Unofficial Translation by the courtesy of The Foreign Banks' Association This translation is for the convenience of those unfamiliar with the Thai language. Please refer to the Thai text for the official version. ------------------------------------------------------------------------
BANK OF THAILAND 21 December 2006 To
Managers All commercial banks registered in Thailand All foreign bank branches No. ThorPorTor. ForNorSor. (21) Wor. 1974/2549 Re: Dispatch of Notification of the Bank of Thailand Re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks
The Bank of Thailand hereby dispatches the Notification of the Bank of Thailand Re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks dated 7 December 2006 which has been come into effect since the last six month accounting period of the year 2006 onwards and is published in the Royal Gazette, (General Issue), Vol. 123, Special part 131 Ngor dated 20 December 2006. 1. The essences of the Notification amendment are summarized as follows: 1.1 For commercial banks to prepare for the implementation of International Accounting Standard (IAS) No. 39 Re: Financial Instruments: Recognition and Measurement (IAS 39) which is expected to be enforced in Thailand in the year 2008, and to soften the impacts on financial positions of commercial banks, therefore, the Bank of Thailand has required commercial banks to gradually set provision of 100% for the difference between the book value of loan and the present value of expected cash flows from the debtor or the present value of expected cash flows from the sale of collateral as follows: (A) For debtors who the court has already adjudged or who are in the process of legal execution, and debtors who are in the process of litigation, provision shall be set since from the last six month accounting period of the year 2006 onwards. (B) For debtors classified as Doubtful of Loss and Doubtful, provision shall be set from the first accounting period of the year 2007 onwards.
BOT Notification No 1974-2549 (21-12-06) (2).doc
-2-
(C) For debtors classified as Substandard, provision shall be set from the last six month accounting period of the year 2007.onwards. The Bank of Thailand attaches herewith the Guideline Re: Methods of the calculation of the present value of expected cash flows from the debtor or the present value of expected cash flows from the sale of collateral for collaterals that are immovable properties and leasehold, machineries and vehicles, and summary table of collateral types and collateral value to be deducted from the book value of loan before making provision for the preparation of IAS 39 implementation for other collaterals exempt from the calculation of the present value of expected cash flows from the sale of such collateral. 1.2 For debtors with similar credit risk characteristics or retail customers with similar characteristics, loan types, and lending objectives such as mortgage loans, credit card loans, personal loans, hire purchase loans and leasing loans, commercial banks can opt to set provision under the aforementioned approach or the collective approach where provision are set from historical loss experiences of each customer group. 1.3 For debtors exempt from the practices in Section 1.1 and 1.2 above, commercial banks may set provision by referring to collateral value specified in summary table of collateral types and collateral value to be deducted from the book value of loan before making provision according to Section 4.11 of the Notification of the Bank of Thailand Re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks attached herewith. 1.4 The guideline regarding making provision of hire purchase loan and leasing loan is revised. For vehicle and machinery hire purchase, commercial bank may deduct the value of vehicle and machinery as stipulated in the mentioned notification from the outstanding balance of hire purchase loan, which is the amount after netting of deferred hire purchase income or deferred financial income, before making provision. 2. The following letters of the Bank of Thailand shall be repealed: 2.1 Circular of the Bank of Thailand No. ThorPorTor. Ngor. (Wor) 669/2542 Re: Provision for Hire Purchase Debtors dated 2 March 1999 2.2 Circular of the Bank of Thailand No. ThorPorTor. SorNorSor. (21) Wor. 774/2545 Re: Acceptance of the Pledge of THB 500,000 Commemorative Notes as Collateral dated 4 April 2002 2.3 Circular of the Bank of Thailand No. ThorPorThor. SorNorSor. (21) Wor.1938/2547 Re: Clarification of the Criteria on Writing-off Debts from Account dated 15 November 2004 2.4 Circular of the Bank of Thailand No. ThorPorThor. SorNorSor. (21) Wor. 91/2548 Re: Clarification on Recognizing The Small Industry Credit Guarantee Corporation’s Letter of Guarantee as Collateral dated 14 January 2005, and BOT Notification No 1974-2549 (21-12-06) (2).doc
-3-
2.5 Circular of the Bank of Thailand No. ThorPorTor. ForNorSor. (21) Wor. 517/2549 Re: Clarification on Recognizing The Thai Asset Management Corporation’s Letter of Guarantee as Collateral dated 12 April 2006. Please be informed and comply with accordingly. With regards,
(Mr. Krirk Vanikkul) Assistant Governor, Financial Institutions Policy Group for Governor Attachment:
1. Notification of the Bank of Thailand Re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks dated 7 December 2006 2. Summary table of collateral types and collateral value to be deducted from the book value of loan before making provision 3. Methods of the calculation of the present value of expected cash flows from the debtor or the present value of expected cash flows from the sale of collateral 4. Summary table of collateral types and collateral value to be deducted from the book value of loan before making provision for the preparation of IAS 39 implementation
Prudential Policy Department Tel.
0-2283-5304, 0-2283-5837, 0-2283-5886
Note
[ ]
The Bank of Thailand will arrange a clarification meeting on ……at……
[X]
No clarification meeting will be arranged
BOT Notification No 1974-2549 (21-12-06) (2).doc
Unofficial Translation by the courtesy of The Foreign Banks' Association This translation is for the convenience of those unfamiliar with the Thai language. Please refer to the Thai text for the official version. ------------------------------------------------------------------------
Notification of the Bank of Thailand Re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks ____________________________________________ 1. Reason to issue the Notification Presently, although commercial banks have already set sufficient provision to absorb expected loss which is in line with the guideline of the Thai Accounting Standard No. 11 Re: Doubtful debts and bad debts which is currently effective, the International Accounting Standard (IAS) No. 39 Re: Financial Instruments: Recognition and Measurement has been applied in several countries since the year 2005 and it is expected to be implemented in Thailand in the year 2008 by the Federation of Accounting Professions. The contents of such accounting standard relate to the impairment of financial instruments especially loans, which are the main assets of commercial banks. That is, commercial banks shall set provision for losses in case that there is objective evidence that the debtors may not be able to fulfill the obligation such as debtors with past due on principal or interest payments for more than 3 months, commercial banks must set provision for the difference between the book value of loan and the present value of expected cash flows from the debtor or the difference between the book value of loan and the present value of expected cash flows from the sale of collateral. The IAS 39 allows commercial banks as they deem appropriate to recognize such provision as the cumulative provision or write-off such debtors as bad debts For commercial banks to prepare for the implementation of IAS 39 which is expected to enforced in Thailand in the year 2008, and to soften impacts on financial positions of commercial banks, the Bank of Thailand (BOT) requires commercial banks to gradually set provision according to such accounting standard by 31 December 2007. 2. Statutory Power By the virtue of the first paragraph of Section 15 bis. of the Commercial Banking Act B.E. 2505 as amended by the Emergency Decrees amending the Commercial Banking Act B.E. 2505, B.E. 2528, the Bank of Thailand, with the approval of the Minister of Finance, hereby issues the prescriptions regarding the Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks as specified in this Notification.
BOT Notification No 1974-2549 (21-12-06) (2).doc
-2-
3. Scope of Application This Notification is applicable to all commercial banks under the Commercial Banking Act. 4. Contents 4.1 The Notification of the Bank of Thailand Re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks dated 23 August 2004 shall be repealed. 4.2
In this Notification: (1)
Worthless or irrecoverable assets refer to assets classified as Loss
(2)
Doubtful Assets that may be Worthless or Irrecoverable refer to: (A)
Assets classified as Doubtful of Loss
(B)
Assets classified as Doubtful
(C)
Assets classified as Substandard
(D)
Assets classified as Special Mention (E)
Assets
classified as Pass (3) Provision refer to reserves set aside as allowance for bad debts or doubtful debts, allowances for price reduction, allowances for impairment, and allowances for revaluation of worthless or irrecoverable assets. Commercial bank shall, at the minimum, set provision for each class of classified assets in accordance with the rates and rules specified in this Notification. 4.3
Assets classified as Loss: The following assets classified as Loss shall be written off:
(1) Claim, for which a reasonable action for the receipt of debt repayment has been taken but there is no possibility of such receipt, satisfied any one of the criteria below: (A) A debtor is dead or adjudged as disappearance or there is an evidence of disappearance and there are no assets to repay the debt. (B) A debtor has dissolved the business operations and is in debt to other creditors with preferential rights over total assets of the debtor where total claims of such creditors exceed total assets of the debtor. (C) A commercial bank has sued the debtor or has applied for the participation in properties in the case that other creditors have also sued such debtor and the court has already ruled the case but the debtor does not have assets to repay the debt. BOT Notification No 1974-2549 (21-12-06) (2).doc
-3-
(D) A commercial bank has filed the debtor a bankruptcy suit or has applied for the receipt of debt repayment in the case that other creditors have also filed such debtor for bankruptcy, and in that case, all parties have agreed for debt restructuring with the approval from the court or such debtor has been adjudged as bankrupt and the first distribution of properties has taken place. (2)
Claim of which the nature or circumstance is treated as
(3)
Other assets, which are impaired, damaged, or worthless
irrecoverable
(4) Loss from debt restructuring carried out in accordance with the regulations and guidelines prescribed by the Bank of Thailand. 4.4
Assets classified as Doubtful of Loss:
The assets classified as Doubtful of Loss satisfying any one of the following criteria shall be subject to provision at 100%: (1) A debtor overdue the principal or interest payments for a cumulative period exceeding 12 months starting from the contractual due date regardless of the contractual conditions or terms or the date that a commercial bank makes the claim or call for the repayment, whichever is earlier, except a debtor classified as Loss. An overdraft debtor shall be classified under (2). (2) An overdraft debtor with no credit line or whose credit line has been revoked, or whose book value of loan has exceeded the credit line, or whose contract has expired and no fund has been transferred to the account for the repayment of principal and interests exceeding 12 months starting from the date which the credit line is revoked or the date which loan outstanding exceeds the credit line or the maturity date of the contract, whichever is earlier. (3) The immovable property acquired through the debt repayment or the public auction, only for the portion that the book value exceeds the value obtained from valuation or appraisal carried out within the last 12 months, whereby the estimated sale expense is deducted from the mentioned obtained value before comparing to the book value. In case where a commercial bank undertook the valuation or appraisal more than 12 months ago, only 50% of the value obtained from the appraisal or valuation can be used. For the immovable property valuation or appraisal, the regulation of Bank of Thailand on collateral valuation and appraisal of financial institutions must be complied with. (4) Other assets, only for the portion that the book value exceeds the fair value or the expected recoverable value, whereby a commercial bank must assign the fair value or the expected recoverable value for the asset following the rules prescribed in the accounting standard.
BOT Notification No 1974-2549 (21-12-06) (2).doc
-4-
(5)
Asset or claim of which the entire value is expected to be
irrecoverable. (6) Loss from debt restructuring carried out in accordance with the regulations and guidelines prescribed by the Bank of Thailand. (7) There is an indicator that an asset or claim may not be entirely recovered as ordered by the Bank of Thailand. 4.5
Assets classified as Doubtful:
The assets classified as Doubtful satisfying any one of the following criteria shall be subject to provision at the minimum of 50%: (1) A debtor overdue the principal or interest payments for a cumulative period exceeding 6 months starting from the contractual due date regardless of the contractual conditions or terms or the date that a commercial bank makes the claim or call for the repayment, whichever is earlier, except a debtor classified as Loss or Doubtful of Loss. An overdraft debtor shall be classified under (2). (2) An overdraft debtor with no credit line or whose credit line has been revoked, or whose loan outstanding has exceeded the credit line, or whose contract has expired and no fund has been transferred to the account for the repayment of principal and interests exceeding 6 months starting from the date which the credit line is revoked or the date which loan outstanding exceeds the credit line or the maturity date of the contract, whichever is earlier. (3)
A debtor under the receivership by the court order.
(4) A debtor who has ceased or dissolved the business operations or the business of such debtor is in the process of liquidation. (5) A debtor who has delayed the debt repayment or has taken any actions in order to prevent the creditor from receiving debt repayment such as moving outside the Kingdom, or removing or disposing the assets. (6) A debtor whom a commercial bank is unable to contact or find or a debtor who has left the domicile stated in the agreement without informing the commercial bank. (7) A debtor whose business is uncertain or a debtor who has not undertaken any business permanently, or a debtor who has used the fund for the purpose other than that agreed. (8) A commercial bank has applied for the participation in properties with other creditors who have also sued the debtor. (9) Asset or claim where the debt (principal and interests) is unlikely to be repaid in full amount. BOT Notification No 1974-2549 (21-12-06) (2).doc
-5-
(10) There is an indicator that an asset or claim may not be fully recoverable as ordered by the Bank of Thailand. 4.6
Assets classified as Substandard:
The assets classified as Substandard satisfying any one of the following criteria shall be subject to provision at the minimum of 20%: (1) A debtor overdue the principal or interest payments for a cumulative period exceeding 3 months starting from the contractual due date regardless of the contractual conditions or terms or the date that a commercial bank makes the claim or call for the repayment, whichever is earlier, except a debtor classified as Loss, Doubtful of Loss, or Doubtful. An overdraft debtor shall be classified under (2). (2) An overdraft debtor with no credit line or whose credit line has been revoked, or whose loan outstanding has exceeded thecredit line, or whose contract has expired and no fund has been transferred to the account for the repayment of principal and interests exceeding 3 months starting from the date which the credit line is revoked or the date which loan outstanding exceeds the credit line or the maturity date of the contract, whichever is earlier. (3) There is an indicator that there are difficulties in the call for repayment of an asset or a claim, or such an asset or claim no longer generates income as usual as ordered by the Bank of Thailand. 4.7 Assets classified as Special Mention or assets classified as Requiring Special Caution: The assets classified as Special Mention or assets classified as Requiring Special Caution satisfying any one of the following criteria shall be subject to provision at the minimum of 2% or at the lower rate calculated according to the rules, procedures, and conditions specified by the Bank of Thailand as stated in the Attachment where the principal outstanding excluding accrued interests is the base for the calculation of such provision: (1) A debtor overdue the principal or interest payments for a cumulative period exceeding 1 month starting from the contractual due date regardless of the contractual conditions or terms or the date that a commercial bank makes the claim or call for the repayment, whichever is earlier, except a debtor classified as Loss, Doubtful of Loss, Doubtful, or Substandard. An overdraft debtor shall be classified under (2). (2) An overdraft debtor with no credit line or whose credit line has been revoked, or whose loan outstanding has exceeded the credit line, or whose contract has expired and no fund has been transferred to the account for the repayment of principal and interests exceeding 1 month starting from the date which the credit line is revoked or the date which loan outstanding exceeds the credit line or the maturity date of the contract, whichever is earlier.
BOT Notification No 1974-2549 (21-12-06) (2).doc
-6-
4.8
Assets classified as Pass:
The assets classified as Pass satisfying any one of the following criteria shall be subject to provision at the minimum of 1% or at the lower rate calculated according to the rules, procedures, and conditions specified by the Bank of Thailand as stated in the Attachment where the principal outstanding excluding accrued interests is the base for the calculation of such provision: (1) A debtor who has no past due or who is not overdue the debt. An overdraft debtor shall be classified under (2). (2) An overdraft debtor who has not fully drawn down the credit line and whose credit line has not been revoked, or whose contract has not reached maturity or the overdraft debtor with the accrued interests of less than 1 month. (3) Other debtor who is not classified as Loss, Doubtful of Loss, Doubtful, Substandard, or Special Mention (or Requiring Special Caution). (4) A debtor with the confirmation letter on the acceptance of completed work issued less than 6 months starting from the acceptance date from the government agency under the regulation of such agency. The part of loan covered by the said letter shall be classified as Pass. For making provision for assets classified as Special Mention under Section 4.7 and assets classified as Pass under Section 4.8, if the Bank of Thailand considers that the rates calculated according to the rules, procedures and conditions specified by the Bank of Thailand as stated in the Attachment is not sufficient to cover risks of the commercial bank, the Bank of Thailand has the right to order such a commercial bank to set provision for such classified assets at the rates deemed appropriate, but not exceeding 2% or 1%, as the case may be. 4.9
Classification by account:
A commercial bank shall classify loan by the account. A commercial bank does not have to classify the group of debtors or the debtors in the same business group into the same class. 4.10
Classification for the case of debt restructuring:
For debt restructuring according to the regulation on debt restructuring of financial institutions prescribed by of the Bank of Thailand, a commercial bank shall comply with the following: (1)
A commercial bank shall write-off or set provision as follows:
(A) In case where a commercial bank has made a concession to a debtor by reducing the principle or interests accrued prior to the debt restructuring, or has accepted the repayment by the transfer of assets, financial instruments, or has accepted the equity of such debtor from securitization (the conversion of the debt into BOT Notification No 1974-2549 (21-12-06) (2).doc
-7-
equity), such a commercial bank can write-off such debtor account and recognize the incurred loss as well as reverse the entry for the portion that exceeds the provision reserved for such a debtor for the whole amount. (B) In case where a commercial bank has made a concession to a debtor by relieving the conditions on debt repayment without reducing the principal or interests accrued prior to the debt restructuring, which causes the expected recoverable amount of restructured debt calculated according to the regulation on debt restructuring of financial institutions prescribed by of the Bank of Thailand to be lower than the sum of the original book value of the loan and accrued interests recorded in the account prior to the debt restructuring, such commercial bank shall recognize the provision for the entire amount of incurred loss. A commercial bank can reverse the entry for the provision set before debt restructuring of such a debtor only the portion that exceeds the incurred loss. However, in case where the provision set before the debt restructuring of such a debtor is lower than the incurred loss, a commercial bank shall set additional provision to cover such loss. (C) In case where a commercial bank has granted the debtor a reduction in the principal or interests accrued prior to the debt restructuring, or has accepted the partial repayment by the transfer of assets, financial instruments, or securitization and has made a concession by relieving the conditions on the remaining debt repayment to a debtor, such a commercial bank shall comply with (A) for the case of concession by reducing of the principal or interests or receiving of the debt repayment, and comply with (B) for the case of concession by relieving the conditions on debt repayment. (2) During the monitoring of debtor's compliance with the debt restructuring conditions where a debtor is required to make the debt repayment according to the new terms of the debt restructuring agreement for at least a period of 3 consecutive months or 3 installments, whichever is longer, a commercial bank shall comply with the following: (A) A debtor originally classified as Doubtful of Loss or Doubtful shall be reclassified as Substandard. (B) A debtor originally classified as Substandard or Special Mention (or Requiring Special Caution) shall be retained in the same class. A commercial bank shall set provision based on the debtor status after the debt restructuring for the case where the provision set according to (2) is greater than the provision for incurred loss from the debt restructuring under (1) (B) and (C). A debtor who has successfully complied with the new terms of the debt restructuring agreement where the debt repayment has been made for at least a period of 3 consecutive months or 3 installments, shall be reclassified such as Pass. In case where a debtor is unable to abide by the new conditions of the debt restructuring agreement, a commercial bank shall add up the past due dates during the debt restructuring period with the past due dates under the original contract
BOT Notification No 1974-2549 (21-12-06) (2).doc
-8-
before the debt restructuring. Then, such debtor shall be reclassified and appropriate provision shall be set according to the rules in this Notification. (3) For a debtor who has undertaken the debt restructuring according to the regulation on debt restructuring of financial institutions prescribed by of the Bank of Thailand and meets one of the following criteria, a commercial bank shall immediately reclassify such debtor as Pass regardless of whether the conditions of the debt restructuring agreement has been fulfilled: (A) A debtor is able to pay the interests at the rate no less than the market interest rate without the grace period for interest repayment. However, there may be the grace period for the principal repayment. (B) A debtor with the loss incurred from the debt restructuring no less than 20% of the book value of the loan prior to the debt restructuring, where such loss has been written off or full provision has been made. Moreover, the proper analysis for the remaining book value of loan on the debtor’s business, financial status and cash flows has also been reasonably conducted with sound principle and there is evidence that such a debtor is able to fulfill the debt restructuring agreement. (C) A debtor with the debt in the form of loan syndication or a debtor with several creditors having agreed to have their loans mutually restructured and there is evidence from the reasonable analysis with sound principle of the debtor's business, financial status and cash flows indicating that such a debtor is able to fulfill the debt restructuring agreement. (D) In case where a commercial bank has filed a lawsuit against a debtor and later the contract of compromise endorsed by the court has been settled and in case where a commercial bank has filed a bankruptcy lawsuit against a debtor and the court has approved the debtor's request for debt restructuring or a rehabilitation plan. (4) In case where a commercial bank has undertaken the debt restructuring with the approval from the Bank of Thailand, such a commercial bank shall immediately reclassify such a debtor as Pass regardless of whether the conditions of the restructuring contract has been fulfilled. (5) In case that there is any apparent irregularity regarding the debt restructuring, the Bank of Thailand may order a commercial bank to rectify or to employ an independent expert to evaluate or review the debt restructuring plan or to order to reclassify and make provision for each individual debtor. 4.11
The value of collateral used in the calculation of provision:
For the calculation for making provision for all classified assets except for assets classified as Doubtful of Loss under Section 4.4 (3), (4) and (6), a commercial bank shall first deduct the value of collateral which has been valued or appraised in accordance with the regulation of the Bank of Thailand on collateral valuation and appraisal from the book value of loan before making provision. A commercial bank may choose any account of the debtor to be deducted first. However, the value of the collateral deducted must not BOT Notification No 1974-2549 (21-12-06) (2).doc
-9-
exceed the credit line stated in the pledge contract, the mortgage contract, the guarantee contract or other collateral contracts, as the case may be. The types of collaterals and the value that can be deducted, as well as the frequency of collateral appraisal or valuation of each type of collaterals shall be in accordance with the summary table of collateral types and collateral value to be deducted from the book value of loan before making provision as specified by the Bank of Thailand. For the calculation of provision for assets classified as Special Mention or Requiring Special Caution according to Section 4.7 and assets classified as Pass according to Section 4.8, a commercial bank may choose whether to deduct the value of collateral from the book value of loan before making provision. In case where a commercial bank chooses to deduct the value of collateral from the book value of loan before making provision, the value of collateral that can be deducted shall be in accordance with summary table of collateral types and collateral value to be deducted from the book value of loan before making provision as mentioned. 4.12
Making provisioning for hire purchase loans and leasing loans:
For making provision for hire purchase loans and leasing loans, a commercial bank shall calculate such provision from the outstanding balance of hire purchase loans or leasing loans, which is the amount after netting of deferred hire purchase income or deferred financial income. In case of the vehicle and machinery hire purchase and leasing loans, a commercial bank may deduct the value of the vehicles and machineries as specified in Section 4.11 from the book value of loan prescribed in the first paragraph prior to making provision. 4.13 Making provision in compliance with the International Accounting Standards (IAS) No. 39 (1)
Making provision:
(A) A commercial bank shall set a provision of 100% for the difference between the book value of loan and the present value of expected cash flows from the debtor or the present value of expected cash flows from the sale of collateral. Methods of the calculation of the present value of expected cash flows from the debtor or the present value of expected cash flows from the sale of collateral shall be in accordance with the guideline specified by the Bank of Thailand. For collaterals other than the immovable properties, leasehold, machineries and vehicles, a commercial bank may use the collateral value as specified in the summary table of collateral types and collateral value to be deducted from the book value of loan before making provision for the preparation of ISA39 implementation without calculating the present value of expected cash flows from the sale of such collateral.
BOT Notification No 1974-2549 (21-12-06) (2).doc
- 10 -
(B) For debtors with the same credit risk characteristic or retail customers with similar characteristic, loan type, and lending objective such as mortgage loans, credit card loans, personal loans, hire purchase loans and leasing loans, a commercial bank has the option to set the provision in accordance with the approach specified in Section (A) or the collective approach where the provision is set from historical loss experience of each customer group. However, historical loss experience should be adjusted by the information on trend, economic conditions, relevant factors, and the current situations that might have an effect on the ability to repay the debt of the debtor groups. Moreover, such a commercial bank must present the Bank of Thailand documents illustrating the calculation of loss rate for the purpose of examination. (2)
Timeframe:
A commercial bank shall set provision according to the following timeframe except for obtaining the permission from the Bank of Thailand. (A) For debtors who the court has already adjudged or who are in the process of legal execution and debtor who are in the process of litigation, the provision shall be set from the last six month accounting period of the year 2006 onwards (B) For debtor classified as Doubtful of Loss and Doubtful, the provision shall be set from the first accounting period of the year 2007 onwards (C) For debtor classified as Substandard, the provision shall be set from the last six month accounting period of the year 2007 onwards. The provision mentioned above must not be less than the provision that a commercial bank set in accordance with Section 4.4 – 4.6. In case where the Bank of Thailand considers that the assumptions and the factors used in the calculation of expected cash flows from the debtor or the present value of expected cash flows from the sale of collateral or historical loss experience of the debtor with the same credit risk or the retail customer with similar characteristic, loan type, and lending objective is inappropriate, the Bank of Thailand may order such a commercial bank to set additional provision. (3) Procedures after the Federation of Accounting Professions has announced the implementation of IAS 39: Once the Federation of Accounting Professions has announced the enforcement of the Thai Accounting Standard (TAS) in the area related to making provision or the impairment of financial instruments according to IAS 39, a commercial bank shall comply with such TAS. 4.14
Making provision for the debtor with an agreement to buy or to sell:
For calculating provision of the debtors that a commercial bank has an agreement to buy or to sell with other outside parties, a commercial bank shall BOT Notification No 1974-2549 (21-12-06) (2).doc
- 11 -
calculate such provision by deducting the trading value from the outstanding balance of the loan before making provision with the following conditions: (1) The bank guarantee for buying from the commercial bank or other financial institutions is required or the buyer must put the deposit at the amount not less than 20% of the trading value. (2) The purchasing / selling process must be completed within 1 year starting from the date on the agreement to buy or sell. 4.15
Dividend payment:
As long as a commercial bank has not yet written off the worthless or irrecoverable assets or has not yet made full provision for the assets that may be worthless or irrecoverable, a commercial bank shall neither pay the dividend nor any other forms of returns to its shareholders. 4.16 Making provision at the rate more stringent than that prescribed by the Bank of Thailand: In case where commercial bank wishes to classify assets or claims and set provision by using more stringent criteria than that prescribed in this Notification, such a commercial bank is permitted to do so. In case where a commercial bank wishes to write-off the debtors due to the debtors’ inability to repay the loan, for example, after the litigation is preceded, the debtor has no other assets to repay for the loan or has no guarantors, or the collateral has become worthless, a commercial bank is permitted to do so. Moreover, for the case of writing-off debtors, a commercial bank is also permitted to write-off any accounts of the debtor. For the purpose of internal control and preventing the fraud that may occur in the future, commercial banks shall proceed as follows: (1) The policy, criteria, or guideline in writing –off the debtor and the internal control shall be clearly set and examined. (2) Writing-off debtors must not be for the benefit of committee, senior management, shareholders of such a commercial bank, or related parties or the entities that such persons have beneficial interest. 4.17
Reports on loan and contingent liability review
A commercial bank shall submit reports on loans and contingent liability review to the Bank of Thailand in accordance with the rules, procedures, and forms prescribed by the Ministry of Finance.
BOT Notification No 1974-2549 (21-12-06) (2).doc
- 12 -
5. Effective Date This notification shall come into force from the last six month accounting period of the year 2006 onwards. Notified on 7 December 2006
(Mrs. Tarisa Watanagase) Governor The Bank of Thailand
BOT Notification No 1974-2549 (21-12-06) (2).doc
The Attachment of the Bank of Thailand Notification Re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks Regulation and Method for the Calculation of Migration Rate of Asset Classified as Pass and Asset Classified as Special Mention 1. Commercial banks are allowed to set provision for assets classified as Special Mention and assets classified as Pass at the rate of 2% and 1% respectively, or at the lower rate which is calculated from the average migration rates of assets classified as Pass or assets classified as Special Mention to assets classified as Substandard, Doubtful, Doubtful of Loss, and Loss that actually occurred during the previous 4 quarters. The calculation method is as follows: 1.1 The migration rates of each quarter shall be calculated from the ratio of assets classified as Pass or assets classified as Special Mention at the beginning of the quarter migrated to assets classified as Substandard or lower at the end of such a quarter, excluding the new debtors during the quarter and the debtors undertaken the debt restructuring. 1.2 The migration rate of the previous 4 quarters means an average ratio of the current quarter and the previous 3 consecutive quarters.
BOT Notification No 1974-2549 (21-12-06) (2).doc
-2-
Example of Methods of Calculating Migration Rate of Assets Classified as Pass For the calculation of the migration rate used in the calculation of the provision required at the end of the first six month accounting period of the year 2002 (30 June 2002), a commercial bank shall calculate the average migration rate from the third quarter of the year 2001 to the second quarter of the year 2002. Assets classified as Pass at the beginning of the quarter (A) 1,000,000
Quarter 3 of the year 2001 Quarter 4 of the year 2001 Quarter 1 of the year 2002 Quarter 2 of the year 2002 Average Migration Rate
Assets (A) migrating at the end of the quarter * (B) 12,000
Migration Rate
(C) = (B) / (A) * 100 1.20
1,200,000
13,000
1.08
1,100,000
7,000
0.64
1,300,000
6,000
0.46 0.85
Once a commercial has derived the average migration rate of assets classified as Pass which in this example is equal to 0.85, such a commercial bank shall calculate the amount of required provision by multiplying such a rate to the outstanding balance of assets classified as Pass (including new debtors during the accounting period and debtors undertaken the debt restructuring) at the end of the first six month accounting period of the year 2002. The above example of the calculation of provision shall also be applied to the case of assets classified as Special Mention. * Refers to assets classified as Pass at the beginning of the quarter that migrate to asset classified as Substandard, Doubtful and Doubtful of Loss at the end of such a quarter. Remark: A commercial bank shall not include the new debtors during the quarter and the debtors undertaken the debt restructuring in the calculation.
BOT Notification No 1974-2549 (21-12-06) (2).doc
Summary Table on Collateral Types and Collateral Value that can be Deducted from the Book Value of Loan before Making provision in accordance with Section 4.11 of the Bank of Thailand Notification Re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks
Collateral Type
Deductible Value
Appraisal or Valuation Frequency
1.
Cash
100%
-
2.
Commemorative bank notes such as note for auspicious coronation
100% of the face
-
wedding and 50th anniversary coronation to the Throne of value 500,000 baht
value
3.
100%
Right of claim in deposit account at such a commercial bank or bills of
-
exchange that such a commercial bank issues to borrow from public 4.
Aval or letter of guarantee, in case of: 4.1
Standby Letter of Credit (SBLC) issued by domestic and foreign
commercial banks 4.2
Aval or letter of guarantee (LG) issued by domestic and foreign
commercial banks
100% of credit line specified in SBLC 95% of aval amount or guarantee line in LG
4.3
LG issued by Small Industry Credit Guarantee Corporation
(SICGC) or Thai Asset Management Corporation (TAMC) 5.
Guarantee from the Ministry of Finance, or the case where the
90% of guarantee line in LG 100%
-
95% of
At the end of each
market price
accounting period
90% of the
At the end of each
appraisal value
accounting period
government will allocate budgets for the repayment of debt, or there is evidence that money will be provided by the authority with certainty 6.
Cash equivalent collateral 6.1
Marketable securities, both equity and debt securities such as
common stocks, preferred stocks, debentures, debt instruments, bonds traded in the Stock Exchange of Thailand or securities trading centers 6.2 7.
Gold
Securities not traded on the Stock Exchange of Thailand or any securities
trading centers 8.
Other collaterals:
(only for debotrs classified as substandard, doubtful, doubtful loss)
8.1
Immovable properties such as land / building
8.2
Transferable leasehold
8.3
Machinery
Every 3 years Every 3 years 90% of appraisal
8.4
Vehicles such as cars, motorcycles, airplanes (with insurance)
value
Every 3 years (with annual depreciation) Every 3 years (with annual depreciation)
8.5
Intellectual properties that can be pledged or can be legally
used as collaterals, with reliable values and legal authority to take possession of
BOT Notification No 1974-2549 (21-12-06) (2).doc
Every 3 years
Methods of the Calculation of the Present Value of Expected Cash Flows from the Debtor or the Present Value of Expected Cash Flows from the Sale of Collateral 1. For a commercial bank choosing to use the present value (PV) of expected cash flows from the debtor method: •
A commercial bank shall project the expected cash flows from the debtor by determining appropriate assumptions and relevant factors in accordance with the economic conditions and current situations.
•
A commercial bank are required to set provision for the difference between the book value of loans and the present value of expected cash flows. The interest rate used in the calculation of such present value is equal to the original effective rate (specified at 7% which is the estimated rate of the current MLR).
•
For the first three months of the payment, if the actual cash flows are different from the projected cash flows, a commercial bank shall set additional provision for the difference between the projected cash flows and the actual cash flows. Moreover, a commercial bank shall re-estimate its expected cash flows.
•
After three months of the payment, a commercial bank shall review whether the projected cash flows are consistent with the actual cash flows. o In case where the actual cash flows are more than or equal to the projected cash flows, a commercial bank shall continually use its projected cash flows. o In case the where the actual cash flows are less than the projected cash flows, a commercial bank shall immediately change the calculation method to the present value of collateral, and in case where there is no collateral, a commercial bank shall immediately set the provision at 100% of the book value of loan.
•
In case where a commercial bank considers that the interest rate used in the calculation of the present value of expected cash flows is not in accordance with the above guideline supporting by provable evidence regarding that matter, a commercial bank may calculate the projected cash flows by whatever method as it deems appropriate. However, such commercial bank shall document such calculation method for the BOT examination.
BOT Notification No 1974-2549 (21-12-06) (2).doc
-2-
2. Method of the calculation of the present value (PV) of expected cash flows from the sale of collateral: In case where a commercial chooses to use the present value (PV) of expected cash flows from the sale of collateral method, such a commercial bank may not switch back to use the present value of expected cash flows from the debtor method except for the case where such a commercial bank has undertaken the debt restructuring for the debtor according to the regulation of the Bank of Thailand. Property and Leasehold •
The collateral value, after deducted all expenses, used in the calculation of the present value is equal to 90% of the valuation or appraised value where the collateral appraisal or valuation is conducted in accordance with the regulation specified by the Bank of Thailand (every 3 years).
•
The number of years where the collateral is expected to be sold is 5.5 years.
•
The interest rate used in the calculation of the present value is equal to the original effective rate (specified at 7% which is the estimated rate of the current MLR).
•
The present value of expected cash flows from the sale of collateral is approximately 62% of the appraisal value.
•
In case where a commercial bank considers that the collateral value, the number of years and the interest rate used in the calculation of the present value is not in accordance with the above guideline supporting by provable evidence regarding that matter, a commercial bank may calculate the present value of collateral by whatever method as it deems appropriate. However, such commercial bank shall document such calculation method for the BOT examination.
Machineries There are 2 types of machineries as follows: •
For non-marketable machineries, the value of such machineries cannot be deducted from the book value of loan before making provision.
•
For marketable machineries: o The collateral value used in the calculation of the present value of machinery is equal to the valuation or appraisal value, where the collateral appraisal or valuation is conducted in accordance with the regulation specified by the Bank of Thailand (every 3 years), deducted by the depreciation of such a machinery which is calculated up to the date expected to be sold.
BOT Notification No 1974-2549 (21-12-06) (2).doc
-3-
o The number of years where the collateral is expected to be sold is 2.5 years. o The interest rate used in the calculation of the present value is equal to the original effective rate (specified at 7% which is the estimated rate of the current MLR). o In case where a commercial bank considers that the number of years and the interest rate used in the calculation of the present value is not in accordance with the above guideline supporting by provable evidence regarding that matter, a commercial bank may calculate the present value of collateral by whatever method as it deems appropriate. However, such a commercial bank shall document such calculation method for the BOT examination. Vehicles For hire purchase loans, leasing loans, or loans with a vehicle as collateral, a commercial bank shall calculate the present value (PV) of expected cash flows from the sale of collateral according to the following conditions: •
Such a vehicle is insured.
•
The collateral value used in the calculation of the present value of vehicle is equal to the valuation or appraisal value, where the collateral appraisal or valuation is conducted in accordance with the regulation specified by the Bank of Thailand (every 3 years), deducted by the depreciation of such a vehicle which is calculated up to the date expected to be sold.
•
The number of years where the collateral is expected to be sold is 1 year.
•
The interest rate used in the calculation of the present value is equal to the original effective rate (specified at 7% which is the estimated rate of the current MLR).
•
For debtor classified as Doubtful of Loss or whose overdue principal or interests period exceeds 12 months, a commercial bank cannot use the value of vehicle in the calculation of the present value of expected cash flows from the sale of collateral.
•
In case where a commercial bank considers that the number of years and the interest rate used in the calculation of the present value is not in accordance with the above guideline supporting by provable evidence regarding that matter, a commercial bank may calculate the present value of collateral by whatever method as it deems appropriate. However, such commercial bank shall document such calculation method for the BOT examination.
BOT Notification No 1974-2549 (21-12-06) (2).doc
Summary Table on Collateral Types and Collateral Value that can be Deducted from the Book Value of Loan before Making provision for the Preparation of IAS 39 Implementation
Collateral Type
Deductible Value
Appraisal or Valuation Frequency
1.
Cash
100%
-
2.
Commemorative bank notes such as note for auspicious coronation
100% of the face
-
wedding and 50th anniversary coronation to the Throne of value 500,000 baht
value
3.
100%
Right of claim in deposit account at such a commercial bank or bills of
-
exchange that such a commercial bank issues to borrow from public 4.
Aval or letter of guarantee, in case of: 4.1
Standby Letter of Credit (SBLC) issued by domestic and foreign
commercial banks 4.2
Aval or letter of guarantee (LG) issued by domestic and foreign
commercial banks
100% of credit line specified in SBLC 95% of aval amount or guarantee line in LG
4.3
LG issued by Small Industry Credit Guarantee Corporation
(SICGC) or Thai Asset Management Corporation (TAMC) 5.
Guarantee from the Ministry of Finance, or the case where the
90% of guarantee line in LG 100%
-
95% of
At the end of each
market price
accounting period
90% of the
At the end of each
appraisal value
accounting period
government will allocate budgets for the repayment of debt, or there is evidence that money will be provided by the authority with certainty 6.
Cash equivalent collateral 6.1
Marketable securities, both equity and debt securities such as
common stocks, preferred stocks, debentures, debt instruments, bonds traded in the Stock Exchange of Thailand or securities trading centers 6.2 7.
Gold
Securities not traded on the Stock Exchange of Thailand or any securities
trading centers 8.
Other collaterals
(only for debtors classified as substandard, doubtful, doubtful loss)
8.1
Immovable properties such as land / building
8.2
Transferable leasehold
8.3
Machinery
Calculated
Every 3 year
by using
Every 3 year
the method specified by
8.4
8.5
Vehicle such as car, motorcycle, airplane (with insurance)
Intellectual property that can be pledged or can be legally used
as collateral, with reliable value and legal authority to take possession of
BOT Notification No 1974-2549 (21-12-06) (2).doc
the Bank of Thailand 90% of appraisal value
Every 3 year (with annual depreciation) Every 3 year (with annual depreciation)
Every 3 year
