STANDARD ON CREDIT RISK MANAGEMENT FOR SAVINGS AND CREDIT COOPERATIVES (SCCs)

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STANDARD ON CREDIT RISK MANAGEMENT FOR SAVINGS AND CREDIT COOPERATIVES (SCCs) Pursuant to Articles 14 and 15 of the Law of June 26, 2002 on Savings and Credit Cooperatives (SCCs), SCCs must comply with the following provisions regarding limits governing credit risk management. The following definitions apply to this circular.

1. Definitions
   1.1 Credit Policy
   The set of principles that must be followed by the management and employees of an SCC regarding credit management. The credit policy is designed to minimize the risk of losses.
   1.2 Credit Risks
   Credit risk is the risk of financial losses resulting from a debtor's inability, for any reason, to fully repay its debts to an SCC.
   Credit risks are associated with the following asset items (on-balance sheet and off-balance sheet):

• Loans and advances, debt securities, letters of credit, guarantees, loan substitute securities, financial lease contracts, credit cards, and credit lines;
• Any unused balance of irrevocable commitments;
• Any irrevocable agreement to purchase loans.
  Credit risks exclude:
• Specific provisions for doubtful debts established and accounted for;
• 75% of the outstanding balance of housing loans secured by a first-ranking mortgage;
• 50% of the outstanding balance of commercial real estate loans secured by a first-ranking mortgage;
• 50% of any other debt provided it is fully secured by a first-ranking mortgage.
  For these last three exclusions, if the value of the mortgage securing the debt is less than the total amount of the debt, the SCC may only deduct 75% or 50% of the mortgage value, as applicable.
  1.3 Related Parties
  A related party to a director or employee of an SCC is:

1. their spouse, child, or the child of their spouse;
2. their brothers, sisters, and their spouses;
3. the person with whom they are associated or the partnership of which they are a partner;
4. a legal entity controlled by them or by their spouse;
5. a legal entity in which they hold at least 5% of the capital.

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A spouse is a person:

1. who is bound by marriage;
2. who lives in a common-law relationship with a person and cohabits with them.
   1.4 Provision for Doubtful Debts
   Refers to an income statement account in which the provision expense necessary to bring the doubtful debts provision to the calculated amount is recorded. It generally represents the difference observed in the doubtful debts provision amount between two financial statement preparation dates. Doubtful debt provisions can be established for the loan portfolio and off-balance sheet credit risks.
   1.5 Guarantee
   Refers to an instrument that allows the creditor to protect against a debtor's default. This instrument guarantees the future fulfillment of an obligation.
   1.6 Loans
   Refers to fund advances or any other debt (on-balance sheet and off-balance sheet), with or without collateral, to a debtor who is required to repay, on demand or at specified dates, the advanced funds as well as payable interest or fees. They notably include consumer loans, housing loans, production loans, and commercial loans. Every loan requires that the analysis be based on the borrower's financial situation, their capacity, and their willingness to repay. Consumer Loans The total of advances and loans granted by an SCC for the acquisition of consumer goods or for the payment of services. Credit card advances are included in this category. Housing Loans The total of loans and advances granted by an SCC for the acquisition, construction, repair, or improvement of a residential real estate property. The term "residential real estate property" includes single-family residences, multi-unit housing of any type, mixed-use buildings where more than half of the floor space is used for residential housing, and land intended for residential construction. Commercial Loans The total of credit extended to a natural or legal person for business purposes. These credits include loans and advances, debt securities, equity securities, letters of credit, guarantees, loan substitute securities, and financial lease contracts. Loans to financial intermediaries, loans to the State, public enterprises, and local authorities, as well as commercial real estate loans, fall into this category. Commercial real estate loans are intended for agricultural buildings, office buildings, commercial and shopping centers, industrial buildings, hotels/motels, mixed-use buildings where more than half of the floor space is used for commercial or industrial operations, and land intended for commercial or industrial construction. Production Loans The total of credit extended to a natural or legal person for production purposes. Production refers to the combination of inputs aimed at producing a finished product intended for marketing or subsequent processing. These credits include loans and advances, debt securities, equity securities, letters of credit, guarantees, loan substitute securities, and financial lease contracts.

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Loans to Cooperatives
The total of credit extended by an SCC to another SCC in the normal course of its activities. These credits include loans and advances, debt securities, equity securities, letters of credit, guarantees, loan substitute securities, and financial lease contracts. Loans to Directors, Employees, and Related Parties The total of credit extended to the directors or employees of an SCC, their spouses, and their related parties. Overdue Loan Refers to a loan where part or all of the principal or interest is due and unpaid. Secured Loan Refers to a loan, even if non-performing, for which the SCC holds adequate protection for both the recovery of the principal and the interest, in the form of one or more eligible guarantees described in section 4 of this circular. Non-Performing Loan Means a loan where part or all of the principal or interest is due and unpaid for more than 90 days. Written-off Loan Refers to a loan that the SCC has written off after all possible restructuring or recovery activities have been undertaken and it is unlikely that they will allow the recovery of the principal and interest. Restructured Loan (Rescheduled) Refers to a loan for which the SCC has agreed to modify the terms due to a deterioration in the borrower's financial situation. A restructured loan generally involves one or both of the following situations:

• Reduction of the principal or the amount payable at the original maturity;
• Reduction of the recognized interest, including interest waiver;
• Postponement or extension of repayments.
  Doubtful Debts Provision
  Refers to a balance sheet account in which any potential devaluation of the loan portfolio is recorded as a contra-asset to the balance of the concerned asset item, and whose minimum amount must be established in accordance with the provisions of this circular. This account includes the general provision and specific provisions established for the loan portfolio. General Provision Refers to the provision established for prudence purposes, to account for the overall risk of the loan portfolio, without reference to a specific loan. Specific Provision Refers to the provision established after the assessment of all overdue loans to account for the specific risk of each loan.
  1.7 Off-Balance Sheet Risk
  Refers to an SCC's commitment to a third party to guarantee the fulfillment of a financial obligation.

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2. Limits Governing Credit Risk Concentration
2.1 Credit Risk Limitation:
The total amount of credit risks must not exceed the following standard:
2.2 Limitation of Risks Taken on a Single Natural and/or Legal Person
The maximum amount of risks taken on a single natural and/or legal person must not exceed the following standard:
2.3 Limitation of Credit Risks Taken on Directors, Employees, and Related Parties
The total amount of credit risks in favor of directors, employees, and their related parties must not exceed the following standard:
3. Establishment of Doubtful Debts Provisions
Every SCC must establish general and specific provisions on loans quarterly in accordance with the provisions of this circular.
3.1 General Provision
Every SCC must establish a general doubtful debts provision of 1% calculated on the outstanding balance of loans not subject to any specific provision.
3.2 Specific Provision
The amount of the specific doubtful debts provision is calculated as follows on overdue loans:
From 31 to 90 days 35% of unsecured outstanding balance From 91 to 180 days 50% of unsecured outstanding balance From 181 days and + 100% of unsecured outstanding balance The unsecured outstanding balance means the sum of each loan included in the category, less eligible guarantees described in section 4 of this circular. Every SCC may, based on past experience and its assessment of the future, use higher doubtful debts provision rates than those proposed in this circular. In no case can these rates be lower than those stated above.

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SCCs affiliated with a federation must also comply with the standards prescribed by their federation, insofar as they are not lower than those stated in this circular.
4. Eligible Guarantees
For the purpose of calculating the specific provision on loans provided for in section 3 of this circular, the following guarantees may be deducted from the outstanding balance of loans:
a. Securities issued by the BRH; b. Securities issued by the Haitian State;
c. Fungible deposits (cash deposits held with the lending SCC to guarantee credit risk – mandatory savings). These deposits are eligible when the funds are held by the lending SCC for the account of the depositor/member under the following conditions:

• The funds cannot be withdrawn during the duration of the risk;
• The lending SCC may use the funds to settle the debt to the extent that it is not settled by the borrower in accordance with the loan agreement terms and where no legal provision prevents the use of the guarantee to settle the debt.
  d. Guarantee letters issued by an SCC authorized to operate or a bank operating in Haiti; e. The value of a first-ranking mortgage on a residential property up to 75% of the loan balance, if this value is equal to or greater than the loan balance. If this value is less than the loan balance, the SCC may only deduct 75% of the mortgage value; f. The value of a first-ranking mortgage on a commercial property up to 50% of the loan balance if this value is equal to or greater than the loan balance. If this value is less than the loan balance, the SCC may only deduct 50% of the mortgage value. For any of these guarantees to be eligible, the SCC must ensure:

1. the existence of adequate legal documentation (the SCC holds the legal documents transferring rights to the enumerated guarantees);
2. a conservatively evaluated and documented net realizable value in the file;
3. a possibility of realization within a reasonable timeframe;
4. the absence of prior liens on said guarantee that could diminish its value or hinder its realization by the SCC.
   When a loan secured by a mortgage has been unpaid for one year, a guarantee may be deducted from the outstanding balance of this loan solely on the condition that legal procedures to realize said guarantee have been initiated by the SCC.

5. Accounting for Doubtful Debts Provisions
   When establishing or reversing provisions, the "provision for doubtful debts" item in the income statement and the "provisions for doubtful debts" item in the balance sheet must be used.
6. Accounting for Written-off Loans
   Losses on uncollectible debts or write-offs are recorded when it is certain that debts are uncollectible.

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The write-off of the net balance of non-performing loans occurs systematically after 365 days of delay.
In the event of partial or total write-off of a loan, an SCC must use the following method:
The written-off amount is first subtracted from the balance sheet item "Provision for Doubtful Debts" if a provision had been established for this loan. If no provision had yet been created or if the provision is less than the written-off amount, the written-off amount or the excess of it over the established provision is recorded in the income statement item "Provision for Doubtful Debts". Recovered amounts, previously written off, are recorded in the income statement account "Recovery on Written-off Loans".
7. Accounting for Accrued Interest on Overdue Loans
When a loan becomes non-performing, the following accounting principles apply to interest:
a) Any accrued interest already recognized as income must be reversed; b) No accrued interest may be recognized as income anymore.
Subsequent payments must be accounted for using the cash accounting method, first against penalties and overdue interest, and then against the loan principal.
Interest accounting reverts to the accrual accounting method when there is no longer any delay in the payment of the loan's principal and interest and when there is no doubt regarding the ultimate recovery of the loan's principal and interest. This section 7 does not apply to restructured loans. Interest capitalization is permitted only when it is part of the credit terms and the SCC considers that the recovery of the loan's principal and interest is beyond doubt. This section 7 does not apply to restructured loans. For the application of the three preceding paragraphs, the credit committee of an SCC must adequately document its decisions in the borrowers' credit files.
8. Restructured Loans
By mutual agreement with the borrower, any SCC may redefine a loan when the borrower's financial situation deteriorates. A loan thus restructured must be fully provisioned for a period of six months. During this period, the following accounting principles apply to interest:
a) Interest is recognized as income when collected; b) No accrued interest may be recognized as income, unless it is provided for as a doubtful debts provision of an equivalent amount. If at the end of this period, doubt remains regarding the ultimate recovery of the principal or interest of the restructured loan, it remains provisioned at 100%. Nevertheless, when the restructured loan performs in accordance with the restructuring provisions and there is no doubt regarding its recovery, the loan will be provisioned according to the doubtful debts provision provisions.

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9. Availability of Information for Inspection
During periodic inspections conducted by the BRH, SCCs must make the following information available to inspectors:

1. Working file related to the preparation of all reports required under this circular;
2. Any individual credit file (on-balance sheet and off-balance sheet), including the pre-disbursement credit analysis, the loan agreement, periodic follow-up reports, the repayment schedule, as well as the description, legal documentation, and initial and periodic evaluations of guarantees;
3. Any report on credit operations issued by the federation to which the SCC is affiliated, if applicable.
4. Compliance Reports
   SCCs must complete and submit the following compliance reports to the BRH:
   For all loan categories

• Risk status by sector of activity (Annex B);
• Status of restructured loans by sector of activity (Annex C);
• Semi-annual report on the calculation of doubtful debts provisions (Annex D);
• Semi-annual report on the outstanding loan portfolio balance and number of days overdue by category (Annex E);
• Status of credit extended to directors and related parties (Annex F);
• Status of credit extended to staff and related parties (Annex G);
• List of the ten largest debtors (Annex H).
  Submission deadlines: 45 days following the end of each semester of the fiscal year.

11. Sanctions
    a) Reliability of Information
    At all times, the amounts declared in the report provided in the annex must be those appearing in the accounting and auxiliary books of the SCC. Failure to comply with this directive, the BRH may, after inspection, apply an administrative sanction against the SCC in accordance with Articles 139 and 140 of the Law of June 26, 2002. b) Non-submission of Report or Delay In case of non-submission or delay in transmitting the semi-annual reports on the credit portfolio, the BRH reserves the right to take administrative sanctions against the SCC in accordance with Articles 139 and 140 of the Law of June 26, 2002. Administrative sanctions imposed by the BRH must be addressed at the SCC's annual general meeting, in accordance with Article 43, paragraph g of the Law of June 26, 2002.
12. Entry into Force of this Circular
    The provisions of this circular enter into force on ___________________________________

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This circular cancels and replaces the provisions contained in Circular No. 3 issued on October 24, 2003.
Port-au-Prince, ___________________________ 2008 Charles CASTEL Governor

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ANNEX A
Annex to the standard on credit risk management for Savings and Credit Cooperatives
Principles for drafting a credit policy applicable to Savings and Credit Cooperatives (SCCs) The credit portfolio represents the main productive asset of an SCC, making credit risk management a key performance factor. Credit risk is the risk of financial losses resulting from a borrower's inability, for any reason, to fully repay its financial obligations to the SCC. The application of a credit policy therefore aims to minimize credit risk as much as possible.

1. Purpose of the Credit Policy
   The credit policy aims to define the practices that must be followed by the management and employees of an SCC regarding credit management.
   The Board of Directors is required to define, adopt, and revise the credit policy and ensure its application. Credit officers and management must refer to it when making decisions related to their tasks. Members may also have access to it. The credit committee is responsible for managing credit, in accordance with the credit policies and procedures adopted by the Board of Directors. The conditions attached to the credit policy, primarily regarding credit granting and recovery terms, must apply uniformly to all SCC members. No preferential treatment must be applied or tolerated in the granting or recovery of credits.
2. Objectives
   2.1 Secure the loan portfolio.
   2.2 Minimize loan losses.
   2.3 Profitize productive assets.
   2.4 Establish policies and principles for credit granting and recovery.
   2.5 Grant loans in