Central Bank of Iraq Regulatory Instructions: Credit Policies and Classification

Introduction

The Central Bank of Iraq’s regulatory instructions emphasize the importance of credit policies and classification in ensuring the soundness and stability of banks’ operations. Effective management of credit risks is crucial to secure a good source of profits and increase capital and shareholders’ equity.

Credit Policies and Classification

Fundamentals for Managing Credit Portfolio

To achieve this, each bank must have fundamental principles in place to manage its credit portfolio. This includes:

• Proper determination of risk types
• Organization and presentation of information
• Classification of credits and risks
• Information systems to manage the credit portfolio

Credit Classification

The Central Bank of Iraq’s regulatory instructions outline five categories of credit classification:

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 performance.

Medium Credit

• Credits considered a potential problem due to weak financial positions and 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

• Loans displaying attributes of Sub-Standard Credit, with high probability of loss.

Loss Credit

• Credits containing loans that have been extended or re-scheduled multiple times.

Precautionary Requirements

To supervise and control credit portfolios, banks must continuously review, evaluate, and classify granted credits according to types. This includes:

Risk Management Standards

• Banks must define:
  • Volume of credit exposures
  • Minimum and maximum percentages
  • Investment policies
  • Other precautionary policies

Guarantees and Collateral

• Credits secured by collateral that is fast and easy to liquidate, covering principal and accrued interest.

Payment Ability and Financial Position

• Credits supported by the payment ability and financial borrower’s ability to pay.

Information System

Banks must establish an information system to manage the credit portfolio, generating reports necessary for taking appropriate actions on any loans and assessing whether the credit portfolio is meeting needs and adhering to Bank Credit Policy.

Conclusion

The Central Bank of Iraq’s regulatory instructions emphasize the importance of credit policies and classification in ensuring the soundness and stability of banks’ operations. By implementing these measures, banks can effectively manage risks, protect assets and off-balance-sheet items, and maintain confidence in the financial system.