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CENTRAL BANK OF IRAQ

Regulatory Instructions (2)

Credit Policies and Classification

The Central Bank of Iraq has issued guidelines for credit policies and classification to ensure the soundness of the banking system.

Credit Policy The Credit Policy is a crucial component in the bank’s risk management strategy. It outlines the principles and procedures for granting credits and managing risks, aiming to ensure that loans are granted on a sound and safe basis while protecting depositors’ interests and promoting economic development.

Key Objectives of Credit Policy

  • Granting collectable loans on a sound and safe basis
  • Protecting depositors’ interests
  • Promoting economic development

Credit Classification

Banks must classify credits based on their creditworthiness. The classification system is as follows:

  • A. Preferred Credits: These are secured by collateral that can be easily liquidated to cover principal and accrued interest.
  • B. Good (Standard) Credits: These are completely supported by the borrower’s payment ability and financial stability.
  • C. Medium Credits: These are considered potential problems due to a customer’s weak financial position.
  • D. Sub-Standard Credits: These are past-due for principal and/or interest payments, with losses expected if management does not take action.
  • E. Bad (Doubtful) Credits: These display the same attributes as Sub-Standard Credits, but with a high likelihood of complete collection being doubtful.
  • F. Loss Credits: This category contains credits that have been extended or re-scheduled multiple times and are considered uncollectable.

Obligatory Needs

To ensure effective risk management, banks must:

  • Define volume of credit exposures
  • Establish minimum and maximum percentages for risk management
  • Develop investment policies and procedures to maintain assets and off-balance-sheet items

Information System

Banks must develop an information system to manage the credit portfolio, generate reports, and assess whether the credit portfolio is meeting needs and adhering to bank credit policy.

Conclusion

The Central Bank of Iraq emphasizes that credit policies and classification are crucial in maintaining a stable and sound banking system. Banks are advised to adhere strictly to these guidelines to ensure the integrity of the financial sector.