Regulation concerning General and Specific Provisions for loan losses of credit institutions.

V.1 Nature of Regulation V 

1. Supervisory Regulation V is aimed at the establishment of effective provisioning guidelines for credit institutions with respect to their lending. Therefore, the regulation deals with provisioning policies at two levels, general as well as specific provisions.
2. The General Provision for Loan Losses (“GPLL”) covers the potential risks in the entire loan portfolio, whereas Specific Provisions for Loan Losses (“SPLL”) are geared towards the setting up of appropriate provisions for identified losses in specific loans.

V.2 Legal basis, purpose and scope 

1.   Supervisory Regulation V is issued in pursuance of article 21, paragraph 2, sub c of the National Ordinance on the Supervision of Banking and Credit Institutions 1994.

2.   This regulation governs the provisioning policies of all credit institutions under the supervision of the Bank and is applicable to all these institutions.

V.3 Definitions

For the purposes of Supervisory Regulation V, the following definitions apply: 

1. "Equity"  is defined as capital, which is calculated as the total amount of capital (class 3) plus minority interest and less intangible assets as defined in the Chart of Accounts.
2. "Subsidiary" is a company or credit institution in which the institution holds a majority of the shares. 
3. "Credit institution" is an institution as defined in article 1, paragraph 1, sub c and d of the National Ordinance on the Supervision of Banking and Credit Institutions of 1994.
4. "Net loan" is calculated as the gross loan amount minus compensations (as per Appendix A of the General Guidelines of the Chart of Accounts) and SPLL.
5. "Consumer installment loan” is defined as a loan (closed or open-end credit) extended to individuals for household, family or other personal expenditure, rather than for business purpose.
6. "Restructured troubled loan” is defined as a loan (either a consumer installment or other type of loan) of which the credit institution has granted the borrower, for economic or legal reasons relating to the borrower’s financial difficulties, a concession (favorable terms) that the credit institution would not otherwise consider. The concession should be in writing and may include the modification of terms, such as a reduction of the originally agreed interest and or extending the loan’s maturity, a reduction in the remaining principal amount, or the transfer of real estate from the borrower to the credit institution, receivables from third parties, other assets, or an equity interest in the borrower in full or partial satisfaction of the loan.

V.4 Provisioning policy concerning the GPLL

1. Credit institutions should set up the GPLL to provide for potential, but as yet unidentified or unexpected losses in their loan portfolio. Branches of foreign banks which are consolidated in their home country and for which branch the Bank has received a head-office guarantee for all liabilities are exempted from this requirement.
2. Every institution under the supervision of the Bank should maintain appropriate policies to set up the GPLL and to determine the adequacy thereof. 
3. The adequacy of the GPLL should be reviewed by the institution periodically, at least once a year [1] , in relation with the level of the credit risk and the equity position of the institution, because prudent banking policy requires a GPLL level that sufficiently accommodates the inherent credit risks affecting a loan portfolio as a whole.
4. In light of the above, the Bank maintains the policy that under normal economic circumstances and market conditions, with no substantial concentrations of risks and an overall soundness of the loan portfolio, the total minimum required GPLL should be calculated as the sum of the following:

(i)    1.0% of the total net loans to banks;

(ii)   1.0% of the total net loans to debtors rated A- or
       better [2] ;

(iii)  2.0% of the total net loans to other debtors.

5. However, under certain circumstances for a particular institution, a higher GPLL percentage may be necessary. Circumstances that may warrant a higher provision percentage are but not limited to, the following:
   1. depressed conditions in one or more sectors of the economy in which the institution operates;
   2. the level of unsecured loans in relation to the total loan portfolio and equity;
   3. the number and size of large loans; and
   4. the overall condition of the loan portfolio which is measured by the extent of loans classified as substandard, doubtful or loss.
6. The management of each credit institution is responsible for assessing the adequacy of its GPLL, taking into consideration the level of risk in the portfolio and the circumstances under which the institution operates, as specified in paragraph V.4.-5. If required, the Bank will request the credit institution to maintain a higher GPLL percentage than the minimum specified in paragraph V.4.-4.

V.5 Provisioning policy concerning the SPLL

1. Each credit institution should review its total loan portfolio periodically, at least once a year [3] , and have in place procedures and systems for identifying, measuring and monitoring (potential) problem credits on an ongoing basis [4] in order to maintain their SPLL in line with the policies mentioned below.
2. Credit institutions should at least adhere to the Bank's SPLL classification and provisioning policies described in the paragraphs V.5.A and V.5.B.
3. With respect to the SPLL and the carrying loan value, credit institutions should identify and recognize loans or a collectively assessed group of related loans, of which it is probable that the institution will not be able to collect, or of which there is no longer reasonable assurance that the institution will collect the full amount due, according to the contractual terms of the loan agreement.
4. As part of its on-site examinations, the Bank performs a credit review at the credit institutions which results in the classification and provisioning of the loan portfolio of the institution.
5. In its credit review, the Bank distinguishes two types of collateral. Firstly, “hard collateral”, such as 1^st mortgage, cash and marketable securities held by the credit institution, guarantees issued by the Governments of the Kingdom of the Netherlands, and bank guarantees by banks’ incorporated in the Kingdom of the Netherlands. Secondly, “soft collateral”, such as personal or corporate guarantees, and 2^nd and 3^rd mortgage if the 1^st mortgage is held by another unrelated institution or company. In general, hard collateral will be taken into account by the Bank to its full extent while soft collateral will be reviewed on a case by case basis.

V.5.A Provisioning policy concerning SPLL, except for
         consumer installment loans

1. Credit reviews
   The Bank’s credit reviews of subject loans results in the following classifications: Satisfactory, Special Mention, Substandard, Doubtful and Loss.
2. Loan classifications and provisioning
   The description of the five loan classifications and the extent of specific provisions required in each case is as follows:

a.   Satisfactory
Loans classified Satisfactory are loans that reflect no weaknesses. These loans are performing according to the loan agreement and are well protected by the current sound worth and paying capacity of the borrower or by the collateral pledged. The Bank does not require a specific provision for these loans.

b.   Special mention
Loans classified Special mention are loans that currently do not expose the bank to enough risk to warrant an adverse classification, but which do possess credit deficiencies requiring management's close attention. Failure to correct deficiencies could result in greater credit risk in the future. Ordinarily, such borderline credits have characteristics that could be remedied with timely corrective action by management. Often in credit lines warranting Special Mention, it is the bank's weak origination and/or servicing policies which constitute the cause for criticism. The Bank does not require a specific provision for these loans.

c.   Substandard
Loans classified Substandard are those loans which are inadequately protected by the current sound worth and paying capacity of the borrower or by the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. The required specific provision is 0%-25% of the loan after considering amongst others the value of collateral pledged and depending on the severity of the weaknesses.

d.   Doubtful
Loans classified Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently known facts, conditions and, values. Therefore, a specific provision of at least 50% of the loan, after considering amongst others the value of collateral pledged, should be maintained by the credit institution.

e.   Loss
Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off these basically worthless assets even though partial recovery may be effected in the future. The required specific provision for such loans is 100% of the loan, after considering amongst others the value of collateral pledged.

3. Treatment of mortgages
   Loans may be reported as mortgages in the Chart of Accounts, if there is an independent appraisal of the underlying property and the outstanding balance of the loan does not exceed 70% of the appraised market value. In case a borrower is 3 months in arrears with payments (either principal or interest) an updated appraisal report, by an independent appraiser, must be made within two months.  If the related appraisal report is not older than 3 years, an appraisal letter or so called “waardebrief” is acceptable. However, in case of a further increase in arrears to 5 months, a complete updated appraisal report is required within two months.

In general the classification and provisioning treatment explained in paragraph V.5.A.2 should be applied to mortgage loans. In addition, a classification as substandard, doubtful, or loss should apply in those cases where the borrower is 3 months or more in arrears with payments. The required provision percentages in these cases should be calculated after considering the execution value of the asset securing the loan.

4. Collateral value of inventory and accounts receivables
   If inventory and accounts receivables are considered as collateral, an updated listing of their collateral value should be kept by the institution on a quarterly basis; the reliability of this listing must not be questionable. In circumstances warranting an earlier update, such as credit extension to borrowers whose business operates in a depressed sector as mentioned in paragraph V.4.-5, the collateral values should be updated more frequently, e.g., monthly or bi-monthly. Hence, the collateral value should be determined prudently.

V.5.B Provisioning policy concerning SPLL for consumer
         installment loans

1. Credit reviews
   The Bank takes a different approach in the review, appraisal and classification of consumer credit, compared to the approach followed with respect to the other loans as explained in the previous paragraph. This difference is based on the following:
   • in general the amount of specific provision required by the Bank for non-consumer credit depends on the classification of the loan based upon among other things the net worth and paying capacity of the borrower and the collateral pledged;
   • however, sound consumer installment credit is generally based on the borrower’s ability to repay, with less consideration for collateral and net worth. The ability to repay such loans is largely measured by the borrower’s level of income in comparison to its current debt obligations;
   • consumer loans are typically small in size and large in number. It is therefore, not practical to investigate the creditworthiness of each borrower.

2. Loan classifications and provisioning
   The loan classification of and extent of specific provisions for consumer loans should be made according to the following criteria:
   
   

The outstanding balance to calculate the required specific provision is calculated as the gross outstanding balance minus applicable compensations (as per Appendix A of the General Guidelines of the Chart of Accounts) and optional [5] , minus the collateral value of the relevant car as specified below.

3. Collateral value of relevant car

If a car loan is:

1. for the specific purpose to buy a car, and;
2. the car is not older than 3 years, and;
3. the car serves as security only for this loan,

than the following collateral value of the relevant car qualifies to calculate the outstanding balance mentioned in paragraph V.5.B.2:

(i)      up to 60% of the lower of the listing price/ or market value of the car can be considered and discounted as collateral value during the first year of the loan agreement;

(ii)    up to 40% of the lower of the listing price/ or market value of the car can be considered and discounted as collateral value during the second year of the loan agreement;

(iii)   up to 20% of the lower of the listing price/ or market value of the car can be considered and discounted as collateral value during the third year of the loan agreement;

(iv)   no collateral value may be considered and discounted after the third year of the loan agreement.

4. Aging record
   In order to qualify for the discount mentioned under V.5.B.3, the credit institution is obliged to maintain readily available detailed records of the relevant car loans. Furthermore, each credit institution should keep an updated aging record of all its car loans [6] , and a separate aging record for all other consumer installment loans, based on the number of days in arrears as specified in the above paragraph V.5.B.2. No discount will be allowed if these requirements are not met.

V.5.C Provisioning policy concerning restructured troubled loans

1.      Credit reviews

The Bank will review the credit institutions records of restructured troubled loans and other information to determine if the records are complete

2.      Loan classifications and provisioning

A restructured troubled loan should be classified, according to the classification criteria in paragraphs V.5.A and V.5.B. Restructuring does not improve the classification other than when it meets the criteria to remove it from the record of restructured loans. Therefore, these loans should remain in the same classification category [7] prior to their restructuring. If the loan quality of the restructured loan deteriorates further, its classification should be further adjusted (lowered).

The specific provision applicable to the classification category should be applied.

A loan which meets the following criteria is not considered a restructured troubled loan anymore, and should be removed from the record of restructured troubled loans:

1. the borrower has paid the full amount of the rescheduled contractual principal and interest payments for a straight period of at least six months since restructuring; and
2. the borrower has paid all overdue amounts.

V.5.D Loan data 

1.   Each credit institution should maintain for each loan an adequate loan file, which should include all relevant and up to date information, amongst others the loan agreement, loan analysis, collateral documentation, insurance information, etc. The loan file should be well structured and easily accessible. Furthermore, each institution should maintain adequate and easily accessible records as to the borrowers that can be considered related or connected [8] pursuant to Supervisory Regulation III.

2.  Each credit institution should keep a separate updated record (listing) of all restructured troubled loans with relevant information [9] of each restructured troubled loan, and a separate updated record of all loans for which a provision has been set-up with relevant information [10] of each individual loan provided for.