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  • 1. General Requirements

    • 1.1 Introduction

      SAMA issued these rules in exercise of the powers vested upon it under Finance Companies Control Law promulgated by the Royal Decree No. (M/51) on 13/08/1433H and in pursuance of the Implementing Regulation of Finance Companies Control Law promulgated by the resolution of the Governor No (2/M U T) dated 14/04/1434H. 
       
      In reference to Article no. 13 of Finance Companies Control Law "The finance company shall allocate a provision for contingent operation losses in accordance with the criteria specified under the Regulations," and Article 62 of the Implementing Regulation of the Finance Companies Control Law "The finance company must set provisions for contingent losses and risks in accordance with international accounting standards. SAMA may require the finance company to make one or more additional provisions for such losses and risks." 
       
      These Rules set out the minimum requirements on Credit Risk Exposure Classification and Provisioning. A finance company's credit risk exposure classification and provisioning are components of its credit risk management framework. Credit Risk Management must be performed by finance companies through the use of appropriate policies, procedures, and controls that identify, measure, monitor, control and report the actual credit risk of the finance company. Finance companies will not be able to achieve compliance with these Rules unless there is an effective and robust Credit Risk Management Framework that is commensurate with the nature, size, complexity and level of their credit risk exposure. As a result, finance companies must first conduct an analysis of current risk management framework to determine what adjustments are necessary as a result of these Rules, and implement the necessary remediating actions to ensure full compliance by the effective date. 
       
      It should be noted that the Board of Directors and Management of the finance company are responsible to set adequate policies and procedures, maintaining sound asset quality, having an adequate level of provisions and general reserve for credit losses at all times, and having effective exposure approval management and classification procedures, as well as an appropriate framework for dealing with problem exposures. 
       

    • 1.2 Objective of the Rules

      The main objectives of these Rules are to enable finance companies to: 
       
      i.Evaluate the degree of credit risk associated with exposures;
       
      ii.Prudently value exposure portfolio;
       
      iii.Determine and make adequate provisions for expected credit losses following robust governance; and
       
      iv.Achieve uniformity and consistency in exposure classification and provisioning methodologies.
       

    • 1.4 Definitions

      The following terms and phrases, where used in these Rules, should have the corresponding meanings, unless the context requires otherwise: 
       
      SAMA:Saudi Central Bank
       
      Rules:Rules Governing Credit Risk Exposure Classification and Provisioning
       
      Credit Exposure:As prescribed by IFRS 9, this include loans and advances and other types of on- and off-balance sheet credit exposure (financial guarantees, bid and unutilized un-cancellable commitments and others), accrued commission/income receivable, commitments and contingent liabilities and any other commission / non-commission bearing credit- related instruments and arrangements. This will also include investments in nontrading debt securities (long-term/held-to-maturity investments) e.g. certificates of deposit, commercial papers and other negotiable debt instruments.
       
      Restructured Exposure:Any exposure arrangement in which the original terms and conditions have been changed or modified. Normal annual renewal of exposures should not be categorized as restructured exposure. Restructuring may occur in the form of either forbearance or renegotiation. Forborne Exposure and Renegotiated Exposure are defined as below:
       
       a.Forborne Exposure: Any exposure arrangement in which the original terms and conditions have been changed or modified such that the modified terms result in a concession to the borrower, and the modification, which would not have been otherwise granted, was granted as a result of the borrower's financial difficulty.
       b.Renegotiated and/or Refinanced and/or Rescheduled Exposure: Any exposure arrangement in which the original terms and conditions have been modified. However, the modification does not necessarily results in a concession to the borrower and the modification was not granted as a result of the borrower's financial difficulty. These 3 terms have the same interchangeable meanings and should be used accordingly, if needed. Any other new term should be discussed with SAMA before using in practice.
       
      Probability of Default:Measures the estimated likelihood of default over a time horizon as prescribed by IFRS 9.
       
      Exposure at Default:As prescribed by IFRS 9, it measures estimated risk exposure at the time of likely default taking into consideration any prepayments, repayments of principal and interest, and drawdowns. This includes both on and off-balance sheet exposure. No consideration is given to collateral when determining the exposure at default.
       
      Loss Given Default:Measures the estimated risk of loss as prescribed by IFRS 9 i.e. the risk exposure adjusted for collateral and other recovery proceeds, fluctuation in market value and realization costs. Eligible collateral as elaborated in Annexure 1 should be included in the Loss Given Default calculation.
       
      Financial Asset:As prescribed by IFRS 9, a financial asset is any asset that is cash, an equity instrument of another entity, a contractual right to receive cash or another financial asset from another entity or to exchange financial asset or financial liabilities with another entity under conditions that are potentially favorable to the entity. This includes derivative and non-derivative contracts.
       
      Expected credit loss:As prescribed by IFRS 9, the estimated credit losses expected to be incurred from the occurrence of a credit event, e.g. default.
       
      Lifetime expected credit loss:As prescribed by IFRS 9, the expected credit losses that result from all possible default events over the life of the financial asset.
       
      12-month expected creditloss:As prescribed by IFRS 9, the expected credit losses that result from those default events on the financial asset that are possible within 12 months after the reporting date.
       
      Stage 1 Exposure:As prescribed by IFRS 9, any exposure for which there is no significant increase in credit risk since origination or otherwise are considered high quality (i.e. rated of investment grade) or exhibit indicators of low credit risk. This exposure can be mapped to "Regular" Loans regulatory category (for the naming convention only) given in SAMA previous circular on Provisions Guidelines issued on 27/04/1438H.
       
      Stage 2 Exposure:As prescribed by IFRS 9, any exposure for which there is a significant increase in credit risk since origination. This includes rebuttable presumption that the credit risk has increased significantly when contractual payments are more than 30 days past due. This exposure can be mapped to "Special Monitoring Accounts and Substandard" regulatory category (for the naming convention only keeping in view conservatism of IFRS 9) given in SAMA previous circular on Provisions Guidelines issued on 27/04/1438H.
       
       There are 2 categories in Stage 2 exposures as defined in these rules for regulatory reporting purposes only and not for accounting purposes, i.e. Stage 2A and Stage 2B. Stage 2A or Special Monitoring Account category represents lower levels of credit risk within the stage 2 allocation while Stage 2B or substandard category represents moderate levels of credit risk within the stage 2 allocation.
       
      Stage 3 Exposure:prescribed by IFRS 9, any exposure which is assessed as impaired or otherwise is in default as determined in Section 8 of these Rules. This includes the fact that the credit risk has significantly increased when contractual payments are more than 90 days past due. This exposure can be mapped to "Doubtful and Loss" regulatory categories (for the naming convention only keeping in view conservatism of IFRS 9) given in SAMA previous circular on Provisions Guidelines issued on 27/04/1438H.
       
       There are 2 categories in Stage 3 exposures as defined in these rules, for regulatory reporting purposes only and not for accounting purposes, i.e. Stage 3A and Stage 3B. Stage 3A or Doubtful category represents higher levels of credit risk leading to impairment within the stage 3 allocation and exposures currently in cure period while Stage 3B or Loss category represents impaired/defaulted exposures within the stage 3 allocation.
       
      Past due:As prescribed by IFRS 9, an exposure where any amount due under the contract (interest, principal, fee or other amount) has not been paid in full at the date when it was due. An exposure should be considered past due from the first day of missed payment (scheduled payment date as per original or modified contract), even when the amount of the exposure or the past-due amount, as applicable, is not considered material (materiality means greater than 5% of total exposure).
       
      Problem loans:Loans that display well-defined weaknesses or signs of potential problems. Problem loans should be classified by the company in accordance with accounting standards, and consistent with relevant regulations, as one or more of:
       
       a.non-performing;
       b.subject to restructuring on account of inability to service contractual payments;
       c.IFRS 9 Stages 2; and exhibiting signs of significant credit deterioration or Stage 3;
       d.under watch-list, early warning or enhanced monitoring measures; or
       e.where concerns exist over the future stability of the borrower or on its ability to meet financial obligations as they fall due.
       
      Net realizable amount:It is the amount the finance company is expected to receive in the ordinary course of business less the estimated costs of recovery. This should follow the same requirements as given in the Accounting Standards and practically followed by the finance companies i.e., the outstanding amount less the actual collateral held and recovery related costs.