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Banking Regulations to Strengthen Risk Asset Management
The Bank of Tanzania has issued The Banking and Financial Institutions (Management of Risk Assets) Regulations, 2014 with the aim of strengthening the management of risk assets in the banking sector.
Classification of Receivables
According to the regulations, all receivables, except accrued interest receivable, shall be classified based on the number of days past due:
- Between 31-60 days past due: “especially mentioned”
- Between 61-90 days past due: substandard
- Between 91-180 days past due: doubtful
- Over 181 days past due: written off as losses
The regulations also require banks to classify inter-office or inter-branch items, suspense accounts, frauds, shortages, uncleared effects, and other assets not specially treated in the regulations based on the number of days past due.
Off-Balance Sheet Commitments
In addition, banks are required to review and appraise their off-balance sheet commitments, such as:
- Guarantees
- Indemnities
- Performance bonds
- Commercial letters of credit
- Other contingent items
These commitments will be classified into current, especially mentioned, substandard, doubtful, or loss categories.
Provisioning for Losses
The regulations provide for provisioning for losses with banks required to maintain specific provisions for all credit accommodations and other risk assets. The minimum provision rates are:
- One percent for current items
- Three percent for especially mentioned items
- 20 percent for substandard items
- 50 percent for doubtful items
- 100 percent for loss items
Banks will also be required to establish a special non-distributable reserve where the provisions computed in accordance with International Financial Reporting Standards (IFRS) are less than those required by the regulations. The reserve will be used to eliminate the shortfall.
Importance of Effective Risk Asset Management
The Bank of Tanzania has emphasized the importance of effective risk asset management in maintaining financial stability and preventing financial crises. The regulations are designed to ensure that banks have adequate policies, procedures, and controls in place to manage their risk assets effectively.
Consequences of Non-Compliance
Banks that fail to comply with the regulations may face sanctions, including:
- Penalties
- Prohibition from declaring or paying dividends
- Suspension of the privilege to issue letters of credit or guarantees
Effective Date and Reporting Requirements
The regulations come into effect on [date] and will apply to all banks licensed by the Bank of Tanzania. Banks are required to submit quarterly reports on their classification and provisioning of credit accommodations and other risk assets not later than the 15th day following the end of the reporting quarter.
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