Rules on Management of Problem Loans

Governance i. Banks should develop policies and procedures in order to ensure proper management of collateral obtained to mitigate the risk of loss associated with the potential default of the borrowers. Collateral policies and procedures should be approved by the Board of Directors or its delegated authority and should be reviewed at least every three years or more frequently if the bank deems is necessary based on the changes in the relevant regulatory requirements or business practices. Collateral policies and procedures should be fully aligned with the bank’s risk appetite statement (RAS). ii. Consistent with SAMA’s requirements on valuation of real-estate collateral, banks should institute an appropriate governance process with respect to valuers and their performance standards. Banks should monitor and review the valuations performed by internal or external valuers on a regular basis, as well as develop and implement a robust internal quality assurance of such valuations. iii. The internal audit function of banks should regularly review the consistency and quality of the collateral policies and procedures, the independence of the valuers selection process and the appropriateness of the valuations carried out by valuers. 7.2 Types of Collateral and Guarantees Banks should clearly document in collateral policies and procedures the types of collateral they accept and the process in respect of the appropriate amount of each type of collateral relative to the loan amount. Banks should classify the collaterals they accept as follows: i. Financial collateral - cash (money in bank accounts), securities (both debt and equity) and credit claims (sums owed to banks). ii. Immovable collateral - immovable object, an item of property that cannot be moved without destroying or altering it - a property that is fixed to the earth, such as land or a house. iii. Receivables - also referred to as accounts receivable, are debts owed to a company by its customers for goods or services that have been delivered or used but not yet paid for. iv. Other physical collateral - physical collateral other than immovable property. v. Treating lease exposures as collateral - exposure arising from leasing transactions as collateralized by the type of property leased. vi. Other funded credit Protection - cash on deposit with, or cash assimilated instruments held by, a third party bank should come under this category. vii. Guarantee - is a promise from a bank, corporate, any other entity or individual, that the liabilities of a borrower will be met in the event of failure to fulfil contractual obligations.