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Central Bank of Iraq Regulatory Instructions: Credit Policies and Classification
The Central Bank of Iraq has issued regulatory instructions to ensure the effective management of credit risks in the banking sector. These instructions aim to promote good lending standards, a proper loan classification system, and corrective actions to reduce risks.
Key Objectives of Credit Policy
- Granting collectable loans on a sound and safe basis.
- Investment of bank funds profitably for the benefit of shareholders and to protect depositors.
- Serving the legitimate credit needs of various economic areas, sectors, and activities to develop the economy.
Credit Classification and Obligatory Needs
Each bank’s internal policies should define:
- The volume of credit exposures
- Minimum and maximum percentages
- Risk management standards
- Investment policies
- Precautionary policies and procedures to maintain assets and off-balance-sheet items
The credit portfolio should be continuously reviewed, evaluated, and classified into five categories:
Credit Classification Categories
A. Preferred Credit: Secured by collateral that is easily liquidated to cover principal and accrued interest.
B. Good (Standard) Credit: Completely supported by the payment ability and financial borrower’s ability to pay.
C. Medium Credit: Considered a potential problem due to the customer’s weak financial position and requires management’s attention.
D. Sub-Standard Credit: Past-due for principal and/or interest payments, with losses expected if management does not take appropriate action.
E. Bad (Doubtful) Credit: Displays attributes similar to Sub-Standard Credit but with a high probability of loss.
F. Loss Credit: Contains loans that are 365 days or more past due and have been extended or re-scheduled for two times.
Information System
Banks should maintain an information system to:
- Manage the credit portfolio
- Generate necessary reports
- Take appropriate actions on individual loans
- Assess whether the credit portfolio is meeting needs and adhering to Bank Credit Policy
Precautionary Requirements
To ensure effective supervision and control of the credit portfolio, banks are required to:
- Continuously review and evaluate granted credits according to types.
- Classify credits into the five categories mentioned above.
- Maintain a proper loan loss provision for each category.
- Ensure that all credits are adequately collateralized.
- Implement corrective actions to reduce risks.
By adhering to these regulatory instructions, banks can minimize credit risk, promote financial stability, and contribute to the overall development of the economy.