Central Bank of Iraq Regulatory Instructions: Credit Policies and Classification

Credit Policies and Classification

In an effort to strengthen the financial stability of banks in Iraq, the Central Bank of Iraq has issued regulatory instructions emphasizing the importance of credit policies and classification. Effective management of credit risks is crucial for a bank’s activity performance and securing good sources of profits.

Key Objectives

A bank’s credit policy should aim to:

• Maintain a healthy balance between credit growth and risk management
• Ensure that credits are granted based on sound lending practices and prudent risk assessment
• Classify credits according to their risk profile, allowing for effective monitoring and provisioning

Credit Classification

Banks must define the volume of credit exposures, minimum and maximum percentages, risk management standards, investment policies, and other precautionary requirements to maintain their assets and off-balance-sheet items.

Credit Categories

The instructions outline five credit classification categories:

• Preferred Credit: Credits secured by collateral that is fast and easy to liquidate, covering principal and accrued interest.
• Good (Standard) Credit: Credits completely supported by the payment ability and financial borrower’s ability to pay, with signed guarantees and current accounts.
• Medium Credit: Credits considered a potential problem due to a customer’s weak financial position, requiring management attention.
• Sub-Standard Credit: Credits past-due for principal and/or interest payments, with losses expected if management does not take action.
• Bad (Doubtful) Credit: Credits displaying the same attributes as Sub-Standard Credit but with doubtful likelihood of complete collection and high probability of loss.
• Loss Credit: Credits that are 365 days or more past due, containing all credits extended or re-scheduled for two times.

Information System

Banks must establish an information system to manage their credit portfolio, generating reports necessary to take appropriate actions on loans and assess whether the credit portfolio is meeting needs and adhering to bank credit policy.

Conclusion

The Central Bank of Iraq’s regulatory instructions aim to promote a healthy banking sector in Iraq, ensuring that banks operate with sound credit policies and effective risk management practices. By implementing these guidelines, banks can maintain financial stability and ensure long-term success.