NATIONAL BANK OF RWANDA

REGULATORY DIGEST ON REGULATION No 59/2023 OF 27/03/2023 DETERMINING CREDIT CLASSIFICATION AND PROVISIONING RULES FOR DEPOSIT-TAKING MICROFINANCE INSTITUTIONS

DTMIs are bodies specifically established to support business development and community empowerment, especially owners of small business entities or Micro, Small, and Medium Enterprises (MSMEs). Primarily, microfinance institutions are known as bodies that provide loans or financing for micro-scale businesses to members and the public. This type of client is considered too risky by traditional banks because they cannot provide real collateral and because they tend to work in the informal sector of the economy. The effective supervision of DTMIs is required to ensure credit classification and provisioning prompt identification, monitoring, and undertaking adequate measures to manage credit risk.

To ensure effective regulation and supervision of DTMIs, the National Bank of Rwanda repealed regulation n° 02/2009 on the organisation of microfinance activity promulgated in 2009 as it was about 14 years back and market needs have evolved thus compelling the review of the regulation with the aim of accommodating current market need and harmonizing it with other legal instruments that have been enacted subsequently and adopted regulation no 59/2023 of 27/03/2023 determining credit classification and provisioning rules for DTMIs to govern classification and provisioning for credits of DTMIs to ensure their prompt identification, their monitoring and undertake adequate measures to manage credit risk.

Regulatory Key Highlights

This regulation covers several aspects of credit classification and provisioning rules for DTMIs that include loan portfolio quality and classification; loan provisioning and other requirements; and loan restructuring.

On loan portfolio quality and classification, the regulation puts in place the duties to the board of directors and management of ensuring that the institution has an effective loan classification system; overseeing and monitoring the credit risk assessment and provisioning processes; ensuring that the DTMI has appropriate credit risk assessment processes and internal controls; and the management of the DTMI has the responsibility to develop and maintain an appropriate, systematic and consistently applied process to classify loans and to determine provisions for loan losses. The regulation also provides for loan classification (normal, watch, substandard, doubtful, and loss) and their reclassification.

The regulation classifies loans of DTMI into five categories: normal; watch; substandard; doubtful; and loss.

On criteria for “Normal” classification, the regulation separates subjective criteria from objective criteria in classifying a loan as “Normal”. Subjective criteria include: the borrower’s sound financial condition; adequate documentation to support the granting of credit; and the account is supported by unimpaired Collateral. Subjective criteria include a credit facility with fixed repayment which is up-to-date in payments; an overdraft or credit facility without fixed repayment which is operating within the approved limit; with an unexpired credit line; with interest

charges covered by deposits; with no hardcore and showing turnovers which are equivalent to, or greater than the approved credit line plus interest charges.

Concerning the “Watch” classification, the regulations set the following criteria: Subjective criteria include any of the following: a credit facility that is currently current but evidence of which suggests that certain factors may, in the future, affect the borrower's ability to properly manage the account; evidence of impairment of the collateral; a deteriorating trend in the financial performance of the debtor; or other criteria provided for by this regulation. Objective criteria include a credit facility with fixed repayment dates when the principal or interest is due and unpaid for 30 days to less than 90 days for DTM companies and one day to less than 30 days for DTM cooperatives; for an overdraft or credit facility without fixed repayment: when the approved limit has been exceeded for 30 days to less than 90 days for DTM companies and one day to less than 30 days for DTM cooperatives.

A watch loan is reclassified to a normal loan after the repayment of all cumulated arrears including principal and interests.

Criteria for classification as a “substandard” loan are as follows: Subjective criteria include: credit facilities display well-defined credit weaknesses that jeopardize the liquidation of the debt, including inadequate cash flow to service the debt, undercapitalized or insufficient working capital, absence of adequate financial information or security documentation and irregular payment of principal or interest; or credit facilities that are not secured by the current sound net worth and paying capacity of the borrower. Objective criteria include: for a credit facility with fixed repayment dates when the principal or interest is due and unpaid for 90 days to less than 180 days for DTM companies and 30 days to less than 90 days for DTM cooperatives; for an overdraft or credit facility without fixed repayment: when the approved limit has been exceeded for 90 days to less than 180 days for DTM companies and 30 days to less than 90 days for DTM cooperatives.

A substandard loan is reclassified to another category as follows:

(a) Watch loan: after the repayment of all cumulated arrears principal and interest;

(b) Normal loan: If the borrower remains compliant with the repayment schedule for the next three consecutive installments, as from the time it was reclassified as a watch loan.

For classification and reclassification of doubtful and loss categories consult the regulation. With respect to loan provisioning and other requirements, the regulation speaks among others general provisions for credit facilities classified as "normal" and "watch" of one and five percent of the outstanding balance of the credit facility respectively, and specific provisions for substandard, doubtful, and loss credit facilities, respectively 25%, 50% and 100% of the outstanding balance of the credit facility. In addition, a DTMI writes off loans that have been classified as loss for more than 12 months, and the use of International Financial Reporting Standards.

For loan restructuring, the regulation permits it upon request of the borrower and says about restructured credit facility, their classification, and reclassification. Furthermore, the regulation provides for loan repurchase; non-accrual status of the interest; and other provisions of the regulation.

Important deadlines

DTMIs have six months from the date of publication of the regulation in the Official Gazette of the Republic of Rwanda, to comply with the classification requirements as provided for in the regulation.

Implications for concerned stakeholders

1.  A deposit-taking financial institution reviews its provisioning level at least on a quarterly basis and reports to the Central Bank using the prescribed forms.

2.  This regulation repeals regulation n° 02/2009 on the organisation of microfinance activity and all other prior provisions contrary to it.

Click here for more details:

https://www.bnr.rw/laws-and-regulations/microfinance-institutions/laws-regulations/