BAruexo SeNrRaL NG prr-rprNAs

OFFICE OF THE GOVERNOR

ctRcutAR No. 1046

Series of 2019

Subiect: Enhanced Guidelines on Sound Credit Risk Management practices for

Non-Stock Savings and Loan Associations (NSStAs); Amendments to the
Manual of Regulations for Non-Bank Financial Institutions

The Monetary Board, in its Resolution No. 1204 dated 09 August 2OLg, approved the
following enhanced guidelines on sound credit risk management practices for Non-Stock
Savings and Loan Associations (NSSLAs) as well as the additional amendments/deletions
of
certain provisions in the Manual of Regulations for Non-Bank Financial Institutions
(MORNBFI).

Section 1. Section 41915 on Credit Risk Management; Policy Statement is hereby added
to
the MORNBFI to read, as follows:

section 4191s credit Risk Management; policy statement.

It is the policy of the Bangko Sentral to ensure that

under its supervisionNSSLAs
have adequate and effective credit risk management systems commensurate to their
lending operations. Towards this end, the following guidelines on credit risk management
set forth the expectations of the Bangko Sentral with respect to the comprehensive
management of credit risk. The guidelines convey the principles and sound practices
that
shall be embedded in the credit risk management framework of NSSLAs and shall
cover the
following areas:

a. establishing an appropriate credit risk environment;

b. operating under a sound credit granting process; and
c. maintaining appropriate credit administration, measurement, monitoring and
control processes over credit risk.

while NSSLAs may employ different approaches in the management of their credit
risk, the Bangko Sentral expects that all these areas are effectively addressed.

5 4791s.t Evaluation of credit risk management system. The Bangko Sentral shall
evaluate the NSSLAs' credit risk management systems. lt will not restrict
the credit risk-
taking activities of NSSLAs: Provided, That extension of credit is made to eligible
members

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and credit risk is effectively managed. Consistent with the credit risk management
guidelines, the Bangko Sentral expects that an NSSLA:

a. Understands, identifies, measures, monitors and controls all risks attendant to the
NSSLA's credit risk-related activities;
b. Adopts a credit risk management system that provides assurance to the members,
other stakeholders and the supervisory authority that good quality of the credit
portfolio is maintained and that the NSSLA operates in a safe and sound manner; and
Maintains capital commensurate with the risk exposure assumed.

Otherwise, the Bangko Sentral may direct the NSSLAs to reduce its exposure to an
appropriate level and/or to strengthen its risk management system.

ln evaluating the above parameters, the Bangko Sentral shall consider the following
factors:

a. The NSSLA's business strategies, operating environment and the competencies of its
trustees, officers and personnel; and

b. The major sources of the NSSLA's credit risk exposure and the complexity and level
of risk posed by the assets and liabilities.

A. Establishing an Appropriate Credit Risk Environment

047975.2 Role of the Board and Senior Monogement

o. Boord of Trustees. The board of trustees shall ensure that it fully understand all the
risks attendant to the NSSLA's credit activities and shall be responsible for the
approval and regular review of credit risk strategy and credit policy, as wefl as the
oversight of the implementation of a comprehensive and effective credit risk
management system appropriate for the size, complexity and scope of operations of
an NSSLA. The board shall ensure that the system provides for adequate policies,
processes and procedures to identify, measure, monitor and control all credit risks
inherent in an NSSLA's products and activities, both at the individual and portfolio
levels on a consistent and continuing basis; and that an independent assessment of
the system is periodically performed, the results of which shall be reported to it or to
a board-level committee for appropriate action.

b. Senior Management. Senior management shall be responsible for ensuring that the
credit risk-taking activities of an NSSLA are aligned with the credit risk strategy
approved by the board of trustees. lt shall also be responsible for developing and
implementing an NSSLA's credit policies and procedures that lay down the
conditions and guidelines for an effective credit risk management process, as well as
proper channels of communication to ensure that these policies are clearly
communicated and adhered to by all levels within the NSSLA.
Page 2 of 24
 NSSLAS shall conduct their lending operations with independence and fairness
relative to their dealings with members, agents and entities employing their members or
paymaster/cashier/ treasurer of such entitles, as the case may be.

For new products and activities, the board of trustees and senior management shall
ensure that it fully understand the risk involved therein and put in place adequate policies,
procedures and controls to identify, measure, monitor and manage risks before being
introduced or undertaken.

947915.3 Credit risk manogement structure. Senior management or an appropriate

level of management shall implement a board-approved credit risk management structure
that clearly delineates lines of authority, and establishes accountabillties and responsibilities
of individuals involved in the different phases of the credit risk management process.

Depending on the size, complexity and scope of credit activities, and in addition to
the roles and responsibilities of the board and senior management, an NSSLA's credit risk
management organization may be broadly classified into the following functional lines of
activities toproperly segregate accountabilities, ensure that no individual is assigned
conflicting responsibilities, and effectively monitor and control the risks being taken:

Front Office: credit origination, classification, provision of allowances for losses

including changes thereon, when necessary and the monitoring of credit exposures
of member-borrowers on a day-to-day basis;

b. Back Office: credit administration, including, among others: ensuring complete

documentation, credit disbursement and recording of payments received;
maintenance of credit and collateral files; and compilation of management
information reports; and

c. Middle office: credit review, problem loan management, and risk

management/control.l

The structure shall likewise provide for independent audit of the credit risk
management system of the NSSLA. The scope of internal audit shall include, among others,
the evaluation of the independence and overall effectiveness of the credit review function.

For simple NSSLAs2: (1.) the problem loan management function may still be
performed by the credit originating function and/or unit responsible for monitoring
the

^The risk management function shall report directly to the Risk Management Committee (RMC)
or appropriate
- board-level committee or the board.
' Simple NSSLAs shall refer to NSSLAs which, due to operational limitations, are not classified
as Complex
NSSLAs. complex NSSLAs shall refer to institutions declared by the Bangko
Sentral as such with total assets
of at least P5 billion and having at least any one (1) of the following characteristics: (i.)Extensive
membership
Page 3 of 24
 quality of such crediU and (2) the independent credit review function may be concurrently
performed by qualified personnel fulfilling other independent control oversight functions
(e.g., compliance, internal audit).

All personnel or staff involved in the credit risk management process shall be
qualified, competent and have the necessary training and experience to exercise prudent
judgment in assessing, managin g and/or controlling credit risk, and a solid understanding of
an NSSLA's strategic direction, policies, procedures, risk tolerance and limits. Their
qualification standards, roles and responsibilities shall be clearly defined in the credit
operating policies and procedures manual of the NSSLA. The board and senior management
shall ensure that adequate resources and appropriate level of staffing are allocated to
execute all kinds of credit activities.

941915.4 Credit policies, processes and procedures. NSSLAs shall have in place
sound, comprehensive and clearly defined credit policies, processes and procedures
consistent with prudent standards, practices, applicable laws and relevant regulatory
requirements adequate for their size, complexity and scope of operations. The board-
approved policies, processes and procedures shall cover all phases of the credit risk
management system.

The credit policy shall:

a. Articulate the credit culture which reflects the NSSLA's values, beliefs and behaviors;
b. Be periodically reviewed and changes thereon must be approved by the board; and
c. Have appropriate line of accountability.

These policies, processes and procedures shall be documented in sufficient detail,

and periodically reviewed and updated to take into account new activities and products, as
well as new lending approaches. To promote constant awareness and guidance within the
NSSLA, these shall be communicated and disseminated to all levels of the NSSLA.

B. Operating Under a Sound Credit Granting process

847915,5 Credit gronting ond loon evaluotion/onolysis process ond underwriting

stondards. Consistent with safe and sound lending practice, NSSLAs shall grant credit to
eligible members in allowable amounts and periods of time, and after ascertaining that the
member'-borrowers are capable of fulfilling their commitment to the NSSLA. Towards this
end, an NSSLA shall establish well-defined credit-granting criteria and underwriting
standards, which shall duly consider the purpose and structure of the credit, source of
repayment and collection cycle.

base such as those which membership extends to employees/retirees of two or more companies/
agencies/institutions, and/or their relatives, and/or with serious issue on the ,,well-defined,, group
requirement under R.A. No. 8367 (Revised NssLA Act of 1997); or (2)Use of non-conventional
business
model, such as those using non-traditional delivery platform such as electronic platforms and
agents.
Page 4 of 24
 An NSSLA shall conduct its credit assessment in a holistic and prudent manner, taking
into account all relevant factors that could influence the prospect for the loan to be repaid
according to its terms and conditions. This shall include an appropriate consideration of the
member-borrowers' existing debt obligations with the NSSLA and other financial
institutions/credit granting entities and repayment history, as well as an assessment of
whether the loan can be expected to be repaid without causing undue hardship and over-
indebtedness. NSSLAs shall ensure that their credit policies and underwriting standards still
consider reasonable cost of living, while the terms and conditions of the loans do not
prejudice members' welfare.

NSSLAS shall factor into their credit-granting decisions, the likelihood of providing
allowance for credit losses and holding adequate capital to absorb unexpected losses for
credits with apparent weaknesses.

NSSLAS may utilize collaterals (e.g., real estate, capital contribution, deposits), and
other financial instruments (e.g., insurance) to help mitigate risk in credit exposures.
However, these shall not substitute for a comprehensive assessment of the member-
borrower's creditworthiness or fully compensate for insufficient information. NSSLAs shall
establish:

a. adequate policies in determining the acceptability of various forms of credit risk

mitigants and appropriate collateral value limits;
b. procedures for regularly assessing the value of physical collaterals and availability
of financial guarantees; and
c. a process to ensure that said collaterals are, and continue to be, enforceable,
realizable and marketable.

84191s.6 Credit approval process. The approval process for new credits as well as
the amendment, renewal and restructuring of existing credit exposures shall be aligned with
the credit risk management structure and clearly articulated in an NSSLA's written credit
policy. lt shall also include an escalation process where approval for restructuring of credits,
policy exceptions or excesses in internal limits, is escalated to units/officer with higher
authorities, as approved by the board of trustees.

The said policies must also cover the escalation processes and procedures, including
approving authorities, in resolving cases of re-billing and handling of accounts falling under
extra-ordinary circumstances that may adversely affect the quality of the individual loan
account and total loan portfolio.

Page 5 of 24
 841915,7 Renewol, NSSLAs shall put in place policies and procedures on renewal of
loans. A loan renewal shall supersede the original loan. Credits and other accommodations
shallonly be renewed:

a. Upon re-establishment of the creditworthiness of the borrower using the same

credit-granting criteria for the evaluation and approval of new loans; and
b. When the corresponding accrued interest receivable has been paid.

C. Maintaining an Appropriate Credit Administration Process

541915.8 Credit Administration. NSSLAs shall have in place a system for the ongoing
administration of their various credit portfolios. Credit administration refers to activities
that support and control extension and maintenance of credit. NSSLAs shall ensure the
efficiency and effectiveness of the following credit administration functions:

o. Credit documentotion. Policies and procedures shall be put in place to ensure

completeness of documentation, including a file documentation tickler system,
execution of the loan transaction, and enforceability of documents.

For each loan granted by an NSSLA, a promissory note must be executed by the
member-borrower in favor of the NSSLA expressing particulars such as the amount
of the loan, date granted, due date, interest rate and other similar information. In
addition, member-borrowers must execute an authorization requiring the payroll or
its equivalent to make deduction from their salary the amount specified in the
contractual obligation and remit such deduction to the NSSLA;

b. Disbursement. Proper approval shall be obtained and complete documentation shall

be ensured prior to disbursement. Exceptions, if any, shall be duly approved;

c. Billing ond repoyment. Payments received shall be properly recorded. Measures

shall be in place to ensure that late payments are tracked and collected; and

d. Mointenance of credit files. Credit files shall include sufficient and updated
information necessary to ascertain the financial condition of the member-borrower
and include documents covering the history of an NSSLA's relationship with the
borrower. All loan and collateral documents shall be kept in a secured area in NSSLA
premises under joint custody.

For billing and repayment, on the basis of properly executed authorization to deduct
from member-borrowers, the billing policies shall expressly provide information on the
methodologies, timing and frequency, and bases of billing through the salary or pension
remittance systems. In the case of loans payable over-the-counter or means other than
through salary-deduction scheme, the policies shall also provide for the mechanics and
requisites thereof, specifically on the use of collection agents/representatives or its
equivalent.
Page 6 of 24
 For each loan granted, the NSSLA expects repayment based on terms agreed upon
with member-borrowers. Upon receipt of the first amortization, it is assumed that the
succeeding periodic amortizations are collected continuously thereafter. Accordingly,
normal collection period (NCP) shall be defined as the period from the date of loan release
to the date the NSSLA is able to collect the first periodic amortization of a loan payable by
installment, or full settlement in the case of loans payable by balloon payment. The NCp
shall be incorporated in the NSSLA's credit policies and considered in its loan review and
monitoring system in order to reflect the true status of loan accounts and ensure that
adequate loss provisioning is provided.

For repayments remitted through payroll or pension systems, the NCp shall be set by
the NSSLA's board of trustees based on the recent collection history (e.g., last three years)
and/or remittance periods specified in contracts with private companies or government
units required to deduct and remit amounts due from employee- or retiree-members of
such NSSLAs. This should be supported by documentary evidences that sufficiently justify
the length of time identified as the NCP. In no case, however, shall the NCp exceed four (4)
months from the date of release of the loan. For over-the-counter payments, the cure
period as specified under subsection 43o6s.1shall apply instead of the NCp.

However, when repayments of loans through payroll/pension systems are beyond

the established NCP and/or there are shortfalls in contracted amortizations, the NSSLA
needs to determine whether these situations may be considered as extra-ordinary
circumstances. Extra-ordinary circumstances are triggered by events or conditions beyond
the control3 of the NSSLA; the effect of which may apply to a specific product or group of
members rather than on an individual basis; and there is reasonable basis to assess that
the
member-borrowers' repayment capacity is not impaired.

For these extra-ordinary circumstances, the board of trustees shall adopt and
implement:

a. Policies and mechanism towards the proper identification and declaration of

situations considered as extra-ordinary given their operating environmenU

b. Commensurate policies and processes of measuring, monitoring and controlling the

risks falling under extra-ordinary circumstance; and

c. Effective Management Information System (MlS) towards adequate and timely

generation of data, reports and feedback on extra-ordinary accounts.

For example collective delay in remittance due to payroll or pension system issues,
unilateral move by
employers or by law to increase net-take home pay requirements
PageT of 24
 The Board and Management are expected to adequately support by documentary
evidences the identification of extra-ordinary circumstances and that the loans are not
impaired. The Bangko Sentral is not precluded from validating the said identification and
non-impairment for the purpose of ascertaining the condition of the loans.

Occurrence of events beyond the control of the NSSLA which have indications that
member:-borrowers' repayment capacity is compromised and may result in impairment of
loans (e.9., member-borrower's absence without official leave, termination from
employment, early retirement, etc.) shall not be considered as falling under extra-ordinary
circumstances. In which case, the loans shall be subject to appropriate work-out strategy,
adverse classification and loss provisioning.

D. Maintaining an Appropriate Credit Measurement, Monitoring and Control process

541915.9 Credit Risk Measurement. NSSLAs shall adopt sound and appropriate risk
measurement methodologies which shall provide a framework to control and monitor the
quality of credit as well as total loan portfolio. To ensure adherence to the NSSLA's risk
tolerance, it shall implement an internal credit grading system that enables the
identification of the credit behavior and measurement of the risk profile of member-
borrowers.

NSSLAs shall develop a contingency plan for scenarios and outcomes that involve
credit risk in excess of the NSSLAs' established risk tolerance. This plan may include
increasing monitoring, limiting portfolio growth and exit strategies for both significant
individual transactions and key portfolio segments.

941915.70 Credit Risk Manogement lnformation ond Reporting Systems. NSSLAs

shall render accurate, reliable and timely information and reports relating to credit risk
management. Thus, adequate management information and reporting systems shall be in
place to support the identification, measurement and monitoring of credit risk and the
overall effectiveness risk management process. The information generated from such
systems shall enable the board and all levels of management to fulfill their respective
oversight roles, including determining the level of capital commensurate with the credit risk
exposure ofthe NSSLA.

a. At a minimum, an effective MIS shall enable NSSLAs to:

(1) Provide adequate information on the quality and composition of the credit
portfolio (including off-balance sheet accounts);
(21 Determine accurately the level of credit risk exposures of an NSSLA through its
various activities (e.g. renewal and extension of loans, collection process, status
of delinquent accounts, write-offs, provisioning, among others);

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 (3) Timely identify and monitor credit risk concentrations, exposures approaching
risk limits, exceptions to credit risk limits and overrides to ensure that policy
and underwriting deviations as well as breaches and other potential problems
are promptly reported to the board and management for appropriate
corrective action;
(4) Aggregate credit exposures to individual borrowers and family group; and
(5) Permit additional analysis of the credit portfolio, including stress testing;

b. Maintain a database for research and use of analytical techniques, report exposures,
track quality and account performances, and maintain limits; The credit policy shall
clearly define the types of information and reports to be generated, frequency of
reporting, deadline of submission, and the users/ recipients of and personnel
responsible for the preparation of such information and reports; and

NSSLAS shall provide sufficient controls to ensure the integrity of the MlS. Reports
shall be periodically reviewed to ensure adequacy of scope and reliability and
accuracy of the information generated. lnternal audit shall also periodically assess
the controls over MlS.

547975.77 Credit Monitoring. To ensure that timely and adequate

board/management action is taken to maintain the quality of the NSSLA's credit portfolio
and other risk assets, and that adequate loss provisioning is set up and maintained at a level
sufficient to absorb the loss inherent in the credit accounts, an NSSLA shall establish an
effective monitoring system appropriate to its risk profile. The said system, which shall be
clearly articulated in the policies and procedures, shall consist of processes and information
systems to effectively monitor the condition and quality of individual loan/risk asset and
the
entire portfolio, and determine the appropriate allowance for credit losses (ACt).

This shall include criteria that identify and report problem credits to reasonably
assure that they are appropriately monitored as well as administered and provided
for.

The system should be able to, among others, provide measures to ensure that: a. the
board and management are kept informed of the current financial condition of the member-
borrowers and the various credit portfolios; b. loan covenants are consistently adhered to;
c. cash flow projections meet repayment requirements; d. prudential and internal
limits are
not exceeded; and e. potential problem credits and other transactions are identified.
Exceptions, breaches and potential problems noted shall be promptly reported
to
board/management for corrective action, possible classification and/or provisioning
and
more frequent monitoring.

NSSLAS shall monitor compliance with prudential and internal limits on a regular
basis. Substantial exposures, as the NSSLA may set, shall be subject to more intensive
monitoring. For this purpose, NSSLAs shall maintain a central liability ledger system for
each
borrower. This system shall allow monitoring of: a. exposures against prescribed and
internal limits on a daily basis; b. asset quality indicators (e.g., non-performing loans,
collateral values, etc.); and c. trends in loan growth to identify potentialweaknesses
in the
portfolio.

Page9 of 24
 941915,12 Credit Review Process.

a. NSSLAs shall implement an independent and objective credit review process to

determine: (1) that credits are granted in accordance with the NSSLA's policies and
procedures; (2) overall asset growth and quality (e.g., PD/NPL, write-offs and
recoveries), including appropriateness of classification and adequacy of booked loss
reserves and loan-loss provisioning consistent with the minimum standards required
in Appendix S-9;(3) trends in the portfolio (segmentation as to loans to employee-
members, retiree-members and immediate family-members); and (4) emerging
problems (e.8., risk concentration, risk migration, and deficiencies in credit
administration, measurement and monitoring processes).

b. NSSLAS may employ an appropriate sampling methodology to determine the scope

of credit review. At a minimum, credit review shall be conducted on all individual
borrowers with substantial exposures, and on a group basis to factor in the
connections among related parties in a borrowing group. Credit review for credits
that are similar in purpose or risk characteristics may be performed on a portfolio
basis. The portfolio sample selected for review shall provide reasonable assurance
that all major credit risk issues have been assessed and valid conclusions can be
drawn. Moreover, sampling methodology shall be documented and periodically
reviewed to ensure its quality and minimize bias.

c. Credit review shall also evaluate credit administration function and ensure that
credit files are complete and updated, and that all loan approvals and other
necessary documents have been obtained.

d. Credit reviews at least annually, and more frequently for

shall be performed
substantial exposures, new accounts and classified accounts. Assessments shall be
promptly discussed with the officers responsible for the credit activities and
escalated to senior management.

e. Results of the credit review shall be regularly and promptly reportedto the board of
trustees or the proper board-level committee for their appropriate action. The board
shall mandate and track the implementation of corrective action/s in instances of
unresolved deficiencies and breaches in policies and procedures. Deficiencies shall
be addressed in a timely manner and monitored until resolved/corrected.

9419 15. 1 3 Cred it Classilication and provisioni ng.

a. Clossification of Loans ond Other Credit Accommodotionsa. NSSLAs shall have in

place a reliable credit classification system to promptly identify credit exposures with
potential or existing problem and determine appropriate ACL. All credit
classifications, not only those reflecting severe credit deterioration, shall be
considered in determining the appropriate ACL.

Other credit accommodations include accounts receivables, sales contract receivables, accrued interest
receivables and advances.
Page 10 of 24
During a transitory period of three (3) years upon the effectivity of this Circular,
NSSLAs shall be subject to the regulatory guidelines in setting up ACL prescribed in
Appendix S-9.

(1) All NSSLAs shall map their classification of loans and other credit
accommodations against the regulatory classification criteria provided below.
However, NSSLAs are encouraged and not precluded from using additional
criteria provided they are consistent with the regulatory classification, as follows:

(a) Poss. These are loans and other credit accommodations that do not have a
greater-than-normal credit risk. The member-borrowers has the apparent
ability and willingness to satisfy their obligations in full.

(bl Especially Mentioned (EM). These are loans and other credit accommodations
that have potential weaknesses that deserve management's close attention.
lf left uncorrected, such weakness/(es) may affect the repayment of the loan.
Some degree of structural weakness may be found in virtually any aspect of
the loan arrangement or type of loan, and the presence of one (or more)
need not be indicative of an overall credit weakness deserving criticism.
lnstead, the NSSLA must evaluate the relative importance of such factors in
the context of the member-borrower's overall financial capacity and
relationship with the NSSLA. Basic characteristics include, but are not limited
to, any of the following:

(i) Deficiencies in underwriting, documentation, structure and/or credit

administration that can compromise an NSSLA's ability to control credit
relationship if economic or other events adversely affect the borrower;
(ii) Continuous renewal without reduction in principal, except when the
capacity to pay of the borrower has been clearly re-established;
(iii)Adverse economic or market conditions, that in the future may affect the
member-borrower's ability to meet scheduled repayments. Loans and
other credit accommodations affected by these characteristics may retain
the EM classification in the next examination should the same adverse
conditions persist: Provided, That the loans remain current; or
(iv) Intermittent delays or inadequate repayment of principal, interest
or
periodic amortizations of loans and other credit accommodations granted
by the NSSLA or by other financial institutions, where such information is
available.

(cl Substondard. These are loans and other credit accommodations that have
well-defined weakness/(es), which may jeopardize repayment/liquidation in
full, either in respect of the cash flow or financial position, which may include
adverse trends or developments that affect willingness or repayment ability
of the member-borrower. Basic characteristics include any of the following:

Page Lt of 24
 (i) Weak financial condition and results of operation of the employer that
leads to the member-borrower's inability to generate sufficient cash flow
for debt servicing;
(ii) Past due secured loans and other credit accommodations where
properties offered as collateral have been found with defects as to
ownership or with other adverse information;
(iii) Breach of any key financial covenants/ agreements that will adversely
affect the capacity to pay of the borrower; or
(iv)classified "Especially Mentioned" as of the last credit review without
adequate corrective action.

(d) Doubtful. These are loans and other credit accommodations that exhibit
more severe weaknesses than those classified as "substandard", whose
characteristics on the basis of currently known facts, conditions and values
make collection or liquidation highly improbable, however the exact amount
remains undeterminable as yet. Classification as "Loss" is deferred because of
specific pending factors that may strengthen the assets. some basic
characteristics include any of the following:

(i) secured loans and other credit accommodations where property/ies

offered as collateral are (aa) either subject to an adverse claim rendering
settlement of the loan through foreclosure doubtful, or (bb) whose value
have materially declined without the borrower offering additional
collateral for the loan/s to cover the deficiency; or
(ii) Loans and other credit accommodations wherein the possibility of loss is
extremely high but because of certain important and reasonable pending
factors that may work to the advantage and strengthening of the loan, its
classification as an estimated loss is deferred untilthe next credit review.

(e) [oss. These are loans and other credit accommodations that are considered
uncollectible or worthless and of such little value that their continuance as
bankable assets is not warranted although the loans may have some recovery
or salvage value. This shall be viewed as a transitional category for loans and
other credit accommodations that have been identified as requiring write-off
during the current reporting period even though partial recovery may be
obtained in the future. Their basic characteristics include any of the
following:

(i) when the borrower's and co-makers'/guarantors, whereabouts are

unknown, or they are insolvent, or their earning power is permanently
impaired; or
(ii) Where the collateral securing the loans are without recoverable value.

(2) split classification may apply for non-performing secured loans and
other credit
accommodations, depending on the recoverability and liquidity of the collateral.
The secured portion may be crassified as "substandard,, or ',doubtful,,, as
appropriate, whilethe unsecured portion shallbe classified as "loss" if there is no
other source of payment other than the collateral.
Page L2 of 24
 (3) NSSLAs may upgrade a classified loan or restore it to a "pass" rating: Provided,
That it does so on the basis of a written policy on the upgrading of classification
or rating and the credit review function is reliable and effective. Such policy shall
include a comprehensive analysis of the repayment capability/financial strength
of the borrower and the corrective actions made on the weaknesses noted to
support the upgrade in classification. Upgrading may be supported by the
following developments:

(a) When all arrears or missed payments on principal and interests including
penalties have been cleared rendering the account to be fully compliant with
the original terms of the loan;
(b) Upon establishing that the weaknesses were substantially addressed and
that the borrower has exhibited a sustained trend of improvement and
willingness and capability to fully pay its loans and advances in a timely
manner to justify the upgrade;
(c) Offering of new or additional collateral security; or
(d) ln the case of restructured loans, the classification shall only be upgraded
after establishing a satisfactory track record of at least six (5) consecutive
payments of the required amortization of principal and interest, or until the
borrower has sufficiently exhibited that the loan will be fully repaid
(continued collection in accordance with the terms of the loans is expected)
and the loan meets the criteria of lower loan classification.

b. Tronsitory period to develop loan loss estimation methodology.

After three (3) years from the effectivity of this circular, NSSLAs may develop and
adopt a sound loan loss estimation methodology that: (L) can reasonably estimate
provisions for loans and other credit accommodations and risk assets in a timely
manner, using their experience and research and this guidance to ensure that the
ACL5are adequate and (2) is fundamentally anchored on the principle of recognizing
expected credit loss (ECL) in accordance with the provisions of Philippine Financial
Reporting Standards 9 (PFRS 9). In such case, NSSLAs shall refer to Appendix e-56 of
the MORNBFI. Otherwise, NSSLAs shall remain subject to the regulatory guidelines in
setting up ACL prescribed in Appendix S-9.

c. Loan Loss Estimation Methodology, provisioning and ACL

(1) An NSSLA's loan loss methodology shall consider the foilowing:

" AcL represents the aggregate amount of individual and collectively assessed probable
credit losses.
Page L3 of 24
(a) written policies and procedures for the credit risk management systems
and controls inherent in the methodology, including roles and
responsibilities of the NSSLA's board of trustees and senior management;

(b) A detailed analysis of the entire loan portfolio performed on a regular basis;

(c) Accounting of the NSSLA's lending activities which adequately consider a

realistic view of the uncertainty and risks inherent in these activities. Loan
accounting policies and practices shall be selected and applied in a
consistent way that reasonably assures that loan and loan loss provision
information is reliable and verifiable;

(d) ldentification of loans to be evaluated individually and segmentation of the

remaining portfolio into groups of loans with similar credit risk
characteristics for collective assessment.

(i) lndividually ossessed loans. NSSLAs shall establish a materiality

threshold for significant credit exposures that will warrant an
individual assessment, which threshold shall be regularly reviewed.

The loan loss estimates shall reflect consideration of the facts and
circumstances that affect the repayment of each individual loan as of
the evaluation date. The following factors are relevant in estimating
loan losses for individually assessed loans:

(aa) Significant financial difficulty of the borrower;

(bb) Probable bankruptcy or other financial reorganization of the
borrower;
' (cc) Breach of contract, such as a defaurt or delinquency in interest
or principal payments; or
(dd) concession granted by the NssLA, for economic or legal
reasons relating to the borrower's financial difficulty, which
would not otherwise be considered.

The methodology shall include procedures describing the

determination and measurement of the. amount of any
impairment, the impairment measurement techniques
available and steps performed to determine which technique
is most appropriate in a given situation; or

(ii) collectively assessed loans. NSSLAs may use different methods to

group loans for the purpose of assessing credit risk and valuation
considering the following characteristics: loan type, product type,
market segment, credit risk grading and classification, coltateral
type, geographical location and past-due status. Estimated credit
losses shall reflect consideration of the NSSLA,s historical net

Page t4 of 24
 charge-off rate6 of the groups, adjusted for changes in trends,
conditions and other relevant factors that affect repayment of the
loans in such groups as of the evaluation date, and applied
consistently over time;

(e) The quality and net realizable values of physical collateral and other
guarantees and credit risk mitigants incorporated in the loan agreement,
where applicable;

(f) Address the methods used to validate models, if any, for credit risk
assessmenU

(e) The analyses, estimates, reviews and other provisioning methodology

functions shall be performed by competent and well-trained personnel and
be well documented, with clear explanations of the supporting analyses
and rationale; and

(h) use experienced credit judgment. Assessment of expected losses shall be

based not only on prescriptive rules or formula but must be complemented
with experienced credit judgment by the appropriate levels of
management. The scope for actual discretion shall be prudently within the
following constraints:

(i) Experienced credit judgments shall be subject to established policies

and procedures;
(ii) with approved and documented analytical framework for assessing
loan quality applied consistently over time;
(iii) Estimates shall be based on reasonable and verifiable assumptions and
supported by adequate documentation; and
(iv)Assumptions concerning the impact on borrowers of changes in general
economic activity, both favorable and unfavorable, shall be made with
sufficient prudence.

The method of determining loan loss provisions shall reasonably assure the
timely recognition of loan losses. while historical loss experience and
recent economic conditions are reasonable starting point for the
institution's analysis, these factors are not, by themselves, sufficient basis
to determine the appropriate level of aggregate loan loss provisions.
Management shall also consider any current factors that are likely to cause
loan losses to differ from historical loss experience, including changes in the
following:

The historical net charge-off rate is generally based on the annualized historical gross loan charge-offs, less
recoveries, recorded by the NSSLA.

Page 15 of 24
 (i) Lending policies and procedures, including underwriting standards
and collection, charge-ofi and recovery practices;
(ii) National and local economic and business conditions and
developments, including the condition of various market segments;
(iii) Trend, volume and severity of past due loans and loans graded as low
quality, as well as trends in the volume of impaired loans, troubled
debt restructurings and other loan modifications;
(iv) The experience, ability, and depth of management and staff of lending
o pe ratio n s/d ep a rt m e nt/u n iU
(v) Changes related to new market segments and products;
(vl) Quality of the NSSLA's loan review system and the degree of oversight
by senior management and board of trustees;
(vii) The existence and effect of any concentrations of credit, and changes
in the level of such concentrations; and
(viii) Credit risk profile of the loan portfolio as a whole as well as the effect
of external factors such as competition and legal and regulatory
requirements on the level of estimated credit losses in the NSSLA's
current portfolio.

Experienced credit judgment shall also be used to determine an acceptable

period that will yield reliable historical loss rates, as loss rate periods shall
not be restricted to a fixed time period to determine the average historical
loss experience for any group of loans with similar credit risk
characteristics. An NSSLA shall maintain sufficient historical loss data over a
full credit cycle to provide robust and meaningful statistical loan loss
estimates for establishing the level of collective impairment losses for each
group of loans with similar credit risk characteristics. when applying
experienced credit judgment, an NSSLA shall provide a sound rationale for
excluding any historical loss data that is deemed not representative of the
performance of the portfolio.

(r) NSSLAS shall set up general loan loss provision (GLLp) equivalent to one
percent (L%l of the outstanding balance of assessed loans for which no
specific provisions are made and/or for which the estimated loan losses are
less than one percent (<Lo/ol,less loans which are considered non-risk under
existing laws, rules and regulations.

(i) NSSLAS shall ensure the adequacy of the ACL for the entire loan portfolio.
They shall have a policy for the regular review of the ACL, which shall be
conducted at least semi-annually after considering results of the credit
review, level of classified loans, delinquency reports, historical losses and
market conditions. Failure to make adequate provisions for estimated
future losses, if any, may result in material misrepresentation of an NSSLA,s
financial condition.

Page L6 of 24
 947915.14 Credit Workout and Remedial Manogement of Problem Credits. NSSLAs
shall develop and maintain a disciplined and vigorous process for the early identification
and intervention for potential or existing problem credits. The process shall ensure that
timely and adequate management action is taken to maintain the quality of the credit
portfolio, prevent further deterioration, and minimize the likelihood of future losses.

Problem credits refer to credits that display signs of potential problems and/or well-
defined weaknesses such as those not performing according to the terms of the
contract, or with credit quality impairment, or deficiencies relating to their approval
and/or conduct that are not in keeping with sound and prudent credit policies. These
shall include past due loans, non-performing loans and restructured loans.
b. NSSLAs shall adopt appropriate and cost effective workout, restructuring or remedial
management policies, processes and strategies to revive and recover problem
credits. The strategies shall take into account the specific condition of the obligor
and the NSSLA's interest, and shall be approved by the board of trustees or
management, in accordance with internal policy.

c. At a minimum, the policies and strategies shall cover the following areas:
(1) authority and responsibilities of officers and staff in managing problem credits;
(2) collection strategy to be adopted for different types of loans;
(3) restructuring and handling of restructured accounts and/or loans for workout;
(4) supervision and monitoring of loan recovery performance;
(5) management and disposal of real and other properties acquired (ROpA),
including appraisal process;
(6) management information system to support the reporting, monitoring and
decision making processes;
(71 defined timelines and provision for regular monitoring; and
(8) other strategies, such as the use of collection agencies, and criteria for hiring a
consultant on problem credits.

d. Restructuring strategies

(1) Restructuring may be resorted to for the purpose of lessening the financial
difficulty of the borrower towards full settlement of his obligation, and
restructuring agreements shall always take into account the borrower,s
capacity to pay his obligation and available credit enhancements such as
financial guarantees and physical collateral. Thus, NSSLAs shall have full
discretion on whether to restructure loans in order to provide flexibility in
arranging the repayment of such loans without impairing or endangering the
NSSLA's interest.

(2) Accounts shall not be restructured unless the financial capacity of the obligor
to repay has been re-established, the events or crises that triggered the
financial stress had been identified, and the nature and extent of protection of

Page t7 of 24
 the NSSLA's exposure had been determined, to justify the need for
restructuring.

(3) At a minimum, the classification and provisioning of a loan, prior to the

execution of the restructuring agreement shall be retained until the borrower
has sufficiently exhibited that the loan will be fully repaid.

(4) A second restructuring of a loan shall be allowed only if there are reasonable
justifications: Provided That it shall be considered a non-performing loan and
cfassified, at least, "Substondord".The restoration to a performing loan status
and/or upgrading of loan classificatiofl, €.8., from "substondard" to "Especially
Mentioned", may be allowed if circumstances warrant an upgrading in
accordance with this Subsection.

(s) When restructuring of exposures is pursued, this shall not be under terms more
favorable than those transacted with others and shall be approved by the
board, excluding the trustee-borrower, if any.

(5) Physical collaterals offered, such as real estate, shall be appraised by an

independent appraisal company (not a subsidiary or an affiliate of the NSSLA)
acceptable to the Bangko Sentral at the time of restructuring and every year
thereafter to ensure that current market values are being used. A credit
exposure benchmark of P1.0 million for simple Fls and P5.0 million for all other
NSSLAs shall be observed, such that physical coltaterals for credit exposures
beyond this amount will require an independent appraisal.

e. Problem credits, including restructured accounts, shall be subjected to more

frequent review and monitoring. Regular reports on the status of loan accounts and
progress of any remedial plan shall be submitted to management to facilitate an
informed decision whether escalated remedial actions are called for.

54797s.75 Writing Off Problem Credits. Policies for writing off problem credits must
be approved by the board of trustees in accordance with existing rules and regulations, and
shall incorporate, at a minimum, well-defined criteria (i.e., circumstances, conditions and
historical write-off experience) under which credit exposures may be written off.
Procedures shall explicitly narrate and document the necessary operational steps and
processes to execute the policies.

Policies and procedures shall be periodically reviewed and if necessary, revised in a

timely manner to address material internal changes (e.g., change in business focus) or
external circumstances (e.g., changes in economic conditions).

NSSLAs shall write-off problem credits, regardless of amount, against

ACL or current
operations within a reasonable period as soon as such problem credits are determined to be
worthless as defined in the NSSLAs'written policies.

Page 18 of 24
 Policies shall define and establish the reasonable period of time within which to
write-off loans already classified as "loss". There shall be no undue delay in implementing
write-offs. Notice for write-off of problem credits shall be submitted in the prescribed form
(Appendix 5-13) to the appropriate supervising department of the Bangko Sentral within
forty-five (45) calendar days after every write-off, with a sworn statement signed by the
President of the NSSLA or officer of equivalent rank that the write-off did not include
transactions with trustees and officers, direct or indirect, and was undertaken in accordance
with board-approved internal credit policy.

An effective monitoring and reporting system shall be in place to monitor debts

written off and future recoveries. Progress on recovery shall be periodically reported to the
board of trustees. A database of loan accounts written off shall be maintained and must be
periodically reviewed for updates on individual loan borrower's information, including the
effects of write-offs to membership eligibility.

9 41915.16 Enforcement Actions. The Bangko Sentral reserves the right to deploy its
range of supervisory enforcement actions to promote adherence to standards and principles
set forth in these guidelines, bring about timely corrective actions and compliance with
Bangko Sentral directives and ensure that NSSLAs operate in a sound, lawful and orderly
manner. Non-observance of the provisions of Section 41915 and its subsections may subject
the NSSLA, its trustees and officers to appropriate sanctions.

Enforcement actions shall be based on a holistic assessment to determine if NSSLAs

adopt appropriate credit risk management practices and/or maintain capital commensurate
with the risk assumed based on existing rules and regulations. These may include, but are
not limited to, the following:

a. Corrective Actions. These are measures intended to primarily require NSSLAs to

rectify any deviations from the standards and principles expected in the conduct of
their credit risk-taking activities to address the negative impact of such deviation.
Corrective actions generally include issuance of specific directives to address
supervisory concerns within a reasonable timeframe.

b. Sanctions. The Monetary Board (MB) may impose sanctions on an NSSLA and/or its
Board, trustees and officers, as provided under existing laws, Bangko Sentral rules
and regulations proportionate to the gravity/seriousness of offense.

c. Other Enforcement Actions. Subject to prior MB approval, the Bangko Sentral, when
warranted, ffioy deploy other enforcement actions such as:

Page L9 of 24
 Initiation into the prompt corrective action (PCA) framework whenever grounds
for PCA exisU
il. Requiring the NSSLA to gross up the amount of required allowance for credit
losses based on the examination of a representative sample of loans, if in the
course of the Bangko sentral examination, a high incidence of non-
reporting/concealment of past due and/or problem loans is noted; or
ilt. other appropriate non-monetary enforcement actions that the MB may impose.

E 41975.17 Transitory Provision. shall be given six (6) months from the
NSSLAs
effectivity of this Circular to: (1) perform a gap analysis of their current credit practices and
processes vis-i-vis the standard provided in this Circular and (2) submit an action plan to the
Bangko Sentral for addressing such gaps duly approved by the board of trustees to achieve
full compliance within a reasonable period of time but in no case longer than two (2) years
from effectivity of this Circular.

All action plans shall be subject to the Sub-Sector Head of the

acceptance through
appropriate sub-sector of the Bangko Sentral. Should an NSSLA fail to submit aforecited
action plan within the specified period or the same is deemed not acceptable, it shall be
subject to the immediate application of the supervisory standards of Section 41915.

Any NSSLA that fails to comply with the foregoing shall be subject to the impos1ion of
appropriate monetary and/ or non-monetary sanctions.

Section 2. Section 43945 and its Subsections on acquired assets in settlement of loans is
hereby added to the MORNBFI to read, as follows:

Section 43945 Acquired Assets in Settlement of Loans. The following rules shall
govern assets acquired in settlement of loans.

943945.1 Posting ond Maintoining Acquired Assets. NSSLAs shall post at all times in
a conspicuous place in the premises of their head office and each of their service unit a list
of acquired assets together with the corresponding lowest price at which the NSSLA is
willing to sell such property. Any real property acquired shall be disposed of by the
NSSLA within a period of five (5) years: Provided, however, That the NSSLA may, after
said period, continue to hold the property for its own use, subject to the limitations of
Section 18(b) of R.A. No. 8367.

543945.2 Booking.

a. Real and Other Properties Acquired (ROPA) in settlement of loans through

foreclosure or dation in payment shall be booked under the ROpA account as
follows:
(1) Upon entry of judgment in case of judicialforeclosure;

Page 2O of 24
 (2) Upon execution of the Sheriffs Certificate of Sale in case of extrajudicial
foreclosure; and
(3) upon notarization of the Deed of Dacion in case of dation in payment ldocion
en pago).

ROPA shall be booked initially atthe carrying amount of the loan (i.e., outstanding
loan balance adjusted for any unamortized premium or discount less allowance for
credit losses computed based on Philippine Accounting Standard (PAS) 39
provisioning requirements, which take into account the fair value of the collateral)
plus booked accrued interest less allowance for credit losses (computed based on
PAS 39 provisioning requirements) plus transaction costs incurred upon acquisition
(such as non-refundable capital gains tax and documentary stamp tax paid in
connection with the foreclosure/purchase of the acquired real estate property).

The carrying amount of ROPA shall be allocated to land, building, other non-financial
assets and financial assets (e.g., deposits or capital contribution in the NSSLA) based
on their fair values, which allocated carrying amounts shall become their initial costs.

The non-financial assets portion of ROPA shall remain in ROPA and shall be
accounted for as follows:
(1) Land and building shall be accounted for using the cost model under pAS 40
"lnvestment Property";
l2l Buildings shall be depreciated over the remaining useful life of the assets,
which shall not exceed ten (10) years from the date of acquisition; and
(3) Land and buildings shall be subject to the impairment provisions of pAS 36
"lmpairment".

d. Financial assets shall be accounted for in accordance with the provisions of pAS 39.

e. Claims arising from deficiency judgments rendered in connection with the

foreclosure of mortgaged properties shall be judged under the real account
"Deficiency Judgment Receivable"; while probable claims against the borrower
arising from the foreclosure of mortgages properties shall be lodged under the
contingent account "Deficiency Claims Receivable,,.

f. Before foreclosing or acquiring any property in settlement of loans, it must be

properly appraised to determine its true economic value. lf the amount of ROpA to
be booked exceeds P5.0 million, the appraisal must be conducted by an independent
appraiser acceptable to the Bangko Sentral. An in-house appraisal of all ROpAs shall
be made at least every other year: Provided, That immediate re-appraisal shall be
conducted on ROPAs which materially decline in value.

Page 2t of 24
 The provisions of this Subsection shall be applied to all outstanding ROPAs and sales
contract receivables (SCR): Provided: That for properties acquired before 01 January 2005,
the carrying amount of the acquired properties when initially booked under ROPA shall be
the cost subject to depreciation and impairment testing, which shall be reckoned from the
time of acquisition.

943945.3 Sales controct receivoble.

a. SCR shall be recorded based on the present value of the installments receivables
discounted at the imputed rate of interest. Discount shall be accreted over the life of
the SCR by crediting interest income using the effective interest method. Any
difference between the present value of the SCR and the derecognized assets shall
be recognized in profit or loss at the date of sale in accordance with the provisions of
PAS 18 "Revenue": Provided, furthermore, That SCR shall be subject to impairment
provision of PAS 39.

The provision of this Subsection shall be applied to all outstanding ROpAS and SCRs:
Provided, That for properties acquired before 01 January 2005, the carrying amount
of the acquired properties when initially booked under the cost
ROPA shall be
subject to depreciation and impairment testing, which shall be reckoned from the
time of acquisition.

b. SCRs which meet all the requirements/conditions enumerated below are considered
performing assets and not subject to classification:

(1) That there has been a down payment or installment payments on the
principal of at least twenty percent (20%) of the agreed selling price;
(21 That payment of the principal must be in equal installments or in diminishing
amounts and with maximum intervals of one (1) year;
(3) That any grace period in the payment of principal shall not be more than one
(1) year; and
(4) That there is no installment payment in arrear either on principal or interest:
Provided, That an SCR account classified "substandard" may only be
upgraded to pass/unclassified/performing status after a satisfactory track
record of at least three (3) consecutive payments of the required
amortization of principal and/or interest has been established.

The Bangko Sentral however, reserves the right to require that specific provision on
ROPA and SCR be made, if based on its assessment, the NSSLA is unable to make the
necessary im pairment provision ing.

Section 3. The entire Appendix 5-9 is hereby deleted and replaced by the "Guidelines on the
Adoption of Philippine Reporting Standards (PFRS) 9 - lmpairment and in Setting Up of
Allowance for Credit Losses" as shown in Attachment 1.

Page 22 of 24
Section 4. Appendix 5-13 is hereby created, which shall contain the "Notice/Application for
Write-Off of Loans, Other Credit Accommodations, Advances and Other Assets" as shown in
Attachment 2.

Section 5. The entire provision of Sections 43015 on Lending Policies, including its
Subsections, and 43025 on Basic Requirements in Granting Loans are hereby deleted and
replaced as follows:

Section 43015 Limitations on lending authority. NSSLAs shall not commit to make any
loan for amounts in excess of the total of the following amounts:

a. Amount of cash available for loan purposes;

b. Amount of cash which can be readily realized upon the sale or redemption of
permissible investments made by NSSLAs; and

c. Amount of credit available for loan purposes from government or private NSSLAs.

Section 43025 Maximum loan maturity. No loan granted by NSSLAs shall have a
maturity date of more than five (5) years, except loans on the security of unencumbered
real estate for the purpose of home building and home development which may be
granted with maturities not exceeding twenty-five (25) years and medium or long-term
loans to finance agricultural projects.

Section 5. Subsection 43055.1 on Accounts considered past due is hereby amended to read,
as follows:

"9 43065.1 Accounts considered past due. As a general rule, loans, investments,
receivables, or any financial asset, including restructured loans, shall be considered past due
when any principal and/or interest or installment due, or portions thereof, are not paid at
their contractual due date, in which case, the total outstanding balance thereof shall be
considered as past due. However, NSSLAs may provide a cure period on a credit product-
specific basis for loans with over-the-counter payment arrangement, not to exceed thirty
(30) calendar days within which to allow the borrowers to catch up on their late payment
without being considered as past due: Provided That any cure period policy shall be based
on verifiable collection experience and reasonable judgment that support tolerance of
occasional payment delays: Provided, further, That the observance of a cure period policy
shall not preclude the timely adverse classification of an account that has developed
material credit weakness/es, and that NSSLAs shall regularly review the reasonableness of
its cure period policy.

Section 7. The title of ltem E of Part lll. Loans and lnvestments should read, as follows:

"E. Loans/Credit Accommodations to Trustees and Officers,,

Page 23 of 24
Section 8. The following Sections/Subsections are hereby deleted and the applicable
provisions are incorporated in the guidelines under Section t hereof:

Section Title/Description Covered Bv

43065.3 Write-off of loans as bad debts 4191S.15
4308S Restructured Loans; General Policy 41915.14 and 43055
4309S Renewals of loans 4191S.7
43925 Loan Portfolio and Other Risk Assets Review 4L9L5.12
System

Section 9. Effectivity. This Circular shall take effect fifteen (15) calendar days following its
publication either in the Official Gazette or in a newspaper of general circulation.

G. FONACIER

lfAugust2oLe

Page 24 of 24
 APP. S.9

GUTDELTNES ON THE ADOPTTON OF PHtLtPP|NE FtNANCTAL REPORTING STANDARDS (PFRSI

9 - IMPAIRMENT AND IN SETTING UP OF ALTOWANCE FOR CREDIT LOSSES
(Ap p e n d ix to Su bsecti o n 4 I 9 75. 731

NSSLAswith the capacity to adopt loan loss methodologies fundamentally anchored

on the principle of recognizing expected credit loss (ECL) in accordance with the provisions of
PFRS 9 may opt to develop the same. In this respect, these NSSLAs shall refer to the
Appendix Q-56 of the MORNBFI for guidance and compliance.

However, NSSLAs with credit operations that may not economically justify adoption
of said loan loss estimation methodology shall, at a minimum, be subject to the following
guidelines:

Section 1. Stages of Credit lmpairment

a) Credit impairment is recognized in three stages under PFRSS:

Stage of credit
impairment Characteristics
Stage 1 Credit exposures that are considered "performing" and with no
significant increase in credit risk since initial recognition or with
low credit risk
Stage 2 Credit exposures that are considered "under-performing" or
not yet non-performing but with significant increase in credit
risk since initial recognition
Stage 3 Credit exposures with objective evidence of impairment, thus,
considered as "non-performing"

b) NSSLAs shall promptly recognize and maintain adequate allowance for credit losses at all
times. lt shall adopt the principles provided under the enhanced guidelines on sound
credit risk management practices for NSSLAs1 in implementing sound and robust credit
risk measurement methodologies that adequately considers ECL. In this respect, the ECL
methodology shall not be considered as a separate and distinct process but as an
important element of the entire credit risk management process.

As a general rule, Especially Mentioned and Substandard Underperforming [e.g.,

substandard accounts that are unpaid or with missed payment of less than ninety (90) daysl
shall be considered as Stage 2 accounts, while Substandard Non-performing, Doubtful, and
Loss accounts shall be considered as Stage 3 accounts.

1 Section 41915 Credit Risk Management; Policy Statement of the MORNBFI.

Page 1 of 4
Section 2. Individually Assessed Credit Exposures2

L. Loans and other credit exposures with unpaid principal and/or interest shall be
classified and provided with allowance for credit losses (ACL) based on the number of
days of missed payments as follows:

For unsecured loans and other credit exposures:

No. of Days
Unpaid/with Missed Classification Minimum Stage
Pavment ACL
31 - 90 days Substandard t0o/o 2
(underperformine)
91 - 120 days Substandard 25o/o 3
(non-performine)
L2L - 180 days Doubtful 50% 3
181 davs and over Loss too% 3

For secured loans and other credit exposures:

No. of Days
Unpaid/with Missed Classification Minimum ACL Stage
Pavment
31 - 90 days* Substandard L0% 2
(underperforming)
91 - 180 days* Substandard LOo/o 3
(non-performing)
181 - 355 days Substandard 25% 3
(non-performing)
OveraVear-5vears Doubtful so% 3
Over 5 vears Loss LOo% 3
* When there is imminent possibility of
foreclosure and expectotion of loss, ACL shatt
be increosed to 25%.

Provided, That where the quality of physical collaterals or financial guarantees

securing the loans and advances are determined to be insufficient, weak or without
recoverable values, such loans and advances shall be treated as if these are
unsecured.

2. Loans and other credit exposures that exhibit the characteristics for classified
accounts described under Subsection 41915.13 shall be provided with ACL as follows:

Other credit exposures include exposures under the scope of PFRS 9, such as investments in debt securities
measured at fair value through other comprehensive income and amortized cost, loan commitments, sales
contract receivables, accounts receivables, accrued interest receivables, and advances.
Page 2 of 4
 Minimum
Classification ACL Stage
Especially Mentioned 5% 2
Substandard - Secured LO% 2or3'
Substandard - Unsecured 25% 2or3'
Doubtful so% 3
Loss LOO% 3

3. Unsecured loans and other credit accommodations classified as "substondord"

in the last two (2) internal credit reviews which have been continuously
renewed/extended without reduction in princlpal and is not in process of
colf ection, shall be downgraded to "Doubtful" classification and provided with a
fifty percent (50%) allowance for credit losses.

4. Loans and other credit accommodations under litigation which have been
cfassified as "Poss" prior to the litigation process shall be classified as
"Substondord" and provided with twenty percent (25o/ol allowance for credit losses.

5. Loans and other credit accommodations that were previously classified as

"Poss" but were subsequently restructured shall have a minimum classification
of Especially Mentioned (EM) and provided with a five percent (5%) allowance for
credit losses, except for loans which are considered non- risk under existing laws,
rules and regulations.

6. Classified loans and other credit accommodations that were subsequently

restructured shall retain their classification and provisioning until the borrower has
sufficiently exhibited that the loan will be fully repaid.

section 3. collectively Assessed Loansa and other credit Exposures

1. Current "Poss" loans and other credit exposures should be provided with a
reasonable level of collective allowance, using historical loss experience adjusted for
current conditions

2. Loans and other credit exposures with unpaid principal and/or interest shall be
classified and provided with ACL based on the number of days of missed payments as
follows:

For unsecured loans and other credit exposures:

No. of Days Unpaid/with Classification Minimum Stage

Missed Payment* ACL
1 - 30 days Especially Mentioned 2% 2

The stage depends on whether the accounts are classified as non-performing (Stage 3) or underperforming
(Stage 2).
This includes microfinance loans, micro enterprises and small business loans and consumer loans such as
salary loans, credit card receivables, auto loans, housing loans and other consumption loans, and other
loan types which fall below the Fl's materiality threshold for individual assessment.
Page 3 of 4
 No. of Days Unpaid/with Classification Minimum Stage
Missed Pavment* ACL
31 - 60 days / Substandard 25% 2or3'
lst restructurinq
51 - 90 davs Doubtful 5Oo/o 30
91 days and over / Loss LOO% 3
2nd restructuring
* Par
for microfinonce loons

For secured and other credit exposures:

No. of Days ACL%

Unpaid/with Classification Other types Secured by Stage
Missed Payment of collateral real estate
31 - 90 days Substandard 10 10 2
(underperforming)
91 - 120 days Substandard 25 15 3
(non-performing)
Lzt -
360 davs Doubtful 50 25 3
361 days - Loss 100 50 3
5 years
Over 5 vears Loss 100 100 3

Provided, that where the quality of physical collaterals or financial guarantees

securing the loans and advances are determined to be insufficient, weak or without
recoverable values, such loans and advances shall be treated as if these are
unsecured.

Section 4. General and Specific Provisions for Loan Accounts

a) NSSLAS shall treat Stage 1 provisions for loan accounts as General Provision (Gp), while
stages 2 and 3 provisions shall be treated as specific provisions (sp).

b) NSSLAs shall set up general loan loss provision (GLLP) equivalent to 1 percent (1%) of all
outstanding Stage 1 on-balance sheet loans, except for accounts considered as credit
risk-free under existing regulations. NSSLAs are not required to provide a l percent(L%l
GP on other credit exposures covered by PFRS 9 such as off-balance sheet accounts and
investments.

c) Alfowance for credit losses for Stages L, 2, and 3 accounts shall be recognized in the
profit or loss statement. NSSLAs that shall use the guidelines provided under this
Appendix (S-9) in determining allowance for credit losses shall book the entire amount of
General Provision (GP), in profit or loss.

s
The stage depends on whether the accounts are classified as non-performing (Stage 3) or underperforming
(Stage 2).
5
Subsection X305.2/43O5Q.2/4306N.2 provides that doubtful accounts are considered as non-performing
hence, shall be classified under Stage 3 notwithstanding the number of missed amortizations.
Page 4 of 4
 APP. S-13

NOTTCE/APPuCAT|ON FOR WRrTE-OFF OF rOANS

OTHER CREDIT ACCOMMODATIONS, ADVANCES AND OTHER ASSETS
( Appendix to Su bsection 4t9 tS. ISI

Formerly SES Form 5H (CBP 7-16-21)

Name of Non-Stock Savings and Loan Association (NSSLA)

Address

Date

Loan and Advances Details

Name of Date of Approving Date Original Deposit + Amount to
Outstanding Maturity Date of Accrued Recommending Justification for
Borrower Membership Officer Capital be Written-
Granted Amount (9) Balance (9) Date Last Interest (P) Body/Officer Write-Off
Contribution off (e)
Payment
(1) (21 (3) (4) (s) (6) (71 (8) (s) (11) (t2l
(10) (13)

Total Amount to be Written-Off:

that the foregoing loans and advances aggregating p

I certify were authorized to be written-off by the Board of Trustees of this
Association in its Resolution No. dated

(Signature of Authorized Officer over Printed Name)