Regulation (NAP) - Credit Risk Management for Microfinance Activities

NAP
PERMANENT APPLICATION NORM
PROPOSER(S): C.A. | VALIDITY DATE: 26/06/2019 | ISSUE DATE: 26/06/2019 | DOC NO.: 06/2019 | PAGE: 1/10 Subject: Credit Risk Management for Microfinance Activities

Considering the importance of the microcredit industry for economic development, namely in encouraging small and medium-sized enterprises and low-income families. Considering equally that the sustainability of the sector must be ensured, for which it is necessary to establish measures guaranteeing adequate credit risk management by each Microfinance Institution (MFI). Taking into account the need to regulate certain legal instruments arising from Law 16/2018 "Legal Regime of Microfinance" (LRM), namely regarding credit risk management by MFIs. In these terms, the Central Bank of São Tomé and Príncipe, exercising the powers conferred by letters d) and f) of Article 8.° of its Organic Law in conjunction with Articles 7.° and paragraph 2 of Article 26.° of the LRM, dated September 3, determines the following:

CHAPTER I
GENERAL PROVISIONS

Article 1.°
(Object and Scope)

1. This NAP establishes the minimum requirements for credit risk management and classification of microcredit operations by MFIs provided for in the LRM.
2. MFIs shall comply with this NAP exclusively regarding their microcredit operations, namely classification requirements, provisioning, and write-off of microcredits, as well as limitations on microcredit restructuring.

26/06/2019 26/06/2019 06/2019
Reviewed by: Revocation Date:

NAP
PERMANENT APPLICATION NORM
PROPOSER(S): C.A. | VALIDITY DATE: 26/06/2019 | ISSUE DATE: 26/06/2019 | DOC NO.: 06/2019 | PAGE: 2/10

Article 2.°
(Definitions)

1. For the purposes of this regulation, the following shall be understood:
   a. BCSTP — Central Bank of São Tomé and Príncipe. b. Credit risk — the risk of loss due to non-payment of obligations by debtors, such as credit-taking clients.
   c. Related parties — The following are related to MFIs:
   a. Members of the management and supervisory bodies; b. Shareholders/members with qualified participation or who exercise significant influence in the institution;
   c. Companies in which the MFI holds a qualified participation;
   d. Related parties by marriage, kinship up to the 2nd degree, or commercial interests to those referred in letters a) and b); e. Any person who has a relevant participation in the entities referred to in letter c); f. Companies exercising management control over the MFI, as well as their main partners and administrators; g. Companies directly or indirectly controlled by shareholders/members of MFIs.
2. Without prejudice to the preceding paragraph, terms used in this legal regime have the definitions attributed to them by the LRM.
3. Regarding operations that do not qualify as microcredit as defined in this NAP, MFIs shall comply with the credit risk regulation applicable to banks.

26/06/2019 26/06/2019 06/2019
Reviewed by: Revocation Date:

NAP
PERMANENT APPLICATION NORM
PROPOSER(S): C.A. | VALIDITY DATE: 26/06/2019 | ISSUE DATE: 26/06/2019 | DOC NO.: 06/2019 | PAGE: 3/10

Article 3.°
(Microcredit)
For the application of paragraph VIII of Article 2.° of the LRM, microcredits are considered credit operations in amounts not exceeding Db 30,000.00 per client.

Article 4.°
(Credit portfolio limits)

1. MFIs must hold only microcredit operations in their portfolios.
2. Exceptionally, microbanks may hold operations that are not considered microcredits in their portfolios.
3. The total volume of microcredit operations for microbanks must correspond to at least 80% of the institution's credit portfolio.

Article 5.°
(Exposure limit per client)

1. The credit risk exposure limit for operations considered microcredits under Article 2.° per client is Db 30,000.00.
2. For operations not considered microcredits, referred to in paragraph 2 of the preceding article, they may not be granted in amounts exceeding Db 250,000.00 per client.

Article 6.°
(Maturity)

1. Microcredits under Article 2.° may not be granted for a term exceeding 18 months.
   Revocation Date: 26/06/2019

NAP
PERMANENT APPLICATION NORM
PROPOSER(S): C.A. | VALIDITY DATE: 26/06/2019 | ISSUE DATE: 26/06/2019 | DOC NO.: 06/2019 | PAGE: 4/10

2. Credit operations not classified as microcredits, referred to in Article 4., may not be granted for a term exceeding two years.

CHAPTER III
CREDIT RISK MANAGEMENT

Article 7.°
(Credit risk management policy)

1. The Management Body of MFIs is responsible for approving and monitoring compliance with credit granting and management policies and procedures, specifying controls and special methodology for microcredits according to international microfinance best practices, alongside other types of credit offered by the MFI.
2. The policy and procedures must at least reflect the types and levels of risk the MFI is willing to manage, minimum requirements for granting each type of credit, procedures for evaluating potential clients' repayment capacity, internal control to monitor credit quality with frequency appropriate to each credit type's characteristics; as well as policies and procedures for debt collection, the acceptable level of credit risk, among others.
3. The microcredit granting policy must describe the target segment, intended purpose, and respective types of guarantees.
4. MFIs must adequately document their credit policy and related procedures, which shall be available to the BCSTP and the MFI's independent auditor.
5. MFIs must have an internal control and credit risk management structure adequate to their size and complexity, enabling them to keep credits permanently and properly classified according to risk level and to take timely and appropriate measures for regularizing overdue credits.

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NAP
PERMANENT APPLICATION NORM
PROPOSER(S): C.A. | VALIDITY DATE: 26/06/2019 | ISSUE DATE: 26/06/2019 | DOC NO.: 06/2019 | PAGE: 5/10

6. Policies must specifically describe the internal control measures to be adopted to minimize conflict of interest risks between credit granting, approval, and monitoring activities, specifically employee abuse by credit officers for their own benefit.
7. Conflict of interest prevention measures referred to in the preceding paragraph must include remuneration policies linked to credit portfolio performance, as opposed to bonuses associated with portfolio growth, as well as adequate procedures for documenting the credit evaluation and granting process.
8. The MFI's internal control must be implemented using information systems adequate and compatible with the MFI's size and complexity.

Article 8.°
(Credit file/dossier)

1. Each granted credit must be supported by a file demonstrating compliance with policies and procedures established by the Management Body.
2. Credits not classified as microcredits must comply with documentation requirements established for banking institutions.
3. Microcredits must be supported by documentation proving the evaluation of the potential client's repayment capacity, including descriptions of visits to the micro or small business premises, as well as financial statements, such as cash flow, produced with the assistance of the MFI's credit officer.
4. The aforementioned documentation must include the granted amount, as well as the amortization plan.
5. The microcredit file must also cover the operation approval process, including the decision or recommendation of the credit officer or the credit committee's decision, as applicable.
   Revocation Date: 26/06/2019

NAP
PERMANENT APPLICATION NORM
PROPOSER(S): C.A. | VALIDITY DATE: 26/06/2019 | ISSUE DATE: 26/06/2019 | DOC NO.: 06/2019 | PAGE: 6/10

6. MFIs must also retain documentation regarding refused credits.

Article 9.°
(Classification of microcredits by risk level)

1. Microcredits must be classified according to their status as shown in the following table:
   Classification | Days overdue
   Class I | 0 (current)
   Class II | 1 to 30 days
   Class III | 31 to 60 days
   Class IV | Over 60 days
2. Monitoring of microcredits and their eventual reclassification to higher risk levels must be performed systematically and repeatedly, depending on the average duration of credits and payment frequency, according to the credit policy established by the Management Body.
3. All microcredits from the same client must receive a more conservative classification based on the credit with the most overdue days.
4. Without prejudice to the preceding paragraph, the MFI must have control mechanisms to track overdue days for each credit separately and accurately.
5. A credit must be considered irregular whenever there is no payment of interest or principal from the first day of overdue, or when collection of interest and principal becomes questionable or loss probability is very high, and whenever there are significant information indicating deterioration of credit quality or borrower's financial capacity.
   Revocation Date: 26/06/2019

NAP
PERMANENT APPLICATION NORM
PROPOSER(S): C.A. | VALIDITY DATE: 26/06/2019 | ISSUE DATE: 26/06/2019 | DOC NO.: 06/2019 | PAGE: 7/10

Article 10.°
(Provisioning of microcredits by risk level)
Microcredits must be provisioned according to their classification, in percentages relative to credit amounts, as shown in the following table:
Classification | Provisioning
Class I | 2%
Class II | 20%
Class III | 50%
Class IV | 100%

Article 11.°
(Write-off of microcredits)

1. Microcredits must be written off from accounting after remaining in Class IV for 180 days.
2. The write-off of a credit operation does not prevent the MFI from continuing efforts to recover the credit.

Article 12.°
(Suspension of interest income recognition)

1. Accrual accounting for microcredit interest revenue must be suspended from the first day of overdue, with such revenue maintained in an off-balance sheet account.
2. All accrued but unpaid interest must be reversed immediately.
3. If interest is received, it shall be considered exceptional revenue.

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Reviewed by: Revocation Date:

NAP
PERMANENT APPLICATION NORM
PROPOSER(S): C.A. | VALIDITY DATE: 26/06/2019 | ISSUE DATE: 26/06/2019 | DOC NO.: 06/2019 | PAGE: 8/10

Article 13.°
(Guarantees)

1. Microcredits may be granted with or without guarantees, according to microfinance best practices.
2. Classification and provisioning rules for microcredits apply independently of associated guarantees.

Article 14.°
(Restructuring)

1. Restructuring of microcredits to avoid a more burdensome classification is prohibited; restructured credits must be maintained in the same risk category.
2. In any case, the MFI must observe all procedures for analyzing the client's repayment capacity and intention, documenting the process as if it were a new credit.
3. Restructured microcredits must be clearly differentiated in the MFI's information systems for monitoring and reporting to the BCSTP.
4. A restructured microcredit that becomes overdue must be placed in Class IV from the first day of overdue.
5. The MFI must have procedures and controls enabling more rigorous monitoring of restructured credits.
6. Restructuring is considered the renegotiation of debt, renewal, granting of a new operation to settle a previous one, or any other type of agreement implying changes to originally agreed maturity dates or payment terms.

26/06/2019 26/06/2019 06/2019
Reviewed by: Revocation Date:

NAP
PERMANENT APPLICATION NORM
PROPOSER(S): C.A. | VALIDITY DATE: 26/06/2019 | ISSUE DATE: 26/06/2019 | DOC NO.: 06/2019 | PAGE: 9/10

Article 15.°
(Operations with related parties and conflict of interest)

1. Granting credits to related parties of the MFI must comply with the NAP on Business with Related Parties.
2. The above does not apply to cooperatives, whose main activity is granting credits and collecting deposits from their members.
3. Without prejudice to the preceding paragraph, the management and supervisory bodies of cooperatives must avoid conflict of interest situations resulting in abuse in granting credits to members involved in the cooperative's administration, especially those participating in the approval process.

Article 16.°
(Assignment of microcredits)
Microcredits may not be assigned to other financial institutions without prior consent from the BCSTP.

CHAPTER IV
FINAL PROVISIONS

Article 17.°
(Sanctioning regime)
Violation of any provisions in this NAP or other BCSTP regulations issued under it shall be subject to the infringement and sanction regime provided for in the Financial Institutions Law and other sectoral regulatory provisions.

26/06/2019 26/06/2019 06/2019
Reviewed by: Revocation Date:

NAP
PERMANENT APPLICATION NORM
PROPOSER(S): C.A. | VALIDITY DATE: 26/06/2019 | ISSUE DATE: 26/06/2019 | DOC NO.: 06/2019 | PAGE: 10/10

Article 18.°
(Supplementary regime)
In all matters not provided for in this NAP, the provisions of the LRM and the Financial Institutions Law shall apply.

Article 19.°
(Entry into force)
This NAP enters into force on the date of its publication.

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Central Bank of São Tomé and Príncipe, on June 26, 2019.
Reviewed by: Revocation Date: