Problem Loans Management

Criticized facilities⁸ as classified in sub-chapter 7.1.c should be recognized by all lending personnel as those that present the greatest risk of future loss and as such should be given special attention in all aspects of bank's credit process.

The responsibility for identifying and self-criticizing problem facilities rests with credit/loan officers. Under no circumtances should the fact that a loan is criticized be revealed to the borrower or any outside party, including other creditors. Information must be kept current and special attention must be given to all proposed changes in terms of

8 An internal format or report of loan categorization

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conditions. It is the responsibility of credit control officers to constantly strive to improve the bank's position to lessen the chance of worsening conditions leading to a possible loss.

Criticized facilities are categorized into the following four levels of criticism (the last three of which are described as 'classified'):

- Special mation (risk rating 08) - Substandard (risk rating 09) - Doubtful (risk rating 10) - Loss (risk rating 10)

The documents and collateral of any facility subject to criticism must be carefully reviewed at the time of criticism, and at least on an annual basis thereafter.

The policy of the bank is to discontinue accrual of interest income on loans where it is determined that reasonable doubt exists with respect to the timely collectibility of such interest and/or principal. Such loan should be risk rated 09 at a minimum. It is the responsibility of the credit officer to make this determination promptly and to place on non-accrual status loans falling into this category.

The loan is placed on non-accrual if either:

- the loan is maintained on a cash basis because of deterioration in the financial position of the borrower, or

- payment in full of principal or interest on the loan is not expected, or

- payment in full of interest or principal on the loan is past due 90 days or more, or - the loan is whole or in part is classified as doubtful.

When any loan or portion thereof, is deemed to be uncollectible, it should be immediately recommended for charge-off (to be approved by board of directors). Quarterly reviews of charge-off recommendations will be made on or about the end of each quarter. Under no circumstances should the fact that all or any portion of a loan that has been charged-off be revealed to a borrower, nor should the borrower be informed that the loan is on a non-accrual basis.

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The following procedures have been designed to monitor problem loans:

- Each credit/loan officer would be proveded a copy of the monthly past due report.

Upon receipt of the report, he/she would immediately determine the cause for the past due payment by contacting the borrower(s) and establish a definitive time frame for the borrower to cure the delinquency.

- A 'problem loan checklist' must be completed to determine the cause and the corrective action plan to cure the problem. The deadline to cure the problem should be noted on the 'loan management checklist' as a follow up to ensure that the borrower(s) meet the target dates. A copy of the 'problem loan checklist' and the 'loan management checklist' are to be forwarded to the Credit Manager for control purpose.

- Each credit/loan officer will be responsible to complete the 'classified/criticized asset report' for all adversely graded loans (09 or worse) on a quarterly basis.

The 'classified/criticized asset report' should identify the weaknesses and implement an action plan and contingency plan with specific target dates to cure the problem.

The following are the signs of potential problem:

- Missing payment - Request for loan renewal - Adverse financial trend

- Depreciation of collateral value

- Appearance of other creditors and credit inqueries - Illness or death of the borrower

- Damages of business from fire or natural disaster - Industry trend facing downward

- etc.

70 b. Workout arrangement:

There a number of arrangements that the bank can bring into use. The choice of a particular arrangement or a combination of them depends on the nature of each problem loan.

- Restructuirng by reducing monthly payment, extending maturity, give some grace period, etc

- Request additional collateral - Obtaining guarantees

- Advance additional funds that borrower may need more working capital to keep his business operational

- Encourage the borrower to increase capital

- Provide financial advisory such as how to manage inventories and account receivables more effectively and how to raise funds in financial market, etc

- Management control that the bank may send its team to participate in the management of the borrower's business

- Merger with other business entity may help improved the situation.

c. Liquidation:

Liquidation must be sought immediately in case where it is obvious that the borrower is unwilling to repay the loan or when dishonesty or fraud has been detected. The deteriorating financial conditions of the borrower to the point of hopelessness may warrant liquidation action. Liquidation action includes legal actions.

d. Accounting procedure for problem loans:

i. Past due loans (no credit approval is required)

When the loan has been past due for 90 days and more:

Debit - Past due loans Credit - Loans

ii. Non-accruals (no credit approval is required)

When the loan is placed on non-accruals, the interest being accrued upt to this date will reversed against interest received for current period (the criteria for placing loans on non-accrual basis is stipulated in the bank's credit policy guide):

Debit - Interest received – loans

71 Credit - Interest receivables – loans

iii. Reserved for possible loan losses (credit approval from the board of directors is required):

iv. Liquidation (credit approval is required)

When the loan is placed on liquidation process:

Debit - Liquidation loans Credit - Past due loans or

Credit - Loans (in case where the loan is not past due but circumstances warrant liquidating action)

v. Charge-off (credit approval from the board of directors is required) Debit - Allowances for loan losses

Credit - Past due loans or Credit - Liquidation loans vi. Loan-loss recovery

Debit - Cash

Credit - Allowance for loan losses.