Rule - Management of Credit Risk and Problem Assets (December 2018)

Summary

This CIMA Rule, issued under the Monetary Authority Law, sets binding requirements for how banks, credit unions, building societies and development banks in the Cayman Islands must manage credit risk and problem assets. It should be read together with CIMA's Statement of Guidance on Credit Risk Classification, Provisioning and Management. The Rule requires these 'Credit Risk Holders' to establish board-approved strategies, policies and procedures covering credit granting, risk measurement and monitoring, asset classification, problem asset identification, provisioning, use of risk mitigants, and board reporting, all proportionate to the size, complexity and nature of the institution's activities.

• Asset classification system: A five-category asset classification system: Satisfactory, Special Mention, Substandard, Doubtful, Loss.
• Adverse classification triggers: Triggers for adverse classification based on contractual arrears.
• Reclassification to performing: Conditions under which a problem asset may be reclassified as performing, including a minimum six-month clean repayment history.
• Write-off requirement: A firm requirement that assets classified as Loss be written off within 90 calendar days.
• Prior approval for acquisitions: Prior written CIMA approval is required before acquiring certain volumes of adversely classified assets.
• CIMA access rights: CIMA has a right of full access to information on asset classification and provisioning on request.

Breach of the Rule exposes affected institutions to CIMA's enforcement powers under its Enforcement Manual and the relevant sectoral laws (Banks and Trust Companies Law, Building Societies Law, Cooperative Societies Law, Development Bank Law) as well as the Monetary Authority Law.

Key obligations

• Establish, implement and maintain board-approved credit risk management strategies, policies and procedures appropriate to the institution's size, complexity and nature of activities.
• Board of directors must regularly review and update credit risk strategies, policies and procedures and ensure appropriate credit risk assessment processes and internal controls are in place.
• Document all strategies, policies and procedures and make them accessible to relevant parties, clearly articulating the institution's risk tolerance.
• Operate within sound, well-defined credit-granting criteria and establish overall credit limits for individual borrowers, counterparties and connected groups.
• Ensure credit decisions are made free of conflicts of interest and on an arm's length basis, with related-party credits authorized only on an exception basis and monitored with particular care.
• Ensure major or unusually risky credit exposures are decided by the Board, Senior Management, or an independent credit risk management function reporting to the Board.
• Monitor total indebtedness and risk factors (including unhedged FX exposure) of borrowers, and measure, monitor and control on- and off-balance sheet credit risk.
• Include credit risk exposures in stress testing programs and periodically (at least annually) formally review credit risk ratings.
• Maintain a reliable asset classification system with at minimum the categories Satisfactory, Special Mention, Substandard, Doubtful and Loss, and adversely classify assets contractually in arrears.
• Formulate and document policies for identifying and managing problem assets, including classification, provisioning and write-offs, and conduct consistent regular reviews of problem assets.
• Maintain organizational resources for early identification of deteriorating assets and ongoing oversight of problem assets and collections.
• Maintain adequate, timely provisioning policies consistent with the applicable accounting framework and retain documentation supporting classification and provisioning decisions.
• Provide the Authority with full access to information on asset classification and provisioning upon request.
• Validate any models used to assess and measure expected credit losses through documented policies and procedures.
• Regularly assess the value and concentration risk of risk mitigants (guarantees, credit derivatives, collateral) against board-defined tolerance levels.
• Provide the Board with timely, appropriate information on asset portfolio condition, classification, provisions/reserves and major problem assets.
• Reassess provisioning adequacy and classification status whenever assets are refinanced or rescheduled.
• Only reclassify a problem asset as performing where arrears are fully cleared, timely repayments have been made for at least a continuous 6-month period, and continued collection is expected.
• Follow any reclassification directives issued by the Authority.
• Support upgraded reclassifications with demonstrated evidence of improved borrower repayment capacity and financial condition.
• Obtain prior written approval from the Authority before acquiring adversely classified assets meeting specified thresholds (10% of total assets or capital).
• Fully write off assets classified as Loss within 90 calendar days.

Applies to

Banks licensed under the Banks and Trust Companies Law, Credit unions established under the Cooperative Societies Law, Societies incorporated under the Building Societies Law, Development banks established under the Development Bank Law

Deadlines

• 90 calendar days: Assets classified as Loss must be fully written off within 90 calendar days.
• not less than 6 months: A problem asset can only be reclassified as performing after timely repayments over a continuous repayment period of not less than 6 months.
• at least annually: Loans with assigned credit risk ratings should receive a periodic formal review, e.g. at least annually.