Limits on Credit Exposure to Non-Bank Counterparties and Banks and Financial Institutions Extension of Business Days to Include Saturdays to Provide Subsidized Real Estate Finance Products
Article 8 of the Banking Control Law limits the exposure of a Saudi Bank to any natural or juristic counterparty to 25% of its paid up Capital and Reserves. This limit can be raised to 50% by SAMA in the public interest. A 1987 Circular (No. 2662/M/A/24 dated 15 September 1987) issued by the Agency provided further guidance to the Saudi Banks by defining such terms as credit exposure, related counterparties etc. These limits, however, did not apply to credit exposures with domestic and foreign banks and with the Government of Saudi Arabia. Also Article 9 of the Banking Control Law specifies the legal requirements for credit exposures to connected parties and a Circular dated 15 September 1987 (No. 2647/M/A/23) provided detailed guidance.
The purpose of this Circular is to update and revise the 1987 rules in light of recent developments in international supervisory practices and to reflect the decisions made by the GCC Governors in 1993 to harmonize the GCC rules in this area. Further more, these rules now also encompass limits on exposure to foreign banks and financial institutions. Guidance on the definitions and interpretations of some key terms included in the rules are attached as Appendix 1 to this Circular.
The Agency requires Saudi Banks to establish a written policy for large credit exposures to customers, banks, countries, and economic sectors to be approved by its Board of Directors. Significant changes to the established policies should be drawn to the attention of the Agency and discussed prior to their implementation.
The Agency expects Saudi Banks to follow prudent lending policies. Notwithstanding the legal lending limit of 25% of capital and reserves the Agency believes that a single credit exposure should not exceed 15%. The Agency expects banks to carefully monitor all large credit exposures and has introduced a monthly prudential return to report all credit exposures in excess of 10% of their capital and reserves.
2.Limits on Credit Exposures to Non-bank Counterparties :
2.1 In accordance with Article 8 of the Banking Control Law, the Agency shall continue to apply a limit of 25% of Capital and Reserves of a bank for credit exposure to a non-bank counterparty or to a group of related counter-parties. The Agency can in the public interest, increase this limit to 50%. The definition of a Credit Exposure and a Group of Related Counterparties is given under item 1 and 2 of Appendix 1.
2.2 Credit exposures to Saudi Government and quasi government institutions are not subject to these limits.
2.3 Credit exposures to the GCC and OECD central banks and central governments are not subject to these limits.
2.4 A bank is prohibited under Article 9 (1) of the Banking Control Law to extend any credit on security of its own shares.
3.Limits on Lending to Connected Non-bank Counterparties :
The definition of connected counter-parties is included under item 5 in Appendix 1.
3.1 A single exposure to a connected non-bank counter-party shall not exceed 10% of Capital and Reserves. A cumulative limit on all such exposures shall be 50%.
3.2 The requirements specified by Article 9 Section 2 of the Banking Control Law that all exposures to connected parties must be fully secured shall continue to apply.
3.3 As stipulated by Article 9 section 3 unsecured loans and credit facilities to officers and employees shall not exceed their four months salary except for housing loans which are secured by the property being financed by the Bank.
4. Clustering And Over-Concentration Applicable to Non-bank Counterparties :
Clustering and over concentration of exposures is a common phenomenon found in troubled banks. It arises where a bank may have a high proportion of large credit exposures to a limited number of customers. Consequently an overall limit of 8 times Capital and Reserves of a bank shall apply to all credit exposures to non-bank counterparties that exceed 10% of a bank's Capital and Reserves. For the purpose of this limit exposures to banks and to the GCC and OECD countries' central banks and central governments are not to be included.
5. Limits on Credit Exposure to Banks and Financial Institutions :
These prudential limits on credit exposures apply to all banks although Saudi Banks are expected to have their own internal limits which may be lower.
5.1 A limit of 50% of Capital and Reserves on credit exposures to any bank or financial institution that is "Adequately Capitalized", as defined under item 4 in Appendix 1.
5.2 A limit of 25% of Capital and Reserves on credit exposures to banks and financial institutions that are not "adequately capitalized". Such credit exposures should also not exceed 25% of the counter-party bank's last published capital and reserves.
5.3 A limit of 25% of Capital and Reserves also applies to all specialized banks and other financial institutions including multilateral banks, insurance companies, mutual funds, investment companies etc. Also, such credit exposures should not exceed 25% of the last published capital and reserves of the counterparty.
6. Consolidation :
All credit exposures are to be measured, monitored and reported on a fully consolidated basis including exposures of all foreign branches and subsidiaries. Subsidiaries include companies in which a bank owns or controls 50% or more of its voting stock.
7. Collateral :
Credit exposures are to be measured, monitored and reported at gross values as no reduction is permitted for any collateral supporting the loan or credit facility, except that cash margins for letters of credits, documentary credits and guarantees received by the Bank shall be permitted for reducing the related credit exposure. Further-more cash margins for foreign exchange and other derivative transactions are also permitted for reducing the related credit exposure. However, such cash margins must be maintained in the same currency as the credit exposure and in the same jurisdiction where the credit exposure is booked.
8. Reporting to the Agency :
8.1 A bank shall report to the Agency, on a monthly basis, all exposures to non-banking counterparties (including foreign Central Banks and central governments and any other levels of governments), that exceed 10% of its Capital and Reserves on the reporting date. It should also report the ratio of the total of such exposures to its Capital and Reserves. However, in calculating the ratio, exposures to GCC and OECD central banks and central governments should be excluded.
8.2 A bank shall report to the Agency, on a monthly basis, all exposures to connected parties that exceed 5% of its Capital and Reserves on the reporting date.
8.3 A bank shall report to the Agency on a monthly basis, all exposures to banks and financial institutions that exceeded their limits during the month and were not resolved within 15 working days thereafter.
9. Implementation Date :
The effective date of this circular is 1 june 1995. Saudi Banks are expected to ensure that their credit exposures conform with these rules by the effective date. The information required by the Agency under items 8.1, 8.2 and 8.3 should be provided by the Banks for the month ending 30 June 1995, and each month thereafter in the prescribed forms attached to this circular.
Appendix - 1
Definitions and Guidance Notes - Limits on Exposures to Non-Bank Counterparties And Banks And Financial Institutions
Definiton of Credit Exposure
This term refers to credit risks arising from actual claims, potential claims and contingent liabilities. Accordingly, it is to include the following items.
1.1 On Balance sheet Items: Direct Claims And Credit Obligations
- Placements.
- Overdraft accounts.
- Loans (secured and unsecured).
- Securities of all forms (CD's, CP's, bonds, equities and debentures).
- Short term trade related transactions.
- Bills, Acceptances and other papers.
- Other claims.
- For banks and financial institutions, Credit balances in the Bank's account (Nostros) with other banks; Overdraft in the other banks account (Vostros) with your bank. While these amounts may be difficult to value due to system and other constraints, a representative or approximate amount may be used such as weighted monthly average, minimum balance requirement etc.
2.1 Off Balance Sheet Items : Potential Claims And Contingent Liabilities.
Direct Credit Substitutes
- Confirming of exports Letters of Credit.
- Irrevocable commitments to extend credit.
- Guarantee of indebtedness.
- Acceptances.
- Standby letters of credit serving as financial guarantees for loans and securities.
- Other direct credit substitutes.
Transaction related contingencies
- Performance bonds.
- Bid or tender bonds.
- Advance payment Guarantees.
- Other related contingencies.
Trade related contingencies.
- Short-term self-liquidating trade related items such as letters of credit collateralized.
- Other trade related contingencies secured by underlying shipments.
Derivative products of Interest rate and Foreign Exchange rate including Swaps, Options, Futures, FRA's etc :
These products involve a smaller credit risk and should be calculated at certain percentage of their notional amounts as given below :
a. Foreign Exchange related contracts (Flat rates)
10% per year up to 2 years.
5% per year for each additional year up to a maximum of 50%.
b. Interest rate Related contracts (Flat rates)
5% per year up to a maximum of 35%.
Other Common commitments and contingent liabilities.
2. Definition of A Group of Related Counterparties:
For the purpose of these rules the term "Related Counterparty" is to be applied as follows :
2.1 A group of related customers means two or more persons whether natural or legal, holding exposures from the same credit institution and any of its subsidiaries, whether jointly or separately but who are mutually associated in that:
a. One of them holds directly or indirectly power of control over the other through.
- Common ownership.
- Common directors.
- Cross guarantees.
- Direct commercial dependency which cannot be substituted in the short term.
b. Their cumulated exposures represent to the institution a single risk in so much as they are so interconnected with the likelihood that if one of them experiences financial problems the others or all of them are likely to encounter repayment difficulties.
2.2For the purpose of this Circular a "Group of closely related customers" means all accounts that may be related as follows :
- In the event the customer is a natural or a legal person, the term shall apply to all sole proprietorship establishments owned by him, all partnerships in which he is a general partner, all establishments owned by such general partnerships, all limited liability companies in which he owns more than 50% of voting shares and all companies that he manages or has direct or indirect control regardless of his share therein.
- In case the customer is a limited, simple or general partnership the term shall apply to all establishments owned by the customer together with all partnerships in which the general partners of the customer are general partners, together with all limited liability companies in which any general partner holds more than 50% of its voting shares or a limited liability company that he manages or over which he has direct or indirect control regardless of his share therein.
- In case the customer is a limited liability company in which one of the shareholder owns more than 50% of its voting share capital, the term shall apply to all establishments owned by the company and to all other establishment owned by the principal shareholder as a sole proprietor, general partner or as a principal shareholder owning more than 50% of the voting shares, together with any other company that he manages or over which he has direct or indirect control, regardless of his shares therein.
2.3For the purpose of this section "control" means;
- One or more persons acting in concert directly or indirectly own, control or have the power to vote 25% or more of the voting shares of an establishment; or
- One or more persons acting in concert control, in any manner, the election of a majority of directors, trustees or other persons exercising similar functions of another person; or
- Any other circumstances exist which indicate that one or more persons acting in concert directly or indirectly exercise a controlling influence over the management or the policies of another person.
3. Capital & Reserves :
The Capital and Reserves for the purpose of these limits is defined as the aggregate of :
- Paid up capital.
- Legal Reserves.
- Other Reserves.
- Prior Years' undistributed Retained earnings.
4. Adequately Capitalized Banks and Financial Institutions :
This term applies to banks and financial institutions that meet the following :
- An overall risk assets capital adequacy ratio of 8%.
- A tier-1 risk assets capital adequacy ratio of 4%. All banks and financial institutions that have failed to publish their risk assets capital ratio or those that do not meet the minimum requirements noted above will be treated as being "Not Adequately Capitalized".
5. Connected Parties :
The definition of connected parties shall include the following :
- Members of its Board of Directors, and its Auditors.
- Un-incorporated establishments in which any Director or Auditor of the Bank is a partner or manager or has a direct financial interest or is a guarantor.
- Principal owner or shareholder - means a person that directly or indirectly owns, controls or has power to vote more than 10% of the voting shares of the Bank granting the facility.
- Affiliated or Associated companies and partnerships. These include establishment that are connected to the Bank by a common parent or a controlling share holder.
6. Monitoring of Credit Exposures to Banks And Financial Institutions :
The Agency expects all Saudi Banks to have internal systems to monitor on a daily basis credit exposures to other banks and financial institutions and report excesses above the bank's internal limits and prudential limits to senior management. While occasional excesses may arise due to unusual market conditions, volatility and unusual operational problems, procedures must be in place to quickly identify the excesses and to take corrective actions. Banks are expected to monitor other banks and financial institutions on a six-monthly basis to see if they are "Adequately Capitalized". They may use both published and un-published data and sources of information including call reports. However, to the extent possible such data should be verified and confirmed.
7. Other Issues and Notes
- No netting is permitted for reciprocal credit exposures with other banks and financial institutions.
- All off-balance sheet items other than forward foreign exchange and interest rate contracts and derivative products, are to be measured at their gross values.
- These lending limits do not apply to principal shareholders that are foreign banks and to foreign banking subsidiaries of a Saudi Bank. Credit exposures to such institutions when they exceed 50% of capital and reserves must be discussed with and approved by the Agency on a case-by-case basis. Credit exposures to non-banking subsidiaries when in excess of 25% of Capital and Reserves of the Bank must be approved by the Agency.
M-19
Exposures to Non-Banking Counterparties in Excess of 10% of Capital & Reserves
(All Amounts in SR.000'0)
Name and location of Borrower Total Amount of Exposure Amount in Excess of 10%
of Capital & Reserves
Original date of Excess Other Comments On Bal. Sheet Off Bal. Sheet Total 1. Exposure in excess of 10% 2. 8 Times capital & Reserves 3. Over and (under) (line 2-1) M-18
Exposures to Connected Non-Banking Counterparties in Excess of 5% of Capital & Reserves
(All Amounts in SR.000'0)
Name and location of Borrower Total Amount of Exposure Amount in Excess of 5% of Capital & Reserves Original date of Excess Other Comments On Bal. Sheet Off Bal. Sheet Total 1. Total of Exposure in excess of 5% 2. Total exposure under 5% 3. Total connected party exposure. 4. 50% of capital and reserves 5. Over and (under) (Line 4-3)