DIRECTIVE NO. DO3A-93/CC CREDIT CONCENTRATIONS FOR FINANCIAL INSTITUTIONS Arrangement of Sections PART I Preliminary 1. Short Title 2. Authorization 3. Application 4. Interpretations PART II Statement of Policy 1. Objectives 2. Rationale PART III Implementation of Section 30 of the Banking Act of 1989 1. General Limitations on Credit Concentrations 2. Existing Concentrations 3. Prior Approvals by the Reserve Bank of Malawi 4. Computation of Large Exposures and Credit Concentrations PART IV Remedial Measures and Administrative Sanctions
1. Remedial Measures 2. Administrative Sanctions PART V Effective Date and Supersedence Effective Date PART I: Sec. 1: SHORT TITLE, AUTHORIZATION, APPLICATION, AND INTERPRETATION Short Title - Credit Concentrations Sec. 2: Authorization - Sections 26 & 30 of the Banking Act of 1989 Sec. 3: Application - Financial Institutions in Malawi Sec. 4: Interpretation - In this directive, unless the context otherwise requires- 1989; 1) "financial institution" is as defined in Section 2 of the Banking Act of 1989; 2) "banking business" is as defined in Section 2 of the Banking Act of 3) "concentration" means a credit facility to a single customer which represents 25% or more of the core capital of a financial institution that is extending such credit; 4) "core capital" is as defined in the Reserve Bank's directive on capital adequacy requirements; 5) "credit facility" is as defined in the Banking Act of 1989, and is also to include direct extensions of credit in the form of loans, overdrafts, and other types of advances;
6) "existing concentrations" are concentrations of financial institutions that are in place as at the effective date of this directive; 7) "group of related debtors" is as defined in the Banking Act of 1989; 8) "large exposure" means a credit facility to a single customer which represents 10% or more of the core capital of a credit institution that is extending such credit; 9) "single customer" means a borrowing entity as a person or corporate body to include a group of related debtors, as defined; 10) "total capital" is as defined in the Reserve Bank's directive on capital adequacy requireme nts. PART II: STATEMENT OF POLICY Sec. 1: Objectives 1) To help ensure financial institutions follow the sound practice of credit diversification; 2) To help ensure credit is not concentrated in a small number of borrowers resulting in denial of credit to smaller entities with viable credit needs; 3) To help ensure that losses incurred by any single borrower or group of related debtors are not large enough to impair the soundness of a financial institution; 4) To ensure that no borrower or related group of borrowers becomes large enough to receive favouritism with regard to: credit standards, interest rates, repayment terms or additional advances to protect existing exposures. Sec. 2: Rationale 1) Financial institutions engage in credit risk; when such credit risk is concentrated in a single borrower or group of related borrowers, the risk of default by such large borrowers impairs the viability of the financial institution;
2) The risks of large credit concentrations are reduced when credit facilities to such borrowers are syndicated or otherwise shared by two or more financial institutions, and such shared risk is encouraged through credit concentration limits; 3) Banking failures and/or crises in many countries have been attributed, in large part, to excessive credit concentrations where such borrowers have failed to properly service their credit obligations; credit concentration limits prevent such excessive risks from developing; 4) Credit concentration limits have become a widely recognized part of effective bank supervision for developing countries, provided such limits are not arbitrary and reflect the nature of the financial sector. PART III: IMPLEMENTATION OF 30 OF THE BANKING ACT OF 1989 Sec. 1: General Limitation on Credit Concentrations Financial institutions are prohibited from extending and/or maintaining credit facilities, as defined in this directive, to a single customer, as defined, when such credit facility is 25% or more of the financial institution's core capital, as defined, unless: 1) the credit facility is unconditionally guaranteed by the Government of Malawi or the portion in excess of the limitation above is so guaranteed; 2) the credit facility is an existing concentration, as defined, and is in compliance with Part III Section 2 of this directive; 3) the credit facility is granted in respect of exports from Malawi, in such circumstances the limitation will not apply to credit facilities other than direct credit facilities of loans, overdrafts, and advances, thus being credit facilities as defined in the Banking Act of 1989; 4) the credit facility has prior approval, on a temporary basis, of the Reserve Bank following the guidelines of Part III Section 3 of this directive. Sec. 2: Existing Concentrations 1) As of the effective date of this directive, each financial institution shall submit to the Reserve Bank a list of its existing concentrations as defined in this directive, with such list to include: core capital, present balance outstanding, firm commitments to extend additional
credit, repayment terms as applicable, and the percentage of core capital represented by the present balance outstanding of each existing concentration. 2) From the first financial year-end date after the effective date of this directive, financial institutions are to reduce each existing concentration, as a percentage of core capital by a minimum of 20% per year, as of financial year-end date, until such existing concentrations are within the limitation of Part III Section 1. Such reductions are to be achieved through an increase in core capital, a reduction on the outstanding balance of the existing concentration through repayment, assumption by another financial institution of part or all of the exposure, or a combination of the above. In cases where a financial institution feels, for pragmatic reasons, the above schedule is not possible for a specific existing concentration, it may apply to the Reserve Bank with an amended schedule of reducing the existing concentration and use such schedule if given prior Reserve Bank permission. 3) Without prior permission of the Reserve Bank, no financial institution may increase its exposure at any one time to an existing concentration, as a percentage of core capital, by more than 5%. 4) With regard to the limitations of this directive for new and existing concentrations, the directive shall not apply to the 1993 tobacco buying season but shall take effect in the 1994 tobacco buying season. Sec. 3: Prior Approvals by the Reserve Bank 1) Within the guidelines set out below, the Reserve Bank may grant prior approval to a financial institution with regards to: a) extending credit on a temporary basis above the limitation of Part III Section 1 as authorized in subsection 4) of that section; b) exempting a financial institution from the reduction requirements for a specific existing concentration in Part III Section 2 (2); c) extending credit to an existing concentration beyond the 5% limitation, as a percentage of core capital, in Part III Section 2 (3). 2) When a financial institution exceeds the limitation for a credit facility of Part III Section 1 when compared to its core capital but is in compliance with the 25% limitation as a percentage of its total capital, it may apply to the Reserve Bank for prior approval, under the circumstances of subsection 1) above, based on its credit facility being within 25% of its total capital, with such approval to be at the discretion of the Reserve Bank.
3) In granting prior approvals under the above, the Reserve Bank is to take into account the following guidelines: a) the temporary nature of the request to exceed the limitation or requirement; in no case is such approval to be granted for a credit facility to be in existence beyond the final repayment date in the original terms; b) the quality of the security to be pledged on such credit facility with, at a minimum, such security to meet the criteria of "well secured" as defined in the Reserve Bank's directive on prudential guidelines; c) the financial institution's capital adequacy taking into account capital ratios and compliance with the Reserve Bank's directive on capital adequacy; d) the financial institution's overall asset quality to include compliance with the Reserve Bank's directive on prudential guidelines; e) the quality and quantity of concentrations above the limitation of Part III Section 1 at the time of the request for Reserve Bank approval. 4) When the Reserve Bank denies a request under this section, the financial institution may appeal such decision to the Minister of Finance, with the Reserve Bank presenting its reasons under the above guidelines for such denial to the Minister to be included in his final decision. Sec. 4: Computation of Large Exposures and Credit Concentrations 1) Financial institutions shall at all times maintain adequate records with regard to all credit facilities, including the grouping of related debtors as defined, to enable accurate reporting to the Reserve Bank on all large exposures and concentrations. 2) Each financial institution shall submit to the Reserve Bank on a quarterly basis a return titled "Large Exposures and Credit Concentrations" to be prepared as at the close of business of the month end dates of March, June, September, and December; this return will be used by the Reserve Bank to determine compliance with this directive. 3) In calculating the percentages in the return called for above, the core capital denominator is to agree to line 1.7 of the quarterly capital adequacy computation as at the same reporting date.
4) All single customers, as defined in this directive, whose total outstandings of all credit facilities meet or exceed 10% of core capital are to be so reported as "large exposures" in the return called for above. 5) All single customers, as defined in this directive, whose total outstandings of all credit facilities meet or exceed 25% of core capital are to be so reported as "credit concentrations" in the return called for above. 6) The Reserve Bank may use its powers to inspect under Section 22 of the Banking Act of 1989 to verify the accuracy of this return and direct such financial institution to adjust or correct this form based on the findings of such inspection. 7) Each financial institution shall require its auditor, as appointed under Section 20 of the Banking Act, to verify to the Reserve Bank the accuracy of this return as of the financial yearend date and to so alert the Reserve Bank of any errors or adjustments to this return as of any other quarter end period during the financial year under review. PART IV: REMEDIAL MEASURES AND ADMINISTRATIVE SANCTIONS Sec. 1: Remedial Measures 1) When the Reserve Bank determines that a financial institution is not in compliance with this directive, it may impose remedial measures as specified under Section 31 of the Banking Act of 1989. 2) When the Reserve Bank determines that a financial institution's non-compliance with this directive has resulted in such undue risk that its capital is impaired or solvency is otherwise threatened, it may petition the High Court to sanction procedures as called for under Section 32 of the Banking Act of 1989. Sec. 2: Administrative Sanctions In addition to the remedial measures available to it as given above in Part IV Section 1, the Reserve Bank may impose any or all of the following administrative sanctions with regards to a financial institution that fails to comply with this directive: 1) Prohibition from declaring and/or paying dividends;
2) Suspension of the establishment of new branches and/or expansion into new banking or financial activities; 3) Suspension of access to Reserve Bank credit facilities; 4) Suspension of lending operations; 5) Suspension of the opening of letters of credit; 6) Suspension of the acceptance of new deposits; 7) Suspension of the acquisition of fixed assets. PART V: EFFECTIVE DATE With effect from 31 December, 1993 Questions relating to this directive should be addressed to the Bank Supervision Department of the Reserve Bank. M.A.P Chikaonda (DR) GOVERNOR