Unofficial Translation This translation is for the convenience of those unfamiliar with the Thai language Please refer to Thai text for the official version 1. Rationale Bank of Thailand Notification No. FPG. 5/2559 Re: Guidelines on Asset Classification and Provisioning of Financial Institutions Previously, the Bank of Thailand has prescribed guidelines on asset classification and provisioning so that financial institutions would set aside provisions sufficient for impairment of their assets, especially loans, which are the core assets of financial institutions. In 2008 (B.E.2551) the Bank of Thailand amended the guidelines for certain parts in order to encourage financial institutions to set aside provisions to better reflect risks of losses that may arise in the business operation. For example, financial institutions shall consider classifying debtors and related parties in the same classification if there are the indicators that cash inflows of the debtor sand those of related parties, for any particular account, are correlated and this may affect the repayment capability of the debtors. In addition, there were the amendments to types of collateral the values of which can be deducted from outstanding balances of loans before provisions. According to the Business Collateral Act B.E.2558 (2015), which has come into effect from 2 July 2016 (B.E.2559), debtors may place assets that have economic value as collateral for debt payment, where the debtors are not required to deliver those assets to the collateral receivers. Therefore, in order to accommodate the practices according to the Business Collateral Act B.E.2558 (2015) and to promote the access to finance of small-sized enterprises, the Bank of Thailand hereby amended the guidelines on asset classification and provisioning by prescribing more types of collateral, covering business collateral with a value of no more than 50 million Baht and non-contractual claims that financial institutions can deduct their values from the outstanding balances of loans before provisions.
2 2. Statutory Power By virtue of the power conferred by Sections 60 and 61 of the Financial Institution Business Act B.E. 2551, the Bank of Thailand hereby prescribed the regulations on asset classification and provisioning for financial institutions to comply with 3. Notification to be Repealed/Amended The Bank of Thailand Notification No. FPG. 31/2551 dated 3 August 2008 (B.E.2558) Re: Regulations on Asset Classification and Provisioning of Financial Institutions 4. Scope of Application This Notification shall be applied to all financial institutions under the Financial Institution Business Act. 5. Contents 5.1 In this Notification Loss assets means assets classified as Loss. Assets that are subject to possible impairment means (a) Assets classified as Doubtful of Loss (b) Asset classified as Doubtful (c) Asset classified as Substandard (d) Assets classified as Special Mention or Special Caution Required (e) Assets classified as Pass Provisions means reserves set aside as allowances for bad debts or doubtful debts, price reduction, devaluation and revaluation of assets that are subject to possible impairment, including other unimpaired assets and obligations. Financial institutions shall set aside provisions for each class of classified assets in accordance with the rates and guidelines as prescribed in this Notification.
3 5.2 Guidelines on asset classification and provisioning 5.2.1 Policies and practices Financial institutions shall set out clearly written policies and practices regarding asset classification, provisioning and amortization for loss assets or assets that are subject to possible impairment. Those policies and practices shall be approved by the board of directors of financial institutions and shall include the following: (1) Roles and responsibilities of relevant directors, executives and staff of financial institutions (2) Quantitative and qualitative factors used for consideration of asset classification financial institutions (3) Assumptions and methods for calculation of provisions (4) Write-off of bad debts and recovery of bad debts of (5) Internal control system and accounting policies (6) Monitoring of accuracy of asset classification, provisioning, write-off of bad debts, as well as reliability of supporting data and documents 5.2.2 Asset classification Financial institutions shall classify the following assets, by each account of assets, in accordance with their attributes. Where, financial institutions shall consider the relationship of cash flows of each account, that is, if the cash flows of debtors and those of related parties of debtors are related, the financial institutions may classify those debtors into the same classification. On this, the Bank of Thailand may require financial institutions to reclassify assets as deemed appropriate. the following attributes: (1) Assets classified as Loss mean assets with any one of (1.1) Claims for which any appropriate arrangement is carried out in order to obtain repayments, but the receipt of those repayments is highly unlikely due to any one of the following: (1.1.1) The debtors are deceased or disappear, or there is evidence of disappearance and there are no any other assets for debt payment.
4 (1.1.2) The debtors dissolve their businesses and there are other creditors that have preferential rights, with more senior claims, over the whole assets of the debtors for an amount exceeding the assets of the debtors. (1.1.3) Financial institutions have taken legal action or submitted a request for a court order to partially obtain assets of the debtors in case where the debtors are also taken legal action by other creditors and where, in that case, there has already been the execution of judgment or a court order, but the debtors do not have any assets for debt payment. (1.1.4) Financial institutions have filed debtors for bankruptcy or have submitted a request for a court order to obtain repayments in case where the debtors are also filed by other creditors for bankruptcy and where, in that case, there will be the debt restructuring as approved by the court, or the debtors have been judged bankrupt and the first allocation of properties of the debtors have been carried out. uncollectible worthless (1.2) Claims that are considered, by their nature, (1.3) Other assets that are impaired, damaged or (1.4) Losses from debt restructuring according to the guidelines and methods as prescribed by the Bank of Thailand (2) Assets classified as Doubtful of Loss mean assets with any one of the following attributes: (2.1) Loans for which the principal or interest payment is past due for a cumulative period of more than 12 months from the due date, irrespective of whether this is under the contractual conditions or periods, or the day financial institutions call for or demand the repayment, whichever is earlier, except loans that have been classified as Loss. For overdraft loans, they shall be classified in accordance with 5.2.2 (2.2). (2.2) Overdraft loans without a credit line, or with a credit line that has been canceled, or with a contractual credit line but the outstanding balance of loans exceeds the credit line, or the contract matures and there is no money deposited into an account to make principal or interest payments for more than 12 months from the day that the credit line is canceled, or the day the outstanding balance of loans exceed the credit line, or maturity date of the contract, whichever is earlier.
5 (2.3) Immovable properties acquired from debt payment or purchased at a public auction, only for portion that the book value is greater than the value from the valuation carried out no later than 12 months. The estimated expenses for sale of the properties shall be deducted before comparing to the book value. If the valuation is carried out later than 12 months, only 50% of the assessed value can be used. The valuation of immovable properties shall be in accordance with the Policy Statement of the Bank of Thailand Re: Valuation of Collateral and Immovable Properties for Sale Obtained from Debt Payment, Loan Guarantees or Purchased at a Public Auction of Financial Institutions. (2.4) Other assets, only for portion that the book value is greater than the fair value or the expected recoverable value; financial institutions must specify the fair value or the expected recoverable value for such assets in accordance with the guidelines as prescribed in Accounting Standards. recoverable (2.5) Assets or claims that may not be entirely (2.6) Losses from debt restructuring in accordance with the guidelines and methods as prescribed by the Bank of Thailand (2.7) There are other indicators that the assets or claims may not be entirely recoverable as prescribed by the Bank of Thailand. of the following attributes: (3) Assets classified as Doubtful mean assets with any one (3.1) Loans for which the principal or interest payment is past due for a cumulative period of more than 6 months from the due date, irrespective of whether this is under the contractual conditions or periods, or the day financial institutions call for or demand the repayment, whichever is earlier, except loans that have been classified as Loss or Doubtful of Loss. For overdraft loans, they shall be classified in accordance with 5.2.2 (3.2). (3.2) Overdraft loans without a credit line, or with a credit line that has been canceled, or with a contractual credit line but the outstanding balance of loans exceeds the credit line, or the contract matures and there is no money deposited into an account to make principal or interest payments for more than 6 months from the day the credit line is canceled, or the day the outstanding balance of loan exceeds the credit line, or maturity date of the contract, whichever is earlier. a court order (3.3) Debtors whose assets have been in receivership by
6 (3.4) Debtors whose businesses have been ceased or dissolved or in the process of liquidation (3.5) Debtors who have delayed the debt payment or have taken any action in order to prevent the creditors from receiving the repayment, such as moving outside the Kingdom, or removing or disposing the assets. (3.6) Debtors who cannot be reachable or found, or debtors who have moved out from the address as specified in the agreement without giving a notice to the financial institutions (3.7) Debtors whose businesses are uncertain, or debtors who have not undertaken the businesses with intention, or debtors who have used the loans for other purposes apart from those specified in the agreement (3.8) Financial institutions have submitted a request to partially obtain the assets in case where the debtors are taken legal action by other creditors be fully received (3.9) Assets or claims for which the repayment may not (3.10) There are other indicators that the assets or claims may not be fully recoverable as prescribed by the Bank of Thailand (4) Assets classified as Substandard mean assets with any one of the following attributes: (4.1) Loans for which the principal or interest payment is past due for a cumulative period of more than 3 months from the due date, irrespective of whether this is under the contractual conditions or periods, or the day financial institutions call for or demand the repayment, whichever is earlier, except loans that have been classified as Loss, Doubtful of Loss or Doubtful. For overdraft loans, they shall be classified in accordance with 5.2.2 (4.2). (4.2) Overdraft loans without a credit line, or with a credit line that has been canceled, or with a contractual credit line but the outstanding balance of loans exceeds the credit line, or the contract matures and there is no money deposited into an account to make principal or interest payments for more than 3 months from the day the credit line is canceled, or the day the outstanding balance of loans exceeds the credit line, or maturity date of the contract, whichever is earlier. (4.3) There are other indicators that the assets or claims has involved certain difficulties in demanding the repayment, or those assets or claims do not generate income as usual as prescribed by the Bank of Thailand.
7 (5) Assets classified as Special Mention or Special Caution Required mean assets with any one of the following attributes: (5.1) Loan for which the principal or interest payment is past due for a cumulative period of more than 1 month from the due date, irrespective of whether this is under the contractual conditions or periods, or the day financial institutions call for or demand the repayment, whichever is earlier, except loans that have been classified as Loss, Doubtful of Loss, Doubtful or Substandard. For overdraft loans, they shall be classified in accordance with 5.2.2 (5.2). (5.2) Overdraft loans without a credit line, or with a credit line that has been canceled, or with a contractual credit line but the outstanding balance of loans exceeds the credit line, or the contract matures and there is no money deposited into an account to make principal or interest payments for more than 1 month from the day the credit line is canceled, or the day the outstanding balance of loan exceeds the credit line, or maturity date of the contract, whichever is earlier. the following attributes: (6) Assets classified as Pass mean assets with any one of (6.1) Loans for which there is no past due payment. For overdraft loans, they shall be classified in accordance with 5.2.2 (6.2). (6.2) Overdraft loans for which the credit line has not been fully drawn down and has not been canceled or the contract does not mature, or overdraft loans for which the interest payment is past due no more than 1 month (6.3) Other loans that have not been classified as Loss, Doubtful of Loss, Doubtful, Substandard or Special Mention (or Special Caution Required) (6.4) Loans with a confirmation letter on the acceptance of works issued by the government agency no later than 6 months from the acceptance date in accordance with the regulations of that agency. The loans with that confirmation letter shall be classified as Pass. 5.2.3 Asset classification in case of debt restructuring For debt restructuring in accordance with the guidelines on debt restructuring of financial institutions as prescribed by the Bank of Thailand, financial institutions shall comply with the following:
provisions, as follows: 8 (1) Financial institutions shall write off losses or set aside (1.1) In case where financial institutions agree to reduce the principal or interest accrued before debt restructuring, or accept the repayment by transfer of debtor s assets, financial instruments, or debtor s equity resulting from debtequity conversion, the financial institutions shall write off those debt accounts and recognize incurred losses as well as reverse the whole amount of excess provisions set aside for those accounts. (1.2) In case where financial institutions agree to allow the relaxation of debt payment conditions by not reducing the principal or interest accrued before debt restructuring, which makes the expected recoverable amount of restructured debt calculated in accordance with the guidelines on debt restructuring of financial institutions as prescribed by of the Bank of Thailand less than the old book value plus accrued interest recorded in the debtor s account before debt restructuring. Financial institutions shall record provisions for the whole amount of those incurred losses. On this, financial institutions may reverse the provisions that have already been set aside before debt restructuring for those debtors only for portion that exceeds the incurred losses. However, if the provisions that have been set aside are less than the incurred losses, financial institutions shall set aside additional provisions to cover those incurred losses. (1.3) In case where financial institutions agree to reduce the principal or interest accrued before debt restructuring, or accept the partial repayment by transfer of debtor s assets, or accept debtor s equity resulting from debtequity conversion, and allow the relaxation of debt payment conditions for the remaining amount of debts, the financial institutions shall comply with 5.2.3 (1.1) in the case of reducing the principal or interest or accepting the partial repayment, and shall comply with 5.2.3 (1.2) in the case of allowing the relaxation of debt payment conditions. (2) In the period during which financial institutions monitor the compliance of debtors with the debt restructuring conditions, where the debtors must make repayments according to the debt restructuring agreement for at least 3 consecutive months or 3 installments, whichever is longer, the financial institutions shall comply with the following: (2.1) Loans that have been classified as Doubtful of Loss or Doubtful shall be reclassified as Substandard. (2.2) Loans that have been classified as Substandard or Special Mention (or Special Caution Required) shall not be reclassified.
9 Financial institutions shall set aside provisions in accordance with the loan classification after debt restructuring if the provisions set aside according to 5.2.3 (2) are greater than the provisions for incurred losses from debt restructuring under 5.2.3 (1.1) (1.2) and (1.3). If the debtors can successfully comply with the new terms of debt restructuring agreement as they can make repayments for at least 3 consecutive months or 3 installments, those debtors shall be reclassified as Pass. If the debtors cannot comply with new debt payment conditions, financial institutions shall count the number of days the payment is past due during the debt restructuring period together with the number of days the payment is past due under the original contract before debt restructuring, then, consider reclassifying those debtors in accordance with the guidelines on debt classification in order to set aside provisions as prescribed in this Notification. (3) For loans that have been under debt restructuring according to the guidelines on debt restructuring of financial institutions as prescribed by of the Bank of Thailand and meet any one of the following criteria, financial institutions shall immediately reclassify those loans as Pass irrespective of whether the debt restructuring conditions have been complied: (3.1) Debtors who can pay interest at no less than the market interest rate without a grace period for interest payments; however, there may be a grace period for principal payments. (3.2) Debtors with losses incurred from debt restructuring for no less than 20% of the outstanding balance of loans before debt restructuring, where those losses have been written off or provisions have been set aside in full, and where, for remaining loans, financial institutions have made the analysis of financial conditions and businesses as well as cash flows based on guidelines, reasonable grounds and supportive documents to ensure that the debtors can comply with the debt restructuring agreement. (3.3) Debtors under loan syndication or lent by several creditors, where those creditors mutually agree to enter into the debt restructuring agreement, and financial institutions can provide the evidence that they have carried out the analysis of financial conditions, businesses and cash flows of the debtors based on guidelines and reasonable grounds to ensure that those debtors are highly likely to comply with the debt restructuring agreement.
10 (3.4) In case where financial institutions have filed a lawsuit against debtors and later entered into a compromise agreement and the court has accordingly approved that agreement, and in case where financial institutions have filed debtors for bankruptcy and the court has approved the request of the debtors for debt restructuring or business rehabilitation plan. (4) If there is any apparent irregularity on debt restructuring, the Bank of Thailand may require financial institutions to make corrections or to have in place an independent expert to evaluate or review the debt restructuring or to make amendments to loan classification and provisioning for each individual debtor. 5.2.4 Provisions and write-off of impaired assets or assets subject to possible impairment Financial institutions shall write off assets and set aside provisions according to classification of assets, as follow: (1) Assets classified as Loss, financial institutions shall write off the entire amount from the account. Substandard: (2) Assets classified as Doubtful of Loss, Doubtful or (2.1) Financial institutions shall set aside provisions at 100 percent of the difference between the outstanding balance of loans and the present value of cash flows expected to receive from the debtor or the present value of cash flows expected to receive from disposing collateral. Financial institutions shall use the calculation methods as prescribed by the Bank of Thailand in Attachment 1. For cash flows expected to receive from disposing other types of collateral apart from immovable properties, leasehold, marketable machineries and vehicles, financial institutions may deduct the value of collateral, according to the Summary table of types and values of collateral that can be deducted from outstanding balances of loans before provisions as prescribed by the Bank of Thailand in Attachment 3. That is, financial institutions are not required to calculate the present value of cash flows expected to receive from disposing that collateral. (2.2) In case of retail debtors that can be appropriately classified into the same pool with similar credit risk exposures, financial institutions may choose to set aside provisions in accordance with 5.2.4 (2.1) or apply the Collective Approach, whereby historical losses are used for calculation of provisions as prescribed by the Bank of Thailand in Attachment 2.
11 In case where the Bank of Thailand deems that financial institutions use inappropriate assumptions and factors in calculating cash flows expected to receive from debtors or present values of cash flows expected to receive from disposing collateral or historical losses for setting aside provisions under the Collective Approach for the pool of retail debtors with similar credit risk exposures, the Bank of Thailand may require the financial institutions to set aside additional provisions or change the calculation method. (3) Assets classified as Special Mention or Pass (3.1) Financial institutions shall set aside provisions by using the outstanding balance of principal excluding accrued interest as base for the calculation by the following rates: Special Mention Pass (3.1.1) 2 percent in case of assets classified as (3.1.2) 1 percent in case of assets classified as On this, financial institutions may deduct the value of collateral, according to the Summary table of types and values of collateral that can be deducted from outstanding balances of loans before provisions as prescribed by the Bank of Thailand in Attachment 3 (3.2) In case of retail debtors that can be appropriately classified into the same pool with similar credit risk exposures, financial institutions may choose to set aside provisions in accordance with 5.2.4 (3.1) or apply the Collective Approach, whereby historical losses are used for calculation of provisions as prescribed by the Bank of Thailand in Attachment 2. On this, if financial institutions do not have adequate data for calculation of provisions under the Collective Approach in accordance with 5.2.4 (3.2), such as having the data of less than 5-year period, the financial institutions shall set aside provisions as calculated in accordance with 5.2.4 (3.2) or 5.2.4 (3.1), whichever is greater. shall be set aside 5.2.5 Provisions for obligations (Off-balance sheet obligation) (1) Off-balance sheet obligations for which provisions Financial institutions shall set aside provisions for offbalance sheet obligations that meet all of the following conditions:
12 (1.1) Off-balance sheet obligations of debtors classified as Loss, Doubtful of Loss, Doubtful and Substandard in accordance with 5.2.2 (1.2) Off-balance sheet obligations that have been recognized as contingent liabilities on the balance sheet in accordance with the Accounting Standards No.37 Re: Provisions, Contingent Liabilities and Contingent Assets and the amendments thereof and meet all of the following conditions: (1.2.1) Current obligations resulting from past events irrespective of whether those obligations are legal or constructive obligations; (1.2.2) It is highly likely that financial institutions will lose economic resources in making payments for those obligations; estimated. (1.2.3) The values of obligations can be reliably (1.3) Off-balance sheet obligations that have high level of credit risk, such as loan guarantees, avals or irrevocable obligations where the Bank of Thailand assigns the credit conversion factor of 1 for calculation of minimum capital requirements in accordance with the Bank of Thailand Notification Re: Regulations on Calculation of Credit Risk-Weighted Assets for Commercial Banks or financial Companies or Credit Foncier Companies, as the case may be. (2) Provision rates Financial institutions shall set aside provisions for offbalance sheet obligations that meet the conditions as prescribed in 5.2.5 (1) using the same rates as for the respective debtors as shown on the balance sheet. In case where debtors have several types of debts with different provisioning rates, financial institutions shall set aside provisions for off-balance sheet obligations using the highest rate of such debtors. This is except the case where the financial institutions can identify the relationship between the repayment for any obligation and the particular account of the debtor, the financial institutions may set aside provision for the obligation using the same rate as for that account. Financial institutions shall record data related to those provisions under the items of other expenses and other liabilities. When the Bank of Thailand subsequently adds such data to the Data Set Classification, financial institutions shall report such data according to the Classification as prescribed by the Bank of Thailand. In addition, financial institutions shall keep relevant documents at the financial institutions for an inspection by the Bank of Thailand.
13 5.2.6 Provisions for hire purchase and leasing contracts Financial institutions shall calculate provisions using the outstanding balance of hire purchase or leasing contract, which is the amount net of deferred revenues from the hire purchase or leasing contract. In case of hire purchase and leasing for vehicles and machineries, financial institutions may deduct the value of vehicle or machinery in accordance with 5.2.9 from the outstanding balance under the first paragraph before calculating provisions. 5.2.7 Provisions for loans with an agreement to purchase or sell In calculating provisions for loans that financial institutions have an agreement to buy or to sell with external parties, the financial institutions shall calculate the provisions by deducting the purchase/sale value from the outstanding balance of loans before provisions in accordance with the following conditions: (1) There must be a bank guarantee for the purchase issued by other financial institution or the buyer must put down a deposit of no less than 20% of the purchase/sale value. (2) The purchase or sale must be completed within 1 year from the day the agreement to purchase or sell is made. 5.2.8 Provisions for loans for purchasing securities If finance companies still have loans for purchasing securities before the finance business and securities business have been separated, the finance companies shall classify the outstanding balance of loans that is greater than the value of collateral as Doubtful of Loss and set aside provisions at 100 percent. 5.2.9 Values of collateral for calculation of provisions In setting aside provisions for all classified assets except assets classified as Doubtful of Loss in accordance with 5.2.2 (2.3), (2.4) and (2.6), financial institutions shall deduct the value of collateral, which has been assessed in accordance with the Policy Statement of the Bank of Thailand Re: Valuation of Collateral and Immovable Properties for Sale Obtained from Debt Payment, Loan Guarantees or Purchased at a Public Auction of Financial Institutions, from the book value of loans before provisions. Financial institutions may choose to firstly deduct the value of collateral from the outstanding balance of any account of the debtor.
14 On this, the value of collateral to be deducted must not be greater than the credit line as specified in a pledge contract, mortgage contract, guarantee contract or business collateral contract, as the case may be. The types of collateral and the value that can be deducted as well as the frequency of valuation for each type of collateral shall be in accordance with the Summary table of types and values of collateral that can be deducted from outstanding balances of loans before provisions as prescribed by the Bank of Thailand in Attachment 3. 5.2.10 Payment of dividend In the period during which financial institutions have not yet written off impaired assets or have not yet set aside provisions for assets and obligations in full, irrespective of whether they are impaired or not, the financial institutions are not allowed to pay dividend nor any other forms of returns to the shareholders. 5.2.11 Provisions at more stringent rates than those prescribed by the Bank of Thailand In case where financial institutions wish to classify assets or set aside provisions using more stringent guidelines than those prescribed in this Notification, the financial institutions are allowed to do so. On this, in case where financial institutions wish to write off loans as the debtors are deemed unable to repay loans, for example, after the financial institutions have filed a lawsuit against the debtors and it is found that the debtors do not have any assets to make repayments or there are no guarantors or the collateral is impaired, the financial institutions are allowed to write off those loans. In addition, in writing off debtors, financial institutions are also allowed to firstly write off any account of the debtor. For the purpose of internal control and preventing frauds that may occur in the future, financial institutions should carry out the following: (1) Set out clear and written policies, guidelines or procedures for writing off loans and internal control, for which the examination can be carried out. (2) Writing off loans must not be for benefits of the directors, senior management, shareholders of financial institutions, or related parties or entities that those persons have related interests.
15 5.2.12 Review of loans and obligations Financial institutions shall conduct a review and prepare a report on review of credits, loans, obligations and credit-like transactions in accordance with the guidelines as prescribed by the Bank of Thailand in the Policy Statement Re: Review of Credits, Credit-Like Transactions and Obligations of Commercial Banks and Retails Banks or the Policy Statement Re: Review of Credits, Loans, Obligations and Credit- Like Transactions of Finance Companies and Credit Foncier Companies, as the case may be. 6. Effective Date onwards. This Notification shall come into effect from 2 July 2016 (B.E.2559) Regulatory Policy Department Tel. 0 2283 5806, 0 2283 5304, 0 2283 5837 Fax. 0 2283 5938 Announced on 10 th June 2016 (Mr. Veerathai Santiprabhob) Governor Bank of Thailand
- 1/1 - Attachment 1 Methods for calculation of present value of expected cash inflows from debtors or present value of expected cash inflows from disposal of collateral 1. In case where financial institutions choose to calculate the present value (PV) of expected cash inflows from debtors: Financial institutions shall estimate expected cash inflows from the debtor by specifying relevant assumptions and factors appropriately to the current economic conditions and environment. Financial institutions are required to set aside provisions for the difference between the outstanding balance of loans and the present value of expected cash inflows. The interest rate used for calculation of present value must be the effective interest rate as prescribed by accounting standards. Initially, financial institutions may apply the interest rate of 7% as the discount rate instead of the effective interest rate. For the first three months of payment, if the actual cash inflows are different from the expected cash inflows, financial institutions shall set aside additional provisions for the difference between the expected cash inflows and the actual cash inflows. Moreover, financial institutions shall re-estimate the expected cash inflows. After the first 3 months of payment, financial institutions shall review whether the expected cash inflows are consistent with the actual cash inflows. o If the actual cash inflows are greater than or equal to the expected cash inflows, financial institutions shall continue using those expected cash inflows. o If the actual cash inflows are less than the expected cash inflows, financial institutions shall immediately change the calculation method by using the present value of collateral. In case where there is no collateral, financial institutions shall immediately set aside provisions at 100% of the outstanding balance of loans. Financial institutions shall review the expected cash inflow every account period. In case where the effective interest rate is a discount rate, financial institutions shall prepare documents related to provisioning, such as supporting documents for calculation of the effective interest rate. Those documents shall be kept at financial institutions for an inspection by the Bank of Thailand.
- 1/2-2. In case where financial institutions choose to calculate the present value (PV) of expected cash inflows from disposal of collateral: In case where financial institutions choose to use the present value (PV) from disposal of collateral to calculate expected cash inflows, the financial institutions cannot return to using the present value of expected cash inflows from debtors, except the financial institutions enter into the debt restructuring agreement with the debtor in accordance with the regulations as prescribed by the Bank of Thailand. 2.1 Immovable properties and leasehold The collateral value used for calculation of PV, net of all expenses, is equal to 90% of the assessed value in accordance with the regulations as prescribed by the Bank of Thailand in 5.2.9 (every 3 years). about 5.5 years. The number of years that the collateral is expected to be sold is The interest rate used for calculation of PV is equal to the effective interest rate as prescribed by accounting standards. Initially, financial institutions may apply the interest rate of 7% as the discount rate instead of the effective interest rate. In case where financial institutions use the assumptions or factors for calculation of PV apart from the above guidelines and where there are verifiable justifications, the financial institutions are allowed to do so but they must have in place supporting documents related to provisioning, such as supporting documents related to the calculation of provisions. Those documents shall be kept at financial institutions for an inspection by the Bank of Thailand. 2.2 Marketable machinery The collateral value used for calculation of PV is equal to 100% of the assessed value in accordance with the regulations as prescribed by the Bank of Thailand in 5.2.9 (every 3 years). Such collateral value is net of depreciation calculated up to the day the collateral is expected be sold before the calculation of PV. about 2.5 years. The number of years that the collateral is expected to be sold is The interest rate used for calculation of PV is equal to the effective interest rate as prescribed by accounting standards. Initially, financial institutions may apply the interest rate of 7% as the discount rate instead of the effective interest rate.
- 1/3 - In case where financial institutions use the assumptions or factors for calculation of PV apart from the above guidelines and where there are verifiable justifications, the financial institutions are allowed to do so but they must have in place supporting documents related to provisions, such as supporting documents related to the calculation of provisions. Those documents shall be kept at financial institutions for an inspection by the Bank of Thailand. 2.3 Vehicles For hire purchase, leasing or loans for which vehicles have placed as collateral, and where those contracts are legitimate and the vehicles insured, financial institutions shall calculate the present value (PV) of expected cash inflows from disposal of collateral in according with the following conditions: The collateral value used for calculation of PV is equal to 100% of the assessed value in accordance with the regulations as prescribed by the Bank of Thailand in 5.2.9 (every 3 years). Such collateral value is net of depreciation calculated up to the day the collateral is expected be sold before the calculation of PV. The number of years that the collateral is expected to be sold is about 1 years and about 5.5 years in case of ships. The interest rate used for calculation of PV is equal to the effective interest rate as prescribed by accounting standards. Initially, financial institutions may apply the interest rate of 7% as the discount rate instead of the effective interest rate. In case where debtors have been classified as Doubtful of Loss or for which the principal and interest payment is past due for more than 12 months, financial institutions cannot use vehicles placed as collateral, except ships, to calculate PV of expected cash inflows from disposal of collateral. In case where financial institutions use the assumptions or factors for calculation of PV apart from the above guidelines and where there are verifiable justifications, the financial institutions are allowed to do so but they must have in place supporting documents related to provisions, such as supporting documents
- 2/1 - Attachment 2 Guidelines on loan classification and provisioning under the Collective Approach 1. Financial institutions shall categorize loans in order to calculate historical losses, as follows: Objective of loans: such as mortgage loans, credit card loans, personal loans, leasing Overdue payment or loan classification: such as Pass (0-1 month overdue), Special Mention (1-3 months overdue), Substandard (3-6 months overdue) long-term loans Term of loans: such as short-term loans, medium-term loans, In addition, financial institutions may incorporate other factors for loan classification in order to better reflect the similarity of credit risk of loans, as follows: Characteristic of debtor: such as industry group, occupation, income, residence or credit rating Characteristic of collateral: such as type of collateral, quality of collateral, liquidity and marketability of collateral, location of collateral Other factors that may affect repayment capability: such as repayment ratio, credit utilization ratio 2. In calculating historical losses, financial institutions shall consider the impact from the time value of money, which is calculated by the effective interest rate in accordance with accounting standards. Initially, financial institutions may apply the interest rate of 7% as the discount rate instead of the effective interest rate. In addition, the model used for the calculation, which may be in form of financial model, statistical model or mathematical model, must be generally acceptable and constructed by methods and assumptions that are in accordance with accounting standards. 3. Financial institutions may calculate historical losses in accordance with the example for calculation of historical losses as prescribed by the Bank of Thailand in form of mathematical model, as follow:
- 2/2 - Historical losses = EAD x PD x LGD Where: EAD is the outstanding balance of loans or exposure at default PD is the probability of default, such as the probability that the group of loans will be classified as Substandard LGD is the loss given default in percentage terms, which can be calculated by the difference between 100 percent and recovery rate of loans, such as a ratio of discounted cash inflows from disposal of collateral to loan amount or a ratio of discounted cash inflows from debtors after loans have been classified as Substandard to loan amount 4. Financial institutions shall update historical losses by taking into consideration tendencies and factors that may affect repayment capability, which shall at least cover: Risk management policy of financial institution: such as policy on granting of loans, review of loans, classification of loans, provisioning, write-off of nonperforming loans or debt restructuring Changes in operating guidelines or procedures of financial institution or relevant supervisory agencies: such as Bank of Thailand, Revenue Department, Legal Execution Department, Department of Lands Domestic and international economic conditions: such as GDP, policy interest rate, inflation rate, exchange rate, oil price, unemployment rate Other factors: such as competitive environment of debtor s industry, fluctuation of collateral price 5. Financial institutions shall keep supporting documents related to provisioning, such as supporting documents related to the calculation of historical losses and relevant revisions, at the financial institutions for an inspection by the Bank of Thailand.
- 2/3 - Example 1: The calculation of historical losses of Group A Loans (In case where a financial institution can reliably calculate the probability that the loan classification will change) A financial institution can calculate provisions under the Collective Approach for Group A Loans, which have the outstanding balance as of 31 December 2015 (B.E.2558) Classified as Pass: 5,000 Baht and classified as Special Mention: 1,000 Baht, as follows: 1. The calculation of the probability that loans will be classified as Substandard (PD) Historical data suggests that Group A Loans, on average, have the historical average of transition probabilities as follows: Loan classification in the current accounting period Probability that the loans will be the classified assets in the next accounting period Pass Special Mention Substandard Pass 95% 4.5% 0.5% Special Mention 14% 85% 1% According to the above data, a financial institution can calculate the probabilities that Group A Loans will be classified as Substandard within a 1-year period as follows: An event which would cause Group A Loans to be classified as Substandard within a 1-year period At the beginning At the end At the end of the first of the first of the second Probability accounting period accounting period accounting period Pass Pass Substandard 95%*0.5% = 0.48% Pass Special Mention Substandard 4.5%*1% = 0.05% Pass Substandard 0.5% Probability that Group A Loans will be reclassified 0.48% + 0.05% + 0.5% = 1.03% from Pass to Substandard within a 1-year period Special Mention Pass Substandard 14%*0.5% = 0.07% Special Mention Special Mention Substandard 85%*1% = 0.85% Special Mention Substandard 1% Probability that Group A Loans will be reclassified from 0.07% + 0.85% +1% = 1.92% Special Mention to Substandard within a 1-year period
- 2/4-2. The calculation of percentage of expected losses when debtors default to loan amount (LGD) Historical losses suggest that Group A Loans after being classified as Substandard will have recovery rates as follows: Number of years after the loans have been classified as Substandard Percentage of recovery amount to loan amount Cash inflows Discounted cash inflows (Discount rate = 7%) 1 10 9.35 2 6 6.99 3 (Maturity) 5 4.08 Total 23 20.42 Recovery rate (RR) is 20.42. Therefore, LGD can be calculated as follows: LGD = 1 - RR = 1-0.2042 = 79.58% or approximately 80% 3. The calculation of historical losses Historical loss rate of Group A Loans classified as Pass can be calculated as follows: Historical loss rate = PD * LGD = 1.03% * 80% = 0.82% Historical loss rate of Group A Loans classified as Special Mention can be calculated as follows: 4. The calculation of provisions Historical loss rate = PD * LGD = 1.92% * 80% = 1.54% According to the analysis conducted by financial institution, if there are no tendencies or factors that may significantly affect repayment capability of debtors, the financial institution shall set aside provisions for Group A Loans as follows: Classification of Group A Loans Loan amount at the end of the quarter (EAD) Provisions (Baht) Pass 5,000 5,000 * 0.82% = 41.0 Special Mention 1,000 1,000 * 1.54% = 15.4
- 2/5 - Example 2: The calculation of historical losses of Group B Loans (In case where a financial institution cannot reliably calculate the probability that the loan classification will change) A financial institution can calculate provisions under the Collective Approach for Group B Loans, which have the outstanding balance as of 31 December 2015 (B.E.2558) Classified as Pass: 6,000 Baht and classified as Special Mention: 1,600 Baht, as follows: 1. The calculation of the probability that loans will be classified as Substandard (PD) In case where a financial institution cannot reliably calculate the probability that the classification of Group B Loans will change, the financial institution may calculate the probability that Group B Loans will be classified as Substandard for the next 1-year period using the loan ratios, which can be calculated from the past classification of Group B Loans, as follows: Unit: Baht Data as of Pass Special Mention Substandard 1 January 2011 1,000 600 16 30 June 2011 1,500 700 17 31 December 2011 2,000 800 18 30 June 2012 2,500 900 19 31 December 2012 3,000 1,000 20 30 June 2013 3,500 1,100 21 31 December 2013 4,000 1,200 22 30 June 2014 4,500 1,300 23 31 December 2014 5,000 1,400 24 30 June 2015 5,500 1,500 25 31 December 2015 6,000 1,600 26 The probability that Group B Loans classified as Pass will be reclassified as Substandard within 1 year can be calculated from the average historical rate of loans classified as Substandard to loans classified as Pass for the previous 2 accounting periods as follows:
- 2/6 - Classification of Group B Loans Classified as Substandard, as of Classified as Pass, as of Average historical rate of loans classified as Substandard to loans classified as Pass 31 December 2011 1 January 2011 18 / 1,000 = 1.80% 30 June 2012 30 June 2011 19 / 1,500 = 1.27% 31 December 2012 31 December 2011 20 / 2,000 = 1.00% 30 June 2013 30 June 2012 21 / 2,500 = 0.84% 31 December 2013 31 December 2012 22 / 3,000 = 0.73% 30 June 2014 30 June 2013 23 / 2,500 = 0.66% 31 December 2014 31 December 2013 24 / 3,000 = 0.60% 30 June 2015 30 June 2014 25 / 2,500 = 0.56% 31 December 2015 31 December 2014 26 / 3,000 = 0.52% Weighted average (percent) (1.80% * 1,000) + (1.27% * 1,500) + (1.00% * 2,000) + (0.84% * 2,500) + (0.73% * 3,000) + (0.66% * 4,000) + (0.56% * 4,500) + (0.52% * 5,000) = 0.73% (1,000 + 1,500 + 2,000 + 2,500 + 3,000 + 3,500 + 4,000 + 4,500 + 5,000) The probability that Group B Loans classified as Special Mention as of the beginning of the first accounting period will be reclassified as Substandard within 1 year can be calculated from the average historical rate of loans classified as Substandard to loans classified as Special Mention for the previous 2 accounting periods as follows: Classification of Group B Loans Classified as Substandard, as of Classified as Pass, as of Average historical rate of loans classified as Substandard to loans classified as Special Mention 31 December 2011 1 January 2011 18 / 600 = 3.00% 30 June 2012 30 June 2011 19 / 700 = 2.71% 31 December 2012 31 December 2011 20 / 800 = 2.50% 30 June 2013 30 June 2012 21 / 900 = 2.33% 31 December 2013 31 December 2012 22 / 1,000 = 2.20%
- 2/7-30 June 2014 30 June 2013 23 / 1,100 = 2.09% 31 December 2014 31 December 2013 24 / 1,200 = 2.00% 30 June 2015 30 June 2014 25 / 1,300 = 1.92% 31 December 2015 31 December 2014 26 / 1,400 = 1.86% Weighted average (percent) (3.00% * 600) + (2.71% * 700) + (2.50% * 800) + (2.33% * 900) + (2.20% 1,000) + (2.09% * 1,100) + (2.00% * 1,200) + (1.92% * 1,300) + (1.86% * 1,400) = 2.20% (600 + 700 + 800 + 900 + 1,000 + 1,100 + 1,200 + 1,300 + 1,400 + 1,500 + 1,600) 2. The calculation of percentage of expected losses when debtors default to loan amount (LGD) Historical losses suggest that Group B Loans after being classified as Substandard will have expected losses when debtors default to loan amount (LGD) of approximately 80% (calculated from recovery rates of Group B Loans classified as Substandard using the same approach as Example 1) 3. The calculation of historical losses Historical loss rate of Group B Loans classified as Pass can be calculated as follows: Historical loss rate = PD * LGD = 0.73% * 80% = 0.59% Historical loss rate of Group B Loans classified as Special Mention can be calculated as follows: 4. The calculation of provisions Historical loss rate = PD * LGD = 2.20% * 80% = 1.76% According to the analysis conducted by financial institution, if there are no tendencies or factors that may significantly affect repayment capability of debtors, the financial institution shall set aside provisions for Group B Loans as follows: Classification of Group B Loans Loan amount at the end of the quarter (EAD) Provision (Baht) Pass 6,000 6,000 * 0.59% = 35.40 Special Mention 1,600 1,600 * 1.76% = 28.16
- 2/8 - Example 3: The calculation of historical losses of Group C Loans (In case where a financial institution can reliably calculate the probability that the loan classification will change) A financial institution can calculate provisions under the Collective Approach for Group C Loans, which have the outstanding balance as of 31 December 2015 (B.E.2558) Classified as Pass: 10,000 Baht, as follows: Historical losses may be calculated from the historical average losses from changes in loan classification from Pass or Special Mention to Substandard, Doubtful of Loss and Loss. These historical losses can be calculated from the amount of loans classified as Pass or Special Mention at the beginning of the quarter that are reclassified as Substandard or below at the end of that quarter, as follows: Group C Loans classified as Pass at the beginning of the quarter Group C Loans reclassified at the end of the quarter Losses from changes in classification (%) 1 st quarter 2015 6,000 40 0.66 2 nd quarter 2015 7,000 60 0.86 3 rd quarter 2015 8,000 80 1.00 4 th quarter 2015 9,000 100 1.11 Weighted average of reclassification rate = (0.66%*6,000 + 0.86%*7,000 + 1%*8,000 + 1.11%*9,000) (6,000 + 7,000 + 8,000 + 9,000) 0.93 According to the analysis conducted by financial institution, if there is no data, tendencies or factors that may significantly affect repayment capability of debtors, the financial institution shall set aside provisions for Group C Loans for portion classified as Pass (outstanding balance of 10,000 Baht) as follows: Provisions for Group C Loans for portion classified as Pass = 10,000 * 0.93% = 93 Baht