Regulation on Credit Risk Management

Pursuant to Article 35, paragraph1, subparagraph 1.1 of the Law No. 03/L-209 on Central Bank of the Republic of Kosovo (Official Gazette of the Republic of Kosovo, No.77 / 16 August 2010), and Article 49 and 85 of the Law No. 04/L-093 on Banks, Microfinance Institutions and Non-Bank Financial Institutions (Official Gazette of the Republic of Kosovo, No.11 / 11 May 2012), the Board of the Central Bank of Republic of Kosovo at the meeting held on 31 August 2016, approved the following REGULATION ON OPERATIONAL RISK MANAGEMENT
CHAPTER I
GENERAL PROVISIONS
Article 1
Purpose and Scope

1. The purpose of this Regulation is to establish the standard and minimum requirements for
   credit risk management, including the establishment of minimum standards for credit risk assessment and classification systems for all credit exposures, as well as the minimum provisioning requirements.
2. This Regulation applies to all banks and branches of foreign banks licensed by the CBK to
   operate in the Republic of Kosovo.

Article 2
Definitions

1. Definitions used in this regulation shall have the same meaning as the definitions used in
   Article 3 of the Law No.04/L-093 on Banks, Micro-finance Institutions and Non-Bank
   Financial Institutions (hereinafter: Law on Banks), and/or as further defined herein for the purpose of this regulation:
   a. Past due loans are defined as the loans classified in the categories of credit classification as: watch, substandard, doubtful and loss. b. Classified loans are defined as the loans classified in the categories of credit classification as: substandard, doubtful and loss.
   c. Non-performing loans are defined as the loans classified in the categories of credit
   classification as: doubtful and loss.

d. Rescheduled credit exposure are those credit exposures to which are changed the contractual terms due to deterioration of financial state of the customer, and among others include:
– extension of maturity; or
– consolidation of more than one credit exposure into a single exposure by changing the contractual terms. e. Delinquent interest is defined as interest, that is not paid before the loan is beng rescheduled, including regular delinquent interest, penalties and other forms of interest related to that loan; f. Stress testing is the process of determining the effects to a loan portfolio resulting from the application of extreme and realistic simulated by using real data and assumptions. g. Fair market value is the price at which an asset would sell for in the open, free market, with willingness of buyer and seller and no pressure is applied to either. h. Sustained performance is defined as four contractual payments of principal and interest as per the payment plan.
i. Mortgage is defined as creation of interest in immovable property through agreement or
law, which gives to the mortgage creditor (mortgagee) the right to initiate procedure for removing the right on the property placed in the mortgage for such immovable property, with the aim of fulfilling an obligation that is ensured with mortgage and needs to be paid. j. The right to pledge (pledge) is defined as creation of an interest in movable property or any right through an agreement or law which grants the pledge-holder the right to take possession of that property or to use that right in order to fulfil any existing and identifiable obligation that has been secured through the pledge.
CHAPTER II
GENERAL REQUIREMENTS ON CREDIT RISK MANAGEMENT
Article 3
Credit Risk Management Systems

1. Banks should have in place a system for credit risk management, adequate for the nature,
   volume and complexity of the Bank’s activities.

2. A credit risk management system in the bank shall consist of the policies, procedures, rules
   and structures used by the bank to manage the credit risk.

3. A credit risk management system should provide an ongoing assessment of credits and other
   assets’ quality on a timely basis, including determining the adequacy of reserves to cover losses related to this risk.
   Article 4
   Strategy and Policy

4. Banks should develop the strategy and policy to manage their credit risk. The credit risk
   strategy and policies should be effectively communicated throughout the Bank. All relevant personnel should clearly understand the Bank’s approach to granting and managing credit and should be held accountable for complying with established policies and procedures.

5. The basic purpose of a credit risk strategy is to determine the risk appetite of the bank. Once
   it is determined, the bank should develop a plan to optimize return while keeping credit risk within predetermined limits. Credit risk strategy shall minimally consist of a. A statement of the bank’s willingness to grant credit based on various client segments and products, exposure type (trade, production, consumer, immovable property, etc.), economic sector, geographic location, currency, maturity and anticipated profitability; b. The identification of target markets and the overall characteristics that the Bank plans to achieve with its loan portfolio, including levels of diversification and concentration tolerance;
   c. The recognition to the goals of credit quality, earnings and growth;
   d. Provide continuity with the approach which needs to take into account the cyclical aspects of the economy and the resulting shifts in the composition and quality of the overall loan portfolio.

6. The credit risk strategy shall be reviewed on a regular basis, at least annually.

7. Policies on credit risk management shall be reviewed on a regular basis, at least annually,
   and shall minimally include following elements:
   a. Mission statement; b. Definition of acceptable and unacceptable types of credit exposures;
   c. Limitation on total loan outstanding in relation to total assets, total deposits or capital;
   d. Desired portfolio mixture; e. Desired portfolio maturity distribution; f. Market segment defined; g. Lending terms: pricing, maturity and down payment/capital requirements; h. Financial information requirements;
   i. Definition of a qualified borrower;
   j. Acceptable collateral and margins; k. Lending authorities and approval process;
   l. Limitations on large exposures;
   m. Lending limits for loan officers regarding their loan portfolio; n. Exposures to insiders and their related interests; o. Guidelines for restructuring credit; p. Internal reports related to credit risk management

q. Organization of the credit function; r. Guidelines for purchases and sales of participations/syndications.
Article 5
Organizational Structure for Credit Risk Management

1. Banks must establish an adequate organizational structure for the management of credit risk,
   by clearly defining the authorities and responsibilities of the governing bodies.
2. Banks shall ensure that the loan sales function be clearly separated from organizational and
   operational functions, as well as from the supporting operational and control functions of credit risk, including protections from any potential influence from the senior levels of governing bodies.
3. Bank shall ensure the appropriate structures for assessing, measuring and controlling credit
   risk concentration by sectors, by geography/locations, by currency and by credit type, etc.
4. The Board of Directors of Banks, with respect to the credit risk management is responsible
   to:
   a. Approve credit risk strategy; b. Approve credit risk management policy and monitor its implementation;
   c. Review the appropriateness of the adopted policy and procedures at least on an annual
   basis; d. Review the credit risk reports:
   i. At least every quarter, the Board of Directors should be briefed on the credit risk
   exposure (including off-balance sheet items) of the Bank and should review, at the very minimum, the following:

• The amount of exposures undertaken in credit activities, broken down by
  categories (type of exposures, products and level of credit grades);

• Large exposure of credit;

• Past due loan list which identifies problems and bank’s potential loss on each
  significant past due loan;

• Status of significant rescheduled loans;

• Credit areas with high rapid growth in the loan portfolio;

• Significant credit exception reports;
  ii. On an annual basis, to the Board of Directors should be submitted a report containing
  a list of all existing credit products. The report should contain, in minimum, the target markets of the credit products, their performance and their credit quality;
  iii. On an annual basis, or more frequently as needed, the Board of Directors should
  review the results of stress-testing for:

• Improving the strategy and policy of credit risk management;

• Drafting and improving the required regulatory (legislative) framework to address
  the main issues related to the exposure against credit risk;

• Forecasting in a timely manner the requirements for capital growth and the
  identification of the most efficient ways for its accumulation. e. Approve the credit risk exposure limits in accordance with the CBK regulation on large exposures; f. Define possible exceptions from the defined limits and assign responsibility for deciding on the application of such exceptions; g. Monitor the efficiency of internal controls, as an integral part of the credit risk management system.

5. The Risk Management Committee shall:
   a. Monitor the credit risk management policy and give proposals for its continual review and revision; b. Assess the credit risk management system;
   c. Analyze the reports of the banks’ credit risk exposure and monitor the management of
   this risk; d. Determine and regularly revise the internal credit indicators and credit risk exposure limits; e. Establish clear delineation of lines of authority and responsibility for the managing of credit risk.
6. The Bank Management shall:
   a. Approve and monitor implementation of credit risk management procedures; b. Create an environment for following the credit risk management policy;
   c. Establish an adequate system of reporting to the Board of Directors and the Risk
   Management Committee on any noncompliance with the credit risk exposure limits; d. Establish proper channels of communication to insure that the credit risk management policy and credit risk tolerances are clearly communicated to and adhered by all appropriate levels of the bank; e. Ensure that adequate and effective operational procedures, internal controls and systems for identifying, measuring, monitoring and controlling credit risks are in place, to implement the credit risk management policies approved by the board of directors; f. Ensure a comprehensive credit risk reporting process; g. Establish an effective management information system to ensure timely, accurate and informative reporting of credit risk exposures; h. Ensure that sufficient resources and competent personnel are allocated to manage and control the daily operations and credit risk management functions effectively;
   i. Perform periodically an independent assessment of the banks’ credit granting functions.

Article 6
Stress Testing

1. Bank, through the stress testing, shall assess, on an ongoing and adequate basis, their
   exposure against credit risk, by considering possible future changes in the risk factors which could affect their credit portfolio’s quality and the banks’ financial situation as it affects net income and the capital adequacy ratio.
2. Banks shall set forth the periods of conducting the stress testing, at least on annual basis, as
   well as reporting of the results to senior management, consistent with the activity size, data on exposure against credit risk and their share in the market. CBK may request from the banks to conduct stress testing in more frequent periods and/or by scenarios with additional and/or different assumptions.
3. Stress testing conducted by the Bank should at least include the use of particular and/or
   combined scenarios, based on factors such as: economic downturns, rapid change of market conditions (market risk conditioned by the exchange rate fluctuations, interest rates, etc.) which could have unfavourable effects on the regular payment of the liability (debt), or scenarios of credit portfolio deterioration, notwithstanding the definition of risk factors which may serve as a reason for the occurrence of unfavourable situations.
4. Bank shall set forth the methodology for stress testing, the assumptions, and the actions that
   might be taken, given the results, including:
   a. Implementation, analysis of stress tests scenarios and their periodicity; b. Realization of stress testing for particular and individual scenarios as well as combined scenarios, given the potential for simultaneous occurrence of some scenarios;
   c. Documentation and regular review of the assumptions used for realization of stress
   testing; d. Form and periods of reporting the results of the stress tests to the management; e. Actions to be taken by the management and/or special structures assigned for credit risk management, based on the stress tests’ results.

CHAPTER III
ASSESSMENT OF CREDITS AND THE ESTABLISHMENT OF LOAN LOSS PROVISION AND CLASSIFICATION
Article 7
Credit Classification

1. The Board of Directors is responsible for approving detailed policy on the classification of
   impaired loans and provisioning.
2. Banks shall review all credit risk exposures at least on a quarterly basis, while the loan
   classification and reporting should be done on a monthly basis. Loan exposures that are individually assessed in amount over 50,000 Euro is required to be reviewed at least in

quarterly basis (reporting period). The reviewed should include at least: state in Credit Registry of Kosovo (CRK), days in arrears and other factors that may affect the financial performance of the borrower. It is also required that the bank should review credit exposures in amounts under 50,000 Euro at least in annual basis. Loan exposures that are individually assessed, in amount over 50,000 Euro is required to be monitored at least in semi-annual basis (reporting period).
3. The following guidance is provided concerning classifications of credit exposures:
a. Standard Loans includes all credit risk exposures, including off-balance sheet exposures that carry normal credit risk. Available information concerning the credit exposure, the performance of the customer’s account, and the financial data all indicate that the settlement of the exposure is reasonably certain without difficulties, (or the obligation is fully secured by eligible collateral, defined in Article 21 of this Regulation). The loan is current, or delinquency is less than thirty 30 days from the date of due payment or maturity. Overdraft facilities are standard loans that are within established limits or only temporarily exceed the limit by less than 5% (percent) in less than thirty days, and cash flow into the account is sufficient to liquidate the overdraft balance, credit lines or similar within 30 days from the expiration date. b. Watch Loans. This classification should be used to identify and monitor exposures which contain weaknesses or potential weaknesses that, at the time of review, do not jeopardize the repayment of the credit or reflect a potential for loss, but which, if not addressed or corrected, could result in the deterioration of the credit to a substandard or more severe classification. Absent any documented evidence to the contrary, Banks must classify as “special attention” those exposures that are overdue from 31 - 60 days or those with continuous indebtedness in excess of 5 percent of approved lines from 31-60 days overdue. This category of classification is intended for banks to identify and address potentially weak relationships at an early stage. This classification may also be used for credits or groups of credits that are poorly structured as a result of insufficient analysis or technical knowledge by the lending officer. This category should not be used for exposures that have documentation weaknesses that do not affect adversely the repayment potential of the exposure.
c. Substandard Loans includes exposures which, based upon a review of all factors
attendant to the credit, have well defined credit weaknesses that jeopardize repayment of the credit in the normal course. A substandard credit is one which, by an analysis of financial data and other respective factors, is not currently protected by the sound worth and paying capacity of the borrower or guarantors or the value of the eligible collateral, if any. Recourse to a responsible and able guarantor for repayment that would involve prolonged negotiations before liquidation of the credit would invoke a substandard classification. The need for recourse to the collateral as the means of satisfying the obligation also would be the basis for a substandard classification. Absent any documented evidence to the contrary, an exposure must be classified at least substandard if any of the following criteria apply:

i. Deposits/cash flows into the customer’s overdraft account are insufficient to liquidate
the outstanding balance from 61-90 days.
ii. The customer exceeded the authorized limit of loan exposure by 5 percent or more, for
61-90 days without paying this excess or without the banks management formally raising the authorized limit.
iii. The customer is overdue in repaying contractual instalments (including interest) for 61-
90 days.
iv. The maturity/expiration date of the loan or other loan exposures is 61-90 days past due
without repayment d. Doubtful Loans includes exposures which, based upon a review of all factors attendant to the credit, contain all the weaknesses that are inherent in a substandard credit, but which are so pronounced that there is a strong probability that a significant portion of the principal amount will not be paid. There is a likelihood of loss, but the exact amount cannot be clearly defined at the time of review or is dependent upon the occurrence of a future act or event. Although the possibility of loss is thus extremely high, because of significant pending factors, reasonably specific, which could be expected to work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until more exact status may be determined. Examples of such pending factors include but are not limited to mergers, acquisitions, capital restructuring, furnishing new collateral or realistic refinancing plans. Uncooperative guarantors or those who are in weak financial condition should not be considered as being able to provide strength to the credit. Recourse to any available collateral that would not be sufficient to cover the amount owing may also justify a doubtful classification. Absent any documented evidence to the contrary, an exposure must be classified at least doubtful in the following cases:
i. Deposits/cash flows into the customer’s overdraft account are insufficient to liquidate
the outstanding balance from 91-180 days;
ii. The customer exceeded the authorized limit of loan exposures by 5 percent or more
for 91- 180 days without paying this excess or without Bank’s management formally raising the authorized limit;
iii. The customer is overdue in repaying any contractual instalment (including interest)
for 91-180 days;
iv. There are deficiencies in the customer’s financial condition that have capital loss;
v. If the loan or other loan exposures were not paid for 91-180 days following the
expiration. e. Loss Loans include exposures which, based upon a review of all factors attendant to the credit, are of such little value or will require such an extended period to realize any value. An exposure must be classified as bad (loss) if any of the following criteria apply:
i. Deposits/cash flows into the customer’s overdraft account are insufficient to liquidate
the balance of the outstanding overdraft over 180 days;
ii. The customer exceeded the authorized limit of loan exposures by 5 percent or more
for over 180 days without paying the excess or without Bank’s management formally raising the authorized limit;

iii. The customer fails to repay a contractual instalment (including interest) for over 180
days;
iv. The maturity/expiration date of the loan or other loan exposures is over 180 days past
due without repayment.
Article 8
Rescheduling of Loan Exposures

1. Banks should reschedule loan exposures only on the basis of improved credit factors. The
   banks should not reschedule delinquent exposures solely to avoid classification and provisioning requirements. The CBK considers such a practice to be both deceptive and unsound. If any such practice is discovered by CBK, it will result in a less than satisfactory rating of that bank’s management.

2. A banks’ management must document in the credit files of each person having an exposure
   to the bank the basis for rescheduling any credit exposure and should prepare a list of rescheduled exposures for periodic review by the Board of Directors or Risk Management Committee. CBK examiners also will review these lists and related files during onsite examinations of each Bank to validate the institution’s rescheduling policy and practices.

3. Banks are prohibited from capitalizing delinquent interest into the principal amount of any
   credit exposure or from creating an additional exposure to the person or a related interest of that person in order to pay the delinquent interest. Therefore, in case of rescheduling the loan exposure, the bank is allowed to treat the delinquent interest through preparing a payment plan without interest which includes a reasonable period.

4. Rescheduled exposure must be (done) written with payment plan, including principal and
   interest. The payment plan must fit the nature of the borrower’s business.

5. Rescheduled loan exposures must be classified at the minimum substandard category or
   worse and will continue to be classified at the same category until sustained performance is observed. After the completion of each period of sustained performance, the bank can classify reschedule loan exposures for one better category.
   Article 9
   Treatment of Multiple Loans to a Single Borrower or Group of Related Borrowers

6. Each separate extension of credit to a borrower or group should be evaluated and classified
   based upon its own merits and the factors pertinent to the particular advance or exposure. However, problems with one advance often are indicative that problems may extend to the entire credit relationship. Therefore, the CBK requires that loan exposures, including off￾balance sheet exposure, to a single borrower should be classified in the same category, except for the credit exposure that meet the “split classification” requirements. Inherent with this recommendation is the requirement that banks must know the full extent of their client’s business relationships and have adequate management information systems with which to monitor aggregate exposures.

7. In situations when a single borrower, or a group of related borrowers, have loan exposures
   towards different financial institutions, and have different classifications, the loan exposures should not be classified better than one category from the worst classification, except for the loan exposures that meet the “split” classification criteria. This applies only for loans that are individually assessed by the banks. Materiality criteria which must be applied in cases of classification of the borrower’s loan exposure only in a financial institution is the amount over 5,000 Euro.

8. In cases when loan exposure is classified to a better category must be taken into
   consideration the sustained performance of the borrower, while in case of classification of loan exposure of the borrower in another category must be taken into consideration the weaker classification in another financial institution.

9. Banks should fully document and analyze all relationships within their portfolios and will
   abstain from “nominee” lending to circumvent the lending limit imposed by regulations and other CBK requirements, or to disguise ultimate beneficiaries of proceeds. Failure to properly document relationships is considered an unsound practice. Bank’s shareholders, directors and officers who knowingly conceal or fail to disclose such relationships will be subject to punitive measures by CBK, including liability to reimburse any losses suffered by the Banks on any such credit exposures.
   Article 10
   Split Classifications
   The CBK recognizes that the factors surrounding a particular exposure (value and liquidity of collateral security, partial guarantees, different sources of repayment, etc.) can result in situations where a portion of the exposure is adequately protected or better protected than other portions. In such situations, where the credit factors are documented and assured, Banks are permitted to split the classifications, and the corresponding provisioning requirements, in order to portray more appropriately the actual credit risk.

Article 11
Classification of Off-balance-sheet Commitments and Contingent Obligations

1. The review of exposures to individual borrowers shall include the off-balance sheet
   commitments and contingent liabilities of the Banks that also represent an exposure to the borrower. These include:
   a. The unused portions of approved/irrevocable credit lines and overdrafts determined in the original agreement. These usually will be classified in the same category as the amount drawn under those lines, but this rule does not apply for revocable credit lines and overdrafts. b. Credit substitutes such as guarantees, standby letters of credit, and commercial letters of credit. These should be classified using the same standards that are employed to judge creditworthiness of advances on the balance sheet. Absent any documented indications or evidence to the contrary, these off-balance sheet exposures shall be classified in the same category as other exposures to the Bank’s customer.

2. Classification should be for amounts that are net of currently appraised values for eligible
   collateral.

Article 12
Classification of Investment Securities

1. Shares (equities) and bonds (debt securities) should be classified based upon the
   creditworthiness of the issuer of the securities or, where appropriate, the guarantor or credit enhancer. Creditworthiness should be determined by analysis of current financial information and/or reference to a rating for the securities provided by a known, reputable credit rating agency.

2. The CBK considers that ratings given by international rating agencies, equal with that of an
   S&P rating lower than BBB to be speculative, and subject to classification. Should there be no rating available, and the financial institution does not have current financial information, the investment should be classified as “loss” and fully provisioned.

3. Exemptions from paragraph 1 and 2 of this Article are the securities of the Government of
   the Republic of Kosovo.
   Article 13
   Classification of Correspondent Bank Exposures

4. All exposures to correspondent banks should be supported by adequate financial and other
   credit information.

5. Classification should be based upon commonly recognized factors used for financial
   institution analysis.

6. In addition, cross-border exposures must be evaluated in terms of country risk, foreign
   exchange risk and transfer risk.

7. In the event of default in interest or principal payments, absent any other information, the
   same performance periods as apply to other credit exposures should be used
   Article 14
   Classification of Assets Where the Bank has taken Ownership Title

8. From time to time, banks may take possession or acquire ownership of assets in satisfaction
   of outstanding debts owed to it. These assets should be recorded at the fair value of the asset possessed, less the estimated cost to sell, and the related loan should be removed from the books.

9. Banks must sell these assets as soon as possible, but in no case may these assets be held
   beyond five years in the case of real property or one year from the date of acquisition in the case of movable property as specified under the CBK Regulation on Limits to Holdings of Immovable and Movable Property.

10. Such assets, by their nature, should be classified no better than substandard, and possibly
    worse, at the time of acquisition, if the possibility of sale at the appraised value becomes protracted.

Article 15
Classification of Other Assets

1. Suspense or holdover accounts, casual overdrafts, and correspondent bank accounts should
   be reconciled and cleared on a regular basis.

2. Banks must write off items that do not clear as soon as their non-collectability becomes
   apparent.

3. In any event, all such items should be written off no later than 90 days after inception.
   Article 16
   Provision (Reserves) Rates for Loan Loss Provisioning

4. Specific Provisions (Reserves)
   a. Minimum provisions shall be made according to paragraph 3 of Article 7 of this Regulation. b. Banks should provision at higher levels than the regulatory minimum if the analysis of the credit risk in any specific exposure indicates such a need.
   c. Provisions should be made against the net value of the exposure after deducting eligible
   collateral. d. Regulatory minimum provisions for classified credit assets are as follows:
   Substandard 20%
   Doubtful 50%
   Loss 100% e. In addition to the minimum provisioning against classified assets as shown above, according to the CBK, the lack of adequate financial data is a serious weakness in many portfolios and constitutes more than normal credit risk. Therefore, for each commercial credit exposure of Five hundred thousand (500,000) Euros or higher that is not supported by current audited financial statements, Banks must make a specific provision equal to 1 % (one percent) of the outstanding balance (or total amount of the facility if it is a legally binding commitment). This provision would apply unless the exposure is classified adversely, in which case the provision relevant to the classification would apply. f. For purpose of the sub-paragraph e. of this paragraph, the terms: “current” means a set of fiscal financial statements that are dated within eighteen (18) months of the date of review for provisioning purposes; “audited” means a set of financial statements for which a certified external auditor has expressed an unqualified opinion.

5. General Provision (Reserve)
   a. In addition to the specific provisions required against classified exposures, Banks shall make a general provision against the remaining, non-classified portfolio or segments of the portfolio. This provision can be against gross or “net of eligible collateral” values, but in the case of the latter, documentation of the exposures with such collateral must be kept on file for review by CBK examiners. b. The general provision made should be on the basis of documented historical experience, adjusted for current and prospective market conditions. Banks commonly can use one or more of the following methodologies: “roll-rate model”, “average charge-off method”, “vintage analysis”, “regression analysis”, or any other internationally recognized model that shall be previously approved by the CBK.
   c. Banks methodologies for determining general provisioning shall be reviewed by the CBK
   during on-site examinations. Any such methodologies and underlying data shall be reviewed and updated at least on annual basis.

Article 17
Treatment of Accrued Interest

1. Accrued interest on balance-sheet items of a bank shall be recognized for the relevant period
   during which the interest is earned, regardless of the time of its actual payment. Whenever a Bank classifies an exposure as non-performing, i.e., having delinquency or default in excess of 90 days (which usually should result in classification as doubtful or loss), it must stop the accrual into the income statement of the interest on that exposure. All uncollected interest that has been previously accrued and recognized as income must be reversed out of income.
2. Banks shall make these adjustments on a monthly basis. The following rules pertain to
   treatment of interest/revenues on non-performing exposures:
   a. Banks are prohibited from accruing or capitalizing interest on credit exposures classified as non-performing. Interest received on these exposures may only be recognized as income on a cash basis, i.e., when actually received. The prescribed accounting procedure at the time that an exposure is categorized as nonperforming, based upon delinquency/default status or whenever there is doubt about full collection of principle or interest, is that all accrued but unpaid interest on the exposure during the current accounting period should be reversed out of income. Banks may account for unpaid interest due on non-performing exposures in off the balance sheet items. If banks are reviewing and classifying their exposures on an appropriate basis, such amounts should not normally exceed the three months preceding the classification of the exposure in doubtful or loss category. b. CBK examiners will review specifically the accounting and reporting of this item during on-site examinations of banks. Previous failure to comply with established requirements could constitute a significant contingent liability for banks. Therefore the CBK urges that portfolio review, classification and provisioning be accomplished on a timely and accurate basis.

Article 18
Write-offs

1. Banks should develop policies, which describe the bases on which uncollectible credit
   exposures are recognized as losses and written off. When a loan is classified as “Loss”, it shall be charged against the Bank’s provision for loan losses and shall be written off the balance sheet according to the following criteria and deadlines:
   a. Credit exposures that are not covered by collateral, either in pledge form or in mortgage form, classified in the "loss" category shall be written-off from the balance sheet within twelve (12) months from the period when they are classified in the "loss" category. b. Credit exposures that are covered by collateral in the form of a pledge, classified in the "loss" category must be written-off from the balance sheet within twenty-four (24) months from the period when they were classified in "loss" category.
   c. Credit exposures that are covered by collateral in the form of a mortgage, classified in
   the "loss" category must be written-off from the balance sheet within forty-eight (48) months from the period when they were classified in "loss" category. d. Credit exposures that are covered by combined collateral, in the form of pledge and mortgage, in cases where the mortgage covers more than fifty percent (50%) of the exposure at the time of approval, then for the purpose of repayment, the credit exposure should be handled according to paragraph c. of this article. e. The list of loans repaid in accordance with the requirements of this Article shall be reported on regular meetings of the Bank's Board of Directors. Whereas repayment of exposures to persons related to the bank should only be done with prior approval by the Bank's Board of Directors.
   Article 19
   CBK decisions related to classification

2. Internal classifications of credit exposures by Banks shall be subject to review and possible
   re-classification by the CBK during on-site examinations. Differences between a classification of the CBK and that of the classifying banks shall be discussed during on-site examinations but, after such discussions, the classification decision of the CBK shall be final for all purposes. Therefore the loan exposures that are classified during CBK examination, may be classified for to better category from the bank, only in cases when the criteria of sustained performance is fulfilled. While in cases when the borrower is classified to a weaker category from the bank the sustained performance of the borrower must not be taken into consideration, but must be respected requirement from paragraph 2, article 9.

3. Any change of loan classification to a better category by banks of loans have been subject of
   the review by the CBK examination, and which occurs during the period between CBK examinations, is required to be reported quarterly to the CBK.
   Article 20
   Rebooking Assets

4. Banks must have a policy that governs the rebooking of assets previously written-off. The
   Banks may reverse a provision and rebook the pertinent asset only when it can satisfactorily demonstrate that the asset’s quality has improved.

5. For any such exposure that exceeds 5% (five percent) of the Tier 1 capital, the Bank’s Board
   of Directors or its Risk Management Committee must approve the rebooking in advance.

6. Approval from paragraph 2 of this article shall be recorded in the Board of Directors or Risk
   Management Committee minutes and must indicate the improved facts and circumstances that justify the rebooking.

7. Rebooked assets shall be assessed by CBK examiners on a case by case basis and rebooked
   assets shall:
   a. Meet the criteria used in granting new loans contained in the Bank’s lending policies; b. Not be granted on more favourable terms than those prevailing for comparable borrowers in good-credit standing with the financial institutions; and
   c. Not be subject to classification.

8. If any of the above conditions are not met, the asset shall not be rebooked.
   Article 21
   Collateral Recognition

9. Collateral security should be taken into consideration in the classification process. The fair
   market and liquidation values of the collateral should be documented by a current appraisal made by a competent party. The Bank’s ability to access and liquidate the collateral within a reasonable period also must be considered.

10. Classification of amounts should always be net of eligible collateral values.
    Eligible collateral is defined as:
    a. Cash collateral or fully collected deposit account balances in the possession of the banks and subject to a validly executed collateral pledge agreement; b. Any cash margin deposit held at the bank to secure a letter of credit or guarantee;
    c. Securities issued or guaranteed by the Government of the Republic of Kosovo to the
    extent that the market value of these securities is at least 100% (one hundred percent) of the exposure, provided that such securities are in the possession of the bank and subject to a validly executed collateral pledge agreement, and are re-valued on a regular basis;

d. Securities issued or guaranteed by countries rated by international rating agencies, which are equal to S&P ratings “A” or better or issued by their Central Banks to the extent that the market value of these securities is at least 100% (one hundred percent) of the exposure, provided that such are in the possession of the bank and subject to a validly executed collateral pledge agreement, and are re-valued on a regular basis; e. Other marketable securities issued by financial institutions rated by international rating agencies, which are equal to S&P ratings “A” or better (shares or bonds that are listed and actively traded on an organized exchange for which market prices can be readily obtained) to the extent that the market value of those securities is at least 125% (one hundred twenty-five percent) of the exposure, provided that such securities are in the possession of the bank, subject to a validly executed collateral pledge agreement, and are re-valued on a regular basis; f. An unconditional guarantee by another financial institution that rated by international rating agencies, which are equal to S&P ratings “A”
3. Other types of collateral should not be deducted from the amount of the exposure for the
purpose of classification. However, that collateral, its condition, accessibility and value, realistically applied, may be a factor in determining the severity of classification of the exposure.
CHAPTER IV
FINAL PROVISIONS

Article 22
Reporting to CBK
Banks shall report to the CBK the classification of credits and other assets which produce credit risk, as well as the establishment of reserves for loan loss provisioning, accordingly to the requirements set out in the CBK Regulation on Reporting of Banks.
Article 23
Enforcement, remedial measures and civil penalties Any violation of this Regulation shall be subject to the remedial measures and penalties provided for in the Law on Central Bank and the Law on Banks.
Article 24
Abrogation
Upon the entry in to force of this Regulation, it shall abrogates the regulation on credit risk management approved by the Board of Central Bank of Republic of Kosovo on 10 May 2013 and any other provisions that may be in conflict with this Regulation.

Article 25
Entry into Force
This Regulation shall enter into force on 30 June 2017.
The Chairman of the Board of Central Bank of the Republic of Kosovo _________________ Prof. Dr. Bedri Peci