Any exposure for which there is significant increase in credit risk since origination. Each finance company must clearly define what it considers to be significant increase in credit risk. Such indicators may include, but are not limited to:
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| i. | The borrower has a moderate risk of default; |
| ii. | The payments are past due by more than 30 days; this is rebuttable only for direct exposures to the Government, Government Agencies or Ministries (or equivalent entities including contractors working directly for a governmental entity in cases where the delay is not due to performance issues); |
| iii. | The borrower has a weak or deficient capacity to meet its contractual cash flow obligations in the near term; and |
| iv. | Adverse changes in economic and business conditions in the longer term are more likely than not to reduce the borrower's ability to fulfil its obligations.
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Finance companies should continuously monitor stage 2 exposures to identify improvements in credit quality and determine eligibility for re-staging stage 2 exposures to stage 1. Finance companies should document the minimum eligibility requirement for re-staging stage 2 exposures into stage 1 exposures, which should at least include the following conditions:
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| i. | The borrower does not have any exposure more than 30 days past due; |
| ii. | Exposure repayments have been made when due over a continuous repayment period (cure period excluding grace period, if any) of 90 days for those non-retail customers that have moved from stage 1 to stage 2 due to overdue principal and/or interest for more than 30 days (but less than 90 days) or extended due to credit risk reasons; |
| iii. | The borrower's situation has improved so that the full repayment of the exposure is likely (tested over 90 days as part of cure period), according to the original or modified terms and conditions; and |
| iv. | The indicators which has contributed to the significant increase in credit risk no longer existed (tested over 90 days as part of cure period) to threaten the full repayment of the exposure under the original or modified terms and conditions. |
| v. | The cure period requirements as stated above (90 days) do not apply to retail customers. For retail customers that have moved from stage 1 to stage 2B (as detailed below), they should be allowed to be moved back to stage 1 after a cure period of 60 days.
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SAMA recognizes the added value of having discrete tiers of credit risk exposures within Stage 2 allocation. As a result, SAMA is establishing, for regulatory reporting purposes only and not for accounting purposes, a bifurcation of Stage 2 totals to be reported in the quarterly prudential returns. It is expected that finance companies will have robust internal risk rating processes and mappings, which can identify and categorize discrete levels of borrower performance characteristics and the resulting credit risk.
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Stage 2 exposures segregation into Stage 2A and Stage 2B categories are explained as follows:
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Stage 2A or Special monitoring accounts category represents lower levels of credit risk within the stage 2 allocation. It represents borrowers with some or all of the following qualitative and quantitative indicators:
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Qualitative indicators include, but are not limited to:
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| i. | Lower but increasing levels of credit risk; |
| ii. | Expected change in credit risk to remain low and currently manageable; |
| iii. | Demonstrates current capacity to repay the financial commitment but this capacity is declining or diminishing from the original approval standards and warrants greater attention; |
| iv. | Demonstrates periodic ability of addressing past due levels within reasonable time frames without significant finance company intervention; and |
| v. | Close monitoring and intervention generally required.
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Quantitative indicator:
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| i. | Past due more than 30 days and up to 60 days.
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Stage 2B or substandard category represents moderate levels of credit risk within the stage 2 allocation. It represents borrowers with some or all of the following qualitative and quantitative indicators:
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Qualitative indicators include, but are not limited to:
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| i. | Obvious cash flow deficiencies; |
| ii. | Higher probability of default; |
| iii. | Higher increase in credit risk is clearly identified; |
| iv. | Financial statements do not demonstrate additional financial resources necessary to reduce credit risk to the finance company or demonstrating additional sources of repayment ability; |
| v. | Monitoring and intervention is done on a continuing basis whether past due or not; and |
| vi. | Finance company is considering or is in the process of providing concessionary terms under a modified exposure arrangement due to financial difficulties of the borrower.
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Quantitative indicator:
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| i. | Past due more than 60 days and up to 90 days.
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Finance Companies may apply other limited discretionary measures to designate exposures as Stage 2B. Such measures must be well documented as this can be subject to thematic review by SAMA in future, if needed.
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