Macro-prudential rules and regulations

Transcription

1 ROYAL MONETARY AUTHORITY OF BHUTAN Macro-prudential rules and regulations Time varying capital provisioning and margin requirements [Draft]

2 Index Part 1. Introduction Short title Authorization Application Definitions... 1 Part 2. Statement of policy Purpose Scope Responsibility... 2 Part 3. Implementation and specific requirements Limits and requirements Reporting requirements... 3 Part 4. Corrective measures Corrective measures and sanctions... 3 Effective date Effective date... 4 Annexure.1 Format for provisioning coverage ratio... 5 Page i

3 Part 1. Introduction 1.1 Short title Time-varying capital provisioning and margin requirements 1.2 Authorization The Royal Monetary Authority is authorized to issue these regulations under Section 9 (h) of the RMA Act 2010 in pursuance of the objectives stated in Sections 8 (a), 8(b), 8(d) and 8(e) of the RMA Act 2010 and Section 3 (a) of the Financial Services Act Application This regulation is applicable to all Banks and Other Financial Institutions (OFIs), (collectively Banks which are licensed by the RMA to perform their Banking/non-Banking functions in Bhutan. 1.4 Definitions Terms used within this regulation are as defined below, or as reasonably implied by contextual usage: i. Bank has the same meaning as in the Financial Services Act of Bhutan 2011; ii. iii. iv. Other Financial Institutions (OFIs) refers to all financial institutions except banks over which RMA can exercise and perform the powers, duties and functions conferred upon the Authority by or under the Royal Monetary Authority Act of Bhutan, 2010; Non-performing loans (NPL) are as defined by the RMA in Section 9.5 of the Prudential Regulations 2002 (amended 22 July 2010). Specific Provisions refer to loan loss provisions made against Substandard, Doubtful, and Loss, as specified by Section of the Prudential Regulations The amount of provisions are to be in line with point Asset Class and Provisioning specified by the RMA in its directive dated November 9, with the subject line: Revision of Prudential Norms or as it may specify from time to time. v. Others shall include provisions over and above the limits set under various regulations issued by RMA. vi. Provisions for diminution in fair value of the restructured accounts classified as NPAs shall mean fall in fair value of the advances classified as NPAs due to reschedulement or rephasement of the repayment of principal amount as part of the restructuring. Part 2. Statement of policy 2.1 Purpose Page 1

4 This regulation is intended to prevent pro-cyclicality in loan loss provisioning arising due to low specific provisions in upward phase and high specific provisions in the downturn phase. The regulation requires banks to build a cushion of general provisions during an upswing that can be used to cover rising specific provisioning needs linked to loan delinquencies during the subsequent downturn. 2.2 Scope This regulation is applicable to all licensed banks and other financial institutions which operate in Bhutan. 2.3 Responsibility The entire responsibility of complying with the stipulations under the Time varying capital provisioning as prescribed by the RMA and its subsequent amendments lies with the respective Board of Directors of each bank/ other financial institution. It is the responsibility of the Board of Directors of each bank and other financial institution to establish policies and procedures to ensure that provisions are built in full compliance with the provisions set forth in this regulation. Part 3. Implementation and specific requirements 3.1 Limits and requirements Time Varying Capital Provisioning A Bank shall maintain minimum provisioning coverage ratio of 70% all times. The provisioning coverage shall be calculated as given in annex: Provisioning Coverage ratio= [Specific Provisions for NPAs held or required+ Provisions for diminution in fair value of the restructured accounts classified as NPAs+ Technical Write-offs+ others] Gross NPA+ Technical Write-off Provisioning coverage ratio as stipulated in shall be complied with on a quarterly basis The surplus of the provision (i.e., others ) under provisioning coverage ratio vis-a-vis as required as per prudential norms should be segregated into an account styled as countercyclical provisioning buffer, computation of which may be undertaken as per the annexed format This buffer will be allowed to be used by banks for making specific provisions for NPAs during periods of system wide downturn, with the prior approval of RMA. Page 2

5 Each bank shall ensure that provisioning coverage ratio be disclosed in the Notes to Accounts to the Balance Sheet. Margin requirements A bank shall compute the margin against security for a borrower who is applying for credit facilities by using the following formula: Securities used as collateral may be shares and other approved securities Banks shall maintain a minimum margin of 50% of the market value of the security Loans against securities given to individuals shall not exceed Nu 2 million The ceiling on maximum loan amount against securities shall not apply to loan applicants other than individuals Banks shall take a written declaration from the borrower about whether he/she is applying to the bank for this loan for the first time or whether the borrower has taken credit facilities for the same intended purpose of the current loan at other financial institutions including those not regulated by RMA, together with valid proofs Banks shall take a written declaration from the borrower that the current collateral is not being used as collateral for any other outstanding loan for a purpose different from the intended purpose of the current loan Each bank should formulate with the approval of their Board of Directors a Loan Policy for grant of advances to individuals against shares and other approved securities subject to the provisions of this regulation. 3.2 Reporting requirements Each bank shall report the provisions made every quarter as per format given in Annex. Part 4. Corrective measures 4.1 Corrective measures and sanctions All individual banks and other financial institutions subjected to these regulations as detailed above shall comply with the same. )f a bank or a financial institution for which the Time varying capital provisioning regulations are applicable, fails to comply with the regulation and reporting requirements, the RMA may take any one or more of the appropriate corrective measures or/and impose any administrative penalties as provided under the RMA Page 3

6 Act, 1982 and its amendments in the RMA Act 2010 and the Prudential Regulations, 2002, issued by the RMA or any other statutory provision, as applicable In alignment with extant statutory provisions, the corrective measures and sanctions may include, but are not limited to any of the following: i. Issue of a formal warning to the bank; ii. iii. iv. Agreements for undertaking remedial measures, including those limiting the operations of the institution engaged in financial services; Stipulating the Bank/its Board of Directors to inject additional capital funds to meet the provisioning requirements and impose fines up to Nu.10,000 per day for each day the short fall continues; Restrict distribution of dividends and discretionary bonuses; v. Suspend access to credit facilities of the RMA; vi. vii. Suspend temporarily or permanently officers or directors from duties in the financial institutions; Order conservatorship in the case of institutions in accordance with provisions of the Part X of Prudential Regulations, 2002; viii. Revoke the license to operate Any bank or financial institution subjected to the regulations under Time varying capital provisioning may approach the Director, FRSD, RMA for advice in advance for need of clarification on application of extant regulations and rules The regulations and rules under the Time varying capital provisioning will be reviewed and revised by the RMA from time to time as the experience of implementing such regulations is acquired over time. 4.2 Effective date The regulation shall come into effect on... Effective date Page 4

7 Annexure.1 Format for provisioning coverage ratio As a part of macro-prudential regulatory policy measures of the RMA, Time varying capital provisioning is considered as an important constituent. With its counter-cyclical characteristics, time varying capital provisioning is envisaged to moderate risks to the overall financial stability in Bhutan and to promote credit smoothening along different stages of economic cycle. The concept of Time varying capital provisioning was first used as a key counter-cyclical prudential regulatory instrument by the central bank of Spain in 2000s, and in the post-global financial crisis scenario, it has gained wide popularity amongst leading central banks worldwide. The phenomenon of pro-cyclicality of bank credit has been a matter of concern for the central bankers with its implications for diluting the potency of monetary policy and exacerbating the risks to the resilience of the financial system over time. It has been observed that excessive credit growth during the economic boom is generally associated with irrational exuberance and dilution of underwriting standards. The realistic risk position becomes evident with deterioration of asset quality during economic downswing which poses significant risks to solvency and liquidity of banks. Consequent provisioning and capital adequacy requirements severely constrain bank balance sheet, and dilutes the potency of the bank credit in stimulating or reviving the economy. The inter-linkages in behavior of bank credit and economic growth in the last decade in Bhutan provide some indications of pro-cyclicality in bank credit growth in Bhutan. This underscores the need for introduction of counter-cyclical macro-prudential policy tools in Bhutan. Globally, various countries have introduced counter-cyclical loan loss provisioning guidelines. Broadly, these guidelines fall into two categories: 1. Pure Dynamic Provisioning Policies: These policies are directed towards smoothening the cyclical variations in specific provisions thereby avoiding fluctuations in the Profit & Loss through the cycle. 2. Conservative Dynamic Provisioning Policies: In addition to targeting the smoothening of the cyclical variations in P&L due to specific provisions, these policies also tend to build-up reserve of general provisions in good times to be used in the downward phase. Majority of the models currently used by countries such as Spain (Statistical provisioning), United Kingdom (FSA model), International Accounting Standards Board, Peru (Generic provisioning), and Columbia are at the advanced stage. These models are complex and are subject to greater data requirements. Given that banking system in Bhutan is yet to mature to meet data requirements for more comprehensive model for countercyclical loan loss provisioning, it is prudent to adopt a simple and easy to implement model such as Provisioning Coverage ratio as a starting point. As discussed in 3.1.1, each bank shall maintain provisioning coverage ratio as per the following formula: Provisioning Coverage ratio= {Specific Provisions for NPAs held or required+ Provisions for diminution in fair value of the restructured accounts classified as NPAs+ Technical Write-offs+ others} Page 5

8 Gross NPA+ Technical Write-off Where, Others shall include provisions over and above the limits set under various regulations issued by RMA. Provisions for diminution in fair value of the restructured accounts classified as NPAs shall mean fall in fair value of the advances classified as NPAs due to reschedulement or rephasement of the repayment of principal amount as part of the restructuring. Under this regulation, banks maintain minimum PCR of 70% of Gross NPA plus Technical Write-off all times. During the upward phase, due to better loan servicing NPA s are low. This allows banks to make low specific provisions. However, fixing minimum provisioning coverage ratio mandates banks to make more provisions than required under loan loss provisioning guidelines issued by RMA. Excess provisions made during upward phase are accumulated as countercyclical buffer. This buffer can be used by banks for making higher provisions during the downward phase. Table 1 shows an illustrative example of the process through which provisioning coverage ratio operates. In this example, banking sector achieve high credit growth till quarter 3 of year 2. Since quarter 1 of year 1 to quarter 3 of year 2 is assumed to be an upward phase, non-performing loans grow at a low rate and also the specific provisions. Provisions for diminution in fair value of the restructured accounts classified as NPAs and Technical Write-off are also low in this phase. Post quarter 3 of year 2, the NPAs increase at a higher rate. This also causes high growth in specific provisions, provisions for diminution in fair value of the restructured accounts classified as NPAs and technical write-off. Starting quarter 1 of year 4, NPA increases at a more rapid rate along with other provisions. It can be seen that without any time-varying capital provisioning, pressure on banks to make specific provisions increases moving from Year 1 to Year 4. It is expected to impact credit availability during year 4. However, in case of minimum provisioning coverage ratio of 70% (as given in column 8), banks accumulate provisions till quarter 4 of year 3 which can be used to support high provisions in year 4. The format for reporting provisioning coverage ratio is given in Table 2. Table 1: Illustrative Example for Provisioning Coverage ratio Year Quarter Gross NPA Specific Provisions Provisions for diminution in fair value of the restructured accounts classified as NPAs Technical Write- Off Mandatory provisioning Suggested PCR Countercyclical Provisioning Buffer = (4+5+6) 8= (70% *3) 9= (8-7) Q Year 1 Q Page 6

9 Year Quarter Gross NPA Specific Provisions Provisions for diminution in fair value of the restructured accounts classified as NPAs Technical Write- Off Mandatory provisioning Suggested PCR Countercyclical Provisioning Buffer = (4+5+6) 8= (70% *3) 9= (8-7) Year 2 Year 3 Year 4 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Note: During the upward phase of the business cycle, mandatory provisions (column 7) are lower than the suggested PCR. This results in accumulation of excess provisions as countercyclical provisioning buffer. During the period of downturn, NPA are high which requires high mandatory provisions. The suggested PCR shall be lower than the mandatory provisions. However, the accumulated countercyclical provisions could be used to meet the gap between mandatory provisions and suggested PCR. Table 2: Format for Time Varying Capital Provisioning as on quarter Gross Plus Technical / Prudentia l Write-off * Specific Provisions for NPAs held/requ ired Provisions for diminution in fair value of the restructure d accounts classified Techn ical writeoff Total (4+5+ 6) Ratio of (7) to (3) Page 7

10 as NPAs 1. Sub-Standard Advances Doubtful Advances (a+b+c) 2. a b c days days days 3. Advances classified as Loss Assets 4. Others 5. Total a. 7 b. Provision Coverage Ratio {(Row 4/Total of Column 3 of Row 4)*100} If PCR < 70%, shortfall in provisioning to achieve PCR of 70% ( 70% of Column 3 of Row 4 Row 8) Countercyclical Provisioning Buffer, if bank has achieved PCR of 70% - Others Countercyclical Provisioning Buffer, if bank has not achieved PCR of 70% Others + Shortfall in provisioning to achieve PCR of 70%, if any (Row 6) which needs to be built up at the earliest. Page 8

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