Circular No. 238 - bccl.gov.lb

1 BANKING CONTROL COMMISSION BANQUE DU LIBAN Beirut, October 23, 2002 Circular No. 238 Addressed to Banks and Financial Institutions Operating in Lebanon Subject: Requirements for the assessment, management and address of credit risk The credit and investment files In application to Decision dated 15/12/2000 concerning Central Bank Circular 77, and Decision dated 21/2/2001 concerning Central Bank Basic Circular 81, And in order to develop the risk management process in the Lebanese banking sector, and to be able to better assess, manage and address this risk in a unified, comprehensive and accurate way, and in accordance with International Banking Practices and Requirements, Banks and Financial Institutions are asked to abide by the following: First : To keep complete files of their customers and all parties they deal with, whether in a credit or an investment relationship, in conformity with Basel Committee requirements on credit and investment risk.

2 The concerned parties are: - Sovereign authorities and Central Banks (including ministries and embassies) - Public Sector institutions (including municipalities, public institutions of commercial ) - Banks and Financial Institutions - Borrowers or groups of related borrowers (individuals, corporations, sole proprietorships, partnerships, branches of foreign companies in ) as defined by the regulations issued by the Central Bank. Second : In order to set common organizational standards and to facilitate the internal and external auditing and follow-up, credit files for each and every type of borrower should include as a minimum the quantitative and qualitative information annexed to this Circular . 2 Third : Credit files should be made available to the appropriate committees and departments that deal with credit, investment facilities, placements etc. whereby internal policies set by the Board of Directors in Lebanese banks or by the General Management in foreign banks, allow these committees to achieve the following: - Acquire a deep knowledge of the activities, financial situation and economic environment in which operates each party they intend to deal with.

3 - Define and measure the credit risk, the market risk, and any other type of risk that might pertain to any of the activities stated above. - Follow up all developments in the risk of the operations stated above which constitute a major part of the global risk that the Bank or Financial Institution might face. - Rationalize credit and investment decisions taken at each level in the organizational decision-making hierarchy, where credit facilities and investments are distributed in a sound methodological way. Ensure that the credit classification of every borrower properly reflects the risks involved, and that sufficient provisioning is met and is in accordance with the bank s lending standards and with the regulations in practice. Fourth : Banks and financial institutions should follow up the information in the credit and investment files and should update them at least once a year or whenever the need arises.

4 A credit file should be kept for every borrower related to the principal borrower in such a way that facilitates reviewing all related files. The files, the access to which should be restricted to the employees dealing with credit and investment and to the concerned committees in the bank, should be kept in a safe place. Fifth : This Circular will be put to implementation starting 31/3/2002 for all new clients and for current clients whose facilities exceed USD 10 million (or equivalent). All information relating to other current clients should be completed before 30/9/2003. Sixth : The present Circular supersedes BCC Circulars 145 and 228. For the Banking Control Commission The Chairman 3 CONTENT OF CREDIT/INVESTMENT FILES First : Major sections of the global credit/investment file.

5 1- Credit file index. 2- Correspondence. 3- General information about the client. 4- Financial information 5- Special information pertaining to large exposures (large debtor customers). 6- Credit / investment analysis and decisions. 7- Follow up and recovery issues. 8- Legal documents. 9- Loan agreements and collateral. 10- Outdated documents (Archives). Second : Detailed of the parts of the file. 1- Listing of information: For each file, a list is made, containing the headings of the information and documents contained in the file, in addition to all documents missing, or that have to be renewed, or that are still not received to date in order to show the content of the file. 2 - Correspondence: Facilities requested with the following mentions facility purpose, type of facility requested, amount, currency, repayment maturities, sources of repayment, and proposed collaterals.

6 An advice signed by the client confirming that he was notified of the bank s approval of the facility, or modification of its terms and conditions, or its cancellation. A written notification to the client of any change in the interest rate(s) or commission(s) applied, and the corresponding effective date. The client s confirmation of the balance of his accounts with the interest rate(s) and commission(s) applied to it. The guarantor s written confirmation of the account balances guaranteed, at least once a year. 3 - General information about the client: Report of the credit information department: This report should contain the following information: Ethics of the client (date at which the client started dealing with the bank, opinion of the client s other bankers) Credit Exposure Report (CDR) and NSF checks reports (obtained from 4 BDL). The financial assessment of the partners or managing shareholders of the corporation.

7 Estimation by the bank of the client s and guarantor s net worth and properties. Report on the real estates and other properties of the client with copies of title deeds and/or real estate certificates. Valuation of the real estates and other properties taken as collateral, to be made by independent appraisers, and in case the loan is not classified as performant the collateral should be revaluated at least once every three years. If the collateral is against a performant loan, it has to be revaluated when the need arises. Reports on the financial situation or financial statements of the guarantor(s) (when applicable), with a detailed list of the properties and other assets owned, and a report from the appraisers valuing these assets, if the collateral given by the client does not provide sufficient coverage. List of the investments of the borrower, and his percentage of ownership in each investment.

8 4 - Financial information (on an individual or consolidated basis when applicable): Financial information: Personal financial situation for an individual client. Financial statements for the last three years (if applicable), signed by the owners of the sole proprietorship that are not required by law to have external auditors. Financial statements on an individual basis (or consolidated if applicable) for the last three years, audited by external auditors, including annual reports of the joint-stock companies, partnerships, and sole proprietorships (if its No. of employees exceeds 25 or its annual turnover exceeds 500,000 Dollars) and branches of foreign companies in Lebanon. The Financial statements include: Balance sheet, profit and loss account, cash flow statement, statement of change in equity and disclosures about the financial statements (refer to IAS 1).

9 In case of financing a new medium or long-term projects, forecasted financial statements should be prepared (budgets). These financial statements should be prepared according to IAS, and according to the regulations and procedures set by the proper authorities, and they should be submitted with the external auditors for the last three years. The published periodic financial statements of companies listed on the Stock Exchange, and of other companies that are required by law to publish their financial statements Other information (commercial facilities) When the turnover of any client exceeds the equivalent of 2 million Dollars, or when the weighted facilities granted exceed the equivalence of 1 million Dollars whichever is less, the following information is requested: A detailed list of the client s payables (if any) Sales breakdown 5 A detailed list of the receivables (if any) with their maturity dates and explanations of the unpaid.

10 Detailed schedules of the maturity dates of receivables and payables. A list of most important items in inventory. 5 - Specific information on large exposures (individuals or corporations): Sectoral and geographic concentration When the facilities granted to a single debtor exceed (after weighting) 10 % of the bank/financial institution capital (tier 1) or the equivalent of million Dollars, whichever is less, a study should be done about the economic sector, and/or the geographic concentration for both the client s business and the guarantor s business (if applicable). This study should detail their ranking and market share. This information should be updated in order to get a comprehensive assessment of the client s risk level. Special information: In addition to the information required in the other sections of the credit file, banks must require, at year-end, from each client or group of related clients, whose facilities exceed (after weighting in all currencies) 15% ofthe bank s capital, or the equivalent of 5 million Dollars, whichever is less, to provide the following data: Turnover of the client s separated between Lebanese Pounds and foreign currencies, including: o Turnover and profit resulting from exports.