The Royal Monetary Authority (RMA) has revised the six-month observation period on loan accounts categorised as non-performing loans (NPLs).
The Authority, on February 28, directed the financial institutions (FIs) that the six-month observation period would no longer be applicable for NPL accounts closed or fully repaid through cash.
However, the Authority has asked the FIs to put in place proper credit assessment processes to sanction new loans to the NPL borrowers under this category.
The RMA’s Prudential Regulations 2017 classifies the loans under five credit exposure categories. They are standard exposure (principal or interest payments overdue up to 30 days), watch exposure (overdue by 31 to 90 days), sub-standard exposure (overdue by 91 to 180 days), doubtful exposure (overdue by 181 to 365 days), and loss exposure (overdue by 366 days and above).
For NPLs under the ‘substandard’ category that have become performing through repayments, the observation period is reduced from six months to three months from the date of repayment.
This comes after the private sectors made several requests to the government and the Authority to either discontinue the observation period or implement progressively.
Many contractors and businesses were not able to carry out their works as loan accounts once categorised under NPLs had to undergo a six-month observation period with no bank guarantee, letter of credit, and other off-balance sheet items even after repayment since October last year.
The revised terms and conditions on the treatment of the NPL would be effective from February 28 this year.
However, the Authority retains the six-month observation period for those NPL accounts closed through court proceedings or foreclosures or transfer of the remaining loans outstanding to another borrower. The borrower or loan transferor will also have to undergo six months observation period.
The six months observation period is also applicable on the NPLs under the ‘doubtful and loss’ categories that has become performing through repayments made by the borrower.
According to the RMA, the NPL borrowers that are under the observation period will not get new bank guarantees, letters of credit, and other off-balance sheet items.
However, the borrowers may renew the existing bank guarantees or letters of credit that have already been issued for the completion of the ongoing projects.
The Authority also stated that the renewal of overdraft or working capital may be granted by the FIs but credit facilities should be renewed within 90 days (including the past overdue days before the expiry of the loan) from the date of expiry of the facilities.
During the observation period, no borrowers will be allowed to withdraw the undrawn amount of the overdraft or working capital from the sanctioned amount.
The Authority also asked the FIs to have in place processes for monitoring and reporting loans classified under the six-month observation period.
For compliance, the independent reviews or audits would be conducted monthly by the control functions of the FIs, and quarterly data to be submitted to the RMA.