NOTICE NO. BU/N-5/2017/40

CLASSIFICATION OF IMPAIRED CREDIT / FINANCING FACILITIES AND FINANCIAL ASSETS FOR PROVISIONING PURPOSES

1. INTRODUCTION

1.1. Following the issuance of Notice No: 1/2009 on Classification of advances as non-performing and treatment of interest on non-performing advances, Guidelines No:1 /2009 on Provision for bad and doubtful debts, Notice No. 2/2010 on Classification of financing as non-performing and treatment of profit on non-performing financing, Guidelines No. 1/2010 on Provision for bad and doubtful financing and the proposed implementation of Pillar 1 of Basel II, the AMBD is issuing a new notice for Credit/ Financing Facilities and Financial Instruments (collectively 'financial assets') which are impaired (collectively `impaired assets'). The objective of this Notice is to establish a common standard for identification of impaired assets and the recognition of income thereon which would be in line with Basel II Pillar 1 standardised approach' and IFRS (IAS 39 and IFRS 9 in particular).

1.2. The requirements in this Notice set the minimum provisioning levels that licensees shall observe for 'impaired assets' in regulatory returns or in financial statements. Any licensee which chooses to adopt more stringent standards is encouraged to do so. Where IFRS require higher provisioning levels than required in this Notice, licensees should take the provision levels required by IFRS. This means in summary that licensees must make provisions (or allowances) for impairment at the higher of the level required by either this Notice or IFRS.

1.3. This Notice is issued pursuant to section 54 of the Autoriti Monetari Brunei Darussalam Order, 2010 and applies to all licensees under the following:- 1.3.1. Banking Order, 2006; 1.3.2. Islamic Banking Order, 2008; and 1.3.3. Finance Companies Act, Chapter 89.

1.4. This Notice shall take immediate effect.

' As outlined in the Capital Adequacy Framework 1

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1.5. Licensees are expected to review their credit/ financing and investment portfolios and implement any required increases in provisions on a portfolio by portfolio basis (e.g. retail secured, retail unsecured, corporate secured, corporate unsecured) or by any other means to ensure compliance with the required minimum levels in paragraph 6 of this Notice by 31st December 2017.

2. DEFINITIONS

For the purposes of this Notice —

"Credit / Financing Facility(ies)" means secured and unsecured credit / financing facility(ies) provided to a customer by a licensee in the form of a loan(s) / financing, advance(s), hire-purchase, credit cards or any other form or manner of credit / financing;

"Financial Instruments" shall have the same meaning as under IFRS. For the purpose of provisioning for impairment, this document refers to financial assets measured at amortised cost (usually loans / financing or receivables), financial assets at fair value through profit and loss, and financial assets at fair value through comprehensive income. This means that the scope of this standard includes not just Credit / Financing Facilities, but also all applicable Financial Instruments under IFRS 9 and IAS 39 which may be subject to impairment where they constitute asset items for the reporting licensee.

"International Financial Reporting Standards (IFRS)" means the accounting

standards adopted in Brunei Darussalam since financial year 2014.

3. CLASSIFICATION OF CREDIT / FINANCING FACILITIES AND FINANCIAL INSTRUMENTS AS IMPAIRED

3.1. The various categories of financial assets shall be classified as "impaired" on the

following basis:-

3.1.1. Overdrafts: When accounts have been static and are in excess of the approved limit for 90 days or more. For this purpose, the accounts of which the balances are not regularly and significantly reduced for 90 days or more are also to

be treated as static.

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3.1.2. Term Loans / Financing, Block Loans / Financing, Packing Credits, Pledge, Hypothecation or Mortgage Loans / Financing, Revolving Loans / Financing, Discounting Facilities, Hire Purchase Agreements and Other Credit Facilities: When principal and/or interest/ profit have been past due for 90 days or more.

3.1.3. Trust Receipts, Bills of Exchange, Bankers Acceptances or other instruments of similar nature: When the facilities are past due for 90 days or more after the maturity

date.

3.1.4. Rescheduled / Restructured Credit / Financing Facilities

When rescheduling / restructuring occurs before a Credit/ Financing Facility is classified as impaired, the rescheduled / restructured Credit / Financing Facility shall be classified as impaired when, in the aggregate, the period of time the Credit / Financing Facility is past due before rescheduling / restructuring (if any) and after rescheduling / restructuring, is 90 days or more. Where rescheduling / restructuring occurs after an account has been classified as impaired, the rescheduled / restructured Credit / Financing Facility shall continue to be classified as impaired.

3.2. Impaired assets shall be classified in the following categories:-

3.2.1. Substandard Financial assets where the situation of the customer, counterparty or issuer (collectively `counterparty) makes it uncertain that part, or the entirety of a Credit / Financing Facility, shall be repaid, and including all

financial assets that are past due for 90 days or more, but less than

180 days, shall be classified as substandard. Characteristically, these are financial assets which involve more than normal risk of loss due to unsatisfactory debt servicing record or financial condition of the counterparty, insufficiency of collateral or any other factors which give rise to some doubts as to the ability of the counterparty to comply with the present terms. Consequently, there is also the distinct possibility that the licensee is likely to sustain some loss if these deficiencies are not

corrected.

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3.2.2. Doubtful Financial assets with a high risk of partial default including those that are past due for 180 days or more but less than 360 days shall be classified as doubtful. Usually these are financial assets where full performance by the counterparty of obligations is improbable and there is a high risk of default.

3.2.3. Loss Financial assets where the situation of the counterparty makes it virtually certain that counterparty cannot fulfil the obligations concerned. The 'Loss' category includes financial assets that are past due for 360 days

or more. These financial assets are deemed uncollectible and worthless.

3.3. All financial assets classified as impaired (collectively 'impaired assets') should be segregated from other financial assets and relocated to a separate control account so as to facilitate close follow-up action for identification and capital adequacy reporting purposes. The transfer to impaired status at 90 days past due should be automated to ensure that there is no human intervention in the identifying of impairment for such past due financial assets.

3.4. A separate Control Account should be maintained for Rescheduled / Restructured Credit / Financing Facilities.

4. TREATMENT OF INTEREST / PROFIT ON IMPAIRED ASSETS

4.1. All interest/profit accrued (but uncollected) from the date a financial asset is classified as 90 days or more past due or from the date a financial asset is classified as 'impaired' shall be treated in accordance with applicable IFRS.

5. RECLASSIFICATION OF IMPAIRED ASSETS INSTRUMENTS AS PERFORMING

5.1. In the case of financial assets stated in Paragraph 3.1.1. to 3.1.3. above, upon settlement of all amounts past due, a Credit / Financing Facility or financial instrument may be reclassified as performing and thereafter, income may be recognised in accordance with IFRS.

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However, funds for the repayment of the past due amount should not be obtained from the creation of new Credit / Financing Facilities or Financial Instruments from the same licensee in the name of the same counterparty.

5.2. In the case of Credit Facilities stated in paragraph 3.1.4. above, such Credit / Financing Facilities may be reclassified as performing only when the repayments under the rescheduled / restructured terms have been complied with for a continuous period of at least 180 days. On the other hand, a Credit / Financing Facility which was performing at the time of rescheduling / restructuring but subsequently became impaired, shall be reclassified as a performing Credit / Financing Facility only upon full settlement of the repayments in past due under the rescheduled / restructured terms.

6. PROVISIONING FOR IMPAIRED ASSETS

6.1. Financial assets classified as 'impaired assets' shall incur minimum provisions (or loss allowances) as follows:-

6.1.1. Substandard In the case of substandard impaired assets, licensees shall make a specific impairment provision of not less than 20 percent of the carrying amount of the financial asset. Licensees should follow IFRS for the accounting treatment of such impairment (i.e. depending on whether the asset is measured at amortised cost, fair value through other comprehensive income or fair value through profit and loss). At this stage, the value of collateral shall not be considered in the calculation of the minimum impairment provision of 20 percent of the carrying amount.

6.1.2. Doubtful In the case of doubtful impaired assets, licensees shall make a specific impairment provision of not less than 50 percent of the carrying amount of the financial asset, net of realisable value of eligible collateral as outlined in paragraph 10 of this Notice. Licensees should follow IFRS for the accounting treatment of such impairment.

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6.1.3. Loss In the case of loss impaired assets, licensees shall make a specific impairment provision equivalent to 100 percent of the carrying amount, net of realisable value of eligible collateral as outlined in paragraph 10 of this Notice, if any.

7. COLLECTIVE IMPAIRMENT PROVISION

7.1. In addition to the specific impairment provisions set out in paragraph 6 above, all licensees are encouraged to maintain a collective impairment provision of any percentage of their total credit / financing portfolio as a more prudential measure in the interests of good credit risk management, and as permitted by IFRS. This collective impairment provision would generally be applicable where financial assets are not yet 90 days past due and have not yet been individually assessed for impairment.

8. WRITE-BACK OF SPECIFIC IMPAIRMENT PROVISION

8.1. Write-back of specific impairment provision shall be permitted under the following circumstances:-

8.1.1. Where the Credit / Financing Facility has been fully settled; 8.1.2. Where the status has changed with the full settlement of past due

amount, from impaired to current; 8.1.3. Where additional eligible collateral2 has been taken to cover the net

exposure of the licensee; 8.1.4. Where there is enhancement in the value of eligible collateral supported

by documentary proof and a current valuation;

8.2. Write-back of specific provision is not allowed upon acquisition of properties in satisfaction of sums due. In the case of mortgage Credit / Financing Facilities, the impaired status and the provision made shall remain till the properties are actually sold and the sale proceeds applied in liquidation of the impaired Credit / Financing Facilities. The foreclosed properties held in lieu of impaired Credit / Financing Facilities shall be disclosed as such in the financial statements of the

licensee.

2 As outlined in paragraph 77 of the Capital Adequacy Framework 6

9. WRITE-OFF POLICY

9.1. All licensees are required to establish a Board-approved policy for:-

9.1.1. Financial assets to be written off; and

9.1.2. Credit / Financing Facilities to be restructured / rescheduled - such a policy should address the maximum number of times a Credit / Financing

Facility may be restructured I rescheduled, have appropriate controls to

prevent 'ever-greening' of Credit / Financing Facilities and a comprehensive provisioning policy for restructured / rescheduled Credit /

Financing Facilities. The criteria to be satisfied for

restructuring/rescheduling should be clearly specified.

10. VALUATION OF ELIGIBLE COLLATERAL FOR PROVISIONING PURPOSES3

10.1. Primary Mortgage Over Property These shall be allowed subject to a 75% haircut on the forced sale value. This collateral can only be considered up to a maximum of 5 years in the loss category. Thereafter, this collateral may no longer be considered for provisioning

purposes.

10.2. Lien Over Fixed Deposit / Savings Deposit These shall be allowed at fair value, as shown in the books of the licensee.

10.3. Guarantees These shall be allowed at fair value, as shown in the books of the licensee.

10.4. Government and Central Bank Securities These shall be allowed subject to a 20% haircut on its fair value, as shown in the

books of the licensee.

3 The treatment of these items on the Capital Adequacy Ratio reporting template is explained in more detail in paragraph 51 of the Capital Adequacy Framework.

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11. PROVISIONS REPEALED

11.1. Notice No. 1/2009 on Classification of advances as non-performing and treatment of interest on non-performing advances & Guidelines No. 1/2009 on Provision for bad and doubtful debts issued to banks on 3 March 2009 are

hereby repealed.

11.2. Notice No. 2/2010 on Classification of financing as non-performing and treatment of profit on non-performing financing & Guidelines No. 1/2010 on Provision for bad and doubtful financing issued to Islamic banks on 12 January 2010 are

hereby repealed.

11.3. Letter issued to banks dated 5 March 2009 titled 'Notice No: 1/2009 & Guidelines

No: 1/2009' is hereby repealed.

11.4. The provisions of any other notices, directives and policy documents issued by AMBD prior to this Notice and which are inconsistent with it are hereby repealed.

MANAGI DIRECTOR AUTORITI MONETARI BRUNEI DARUSSALAM

Date: RI Jamadilakhir 1438 / llMarch 2017

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