Central Bank of Iraq: Regulatory Instructions (2) - Credit Policies and Classification

Introduction

The process of making loans is a crucial income-generating activity for banks. Effective management of credit risks is vital in ensuring the stability and soundness of the financial system.

Credit Policies and Management

Each bank needs fundamental principles to manage its credit portfolio, taking into account its size, activities, diversification of credit portfolio, and types of risks it may be exposed to. Good credit risk management is essential for maintaining capital adequacy, reducing loan losses, and improving overall performance.

Credit Classification and Obligatory Needs

Internal policies should define the volume of credit exposures, minimum and maximum percentages, risk management standards, investment policies, and other precautionary measures to maintain assets and off-balance-sheet items.

Classification System

Banks should continuously review, evaluate, and classify granted credits according to types. The classification system is divided into six categories:

Preferred Credit

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

Good (Standard) Credit

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

Medium Credit

• 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, where losses are expected if management does not take appropriate action.

Bad (Doubtful) Credit

• Loans displaying the same attributes as Sub-Standard Credit, with a high probability of complete collection being doubtful.

Loss Credit

• Credits written off or declared uncollectible.

Information System to Manage the Credit Portfolio

A bank should establish an information system to:

• Manage its credit portfolio
• Generate reports necessary for taking appropriate actions on loans
• Assess whether the credit portfolio meets needs and adheres to Bank Credit Policy

By following these regulatory instructions, banks can ensure effective management of their credit portfolios, reducing risks and improving overall performance.