loan Classification, Provisioning and Credit Review

Historical Data In general, if a bank has at least 3 years of reliable historical data captured through a system validated and approved by SAMA, it could establish an appropriate general provision using such data adjusted for current observable conditions. Such banks may seek exemption from SAMA in relation to the requirements in paragraph 2.2 above. Saudi banks are also encouraged to develop and implement more sophisticated systems that capture historical data on loan defaults and loss experience that could be used for general provisioning purposes. Although historical loss experience provides a reasonable starting point for a bank analysis, these cannot be accepted without analysis of current conditions and future prospects. Banks must make an adjustment that should reflect management’s best estimate of the level of charge-offs or specific provision that will be recognized. Factors include: • Change in national and international lending policies and procedures. • Change in local, national and international economic and business conditions. • Changes in trends, volumes and severity of past due loans, impaired loans and troubled debt restructuring. • Changes in experience, depth and ability of lending management and staff. • Changes in bank’s loan review system and the degree of oversight by the Board. • Existence and effect of any concentration of credit. • Effect of external factors, competition, legislation, regulatory requirement, etc. • Changes in the risk profile of the portfolio as a whole. Loans that have been individually analyzed and provided for with a provision should also be included in the group for determining a bank’s historical experience for such group. However, to avoid double counting, loans for which specific provision has already been made should be subtracted from the group before a historical loss factor is applied to the group to establish appropriate general provisions. Saudi banks should use a period of at least 3 years to determine their average historical loss experience. However, banks should weigh recent experience more heavily to accurately estimate bank’s expected losses in the current economic climate. 2.4 Specific Provisions A specific provision should be made for incurred and expected losses for individually assessed corporate, government, private banking and other large loans to reduce the carrying value of impaired credits to their estimated net realizable amount. Retail loans that fall under the non-performing loan categories should also be covered by specific provisions. Unless otherwise prescribed by SAMA, the following minimum provisions should be made on the aggregate of individual net exposures for each classification category. Loans which have been individually assessed and on which specific provisions, in excess of the prescribed minimum, have been made should be excluded in computing the minimum provisions by each classification category. Minimum provisions are to be computed on the net exposure which represents the balance outstanding less a prudent estimate of the fair value of the perfected collateral. Category Minimum Provision (% of net exposure) ‘Substandard’ 25% ‘Doubtful’ 50% ‘Loss’ 100%