Slide 1: Introduction to the Directive

Directive Title: Asset Classification and Provisioning Directive No. SBB/90/2024

Purpose:

 Aligns with International Financial Reporting Standards (IFRS) for loan

classification and provisioning.
 Ensures timely recognition of non-performing exposures (NPEs) and realistic credit
loss estimates.
 Protects banks from overstating profits by restricting accrual of uncollected interest.
 Establishes a consistent legal framework for accurate credit risk management.

Slide 2: Key Terms and Definitions (Part 1)

1. Bank: A licensed private or state-owned financial institution.

2. Capitalized Interest: Uncollected interest added to loan principal.
3. Cash Collateral: Secured funds held by the bank to back loans.
4. Credit-Impaired Assets: Financial assets with reduced repayment expectations.
5. Defaulted Borrower: A borrower with 90+ days past due payments or significant financial
distress.
6. Exposure: Includes loans, guarantees, letters of credit, and other commitments.
7. Expected Credit Loss (ECL): Reflects weighted credit losses considering future economic
events.

Slide 3: Key Terms and Definitions (Part 2)

8. Non-Performing Exposures (NPEs):

 Loans past due by 90+ days.

 Credit-impaired loans or those requiring collateral realization for repayment.
 Sub-standard, doubtful, or loss exposures.

9. Overdraft: A current account with a negative balance.

10. Forbearance-Restructure: Concessions provided to borrowers facing financial difficulties.
11. Loan Workout: Steps taken to normalize problem loans.
12. Write-off: Reduction of loan value when recovery is no longer expected.
13. Net Recoverable Value: The most probable collateral sale value for loan recovery.

Slide 4: Loan Classification and Risk Framework

Loan Categories by Maturity:

 Short-term Loan: Repayment ≤ 1 year.

 Medium-term Loan: Repayment > 1 year and ≤ 5 years.
 Long-term Loan: Repayment > 5 years.

Non-Performing Loan Criteria:

 Payments overdue for 90+ days.

 Breached overdraft limits for 90+ days.
 Loans without activity for 90+ days.
 Accounts with insufficient deposits or inactive use.

Slide 5: Regulatory Compliance and Impact

Banks' Obligations:

 Classify and report loans per directive standards.

 Maintain provisions for expected credit losses.
 Apply industry average recovery rates for collateral valuation.
 Avoid recognizing accrued interest on non-performing loans.

Benefits of Compliance:

 Improved transparency and risk management.

 Protects financial stability by preventing overstated profits.
 Uniform application of credit classification across banks.

3. Scope of the Directive

This Directive shall be applicable to commercial banks operating in Ethiopia

Slide 1: Responsibility for Loan Review

Key Points:

1. Board of Directors' Role:

o Establish policies for grading, classifying, and monitoring all credit exposures
(including restructured and off-balance sheet exposures).
o Identify and manage problem assets proactively.
2. Loan Review System Objectives:
o Timely recognition of deteriorating loans.
o Ensure adequate provisioning and write-offs for credit losses.
o Monitor proper use of loans as negotiated.
Slide 2: Loan Review System Requirements

Key Actions:

1. Regular Loan Quality Reviews:

o Conduct reviews at least quarterly.
o Reflect realistic repayment and recovery expectations.
2. Address Identified Problems:
o Correct issues in loans, underwriting practices, or credit policies.
o Reverse accrued but uncollected interest for non-performing loans.
3. Maintain Comprehensive Records:
o Support evaluations of expected credit losses.
o Ensure compliance with regulatory standards.

Slide 3: Specific Responsibilities of the Loan Review Function

Key Responsibilities:

1. Loan Monitoring and Reporting:

o Ensure lending complies with board-approved standards.
o Classify and place deteriorating loans on non-accrual status.
2. Provisions and Write-offs:
o Appropriately provide for credit losses and write off uncollectible loans.
o Review high-risk loans (≥5% of bank’s capital) and a sample of smaller loans.
3. Independent Oversight:
o Appoint knowledgeable, independent reviewers.
o Report findings directly to the board on a quarterly basis.

Slide 4: Non-Performing Loans and Non-Accrual Status

Key Criteria for Non-Performing Loans (NPL):

1. Non-Accrual Status Requirements:

o Loans overdue by 90+ days.
o Eliminate uncollected accrued interest by the end of the quarter.
2. Upgrading NPLs to Performing Status:
o All overdue amounts cleared.
o Consistent repayments made over a defined period.
o Improved counterparty financial status.
3. Reporting Requirements:
 o Submit details of restructured loans and those upgraded from non-accrual status to
the National Bank quarterly.

Slide 5: Regulatory Compliance and Action Plans

Compliance Measures:

1. Banks' Obligations:
o Submit action plans if NPL exceeds 5% of total exposures.
o Plans must include provisioning, write-offs, restructuring, and other initiatives.
2. Cross-Default Clause:
o If one loan meets NPL criteria (≥20% of borrower’s total loans), all other loans
with the same borrower are classified as non-performing.
3. Timely Action:
o Ensure consistent regulatory reporting to the National Bank.
o Focus on improving asset quality and reducing non-performing exposures.

Slide 1: Title Slide

Title: Classification of Exposures – Overview

Subtitle: Key Concepts and Regulatory Requirements

Slide 2: Purpose of Classification

Content:

 Objective: Ensure effective risk management and compliance.

 Classification helps identify and mitigate credit risks.

Slide 3: Overview of Categories

Content:

 Five Categories:
1. Pass
2. Special Mention
3. Sub-standard
4. Doubtful
5. Loss
 Differentiated by the level of risk and overdue days.
Slide 4: Category 1 – Pass

Content:

 Definition: No significant increase in credit risk.

 Characteristics:
o Strong financial capacity.
o Fully compliant with repayment terms.

Slide 5: Category 2 – Special Mention

Content:

 Definition: Significant increase in credit risk.

 Key Criteria:
o Overdue by 30–89 days.
o Overdraft accounts inactive for 30+ days or exceeding limits.
 Requires monitoring to prevent further risk escalation.

Slide 6: Category 3 – Sub-standard

Content:

 Definition: Non-performing exposures with 90–179 days overdue.

 Key Characteristics:
o Borrower’s financial condition weakened.
o Overdraft accounts exceed limits for 90+ days.
o Debit balances between 5–19% of approved limit.

Slide 7: Category 4 – Doubtful

Content:

 Definition: Non-performing exposures with 180–359 days overdue.

 Key Characteristics:
o High uncertainty in repayment.
o Overdraft balances at 20–49% of approved limit.
o Likely to require collateral realization for recovery.
Slide 8: Category 5 – Loss

Content:

 Definition: Exposures overdue 360+ days.

 Key Characteristics:
o Minimal chance of recovery.
o Overdraft balances at 50%+ of approved limit.
o Immediate write-off and provisioning required.

Slide 9: Unlikely to Pay

Content:

 Applies to sub-standard, doubtful, and loss categories.

 Definition: Loans classified as non-performing if repayment is unlikely without
collateral realization, regardless of overdue days.

Slide 10: Forbearance and Restructuring – Overview

Content:

 Purpose: Assist borrowers in financial difficulty while maintaining credit quality.

 Restructuring policies must align with regulatory requirements.

Slide 11: Forbearance and Restructuring – Key Points

Content:

 Limits on Restructuring:
o Short/Medium-term loans: Max 3 iterations.
o Long-term loans: Max 4 iterations.
 Restructured loans remain flagged as non-performing for at least 6 months.

Slide 12: Criteria for Reclassification to Performing

Content:

 Two Conditions:
1. Timely payments for 1 year.
2. Borrower’s financial difficulties resolved.
 Forbearance cannot be used to bypass classification standards.

Slide 13: Regulatory Oversight

Content:

 Role of National Bank:

o Ensure compliance with classification and provisioning standards.
o Scrutinize policies, processes, and methodologies.
 Examiners maintain discretion during reviews.

Slide 14: Actions by National Bank

Content:

 When Issues Are Found:

o Revise classification and provisioning policies.
o Adjust exposure classifications.
o Increase provisions, reserves, or capital.
 Objective: Strengthen risk management practices.

Slide 15: Summary of Key Takeaways

Content:

 Five categories ensure accurate classification of exposures based on risk.

 Restructuring supports borrowers but requires prudent implementation.
 Strong regulatory oversight protects the financial system's integrity.

Slide 1: Title Slide

Title: Provisioning Requirements for On-Balance Sheet Exposures

Subtitle: Key Guidelines and Minimum Prudential Provisions
Slide 2: Provision for Loan Losses Account

Content:

 Requirement: All banks must maintain a Provision for Loan Losses Account.
 Purpose: To absorb potential loan losses.
 Key Points:
o Provisions are charged to the profit and loss statement.
o Account must always have a credit balance.
o Adjustments made at least every calendar quarter.

Slide 3: Minimum Prudential Provision Percentages

Content:

 Provisions based on loan classification:

Classification Provision %
Pass 1%
Special Mention 3%
Sub-standard 20%
Doubtful 50%
Loss 100%

 Applied to the total outstanding principal balance.

Slide 4: Additional Provisioning Requirements

Content:

 Factors influencing larger provisions:

o Historical loan loss experience.
o Economic conditions and delinquency trends.
o Ineffective lending/collection policies.
 Minimum provision for non-performing loans: 3% after deductions.

Slide 5: Deductions from Non-Performing Loans

Content:
  Before applying minimum provisions:
1. Accrued but uncollected interest can be deducted.
2. Net recoverable collateral value may be deducted.
 Even with deductions, minimum provision for non-performing loans is 3%.

Slide 1: Title Slide

Title: Provisioning Requirements for Off-Balance Sheet Exposures

Subtitle: Key Guidelines and Prudential Provisions

Slide 2: Introduction to Off-Balance Sheet Provisions

Content:

 Banks must maintain a Provision for Loan Losses Account for:

o Letters of Credit (sight or acceptance).
o Guarantees (performance bonds, bid bonds).
o Commitments to loans or advances.
 Purpose: Ensure adequate reserves for potential losses.
 Provisioning applies to total off-balance sheet exposure, excluding cash margins or
eligible collateral.

Slide 3: Minimum Prudential Provision Percentages

Content:

 Provisioning Requirements by Category:

Exposure Type Provision %

Guarantee (no counter guarantee) 2%
Guarantee (with counter guarantee by foreign bank/insurance rated A) 1%
Commitment to provide loan/advance 2%
Letter of credit 2%
Other off-balance sheet exposures 2%

Slide 4: Additional Provisioning Requirements

Content:

 Extra Provisions for Riskier Exposures:

 o Additional 2% for:
 Non-performing off-balance sheet exposures.
 Deterioration in counterparty creditworthiness.
o Additional 5% for exposures under litigation.
 Ensures coverage for higher-risk situations.

Slide 5: Monitoring and Review

Content:

 Monitoring:
o Banks must implement a system to measure and control risks of off-balance sheet
exposures.
 Continuous Review:
o Ensure provisions reflect actual potential losses.
o Adjust provisions as necessary based on updated risk assessments.

Slide 1: Title Slide

Title: Eligibility of the Collateral

Subtitle: Criteria for Determining Collateral in Loan Provisioning

Slide 2: General Rules for Collateral

Content:

 Collateral Evaluation Requirement:

o For loans/advances classified as sub-standard or worse, banks must assess
collateral.
o Collateral realization can be initiated once the loan becomes non-performing.
 Purpose of Collateral:
o Helps determine the required provisioning levels for non-performing loans.
o Acts as security for recovery in cases of borrower default or insolvency.

Slide 3: Criteria for Eligible Collateral

Content:

1. Legally Valid and Enforceable:

o Supported by proper legal documentation and review.
 2. Properly Charged and Registered:
o Bank has legal rights to take possession in case of default.
3. Adequate Insurance:
o Fully insured collateral to ensure its value.
4. Proper Valuation:
o Must be valued by an approved valuer (as per regulations).
5. Free of Liens:
o Collateral should not have prior claims against it.
6. Foreclosure Feasibility:
o Should be free of practical or legal issues in liquidation or disposal.

Slide 1: Title Slide

Title: Valuation of Physical Collateral

Subtitle: Guidelines for Banks in Collateral Assessment
Slide 2: Role of External Valuers

Content:

 Use of External Valuers:

o Banks must maintain a list of accepted external valuers with expertise in
property sectors.
o The valuation process must be impartial, clear, and objective.
 Valuer Requirements:
o Valuers must provide a final report including key details such as:
 Collateral value
 Valuation methodology
 Description of collateral and location

Slide 3: Key Aspects of Valuation Reports

Content:

 Valuation Report Details:

1. Collateral Value: The final assessed value.
2. Methodology & Assumptions: Approaches like market changes, cost of sale, and
liquidation costs.
3. Collateral Description: Type, quality, age, and condition.
4. Location & Market Conditions: Overview of local factors affecting value.
5. Legal Attributes & Short-term Factors: Any aspects that may affect collateral
value.

Slide 4: Valuer Competence and Independence

Content:

 Valuer Competence Requirements:

1. Professional Standards: Must meet national/international standards.
2. Knowledge & Experience: Relevant property market and valuation expertise.
3. Independence: Must not be involved in the credit decision-making process.
4. No Conflicts of Interest: Fees or results should not influence objectivity.
 Conflict of Interest Mitigation:

o Ensure valuers or their family members are not involved in the loan process.
o Adequate rotation and independence from the buyer/seller.
Slide 1: Title Slide

Title: Duty to Use Applicable International Financial Reporting Standard

Subtitle: Guidelines for Calculating Credit Losses
Slide 2: Calculating Expected Credit Losses

Content:

 Banks' Responsibility:
o Banks must calculate expected credit losses following the applicable
International Financial Reporting Standards (IFRS).
 Two Key Scenarios:

0. IFRS Expected Credit Losses vs. Minimum Prudential Provisions:

 If IFRS loss calculation is lower than minimum provisions, the difference
is transferred to a non-distributable reserve.
1. IFRS Expected Credit Losses Higher than Minimum Provisions:
 If IFRS loss calculation is higher, it is considered adequate for the
Directive's requirements.

Slide 3: Impact of Differences in Credit Loss Calculation

Content:

 When Expected Credit Losses are Lower (than Minimum Provisions):

o The difference is treated as an appropriation from retained earnings and added
to a non-distributable reserve.
 When Expected Credit Losses are Higher:
o Such losses are accepted as adequate and satisfy the Directive’s requirements.

 Portfolio Composition and Review of Financial Statements of Borrowers

Banks shall review financial statements for the latest financial year of a borrower,
who has been in business for a year or above, audited by external auditors, before
granting loans or advances of Birr ten (10) million or above.

Slide 1: Title Slide

Title: Examiner Review

Subtitle: Overview of Procedures and Requirements for Loan Loss Provisions

Slide 2: Record Maintenance and Evaluation

  Record-Keeping:
o Banks must maintain records to support the evaluation of potential loss exposure
in loans/advances.
o These records should also document the entries for the Provisions for Loan
Losses Account.
 Availability for Review:
o The records must be available to National Bank examiners for evaluation when
requested.

Slide 3: Evaluating Provisions for Loan Losses

 Examiners' Role:
o Examiners will assess the reasonableness of the bank’s loss estimation, the
reliability of the data, and the adequacy of the provisions for loan losses.
o They verify that the provisions are sufficient to absorb potential losses.
 Corrective Actions:
o If discrepancies are found, particularly if the provisions are inadequate by more
than 10%, the bank’s Board of Directors must take corrective action within 30
days.

Slide 4: Adjustments and Requirements

 Increase in Provisions:
o If the Provisions for Loan Losses Account is found to be insufficient by more than
10%, the bank’s executive officers must adjust the provisions to meet the
National Bank’s estimated level.
o This must be done within 30 days of the notification from the National Bank.
 Compliance:
o The adjustments are required to ensure that the provisions are in line with the
examiners' findings.

Slide 5: Disagreements and Appeals

 Material Disagreements:
o If there are material disagreements between the bank’s officers and the examiners,
the Board of Directors has the option to appeal the decision to the National
Bank.
o Executive officers are required to attend all discussions and on-site meetings to
stay informed about the examiner's concerns.
 Appeal Process:
 o The appeal process does not exempt the bank from addressing the examiner's
concerns promptly.

 Write-off Policy

A bank shall have sound policies and processes to ensure that write-offs of
identified losses are made in a timely manner.

Slide 1: Title Slide

Title: Other Provisioning or Write-off Requirements

Subtitle: Overview of Depreciation, Losses, and Asset Pledging Requirements

Slide 2: Depreciation, Losses, and Asset Pledging

 Depreciation of Fixed Assets:

o Depreciation expenses are to be covered out of the bank’s annual income, in
accordance with relevant laws.
 Operating and Accumulated Losses:
o Losses must be covered from the annual net profit until fully addressed.
 Pledging of Assets:
o If assets are pledged to secure a liability, the full value of the asset must be
provided for at the time of lodging/pledging, in accordance with Proclamation No.
592/2008.

Slide 3: Preliminary Expenses and Uncollectible Claims

 Preliminary Expenses:
o Expenses related to organization, extension, or purchase of business assets must
be amortized fully within 5 years.
 Uncollectible Claims:
o Uncollectible claims, other than loans or advances, should be classified and
provided for in the same way as term loans with monthly repayment
programs.
o Alternatively, uncollectible claims may be written off as operating expenses.

Slide 1: Title Slide

Title: Interpretation of the Directive and Reporting Requirements

Subtitle: Summary of Key Points on Directive Interpretation, Reporting, and Effective Date
Slide 2: Interpretation of the Directive

 Exposure Accounting & Categorization:

o All exposures held by a bank must be accounted for and categorized according to
the requirements of this Directive.
 Written Confirmation:
o Any interpretation of this Directive must be confirmed in writing by the
National Bank.
 Request for Clarification:
o For exposures not explicitly covered by the Directive, banks should request
written confirmation from the National Bank for proper application.

Slide 3: Reporting Requirements (Part 1)

 Quarterly Reports to National Bank:

o Banks must submit the following reports on a quarterly basis:
1. Loan and advances classification and provisioning
2. Provisioning for off-balance sheet exposures

Slide 4: Reporting Requirements (Part 2)

 Additional Quarterly Reports:

o In addition to the above, banks must also submit reports on:
1. Restructured loans and advances
2. Loans re-categorized from non-accrual to accrual status

Slide 5: Other Provisions

 Interest-Free Financing:
o Banks providing interest-free services should consider margin/profit instead of
interest as per the Directive.
 Transition Period:
o Banks not fully compliant with the Directive must submit an action plan within 90
days and comply within 2 years from the effective date.
 Repealed Directive:
o The previous Directive No. SBB/69/2018 is repealed and replaced by the new
Directive.
 Effective Date:
 o The Directive enters into force on 12th June 2024.

Slide 1: Title Slide

Title: Credit Impaired, Forbearance, and SICR Overview

Subtitle: Key Concepts and Guidelines

Slide 2: Credit Impaired – Definition

 Credit Impairment occurs when a financial asset shows signs of significant credit risk.
 Key Indicators include:
o Significant financial difficulty of issuer/borrower
o Breach of contract (default or past due)
o Concessions granted by lender(s)
o Likelihood of bankruptcy or financial reorganization
o Disappearance of an active market
o Purchase of asset at a deep discount

Slide 3: Credit Impaired – Combined Effects

 Multiple Events May Contribute to credit impairment:

o A single event may not be identifiable.
o Combination of Events causes credit impairment.

Slide 4: Forbearance – Financial Difficulty

 Examples of Financial Difficulty:

1. Past Due on exposures
2. Probable Future Delinquency
3. Delisted Securities or threat of delisting
4. Forecasted Cash Flow Shortages
5. Non-Performing Status
6. Unable to Obtain Funds at market interest rates

Slide 5: Forbearance – Concessions

 Concessions are special terms granted to counterparty in financial difficulty.

  Examples of Concessions:
o Extending loan term
o Rescheduling payments
o Reducing interest rate
o Capitalizing arrears
o Forgiving or postponing payments
o Changing loans to interest-only
o Releasing or reducing collateral

Slide 6: Refinancing as Concession

 Refinancing could be a concession even if the new contract terms aren’t more favorable
than the existing one.
 Condition: Refinancing is due to financial difficulty.

Slide 7: Significant Increase in Credit Risk (SICR)

 SICR Recognition:
o Reasonable, Supportable Information must be considered to determine if
lifetime expected credit losses are required.

Slide 8: SICR – Key Indicators

 Key Indicators of SICR:

1. Significant change in borrower’s external credit rating
2. Internal credit downgrade or decrease in scoring
3. Adverse changes in business/economic conditions
4. Declining operating results, margin, or revenues
5. Changes in regulatory/economic environment
6. Changes in collateral value or credit enhancements

Slide 9: SICR – Continued Key Indicators

 Additional Indicators:
1. Reduction in financial support from parent or affiliates
2. Expected breach of loan documentation
3. Significant changes in borrower’s behavior
4. Past due information (e.g., 30 days rebuttable presumption)
Slide 10: Summary

 Credit Impairment: Results from observable data indicating financial difficulty, breach
of contract, or financial deterioration.
 Forbearance: Special concessions granted to borrowers in financial difficulty to help
them manage debts.
 SICR: Identifying significant increases in credit risk based on various financial,
economic, and operational changes.
Slide 1: Overview of Net Recoverable Value

Definition:

 Net Recoverable Value: The most probable value that will be realized from the sale of collateral
securing a loan or advance in a competitive market.
 Calculation:
o Outstanding loan principal balance multiplied by the bank's average recovery rate.
o The average recovery rate cannot exceed the industry average recovery rate by 15
percentage points.

If No Recovery Rate Data Exists:

 Banks must use the industry average recovery rate if they lack sufficient data on their own
recovery performance.

Slide 2: Average Recovery Rate

Definition:

 Average Recovery Rate: Ratio of total cash received from the sale of collateral and the net
market value of acquired properties to the outstanding loan balance over the past 18 months.

Important Notes:

 Exclusions: Loans with multiple collateral types are excluded unless all collateral is sold or
acquired.
 Timeframe: Calculated over 18 months prior to determining the minimum provision
requirement.

Slide 3: Key Terms and Calculations

Important Definitions:

 Aggregate Net Cash Receipts: Cash collected from selling foreclosed collateral over the last 18
months, minus sale-related expenses.
  Total Net Market Value of Acquired Properties: The average of the highest bid price and the
reserve price of foreclosed properties at auctions before acquisition.

o If no bidder participates, the auctioned property value is zero.

 Ask/Reserve Price: The minimum price the bank will accept for selling foreclosed assets.

Slide 4: Industry Average Recovery Rate & Limitations

Industry Average Recovery Rate:

 Definition: The average recovery rate calculated for all banks in Ethiopia over the past 18
months.

o It’s the aggregate of net cash receipts plus the market value of acquired properties,
divided by the total outstanding loan balance at the time the collateral was acquired.

Key Points:

 Exclusion Criteria: Loans secured by multiple collaterals are excluded unless all properties are
sold or acquired.
 Regulatory Role: The National Bank calculates and shares this average recovery rate quarterly.

Limitations:

 Ceiling on Recovery Rate: The recovery rate cannot exceed 100% of the outstanding non-
performing loan value.

Slide 1: Title Slide

Title: Classification of Exposures and Provisioning Requirements

Subtitle: Overview of Bank Exposure Categories and Guidelines
Date: [Insert Date]

Slide 2: Introduction to Exposure Classification

 Purpose: Banks are required to classify all exposures based on credit risk.
 Categories: The Directive classifies exposures into five categories based on risk:
1. Pass
 2. Special Mention
3. Sub-standard
4. Doubtful
5. Loss

Slide 3: Pass Classification

 Definition: Exposures with no significant increase in credit risk since initial recognition.
 Characteristics:
o Fully protected by the borrower’s current financial capacity.
o Not subject to criticism.

Slide 4: Special Mention Classification

 Definition: Exposures with a significant increase in credit risk.

 Criteria: Includes:

1. Past due 30-90 days (with or without a repayment program).

2. Debt exceeding approved limit for 30+ days.
3. Interest due and uncollected for 30+ days.
4. Overdraft Accounts:

 Inactive for 30+ days, or

 Debit balance of 1-4% of the approved limit, at least once in the last 360 days.

Slide 5: Sub-standard Classification

 Definition: Exposures with severe credit risk.

 Criteria: Includes:

1. Past due 90-180 days (with or without a repayment program).

2. Debt exceeding approved limit for 90+ days.
3. Interest due and uncollected for 90+ days.
4. Overdraft Accounts:

 Inactive for 90+ days, or

  Debit balance of 5-19% of the approved limit, at least once in the last 360 days.

Slide 6: Doubtful Classification

 Definition: Exposures with very high risk of default.

 Criteria:

1. Past due 180-360 days (with or without a repayment program).

2. Debt exceeding approved limit for 180+ days.
3. Interest due and uncollected for 180+ days.
4. Overdraft Accounts:

 Inactive for 180+ days, or

 Debit balance of 20-49% of the approved limit, at least once in the last 360 days.

Slide 7: Loss Classification

 Definition: Non-performing loans with a high probability of default.

 Criteria:

1. Past due 360+ days (with or without a repayment program).

2. Debt exceeding approved limit for 360+ days.
3. Interest due and uncollected for 360+ days.
4. Overdraft Accounts:

 Inactive for 360+ days, or

 Debit balance of 50%+ of the approved limit, at least once in the last 360 days.

Slide 8: Unlikely to Pay

 Definition: Exposures deemed unlikely to be repaid without collateral realization.

 Criteria:
o Applies regardless of the number of days past due.
o Based on evidence that full repayment is unlikely.
Slide 9: Forbearance-Restructure Process

 Definition: Restructuring of exposures to improve credit quality.

 Key Points:
o Prudent restructuring to improve credit quality.
o Maximum of 3 restructurings for short/medium-term loans; 4 for long-term loans.
o Restructured loans must meet exit criteria to improve classification.

Slide 10: Impact of Restructuring on Classification

 Post-Restructure Classification:
o Loans restructured more than twice are classified as sub-standard or worse.
o Restructured loans remain "restructured" until they meet certain exit criteria (e.g.,
timely payments for one year).

Slide 11: Bank's Role and National Bank Oversight

 Oversight: National Bank reviews banks’ classification and provisioning policies.

 Actions: If classification or provisioning is inadequate:
o Bank may be required to revise policies, adjust classifications, or increase provisioning.

Slide 12: Provisioning Requirements

 Purpose: Banks must maintain provisions for loan losses to absorb potential losses.
 Minimum Provision Percentages (based on classification):
o Pass: 1%
o Special Mention: 3%
o Sub-standard: 20%
o Doubtful: 50%
o Loss: 100%

Slide 13: Deductions and Provisioning Adjustments

 Deductions: Before applying minimum provisions, banks can deduct:

 o Accrued but uncollected interest in suspended accounts.
o Estimated collateral value (if applicable).
 Minimum Provision: No less than 3% of the outstanding loan or advance, even after deductions.

Slide 1: Title Slide

Provisioning Requirements for Off-Balance Sheet Exposures

 Overview of the main provisions

 Key regulations for banks

Slide 2: Overview of Provisioning Requirements

 Banks must maintain provisions for potential losses from off-balance sheet exposures.
 These provisions are established via charges to the provision expense in the profit and loss
statement.
 Includes exposures like letters of credit, guarantees, and commitments to loan or advances.

Slide 3: Types of Off-Balance Sheet Exposures

1. Letter of Credit (LC)

2. Guarantees (Performance Bonds, Bid Bonds, etc.)
3. Commitments to Loan/Advances
4. Other Off-Balance Sheet Exposures

 Each requires specific provisions and risk management measures.

Slide 4: Prudential Provision Percentages

 Banks must maintain provisions against total off-balance sheet exposures.

 The following minimum general provisions are required:

o Guarantee without counter-guarantee: 2%

o Guarantee with counter-guarantee (foreign bank/insurance): 1%
o Commitment to loan/advance: 2%
 o Letter of credit: 2%
o Other exposures: 2%

Slide 5: Additional Provisions for Non-Performing Exposures

 Non-performing exposures: Additional 2% provision required.

 Conditions include:

o Unlikely full recovery.

o Deteriorating creditworthiness of counterparty.

Slide 6: Provisions for Off-Balance Sheet Exposures under

Litigation

 An additional 5% provision is required for off-balance sheet exposures that are under litigation.

Slide 7: Monitoring and Reviewing Provisions

 Banks must have a system in place to measure and control off-balance sheet risks.
 Continuous review is necessary to ensure provisions remain adequate and reflect potential
losses.

Slide 8: Eligibility of Collateral

 Collateral must meet certain criteria to be considered for provisioning:

1. Legally enforceable.
2. Appropriately charged and registered.
3. Adequately insured.
4. Valued by a qualified valuer.
5. Free from prior liens.
Slide 9: Valuation of Physical Collateral

 Banks must use external valuers approved by competent authorities.

 Valuations must be impartial, transparent, and objective, covering:

o Value of the collateral.

o Market conditions.
o Legal and actual attributes of collateral.

Slide 10: Mitigating Conflicts of Interest in Collateral

Valuation

 Valuers must be independent of the credit decision-making process.

 Banks should ensure valuers are professionally competent and meet applicable standards.
 Procedures must avoid conflicts of interest, such as valuers being involved in loan decisions.

Slide 1: Title Slide

Duty to Use Applicable International Financial Reporting Standard

Overview of Key Requirements for Provisioning, Financial Reporting, and Write-offs

Slide 2: Introduction to IFRS and Credit Losses

 Banks must calculate expected credit losses in line with International Financial Reporting
Standards (IFRS).
 The directive ensures proper financial management and risk assessment for banks.

Slide 3: Role of IFRS in Credit Loss Calculation

 IFRS provides a standardized approach to calculating expected credit losses.

 Aligns financial reporting across banks and enhances transparency and consistency.

Slide 4: Prudential Provisions vs. IFRS Losses

  If expected credit losses (under IFRS) are lower than prudential provisions:

o The difference is transferred from retained earnings to a non-distributable reserve.

 If IFRS losses are higher, they are considered sufficient for compliance with the directive.

Slide 5: Provisioning for Loan Losses

 Banks must maintain provisions for loan losses that reflect potential future credit losses.
 The provision level is determined using both IFRS and prudential standards.

Slide 6: Portfolio Composition and Financial Statement

Review

 Banks must review the latest financial statements of borrowers who have been in business for
one year or more.
 Required for loans of Birr 10 million or more to assess financial health and creditworthiness.

Slide 7: Audited Financial Statements Review

 Borrowers must provide audited financial statements.

 This ensures the reliability and accuracy of financial information before granting large loans.

Slide 8: Examiner’s Role in Review

 Examiners from the National Bank assess the bank’s provisions for loan losses.
 The bank must maintain detailed records supporting the Provisions for Loan Losses Account.

Slide 9: Adequacy of Loan Loss Provisions

 If provisions are inadequate by more than 10%, the bank must adjust the provisions to be within
10% of the examiner's estimate.
Slide 10: Disagreements with National Bank’s Examiners

 If there’s a disagreement regarding the adequacy of provisions, the Board of Directors can
appeal to the National Bank.
 The appeal process ensures fairness and transparency in the evaluation of provisions.

Slide 11: Executive Officer Responsibilities

 Bank executive officers must attend all on-site examination meetings.

 They must be fully apprised of the examiner’s concerns regarding loan classifications and
provisioning.

Slide 12: Write-off Policy

 Banks must establish sound policies for timely write-offs of identified losses.
 Write-offs ensure that non-performing loans are properly addressed and do not distort financial
reports.

Slide 13: Sound Write-off Procedures

 Write-offs must be done promptly once a loss is identified.

 This keeps financial statements accurate and aligns with regulatory requirements.

Slide 14: Provisioning or Write-off Requirements (1)

1. Depreciation of Fixed Assets:

o Must be charged from the bank’s annual income.

2. Operating and Accumulated Losses:

o Must be provided for from the annual net profit until fully covered.
Slide 15: Provisioning or Write-off Requirements (2)

1. Pledged Assets:

o Fully provided for when lodged or pledged as collateral.

2. Preliminary Expenses:

o Amortized fully within five years.

Slide 16: Treatment of Uncollectible Claims

 Uncollectible claims (other than loans) should be classified and provided for following the same
method used for term loans.
 These claims may also be written off as operating expenses once identified.

Slide 17: Interpretation of the Directive

 All exposures held by a bank must be accounted for and categorized in accordance with this
directive.
 Banks must submit written requests to the National Bank for confirmation on any interpretation
not covered by the directive.

Slide 18: Reporting Requirements

 Quarterly Reports on the following must be submitted to the Banking Supervision Directorate:

o Loan and advances classification and provisioning.

o Provisioning for off-balance sheet exposures.

Slide 19: Additional Reporting on Loans

 Restructured Loans: Report on loans that have been restructured.

  Loans Re-categorized: Report on loans moved from non-accrual to accrual status.

Slide 20: Transition Period and Compliance Timeline

 Banks not fully compliant with the directive must submit an action plan within 90 days.
 Full compliance is required within two years from the effective date (June 12, 2024).

The International Financial Reporting Standards (IFRS), specifically IFRS 9: Financial

Instruments, addresses the calculation and recognition of Expected Credit Losses (ECL). Here
are the key points of IFRS 9 on Expected Credit Losses:

1. Expected Credit Loss Model

 IFRS 9 introduced the Expected Credit Loss (ECL) model to calculate provisions for credit losses.
 Unlike the incurred loss model under IAS 39, which recognized losses only when a trigger event
occurred, the ECL model requires recognizing losses earlier—as soon as a financial asset is
originated or purchased.
 The model aims to improve the timeliness of loss recognition, ensuring that banks and other
financial institutions anticipate potential future credit losses.

2. ECL Calculation

 Expected Credit Losses are calculated based on forward-looking information and take into
account:

o Probability of Default (PD): The likelihood that the borrower will default on a loan.
o Loss Given Default (LGD): The loss the lender expects to incur if the borrower defaults,
after considering recovery rates.
o Exposure at Default (EAD): The amount the lender is exposed to at the time of default.

 The loss is calculated using best estimates of these parameters over the life of the loan.
3. Three-Stage Approach for ECL Recognition

IFRS 9 uses a three-stage approach to determine the level of provisioning:

 Stage 1: Performing Loans (Low Credit Risk)

o For loans that are performing and have not shown significant increases in credit risk,
banks calculate 12-month ECL. This reflects the expected losses over the next 12
months.

 Stage 2: Underperforming Loans (Significant Increase in Credit Risk)

o When there’s a significant increase in credit risk since initial recognition but the loan is
not yet in default, banks must recognize the lifetime ECL, which reflects the total
expected credit losses over the life of the asset.
 Stage 3: Non-performing Loans (Credit Impaired)

o When a loan becomes credit impaired (i.e., it is in default), banks recognize the lifetime
ECL, which is calculated based on the full life of the asset.
o Interest revenue is then recognized on the net carrying amount (i.e., after applying the
provision).

4. Forward-Looking Information

 The ECL model requires the incorporation of forward-looking information such as:

o Economic conditions.
o Macroeconomic factors (e.g., unemployment rates, GDP growth, interest rates).
o Borrower-specific financial condition.

 Banks must adjust their ECL estimates to reflect future economic expectations rather than
relying solely on historical data.

5. Simplified Approach for Trade Receivables and Lease

Receivables

 For trade receivables and lease receivables that do not have a significant financing component,
IFRS 9 allows the use of a simplified approach.
  Under this approach, lifetime ECL is always recognized, and there’s no need to track changes in
credit risk.

6. Impact on Financial Statements

 ECL provisions directly affect the balance sheet as they represent the credit loss provision for
financial assets.
 Banks must also disclose the amount of ECL recognized in the income statement for each
period, as well as the assumptions used in calculating them.

7. Implementation and Timing

 IFRS 9 requires the adoption of the ECL model for financial years starting on or after January 1,
2018.
 Transitioning from the incurred loss model to the ECL model was a significant change in how
banks recognize and provision for credit losses.

Summary:

The IFRS 9 ECL model ensures that financial institutions recognize and account for credit
losses based on forward-looking information rather than waiting for a trigger event. By
adopting a three-stage approach, banks are encouraged to continuously assess the credit risk of
their financial assets, recognizing losses earlier and providing more accurate provisions to cover
potential defaults.

You said:

what mean IFRS 9

ChatGPT said:

ChatGPT

IFRS 9 (International Financial Reporting Standard 9) is a set of accounting standards issued by

the International Accounting Standards Board (IASB), which addresses the accounting for
financial instruments. It was introduced to replace IAS 39 (Financial Instruments: Recognition
and Measurement) and provides a more comprehensive framework for the classification,
measurement, and impairment of financial assets and liabilities.
Key Elements of IFRS 9:

1.

Classification and Measurement of Financial Instruments

2.

o IFRS 9 establishes criteria for classifying financial assets and liabilities based on their
cash flow characteristics and the business model within which they are managed.
o Financial assets are classified into three categories under IFRS 9:

 Amortized cost (e.g., loans and receivables).

 Fair value through other comprehensive income (FVOCI) (e.g., debt
instruments held for collection and selling).
 Fair value through profit or loss (FVPL) (e.g., trading securities).

o Financial liabilities are generally classified and measured at amortized cost unless they
are held for trading or designated at fair value.

3.

Impairment (Expected Credit Loss Model)

4.

o One of the most significant changes under IFRS 9 is the introduction of the Expected
Credit Loss (ECL) model for impairment of financial assets.
o Banks and other financial institutions are required to recognize credit losses on financial
assets as soon as they are originated, rather than waiting for a trigger event (e.g., a
default).
o The model includes a three-stage approach to recognize and measure impairment
based on changes in the credit quality of the financial asset over time:

 Stage 1: 12-month ECL for financial assets that have not significantly
deteriorated in credit quality.
 Stage 2: Lifetime ECL for financial assets that have shown a significant increase
in credit risk since initial recognition.
 Stage 3: Lifetime ECL for credit-impaired financial assets (i.e., loans in default).

5.
 Hedge Accounting

6.

o IFRS 9 provides updated guidance on hedge accounting, making it more aligned with
risk management practices. The standard allows for better alignment of the accounting
for hedging instruments with how entities manage risks.
o The goal of hedge accounting under IFRS 9 is to provide better transparency and reflect
the economic effect of hedging transactions in the financial statements.

Why Was IFRS 9 Introduced?

IFRS 9 was developed to address some of the limitations and complexities in IAS 39:

 IAS 39 was often seen as too complex and inconsistent, especially in how it dealt with
impairment and the recognition of credit losses.
 IFRS 9 aims to provide clearer and more transparent rules for recognizing and measuring
financial instruments, improving the relevance and comparability of financial statements.

Effective Date:

 IFRS 9 became effective for annual periods beginning on or after January 1, 2018. It applies to
all entities reporting under IFRS and impacts the accounting for financial instruments, including
loans, investments, derivatives, and debt securities.

Summary:

In short, IFRS 9 is a standard that governs the accounting for financial instruments, focusing
on:

 Classifying and measuring financial assets and liabilities.

 Recognizing credit losses earlier through the Expected Credit Loss (ECL) model.
 Simplifying and improving hedge accounting practices.

Its primary aim is to enhance the quality and transparency of financial reporting, especially in
relation to financial assets' credit risk and impairments.

IFRS 9 replaced IAS 39 (Financial Instruments: Recognition and

Measurement) as the standard for accounting for financial instruments.
IFRS 9 came into effect for annual periods beginning on or after
January 1, 2018, marking the replacement of IAS 39.
IAS stands for International Accounting Standards. These are a set of
accounting rules and guidelines developed by the International
Accounting Standards Committee (IASC), which was established in
1973. The goal of IAS was to create a global standard for financial
reporting to ensure consistency and comparability in financial statements
across different countries.

Slide 1: Title Slide

 Title: Credit Impairment, Forbearance, and Significant Increase in Credit Risk (SICR)
 Subtitle: In-depth Overview of Credit Risk Assessment and Management
 Date: [Insert Date]
 Presenter: [Your Name]

Slide 2: Introduction to Credit Risk Management

 Overview of Key Concepts:

1. Credit Impairment: Identification of credit-impaired assets.

2. Forbearance and Restructuring: Measures to aid distressed borrowers.
3. Significant Increase in Credit Risk (SICR): Criteria for determining when credit risk has
increased significantly.

Slide 3: What is Credit Impairment?

 Definition: Credit impairment refers to a financial asset that has experienced a significant
decline in value due to a borrower’s financial difficulties.
  Importance: This assessment helps financial institutions to adjust provisions and manage risk
effectively.

Slide 4: Key Indicators of Credit Impairment

 Observable data showing the following:

o Financial Difficulty: Borrower is facing financial stress.

o Breach of Contract: Default or past due payments.
o Concessions Given: Lender makes special terms to assist the borrower.
o Bankruptcy Risk: Likelihood of borrower filing for bankruptcy or reorganization.
o Disappearance of Market: Loss of active market for the financial asset.
o Deep Discount Purchases: Purchase of assets at a deep discount reflecting losses.

Slide 5: Examples of Events Leading to Credit Impairment

 Several events that can lead to credit impairment:

o Single Event or Combined Events: A single event (e.g., default) or multiple factors (e.g.,
declining financial performance and default) may cause an asset to become impaired.
o Comprehensive Assessment: No single event is required; a combination of factors may
indicate impairment.

Slide 6: What is Forbearance?

 Forbearance refers to the temporary relief or concession provided by a bank to a borrower

experiencing financial difficulty.
 Purpose: To prevent default and help the borrower service the debt under more favorable
conditions.

Slide 7: Types of Forbearance Measures

 Examples of Concessions:

1. Extended Loan Term: Giving more time for repayment.

 2. Rescheduled Payments: Adjusting dates for principal and interest payments.
3. Interest Rate Reduction: Lowering the interest rate to ease repayment.
4. Grace Periods: Allowing periods where no payments are due.
5. Capitalizing Arrears: Adding overdue amounts to the principal balance.

Slide 8: Forbearance Measures (Contd.)

 More examples:

o Forgiving Debt: Reducing the principal or interest owed.

o Debt-to-Equity Conversion: Converting outstanding debt into equity.
o Collateral Adjustments: Reducing or releasing collateral demands.
o Amortization Changes: Changing an amortizing loan to an interest-only loan.

 Important Note: These measures are provided when the borrower is assessed as experiencing
financial difficulty.

Slide 9: Identifying Financial Difficulty in Borrowers

 Financial Difficulty Indicators:

1. Past Due or Expected Default: Borrower is overdue or likely to default soon.

2. Delisting of Securities: Borrower’s securities are at risk of being delisted due to non-
compliance.
3. Inability to Service Debt: Forecasted cash flow shortfall preventing debt servicing.

Slide 10: Concessions in Financial Difficulty

 Concessions Include:

1. Changes in Contract Terms: Significant alterations to the loan agreement terms.

2. Supplementary Agreements: New contracts to refinance the debt.
3. Clause Exercise: Using clauses in existing contracts to modify terms.

 Goal: To allow borrowers sufficient flexibility to repay their obligations without default.
Slide 11: Refinancing as a Concession

 Refinancing can be a form of concession if:

1. New Contract: Replacing the original contract due to financial distress.

2. Similar Terms: Even if the new contract terms are not more favorable, refinancing may
still count as a concession if triggered by financial difficulty.

 Considerations: The new terms must assist the borrower in avoiding default.

Slide 12: What is Significant Increase in Credit Risk (SICR)?

 SICR refers to a situation where the credit risk associated with a financial asset has increased
significantly since its initial recognition.
 Purpose: To determine when the asset should be assessed for lifetime expected credit losses
rather than 12-month expected losses.

Slide 13: Factors Affecting SICR

 Information to Consider:

1. External Credit Rating Changes: Significant downgrade by external agencies.

2. Internal Credit Rating Downgrades: Decrease in the internal credit score or risk level of
the borrower.
3. Economic or Business Conditions: Expected increase in interest rates, higher
unemployment, or declining business performance.
4. Adverse Financial Conditions: Changes in the borrower’s financial health that impact its
ability to meet debt obligations.

Slide 14: More Factors Influencing SICR

 Additional factors include:

1. Operating Results: Declining revenues, increasing risks, or financial leverage issues.

 2. Collateral Value: Decrease in the value of collateral that supports the loan.
3. Third-Party Guarantees: Decline in the quality of third-party guarantees or
enhancements.

Slide 15: More Signs of SICR

 Other Signs:

1. Decline in Performance: Negative changes in the borrower’s performance (e.g.,

declining sales or margins).
2. Regulatory or Technological Shifts: External factors affecting the borrower’s ability to
repay (e.g., technology disruptions).
3. Changes in Loan Documentation: Breach of contract or amendments to loan terms.

Slide 16: Past Due Information and SICR

 30-Day Presumption: If a financial asset is more than 30 days past due, it is assumed to have
experienced a significant increase in credit risk.
 Rebuttable Presumption: This can be rebutted with sufficient evidence to the contrary.

Slide 17: Impact of SICR on Credit Loss Recognition

 Lifetime Credit Losses: Once SICR is determined, the expected credit losses over the life of the
asset must be recognized.
 Important for Credit Risk Management: Early identification of SICR is crucial for maintaining
accurate provisioning.

Slide 18: Monitoring and Reviewing Credit Risk

 Continuous Monitoring: Banks need to regularly review the borrower’s financial status and any
changes in market conditions.
 Documentation and Updates: Ensure that all information related to credit risk changes is
documented and regularly updated.
Slide 19: Key Takeaways

 Credit Impairment: Recognize signs of impairment through various events (default, financial
difficulty).
 Forbearance: Provide temporary relief for borrowers facing financial hardship.
 SICR: Monitor significant increases in credit risk and ensure appropriate provisioning for credit
losses.

Slide 20: Conclusion

 Summary:

1. Understanding credit impairment, forbearance, and SICR is essential for sound risk
management.
2. Proactive monitoring and timely interventions help reduce the impact of credit losses.
3. Proper assessment of credit risk leads to better financial decision-making and more
accurate financial statements.