Rules on Management of Problem Loans

Specific Requirements for Each Type of Collateral and Guarantees A) Financial collateral Under all approaches and methods, financial collateral should qualify as eligible collateral where all the following requirements are met: i. The credit quality of the borrower and the value of the collateral should not have a material positive correlation. Where the value of the collateral is reduced significantly, this should not alone imply a significant deterioration of the credit quality of the borrower. Where the credit quality of the borrower becomes critical, this should not alone imply a significant reduction in the value of the collateral. Securities issued by the borrower, or any related group entity, should not qualify as eligible collateral. Notwithstanding the aforementioned, a borrower's own issues of covered bonds qualify as eligible collateral, when they are posted as collateral for a repurchase transaction, provided that they comply with the condition set out in this paragraph. ii. Banks should ensure that sufficient resources are devoted to the orderly operation of margin agreements with OTC derivatives and securities-financing counterparties, as measured by the timeliness and accuracy of their outgoing margin calls and response time to incoming margin calls. B) Immovable property i. Banks should clearly document the types of residential and commercial immovable property they accept in their lending policies. ii. Immovable collateral should be classified in the following categories based on the underlying nature and behaviour: a) Investment properties; b) Owner-occupied properties; c) Development properties; d) Properties normally valued on the basis of trading potential. C) Receivables Receivables should qualify as eligible collateral, where all the following requirements are met: i. Banks should have in place a sound process for determining the credit risk associated with the receivables, such a process should include analyses of a borrower's business and industry and the types of customers with whom that borrower does business. Where the bank relies on its borrowers to ascertain the credit risk of the customers, the bank should review the borrowers' credit practices to ascertain their soundness and credibility; ii. The difference between the amount of the loan and the value of the receivables should reflect all appropriate factors, including the cost of collection, concentration within the receivables pool pledged by an individual borrower, and potential concentration risk within the bank's total loans beyond that controlled by the bank's general methodology. iii. Banks should maintain a continuous monitoring process appropriate to the receivables. They should also review, on a regular basis, compliance with loan covenants, environmental restrictions, and other legal requirements; iv. Receivables pledged by a borrower should be diversified and not be unduly correlated with that borrower. Where there is a material positive correlation, banks should take into account the attendant risks in the setting of margins for the collateral pool as a whole; v. Banks should not use receivables from subsidiaries and affiliates of a borrower, including employees, as eligible credit protection: vi. Banks should have in place a documented process for collecting receivable payments in distressed situations. Banks should have in place the requisite facilities for collection even when they normally rely on their borrowers for collections. D) Other physical collateral Physical collateral other than immovable property should qualify as eligible collateral, when the conditions specified as general requirements for collateral are met. E) Treating lease exposures as collateralized Banks should treat exposures arising from leasing transactions as collateralized by the type of property leased, where all the following conditions are met: i. The conditions set out for the type of asset/property leased to qualify as eligible collateral are met; ii