DIRECTIVE ON SUPERVISORY REPORTING ON FORBEARANCE AND NON- PERFORMING EXPOSURES THE BUSINESS OF CREDIT INSTITUTIONS LAWS OF 1997 TO 2015

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1 DIRECTIVE ON SUPERVISORY REPORTING ON FORBEARANCE AND NON- PERFORMING EXPOSURES THE BUSINESS OF CREDIT INSTITUTIONS LAWS OF 1997 TO 2015 [66(I)/1997, 74(I)/1999, 94(Ι)/2000, 119(Ι)/2003, 4(Ι)/2004, 151(Ι)/2004, 231(Ι)/2004, 235(Ι)/2004, 20(Ι)/2005, 80(Ι)/2008, 100(I)/2009, 123(I)/2009, 27(I)/2011, 104(I)/2011, 107(I)/2012, 14(I)/2013, 87(Ι) 2013,102(I) 2013,141(Ι)2013, 5(I)2015] Directive under section 41 66(I) of (Ι) of (Ι) of (Ι) of (Ι) of (Ι) of (Ι) of (Ι) of (Ι) of (Ι) of (Ι) of (I) of (I) of (I) of (Ι) of (I) of (I) of (I) of (Ι) of (I)2015. The Central Bank of Cyprus, by virtue of the powers vested on it by section 41 of the Business of Credit Institutions Laws of 1997 to 2015 (the Law ), issues this Directive to credit institutions established in a third country which operate in the Republic through a branch under license granted by the Central Bank of Cyprus and which for the purposes of this Directive are referred to as ACIs. PART I - GENERAL PROVISIONS Short title and explanation. 1.-(1) This Directive shall be cited as the Directive to Branches of Third Country Credit Institutions on Supervisory Reporting on Forbearance and Non-Performing Exposures". (2) This Directive sets the reporting framework in which ACIs shall report information on their activities in the Republic in relation to forbearance and nonperforming exposures.

2 Definitions and explanations. 2. For the purposes of this Directive, all relevant interpretations of the Law shall apply, unless it is otherwise specified in this Directive. In addition, the following interpretations, unless the context otherwise requires, are applicable: accumulated impairment shall mean the reduction in the carrying amount either directly or through use of an allowance account. specific allowances for individually assessed financial assets shall include cumulative amount of impairment related to financial assets which have been assessed individually. specific allowances for collectively assessed financial assets shall include the cumulative amount of collective impairment calculated on insignificant loans which are impaired on individual basis and for which the ACI decides to use a statistical approach (portfolio basis). This approach does not preclude performing individual impairment evaluation of loans that are individually insignificant and thus to report them as specific allowances for individually assessed financial assets. collective allowances for incurred but not reported losses shall include the cumulative amount of collective impairment determined on financial assets which are not impaired on individual basis. For allowances for incurred but not reported losses, IAS 39.59(f), AG87 and AG90 may be followed. accumulated write-offs shall include the cumulative amount of principal and past due interest of any debt instrument that the ACI is no longer recognising because they are considered uncollectible, independently of the portfolio in which they were included. These amounts shall be reported until the total extinguishment of all the ACI's rights (by expiry of the statute-of limitations period, forgiveness or other causes) or until recovery. Write-offs could be caused both by reductions of the carrying amount of financial assets recognised directly in profit or loss as well as by reductions in the amounts of the allowance accounts for credit losses taken against the carrying amount of financial assets. forborne exposures shall mean debt contracts in respect of which forbearance measures have been extended. Forbearance measures consist of concessions towards a debtor facing or about to face difficulties in meeting its financial commitments ( financial difficulties ). refinancing shall mean the use of debt contracts to ensure the total or partial payment of other debt contracts the current terms of which the debtor is unable to comply with. For instance, a contract has been refinanced if it is completely repaid with a new contract granted on or close to the day when the initial contract expires. 2

3 credit risk adjustment shall mean the amount of specific and general loan loss provision for credit risks that has been recognised in the financial statements of the ACI in accordance with the applicable accounting framework. of which: defaulted shall include the nominal amount of those loan commitments, financial guarantees and other commitments given whose counterparty has incurred in default. mortgage loans shall mean loans collateralised by immovable property and include residential and commercial loans, residential loans shall mean loans secured by residential immovable property commercial loans shall mean loans secured by pledges over commercial immovable property. other collateralised loans, Cash [Debt instruments issued] shall mean pledges of deposits in or debt securities issued by the ACI, and Rest includes pledges of other securities or assets. financial guarantees received shall mean contracts that require the issuer to make specified payments to reimburse the ACI of a loss it incurs, because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. Default of an obligor PART II CRITERIA FOR EXPOSURES IN DEFAULT 3.(1) A default shall be considered to have occurred with regard to a particular obligor when either or both of the following have taken place: (a) the ACI considers that the obligor is unlikely to pay its credit obligations to the ACI, the parent undertaking or any of its subsidiaries in full, without recourse by the ACI to actions such as realising security; (b) the obligor is past due more than 90 days on any material credit obligation to the ACI, the parent undertaking or any of its subsidiaries. (2) In the case of retail exposures, ACIs may apply the definition of default laid down in points (a) and (b) of the first subparagraph at the level of an individual credit facility rather than in relation to the total obligations of a borrower. (3) The following shall apply for the purposes of point (b) of subparagraph 1: (a) for overdrafts, days past due commence once an obligor has breached an advised limit, has been advised a limit smaller than current outstandings, or has drawn credit without authorisation and the underlying amount is material; (b) for the purposes of point (a), an advised limit comprises any credit limit determined by the ACI and about which the obligor has been informed by the ACI; (c) days past due for credit cards commence on the minimum payment due date; (d) materiality of a credit obligation past due shall be assessed against the 3

4 threshold specified in paragraph 4; (e) ACIs shall have documented policies in respect of the counting of days past due, in particular in respect of the re-ageing of the facilities and the granting of extensions, amendments or deferrals, renewals, and netting of existing accounts. These policies shall be applied consistently over time, and shall be in line with the internal risk management and decision processes of the ACI. (4) For the purpose of point (a) of sub-paragraph 1, elements to be taken as indications of unlikeliness to pay shall include the following: (a) the ACI puts the credit obligation on non-accrued status; (b) the ACI recognises a specific credit adjustment resulting from a significant perceived decline in credit quality subsequent to the ACI taking on the exposure; (c) the ACI sells the credit obligation at a material credit related economic loss; (d) the ACI consents to a distressed restructuring of the credit obligation where this is likely to result in a diminished financial obligation caused by the material forgiveness, or postponement, of principal, interest or, where relevant fees; (e) the ACI has filed for the obligor's bankruptcy or a similar order in respect of an obligor's credit obligation to the ACI, the parent undertaking or any of its subsidiaries; (f) the obligor has sought or has been placed in bankruptcy or similar protection where this would avoid or delay repayment of a credit obligation to the ACI, the parent undertaking or any of its subsidiaries. (5). ACIs that use external data that is not itself consistent with the definition of default laid down in sub-paragraph 1, shall make appropriate adjustments to achieve broad equivalence with the definition of default. (6). If the ACI considers that a previously defaulted exposure is such that no trigger of default continues to apply, the ACI shall rate the obligor or facility as they would for a non-defaulted exposure. Where the definition of default is subsequently triggered, another default would be deemed to have occurred. Materiality threshold 4. ΑCΙs apply the following thresholds for determining the materiality of a credit obligation past due for the purposes of point (b) of sub-paragraph 1 of paragraph 3: (a) for obligors of retail exposures, including exposures secured by mortgages of residential or commercial property, the higher of: (i) a minimum limit of 500, i.e. if the amount in arrears of an obligor who has a retail exposure does not exceed 500, this exposure is not classified as defaulted exposure or (ii) 1 loan instalment or an overdraft excess of 10% of the contractual limit, as applicable. 4

5 (b) for other exposures, the higher of: (i) a minimum limit of 1000, i.e. if the total amount in arrears of the total exposure of an obligor does not exceed 1000, the exposures to that obligor are not classified as defaulted exposures or (ii) the amount of arrears and excesses that in total exceed 10% of the total exposures to the obligor. PART III REPORTING FORMAT Reporting template 1 5.-(1) Reporting template 1 provides information on performing and non-performing exposures. For the purpose of template 1, (a) non-performing exposures" are those that satisfy either or both of the following criteria: (i) material exposures which are more than 90 days past-due; (ii) the debtor is assessed as unlikely to pay its credit obligations in full without realisation of collateral, regardless of the existence of any past-due amount or of the number of days past due. (b) The categorisation in point (a) shall apply notwithstanding the classification of an exposure as defaulted in accordance with paragraph 3 or as impaired for accounting purposes. (c) Exposures in respect of which a default is considered to have occurred in accordance with paragraph 3 and exposures that have been found impaired in accordance with the applicable accounting framework shall always be considered as non-performing exposures. Exposures with incurred but not reported losses shall not be considered as non-performing exposures unless they meet the criteria to be considered as non-performing exposures. (d) Exposures shall be categorised for their entire amount and without taking into account the existence of any collateral. Materiality shall be assessed in accordance with paragraph 4. (e) Exposures includes all debt instruments (loans and advances and debt securities) and off-balance sheet exposures, except held-for-trading exposures. Off-balance sheet exposures comprise the following revocable and irrevocable items: i) loan commitments given, ii) financial guarantees given, and 5

6 iii) other commitments given. (f) An exposure is past-due when any amount of principal, interest or fee has not been paid at the date it was due. (g) The term debtor means an obligor within the meaning of paragraph 3. (h) A commitment shall be regarded as a non-performing exposure for its nominal amount if, when withdrawn or otherwise used, it would lead to exposures that present a risk of not being paid back in full without realisation of collateral. (i) Financial guarantees given shall be regarded as non-performing exposures for their nominal amount when the financial guarantee is at risk of being called by the counterparty ( guaranteed party ), including, in particular, when the underlying guaranteed exposure meets the criteria to be considered as non-performing. Where the guaranteed party is past-due on the amount due under the financial guarantee contract, the reporting ACI shall assess whether the resulting receivable meets the non-performing criteria. (j) Exposures shall be assessed as non-performing on an individual basis ( transaction approach ) or by considering the overall exposure to a given debtor ( debtor approach ) using the following approaches: (i) (ii) for non-performing exposures that are defaulted or impaired the approaches used shall be those provided for in Part II and those used for the recognition of impairment, respectively; for other non-performing exposures, the provisions of Part II for defaulted exposures shall be applied. (k) When an ACI has on-balance sheet exposures to a debtor that are past due by more than 90 days the gross carrying amount of which represents more than 20% of the gross carrying amount of all on-balance sheet exposures to that debtor, all on- and off-balance sheet exposures to that debtor shall be considered as non-performing. When a debtor belongs to a group, the need to also consider exposures to other entities of the group as non-performing shall be assessed, when they are not already considered as impaired or defaulted in accordance with Part II, except for exposures affected by isolated disputes unrelated to the solvency of the counterparty. (l) Exposures may be considered to have ceased being non-performing when all of the following conditions are met: (i) the exposure meets the exit criteria applied by the reporting ACI for the discontinuation of the impairment and default classification; (ii) the situation of the debtor has improved to the extent that full repayment, according to the original or, when applicable, the modified conditions, is likely to be made; and 6

7 (iii) the debtor does not have any amount past-due by more than 90 days. (m)an exposure shall remain classified as non-performing while these criteria are not met, even though the exposure has already met the discontinuation criteria applied by the reporting ACI for the impairment and default classification. (n) When forbearance measures are extended to non-performing exposures, the exposures may be considered to have ceased being non-performing only when all the following conditions are met: (i) the extension of forbearance does not lead to the recognition of impairment or default; (ii) one year has passed since the forbearance measures were extended; and (iii) there is not, following the forbearance measures, any past-due amount or concerns regarding the full repayment of the exposure according to the post-forbearance conditions. The absence of concerns has to be determined after an analysis of the debtor s financial situation. Concerns may be considered as no longer existing when the debtor has paid, via its regular payments in accordance with the post-forbearance conditions, a total equal to the amount that was previously past-due (if there were past-due amounts) or that has been written-off (if there were no past-due amounts) under the forbearance measures or the debtor has otherwise demonstrated its ability to comply with the post-forbearance conditions. (o) These specific exit criteria shall apply in addition to the criteria applied by reporting ACIs for impaired and defaulted exposures. (p) Past-due exposures shall be reported separately within the performing and non-performing categories. Performing exposures past-due by less than 90 days shall be reported separately. (q) Non-performing exposures shall be reported broken down by past-due time bands. Exposures that are not past-due or are past-due by 90 days or less but nevertheless are identified as non-performing due to likelihood of nonfull repayment shall be reported in a dedicated column. Exposures that present both past-due amounts and likelihood of non-full repayment shall be allocated by past-due time bands consistent with their number of days pastdue. (r) The following exposures shall be identified in separate columns: (i) exposures which are considered impaired in accordance with the applicable accounting framework, except, when they are exposures with incurred but not reported losses; 7

8 (ii) exposures in respect of which a default is considered to have occurred in accordance with Part II. (s) Accumulated impairment shall be reported for financial assets at amortised cost or at fair value through other comprehensive income. Accumulated changes in fair value due to credit risk shall be reported for financial assets at fair value through profit or loss. Accumulated impairment shall include specific allowances for individually and collectively assessed financial assets as well as Collective allowances for incurred but not reported losses but do not include Accumulated write-offs amounts as all these terms are defined in paragraph 2. (t) Accumulated impairment figures reported for non-performing exposures shall not include incurred but not reported losses. Incurred but not reported losses shall be reported in accumulated impairment figures for performing exposures. (u) Accumulated changes in fair value due to credit risk shall be reported for exposures designated at fair value through profit and loss in accordance with the applicable accounting framework. (v) Information on collateral held and financial guarantee received on nonperforming exposures shall be reported separately. Amounts reported for collateral received and financial guarantees received shall be calculated as follows: i) The pledges and guarantees backing the loans and advances shall be reported by type of pledges: mortgage loans and other collateralised loans, and by financial guarantees. The loans and advances shall be broken down by counterparties. ii) Τhe maximum amount of the collateral or guarantee that can be considered shall be reported. The sum of the amounts of a financial guarantee and/or collateral shall not exceed the carrying amount of the related loan. Therefore, the sum of the amounts reported for both categories shall be capped at the carrying amount of the related exposure. iii) For reporting loans and advances according to the type of pledge the definitions of mortgage loans, other collateralised loans and financial guarantees received in paragraph 2 shall be used. iii) For loans and advances that have simultaneously more than one type of collateral or guarantee, the amount of the Maximum collateral/guarantee that can be considered shall be allocated according to its quality starting from the one with the best quality. 8

9 Reporting Template 2 (5)(1) Reporting template 2 provides information on forborne exposures. (2) When completing reporting template 2, the following shall be taken into account: (a) A concession within the context of forbearance refers to either of the following actions: (i) a modification of the previous terms and conditions of a contract the debtor is considered unable to comply with due to its financial difficulties ( troubled debt ) to allow for sufficient debt service ability, that would not have been granted had the debtor not been in financial difficulties; (ii) a total or partial refinancing of a troubled debt contract, that would not have been granted had the debtor not been in financial difficulties. A concession may entail a loss for the ACI. (b) Evidence of a concession includes: (i) a difference in favour of the debtor between the modified and the previous terms of the contract; (ii) cases where a modified contract includes more favourable terms than other debtors with a similar risk profile could have obtained from the same ACI. (c) The exercise of clauses which, when enforced at the discretion of the debtor, enable the latter to change the terms of the contract ( embedded forbearance clauses ), shall be treated as a concession when the ACI approves the exercise of the clauses and assesses that the debtor is in financial difficulties. (d) The term debtor includes all the natural and legal entities in the debtor s group which are within the accounting scope of consolidation. (e) The term debt includes loans, debt securities and revocable and irrevocable loan commitments given, but excludes exposures held for trading. (f) Exposure has the same meaning as given for debt. (g) ACI means the ACI which extended the forbearance measures. (h) Exposures shall be treated as forborne if a concession has been made, irrespective of whether any amount is past-due or of the classification of the exposures as impaired or as defaulted in accordance with Part II. (i) Exposures shall not be treated as forborne when the debtor is not in financial difficulties. (j) The following situations shall be treated as forbearance measures: (i) a modified contract was classified as non-performing or would in the 9

10 absence of modification be classified as non-performing; (ii) the modification made to a contract involves a total or partial cancellation by write-offs of the debt; (iii) the ACI approves the use of embedded forbearance clauses for a debtor who is under non-performing status or who would be considered as nonperforming without the use of these clauses; (iv) simultaneously with or close in time to the concession of additional debt by the ACI, the debtor made payments of principal or interest on another contract with the ACI that was non-performing or would in the absence of refinancing be classified as non-performing. (k) A modification involving repayments made by taking possession of collateral shall be treated as a forbearance measure when the modification constitutes a concession. (l) There is a rebuttable presumption that forbearance has taken place when: (i) the modified contract was totally or partially past-due by more than 30 days (without being non-performing) at least once during the three months prior to its modification or would be more than 30 days past-due, totally or partially, without modification; (ii) simultaneously with or close in time to the concession of additional debt by the ACI, the debtor made payments of principal or interest on another contract with the ACI that was totally or partially 30 days past due at least once during the three months prior to its refinancing; (iii) the ACI approves the use of embedded forbearance clauses for 30 days past-due debtors or debtors who would be 30 days past-due without the exercise of these clauses. (m) Financial difficulties shall be assessed at the debtor level, as defined in point (d). Only exposures to which forbearance measures have been extended shall be identified as forborne exposures. (n) The forbearance classification shall be discontinued when all the following conditions are met: (i) the contract is considered as performing, including if it has been reclassified from the non-performing category after an analysis of the financial condition of the debtor showed it no longer met the conditions to be considered as non-performing; (ii) a minimum 2-year probation period has passed from the date the forborne exposure was considered as performing; (iii) regular payments of more than an insignificant aggregate amount of principal or interest have been made during at least half of the probation period; 10

11 (iv) none of the exposures to the debtor is more than 30 days past-due at the end of the probation period. (o) When the conditions are not met at the end of the probation period, the exposure shall continue to be identified as performing forborne under probation until all the conditions are met. The conditions shall be assessed on at least a quarterly basis. (p) A forborne exposure may be considered as performing from the date when forbearance measures were extended if either of the following conditions is met: (i) this extension has not led the exposure to be classified as nonperforming; (ii) the exposure was not under non-performing status at the date the forbearance measures were extended. (q) If a performing forborne contract under probation is extended additional forbearance measures or becomes more than 30 days past-due, it shall be classified as non-performing. (r) Performing exposures with forbearance measures comprise forborne exposures that do not meet the criteria to be considered as non-performing. Forborne exposures under probation period that have been reclassified out of the non-performing forborne exposures shall be reported separately within the performing exposures with forbearance measures in the column of which: Performing forborne exposures under probation. (s) Non-performing exposures with forbearance measures comprise forborne exposures that meet the criteria to be considered as non-performing. These exposures are those that have been non-performing due to the extension of forbearance measures, which were non-performing prior to the extension of forbearance measures and to which the conditions in paragraph 4(1)(n) apply and forborne exposures which have been reclassified from the performing category, including exposures under probation having been reforborne or more than 30 days past-due. Exposures to which paragraph 4(1)(n) applies shall be separately identified in the column of which: forbearance of non-performing exposures. (t) The column Refinancing comprises the gross carrying amount of the new contract ( refinancing debt ) granted as part of a refinancing transaction qualifying as forbearance, as well as the part of the re-paid other contract ( refinanced debt ) that is still outstanding, if any. (u) Forborne exposures combining modification and refinancing shall be allocated to the column Instruments with modifications of the terms and conditions or the column Refinancing according to the measure that had the most impact on cash flows, if any. Refinancing by a pool of banks shall be reported in the column Refinancing for the total amount of refinancing 11

12 debt provided by or refinanced debt still outstanding at the reporting ACI. Repackaging of several debts in a new one shall be reported as a modification, unless there is also a refinancing transaction that has the largest impact on cash-flows. When forbearance through modification of the terms and conditions of a troubled exposure leads to its de-recognition and to the recognition of a new exposure, the new exposure shall be treated as forborne debt. (v) Accumulated impairment shall be reported for financial assets at amortised cost or at fair value through other comprehensive income. Accumulated changes in fair value due to credit risk figures shall be reported for financial assets at fair value through profit or loss. (w) Accumulated impairment shall include specific allowances for financial assets, individually and collectively estimated, as well as Collective allowances for incurred but not reported losses but do not include Accumulated write-offs amounts. The amount of accumulated impairment to be reported in the column on non-performing exposures with forbearance measures for non-performing exposures shall not include incurred but not reported losses. (x) Incurred but not reported losses shall be reported in the column on performing exposures with forbearance measures. (y) For debt instruments at amortised cost or at fair value through other comprehensive income, Gross carrying amount shall mean the carrying amount excluding Accumulated impairment. Frequency and remittance dates 6. (1) The Reporting Templates shall be submitted to the Central Bank on a monthly basis. (2) The Reporting Templates shall be submitted to the Central Bank within one month from the reference date. (3) The Central Bank, by issuing a circular letter, shall determine the means of submission and may determine a different frequency and remittance date. Date of application. PART IV - SUNDRY PROVISIONS 7. The first Reporting Templates shall refer to the data as at 31 December 2014 and shall be submitted to the Central Bank the latest by 27 February