Financial Crime World

Credit Risk Framework for Off-Balance Sheet Exposures

The Bank of Tanzania has introduced a new credit risk framework to mitigate the risks associated with off-balance sheet exposures. This framework applies a credit conversion factor (CCF) to various types of off-balance sheet exposures, taking into account their risk profiles.

CCF Application

The CCF will be applied as follows:

  • Direct Credit Substitutes: A 100% CCF shall apply to direct credit substitutes, such as:
    • General guarantees of indebtedness
    • Sale and repurchase agreements with recourse
    • Lending of securities
    • Forward asset purchases
    • Other off-balance sheet items that are credit substitutes
  • Note Issuance Facilities (NIFs) and Revolving Underwriting Facilities (RUFs): A 50% CCF shall apply to NIFs and RUFs, regardless of the maturity of the underlying facility. Additionally, certain transactions-related contingent items, such as:
    • Performance bonds
    • Bid bonds
    • Warranties
    • Standby letters of credit related to specific transactions
  • Commitments: A 40% CCF shall apply to commitments, regardless of their maturity, unless they qualify for a lower CCF.
  • Short-Term Self-Liquidating Trade Letters of Credit: A 20% CCF shall apply to the issuing and confirming banks of short-term self-liquidating trade letters of credit arising from the movement of goods.
  • Uncancellable Commitments: A 10% CCF shall apply to commitments that are unconditionally cancellable at any time by the bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower’s creditworthiness.

Defaulted Exposures

A defaulted exposure is defined as a non-performing exposure that meets certain criteria prescribed in the Banking and Financial Institutions (Management of Risk Assets) Regulations. Defaulted exposures will be risk-weighted net of specific provisions, with:

  • A 150% risk weight applying when specific provisions are less than 20% of the outstanding amount of the loan.
  • A 100% risk weight applying when specific provisions are equal to or greater than 20%.

Other Assets

The standard risk weight for all other assets will be 100%, except for:

  • Gold positions, which will carry a 0% risk weight.
  • Cash owned and held at the bank or financial institution, or in transit, which will carry a 0% risk weight.
  • Cash items in the process of collection (cheques and items for clearing), which will carry a 20% risk weight.
  • Float balance from Mobile Network Operators (MNOs), which will carry a 20% risk weight.

Credit Risk Mitigation Techniques

Banks and financial institutions are required to use simple approaches to mitigate credit risks. Under this approach, the risk weight of the counterparty is replaced by the risk weight of the collateral instrument collateralizing or partially collateralizing the exposure. Eligible collateral instruments include:

  • Guarantees from government entities
  • Cash deposits
  • Treasury bills, notes, or bonds
  • Unconditional and irrevocable guarantees from first-class international banks or financial institutions

The introduction of this credit risk framework aims to strengthen the risk management practices of banks and financial institutions in Tanzania, ensuring a more stable and resilient financial system.