Rules Governing Credit Risk Exposure Classification and Provisioning

Additional Consideration for Stage Allocation i. A single exposure to a borrower should not be split between stages. The total balance outstanding (including any overdue amount) must be staged in the higher credit risk stage. Thus, staging of such exposures must occur at the counterparty level instead of at the transactional level. ii. Multiple exposures to the same borrower should be allocated in the same stage if each individual exposure is greater than 5% of total exposures to the customer. The aggregate of the exposures (including any overdue amounts) should be staged in the highest credit risk stage. Thus, staging of such exposures must occur at the counterparty level instead of at the transactional level. 4. Expected Credit Loss Provisioning All finance companies are required to develop and document a robust methodology for estimating the expected credit losses inherent in its exposures and establish adequate provisioning to offset the realization of such expected credit losses. SAMA may request additional provisions, if based on its own assessment, the ECL provision is not considered to be adequate. SAMA may issue additional rules specifying regulatory provision requirements for finance companies. 5. Interest Recognition Interest is recognized on Stage 1 and Stage 2 exposures based on the interest revenue calculated on the gross carrying amount (i.e. without deducting expected credit losses) on Stage 1 and Stage 2 exposures. Interest income on Stage 3 loans is calculated on the net carrying amount (i.e. after deducting expected credit losses). Forborne exposures for which the concession granted was the capitalization of accrued interest previously booked to income should result in a reversal of the accrued interest income capitalized from the income recognized. Where the interest income to be reversed spans more than one financial period, the interest income recognized in the current financial period should be reversed from current interest income. Interest income recognized in the prior financial period should be offset against the provisions for expected credit losses account. This treatment should follow requirements of the IFRS 9. 6. Macroeconomic Factors Finance companies should benchmark economic data published by SAMA and Other Governmental Agencies on an annual basis as part of their economic modelling process. Economic scenarios should be compared with macroeconomic drivers that are relevant to finance company portfolio. Macroeconomic factors may include the following: • GDP and GDP forecast • Brent oil prices (actual and forecast) • Expectations of government spending • Credit growth and availability • Employment indicator (for finance companies active in retail lending) A finance company should use at-least two macroeconomic factors in determining expected credit losses based on their relevance. Finance companies should annually assess whether their approach for macroeconomic factors (based on single model or multiple models) continues to be appropriate in the light of changes in business circumstances i.e. growth in balance sheet, new and complicated products. Forward looking macro-economic scenarios: A moderate stress testing scenario as required under IFRS 9 should be used for upside and downside assumptions i.e. Upside and downside scenarios may each be given maximum 30% weight while the base case scenario may ideally be given 40% weightage. This may be subject to change depending on economic cycles in future. 7. Restructuring Restructuring occurs when there is a change or modification of the terms and conditions of the original exposure contract. Restructuring may only occur in the form of either forbearance or renegotiation and/or refinancing and/or rescheduling. The determination of whether restructuring results in forbearance or renegotiation is based on whether the modified terms of the original exposure contract is concessionary and whether the modification (which otherwise would not have been granted) was in fact granted as a result of the financial difficulty of the borrower.