that the risk position and the deposit or certificate are denominated in the same currency; d) Fully guaranteed by cash deposits or deposit certificates constituted or issued by the lending institution or by branches of the lending institution, not covered by the previous letter, provided that the risk position and the deposit or certificate are denominated in the same currency; e) Fully guaranteed by bonds or obligations issued by the Angolan State or by the Bank of Angola.

are classified with risk level A and consequently exempt from the constitution of provisions.

2. Risk positions fully linked to guarantees, eligible under the terms provided in Notice No. 10/2014, on guarantees for prudential purposes, granted by the entities mentioned in letters a) and b) of paragraph 1 are exempt.

3. The deposits mentioned in letters c) and d) of paragraph 1 of this article must respect the conditions provided in Notice No. 10/2014, on guarantees for prudential purposes, for eligibility as real guarantees.

Article 6.
(Review of Risk Position Classification)

1. The classification of risk positions must be reviewed monthly, and whenever there are changes in indicators of impairment in the delay of payment of principal installments, charges, and characteristics described in Article 4, observing that:
   a) Delay equal to or less than 30 (thirty) days or that does not present indicators of impairment must be classified at most as risk level B; b) Delay greater than 30 (thirty) and equal to or less than 60 (sixty) days must be classified at most as risk level C; c) Delay greater than 60 (sixty) and equal to or less than 90 (ninety) days must be classified at most as risk level D; d) Delay greater than 90 (ninety) and equal to or less than 150 (one hundred and fifty) days must be classified at most as risk level E; e) Delay greater than 150 (one hundred and fifty) and equal to or less than 180 (one hundred and eighty) days must be classified at most as risk level F; f) Delay greater than 180 (one hundred and eighty) days must be classified as risk level G.

2. Without prejudice to the provisions of the previous paragraph, financial institutions must maintain at level "A" the classification of operations provided for in letters a) and b) in paragraph 1 of Article 5 of this Notice, even in circumstances of observing delay in the payment of a principal installment or charges.

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3. At the time of the monthly review provided for in paragraph 1, the reclassification of credit to a lower risk category, due to the payment of the overdue debt installment, is limited to the level established in the initial classification.

4. It is considered that operations classified at a risk level of "B" cannot correspond to the existence of any indicator of impairment, according to the criteria defined in this Notice.

5. Although overdue values represent objective evidence of impairment, for the classification of risk levels, it must be considered that overdue values up to 30 (thirty) days are immaterial and do not represent indicators of impairment.

Article 7.
(Rollover)

1. Risk positions relating to the same client or economic group must be classified with reference to those representing the greatest risk.

2. The obligation referred to in the previous paragraph only applies when the client or economic group presents, at least, one risk position in a situation of delay greater than 30 (thirty) days and when the consolidated risk position of the client represents an amount greater than 10% (ten percent) of the consolidated risk position of the economic group.

Article 8.
(Credit Operations)

1. Institutions are expressly prohibited from carrying out credit operations, by disbursement, in foreign currency, for any terms and for any credit purposes.

2. The obligation referred to in the previous paragraph does not apply to credit operations granted to exporters and the Angolan State.

3. Institutions shall not increase the amount of existing foreign currency credit in the portfolio, nor grant new foreign currency credit, from the date of publication of this Notice, except regarding credit operations granted to exporters and the Angolan State.

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Article 9.
(Advances to Depositors)
Operations of advances to depositors must be considered as credit granted since their contracting, with full observance of the provisions established in this Notice.

Article 10.
(Registration of Operations)

1. The registration of credit operations and other internal procedures relating to them, as well as financial plans, must be expressed in the contracted currency.

2. The registration of the credit operation is carried out by the applied value, on the date of the release of funds to the taker. If the release of credit is partial, subsequent fund releases follow the same principle.

Article 11.
(Disbursement and Reimbursement)

1. Institutions must verify the economic reality of the funds used in the payments of capital or interest, which cannot originate from new credit operations carried out by the institution or by entities belonging to the same financial group.

2. In credit operations, disbursements must be made in the contracted currency.

3. Financial institutions must, in the collection of credit installments granted, accept funds available in their clients' accounts expressed in any currencies, regardless of the contracted currency.

4. The obligation referred to in the previous paragraph does not apply to credit operations contracted before June 30, 2011.

Article 12.
(Deduction of Credits from Assets)

1. Credit classified as risk level G may be transferred to a specific off-balance sheet account, with the corresponding debit in provision, after 1 (one) month has elapsed since its classification at this risk level, provided it presents a delay greater than 180 (one hundred and eighty) days, and transfer is not admitted in a period less than that.

2. A credit should be deducted from assets only when the financial institution considers that, based on available information, the credit in question will be irrecoverable.

3. The credit deducted from assets must:
   a) Be controlled analytically, with identification of the characteristics of the operation, debtor, guarantees, and respective administrative and judicial measures aimed at its recovery; b) Remain registered in an off-balance sheet account for a minimum period of 10 (ten) years and while all procedures for collection have not been exhausted.

Article 13.
(Appropriation of Income)
Income of any nature relating to credits that present a delay greater than 90 (ninety) days must cease to be recognized for the purposes of the period's result, and must be considered in an off-balance sheet item corresponding to a control account.

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Article 14.
(Credit Recovery)

1. In the case of recovery of credit deducted from assets, through the transfer of assets in payment, the following procedures must be observed:
   a) The value of the asset to be registered must be limited to the amount determined in its evaluation, with the counterpart being the recognition of income from the recovery of credits deducted from assets; b) When the evaluation of the assets is higher than the value of the credits, the difference must be registered as an obligation.

2. In the case of recovery of credit deducted from assets, through payment in cash or in kind, the value received in the form of cash or the fair value of the assets received by the financial institution for the settlement of the borrower's liabilities, respectively, must have as counterpart the recognition of the period's income.

3. In the recovery of credit not yet deducted from assets, through the transfer of assets in payment, the following procedures must be observed:
   a) The value of the asset must be registered observing the amount determined in its evaluation; b) The accounting value of the credits must be canceled, as well as the value of the specific provision constituted, with the respective registration of the cancellation of provisions for credits; c) When the value of the credits is higher than their accounting value, the difference must be recognized as income of the period, up to the amount determined in the evaluation of the assets; d) When the evaluation of the assets is lower than the accounting value of the credits, the difference must be recognized as a cost of the period; e) When the evaluation of the assets is higher than the value of the credits, the difference must be registered as an obligation.

4. In the recovery of credit not yet deducted from assets, through payment in cash, the following procedures must be observed:

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a) The accounting value of the credit must be canceled, as well as the value of the specific provision constituted, with the respective registration of the cancellation of provision for credit; b) When the value received is higher than the accounting value of the credit, the difference must be recognized as income of the period; c) When the value received is lower than the accounting value of the credit, the difference must be recognized as a cost of the period.

Article 15.
(Present Value of Credit)
All credits must have their present value controlled in a specific off-balance sheet account, for the purposes of providing information to the Credit Risk Information Center (CIRC).

Article 16.
(Sanctions)
Non-compliance with the imperative norms established in this Notice constitutes a misdemeanor punishable under the terms of the Law of Financial Institutions.

Article 17.
(Doubts and Omissions)
Doubts and omissions raised in the interpretation and application of this Notice are resolved by the Bank of Angola.

Article 18.
(Revocation)
Notice No. 3/2012 of March 28 is revoked, with effects from January 1, 2016.

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Article 19.
(Entry into Force)
This Notice enters into force on January 1, 2015.

PUBLISH.

Luanda, December 10, 2014.

THE GOVERNOR
JOSÉ DE LIMA MASSANO