DRAFT

Notice to Finance Companies MAS 811 Credit Files, Grading, and Provisioning This notice is issued pursuant to section 30 of the Finance Companies Act (Cap. 108). 2 Credit Files 2.1 All finance companies are also required to maintain credit files on all borrowers. These should contain adequate and timely information on the credit-worthiness of the borrowers so as to enable proper and effective monitoring of credit facilities extended. The information in the credit files should be available in English. 2.2 The credit files are also necessary to enable examiners from the Authority, as well as finance companies’ internal and external auditors, to have immediate and complete factual information from which they can form an objective appraisal on the quality of the credit facilities. 2.3 At a minimum, finance companies are required to maintain in the credit files, information as listed in Appendix 1. Documents to support the information should also be available in the credit files. 3 Grading of Credit Facilities 3.1 In conjunction with the maintenance of adequate credit files, all finance companies in Singapore are also required to conduct regular and systematic reviews of all credit facilities (including off balance sheet items) extended to their borrowers. 3.2 Finance companies should categorise the credit facilities according to the differentiating levels of credit risk arising from the facilities granted. At a minimum, the credit facilities should be categorised into the following five credit grades, namely: pass, special mention, substandard, doubtful and loss. The last three credit grades are considered as classified grades. 3.3 Credit evaluation should be based on the assessment of the borrower’s ability to repay from normal sources of income. The description of each of the credit grades is as follows:-

DRAFT

Pass: To indicate that timely repayment of the outstanding credit facility is not in doubt.

• The credit facility is satisfactorily conducted and does not exhibit any possibility of loss or potential weaknesses in repayment capability, business, cash flow or financial position of the borrower.

Special Mention: To indicate that the credit facility exhibits potential weaknesses that, if not corrected in a timely manner, may adversely affect repayment at a future date, and warrant close attention by the finance company's management.

• Characteristics of special mention credit facilities include, but are not

limited to, the following:-

- Any declining trend in the borrower's operations that signal a potential weakness in the financial position of the borrower, but not to the point that repayment is jeopardised.

- Economic and market conditions that may unfavourably affect the borrower’s profitability and business in the future.

Substandard: To indicate that the credit facility exhibits definable weaknesses, either in respect of the borrower's business, cash flow or financial position, that may jeopardise repayment on existing terms.

• Characteristics of substandard credit facilities include, but are not limited to, the following:-

- Inability of the borrower to meet contractual repayment terms of the

credit facility. - Unfavourable economic and market conditions or operating problems

that would affect the borrower’s profitability and business in the future.

- Weak financial figures (eg losses, negative net worth) or the inability of the borrower to generate sufficient cash flow to service the payments.

- Difficulty experienced by the borrower in repaying other credit facilities granted by the same finance company, or by other financial institutions (where such information is available).

- Breach of any key financial covenants by the borrower.

Doubtful: To indicate that the outstanding credit facility exhibits more severe weaknesses than those in a “substandard” credit facility, such that the prospects of full recovery of the outstanding credit facility are questionable and the prospects of a loss are high, but the exact amount remains undeterminable as yet.

DRAFT

Loss: To indicate that the outstanding credit facility is uncollectible, and little or nothing can be done to recover the outstanding amount from any collateral or from the borrower's assets generally.

3.4 Based on repayment conduct, all credit facilities should, at the minimum, be classified:

• where principal and/or interest is 3 months or more in arrears; or • in the case of a revolving credit facility where the outstanding amount

has remained in excess of the approved limit for a period of 3 months or more, unless the facility does not exhibit weaknesses that would render it classified according to the credit grading framework set out in paragraph 3.3.

Credit facilities should, however, be classified, even when the amount in arrears or the amount in excess of the approved limit has been in arrears for less than 3 months, if the credit facility exhibits weaknesses that render a classification appropriate according to the credit grading framework. 3.5 Restructured credit facilities should be graded “substandard”, or “doubtful” or “loss”, depending on the assessment of the borrower’s ability to repay on the restructured terms. Restructured credit facilities refer to credit facilities for which the finance company has granted to the borrower concessions by virtue of the borrower having difficulty in meeting the original repayment schedule or repayment terms. 3.6 Finance companies may use split credit grades only if certain portions of the credit facility are likely to be recoverable from the realisation of the collateral. If the amount recoverable is considered insufficient to cover the entire amount outstanding, the portion of the credit facility covered by the amount realisable should be graded "substandard" and the remaining portion should be graded "doubtful" or “loss”, as appropriate. 3.7 For finance companies which map their internal credit grades to those set out in the preceding paragraphs, the methodology for mapping the credit grades should be reviewed carefully, to ensure that the internal credit grading classifications are in line with the definitions above. 4 Requirements for Specific Provisions 4.1 Finance companies are required to make specific provisions for their classified credit facilities. Loan loss provisions should be established and maintained at a level that is adequate to absorb expected losses in the finance company’s credit portfolio. Provisioning decisions should be based primarily

DRAFT

on an assessment of the recoverability of individual credit facilities. Specific provisions should be made as soon as a credit facility is classified. 4.2 The specific provisions to be made for classified credit facilities should be the portion not covered by amounts realisable from collateral. 4.3 Finance companies should consider the reliability and timeliness of appraisals or valuations of collateral to ensure that values used for provisioning calculations are appropriate. Finance companies should ensure that an appraisal or valuation of the collateral reflects a realistic estimate of its net realisable value, and takes into consideration the period of time likely required to realise the value of the collateral and the current market conditions when realising the collateral. The net realisable value of the collateral should also take into account the legal enforceability of claims on the collateral and the ease of realisation of the collateral, especially in cross-border situations. Where there are concerns over market liquidity and/or other risks, finance companies should either apply a haircut to the net realisable value of the collateral, or use the forced sale value in the case of mortgaged properties, to determine a realistic value of the collateral. 5 Interest Recognition

When a credit facility is classified, interest that has previously been recognised as income but has not been received should be reversed or fully provided for, unless the amount is adequately secured by collateral. The accrual of interest as income should also cease or be fully provided for. However, interest from classified credit facilities can nonetheless be recognised as income on a cash-receipt basis. 6 Upgrading of Classified Credit Facilities 6.1 Upgrading of classified credit facilities should be supported by a credit assessment of repayment capability, cash flows and financial position of the borrower, in line with the credit grading framework set out in paragraph 3.3. The finance company should exercise prudence in the upgrading of credit facilities and be satisfied that the credit facility has exhibited a sustained trend of improvement to justify the improved credit grading.

DRAFT

6.2 A classified credit facility should only be restored to unclassified status when:-

a) the finance company has received repayment of the past due principal and interest, and the finance company expects repayment of the remaining principal and interest in accordance with the terms of the credit facility; or

b) in the case of restructured credit facilities, there is reasonable

assurance that the borrower will be able to service all future principal and interest payments on the credit facility in accordance with the restructured terms. As a minimum requirement, restructured credit facilities should be classified unless the borrower has complied fully with the restructured terms and serviced all payments continuously for either a period of 6 months, in the case of credit facilities with monthly repayments, or a period of 1 year, in the case of credit facilities with quarterly or semi-annual repayments.

DRAFT

MAS 811 Appendix 1

INFORMATION TO BE MAINTAINED IN CREDIT FILE INFORMATION ON BORROWER Natural Persons– Occupation, Employer, Salary/Income, Financial

position/net worth and any other relevant information. Others– Constitution (proprietorship, partnership, private company,

public company, society, club, co-operative, statutory board), Business background and history, Organisation structure, Management team/Directors, Shareholders/proprietor/partners, Financial position and performance, and any other relevant information.

INFORMATION ON CREDIT FACILITY Description of facility type Purpose of facility Terms of facility – limits, interest rates, repayment schedules, expiry dates Collateral – types, valuation amount, valuation date and where applicable,

valuer name Guarantors – names, financial position and net worth INFORMATION FOR APPRAISAL OF CREDIT APPLICATION (Certain information would not be applicable for borrowers who are natural persons.) Assessment and recommendations of account officer/manager Approval and basis of approval by management/credit committee Qualitative analyses based on:-

Borrower Information History of relationship with customer Information on the relationship of other related groups of the borrower with

the finance company Information obtained on the borrower from other institutions and sources,

including related offices of the finance company Analysis of industry and business risk Single customer concentration (if appropriate)

Quantitative analyses based on:- Financial position and performance (previous, current and projected)

DRAFT

Business plans, sources and cash flow forecast for meeting repayment requirements

Capital resources Other commitments

Collateral appraisal and value INFORMATION FOR PERIODIC CREDIT REVIEW (Certain information would not be applicable for borrowers who are natural persons.) Assessment and recommendations of credit review officer, including:-

Credit grading/rating accorded Provision for losses Suspension of interest

Approval and basis of approval by management/credit committee Current account information:-

Outstanding facilities utilised, including contingent liabilities, commitments and other off-balance sheet transactions

Conduct and servicing of account Correspondences and call reports from meetings with borrowers and site

visits Current qualitative analyses based on latest updated information on borrower,

including review comments from internal and external auditors Current quantitative analyses based on latest updated financial information,

appraisals and valuations Information on the account conduct of other related groups of the borrower Analysis of industry and business risk

DRAFT

FREQUENTLY ASKED QUESTIONS (FAQ) This FAQ note does not form part of the Notice but serves to provide guidance on recommended practices in implementing the Notice. 1 How should the minimum grading requirements stipulated in

paragraph 3.4 be applied to credit facilities that have quarterly, semi-annual or longer repayments?

For credit facilities with repayments on a quarterly, semi-annual or longer basis, the 3-month arrears guideline should not be applied as the prescriptive benchmark. Finance companies should classify such facilities as soon as a default occurs, unless the facility does not exhibit weaknesses that would render it classified according to the credit grading framework set out in paragraph 3.3.

2 Does the minimum guideline stipulated in paragraph 6.2b apply to

restructured payments comprising both principal and interest as well as payments comprising only interest?

The minimum guideline noted in the Notice applies to restructured

facilities whose monthly, quarterly, or semi-annual repayments comprise both principal and interest payments. For restructured facilities with principal repayments on an annual or longer basis, the assessment for upgrading will primarily be based on the assessment of future interest and principal repayment repayment capability, cash flow and financial position of the borrower, in line with the grading framework set out in paragraph 3.3. Restructured facilities which are given a debt moratorium should remain classified with the minimum period to upgrade commencing from the end of the moratorium period.

3 How should syndicated loans be treated with regard to maintenance of credit information and grading? For syndicated loans, each participating financial institution has the

responsibility to maintain credit information, and to grade and make provision for their portion of the syndicated loan in accordance with the requirements of this Notice. The lead/manager financial institution has the responsibility to provide the participating financial institutions with the required information upon the participating financial institution’s request. Where information has come to the attention of a participating financial institution that the lead manager or any other participating financial institution has classified the loan, the participating financial institution should also likewise classify the loan.

DRAFT

4 How should finance companies grade credit facilities granted to borrowers who are adversely affected by an industry-specific downturn?

Finance companies should assess whether the problems faced by

borrowers in any particular industry are in the nature of temporary or seasonal cashflow difficulties or represent a broader deterioration in their financial condition. Any loan that exhibits definable weaknesses which may jeopardize repayment on existing credit terms should be duly classified by the finance company. Classification serves to signal that the loan should be carefully monitored, and that the finance company should set aside a provision to buffer against the possibility that the loan may not be repaid.