CREDJT RISK MANAGEMENT

Licensed banks shall be required to maintain sound and acceptable policies and practices
to prudently manage and control their credit portfolio and exposure to credit risks. The
credit risk management should provide, at minimum, a credit policy and credit review
process.

Credit Policy

The credit policy should be clearly documented, should contain as minimum, the following:

a) General Area of Credits which include types of loans and advances and
borrowers, sectors, etc.

b) Delegation of Authority indicating appropriate levels for credit approvals.

portfolio concentration limits, provisions or write-offs.
c) Procedure for evaluation., grant documentation and Collection of credits.

d) Requirements for Credit File. A credit file should be maintained in such

manner as to facilitate proper review of the credit to permit assessment of
the borrowers' repayment prospects. lt should contain, at a minimum, the
identification of the borrower (name, type of business, connected parties,
etc.), evidence of the authority to borrow, financial statements, purpose and
terms of credit, details of collateral, credit authorization, repa) ment
history and internal credit reviews

e) Internal Credit Inspection & Audit.

Credit Portfolio Review

Licensed banks shall establish adequate procedures to effectively monitor and control
their credits so as to be aware of the borrowers' current financial condition, ensure that the
collaterals are adequate, ascertain that the credits are in compliance with the terms &
conditions of grant, and to provide early identification and classification of potential
problem credits.

The licensed banks shall, therefore, review their credit portfolios continuously [at least
once in a quarter] with the view to recognizing any deterioration in credit quality. Such
reviews should systematically and realistically classify the banks' credit exposures based
on the perceived risks of default. In order to facilitate the classification of the credit
portfolio, the assessment of risk of default should be based on criteria which should include,
but are not limited to repayment performance, borrower's repayment capacity on the basis
of current financial condition and net realizable value of collateral.

Loan Payments

Loan or authorized overdraft payment may be made from checking/deposit accounts of

customers. However, there shall be no loan payment applied to unfunded
checking/deposit accounts. 11-lis means that loan payment through checking/deposit
 accounts shall be allowed only to the extent of the amount in the customer's account. The
unfunded portion of the loan shall remain part of the outstanding loan amount, and not
be converted into an overdraft.

ASSET CLASSIFICATION
The loans and advances subject to this regulation shall include Loans and Advances, Overdrafts,
Commercial Papers, Bankers Acceptances, Bills Discounted. Lease Financing, Hire Purchase Loans
and Off-Balance Sheet Items.

Loans and Advances should be classified in the following five categories which will
determine the level of provisions required against the perceived or anticipated
diminution in asset quality;

a) Current or Performing
b) Other Loans Especially Mentioned (OLEM or Cristable)
c) Substandard
d) Doubtful
e) Loss

Current or Performing

Loans and Advances are deemed to be performing if the payments of both principal and
interest are up-to-date in accordance with the agreed terms. An overdraft would be
regarded as current if there was regular activity on the account with no sign of a hard
core of debt developing.

OLEM Loans and Advances

Loans and Advances in this category are currently protected by adequate security, both
as to principal and interest, but the1 are potentially weak and vulnerable to credit risk,
although not to the point of justifying the classification.. Substandard". The credit risk
may be relatively minor yet constitute an unwarranted risk in the light of circumstances
surrounding a case. The weaknesses, may, if not checked or corrected, weaken the asset or
inadequately protect the bank’s credit position at some future date.

This category would include loans and advances that are unusual due to their nature, the
customer or project; loans in respect of which financial information is lacking; the
lending officer may be unable to supervise the loan properly because of lack of expertise;
an inadequate loan agreement; the condition of and control over collateral may require
improvement; or any other deviations from prudent lending practices. Banks are required
to keep such loans and advances in the Watch List so as to properly and closely monitor
them.
 Sub-Standard Loans and Advances

Non-performing loans and advances for which the principal and/or the interest remain
outstanding for ninety (90) days but less than on hundred and eighty ( 1 80) days shall be
classified substandard.

Overdrafts and other credits without pre-established repayment programs are

considered Substandard when the advances exceed the customer's borrowing line for
ninety (90) consecutive days but less than one hundred and eighty (180) days; or the
borrowing line has expired for ninety (90) days but less than one hundred and eighty
(180) days; or interest is due and unpaid for ninety (90) days but less than one hundred
and eighty (180) days and deposits are insufficient to cover the interest capitalized
during the period. The principal balance outstanding (and not the unpaid amounts) is
used in determining the aggregate amount of past- due obligations.

Substandard loans and advances show clear manifestations of credit weaknesses that
jeopardize the liquidation of the debt. Substandard loans and advances include loans to
borrowers whose cash flows are not sufficient to meet currently maturing debts, loans
to borrowers which are significantly undercapitalized, and loans to borrowers lacking
sufficient working capital to meet their operating needs. Substandard loans and
advances are not protected by the current sound worth and paying ability of the
customer. In this respect, the bank will need to rely on the secondary sources of
repayment such as collateral or fresh capital to service the debt.

Doubtful Loans and Advances

Non-performing loans and advances for which the principal and/or the interest remain
outstanding for one hundred and eighty (180) days but less than three hundred and
sixty (360) days shall be classified doubtful.

Doubtful loans and advances display all the weakness inherent in loans and advances
classified as sub-standard but with the added characteristics that they are not well
secured and the weaknesses make collection or liquidation in full, on the basis of
currently available information highly questionable and improbable.

The possibility of loss is extremely high but because of certain mitigating circumstances
which may work to the advantage and strengthening of the facility, its classification as
an estimated loss is postponed until its more dd1ncd status is ascertained.

Loss Loans and Advances

Non-performing loans and advances for which the principal and/or the interest remain
outstanding for three hundred and sixty (360) days or more shall be classified as loss.

Loans and advances shall be classified as loss where they are considered uncollectible
and of such little value that their continuation as recoverable facilities is not defensible.
 This classification does not imply that the facility has absolutely no recoverable value,
but rather it is not practical or desirable to defer making full provisions for the facility
even though partial recover in future may not be entirely ruled out. Loans and advances
classified as loss include those to bankrupt companies and insolvent firms with negative
working capital and cash flow or those to judgment debtors with no means or
foreclosable collateral to settle the debts. Licensed banks should not retain such
facilities on their book while pursuing long-term recoveries. Losses should be taken
in the period in which the surface as uncollectible.

Restructured or Rolled-over Loans and Advances

Loans and advances classified as Substandard, Doubtful or Loss, shall be renewed, rolled
over or returned to accrual status on a case-by-case basis, to allow greater flexibility in
loan restructuring. However, loans must remain as substandard, until borrowers
perform under the new repayment schedule for at least a six-month period for quarterly
loan repayment schedule and three-month period for monthly or less loan repayment
period.

3.10 Restructured and Performing I,oans

Financial institutions shall on a monthly basis submit to the CBL the status of all
restructured loans.

3.11 Write-Off Loans

a) As a minimum requirement, financial institutions involved in providing credit

services are to write-off a loan when the loan is deemed uncollectible and
additional collection efforts are non-productive or worthwhile, regardless of the
number of months of delinquency. However, in no case should a loan classified as
loss remain on the books of a bank for two years or more.

b) Any loans that are determined to have been made as a result of fraudulent
activities of a borrower or collusion between the borrower and the bank's
relationship officer or staff member or any other type of fraud relating to
acquisition of a loan must be written-off immediately.

c) Loans which have been past due two years or more and either (i) the borrower
cannot be located or there has been no contact with the borrower, or (ii) legal
proceedings have
 not been initiated against the borrower must be written-off. The provisions of this
regulation shall take immediate effect and apply retroactively to the loan portfolio.

d) Without prejudice to Section 3.17 above, each financial institution is required to

have a well-defined and transparent write-off policy approved by its Board of
Directors (BoD).
e) Before considering/processing of a write off proposal, banks shall adhere to
following minimum requirements:
i) Ensure that reasonable efforts have been made to recover the
outstanding loan amount.
ii) Ensure that there is substantial evidence that the debt is uncollectible.
There is evidence of uncollectibility if one or more of the following
circumstances are present:-
* the debtor is insolvent and the debt in question has been discharged in
a bank bankruptcy· proceeding
* the debtor has died leaving no assets or the assets are insufficient
to repay the debt;
* the debtor has become incapacitated, and has no income or income
is insufficient to permit repayment of the obligation;
* the debtor is a legal person that has ceased operation and has assets
insufficient to pay the debt, or has suffered a crippling business loss
and there is no reasonable expectation that the debtor will recover or
otherwise be :financially competent to repay the obligation.
iii) Establish that all available means have been exerted to verify that the
borrower(s) has not created other business interests and assets out of the
non- performing loans proposed to be written off and the loan is truly
irrecoverable.
iv) Assets held by the banks as security for these loans should be re-
valued/appraised at the time of write-off. The valuation report shall clearly
indicate amongst others, the present market value as well as forced sale
value. The valuation should be conducted through a credible appraisal.
f) The 'write off of loans, if any, in the names of Directors, Chief Executives,
shareholders of the bank or their relatives/dependents is well as related
entities/institution shall require prior approval of the Board of Directors and the
Central Bank.

g) Banks are to submit to the Central Bank of Liberia on a monthly basis, a report on
loans written off with necessary details in respect of those loans.

SECURITY

All loans and advances to customers and staff should be well secured on the grounds of
prudence. Well secured means that a facility is secure by collateral that is sufficient to
protect the licensed banks from loss of principal and/or interest through its timely
relaxation or under a forced sale program. Sufficiency implies the availability of proper
and enforceable legal documentation, a net realizable market value which is adequate to
cover the principal and interest outstanding, and the absence of prior and subsisting liens
and charges on the collateral which could diminish its value or otherwise prevent the
licensed bank form acquiring an indefeasible title. In addition the collateral must be
tangible and amenable to foreclosure.