Lao People's Democratic Republic
Peace Independence Democracy Unity Prosperity
Bank of the Lao PDR No. 06/BOL
Vientiane, dated 11/05/2004
On Loan Classification requirement for Commercial Banks which are under the Supervision of the Bank of the Lao PDR
The Governor of the Bank of the Lao PDR regulates as follows:
The purpose of this regulation is to establish minimum prudential standards to ensure that banks (i) review and grade loans in a consistent manner; (ii) identify loans as being overdue when principal or interest is not being paid in accordance with the terms of the borrower's loan agreement; (iii) properly account for accrued but unpaid interest on loans in the profit and loss statement; (iv) write off losses out of the financial statement as they are identified and adequately provide and maintain provisions for other loans in their books; and (v) properly account for and classify restructured loans and properly record the account. The assignment of true and realistic values to loans made by banks is fundamental to the soundness and stability of the banking sector and in increasing the confidence of depositors and creditors in the banking sector.
2.1."Bank" means commercial banks.
2.2. "Loans" means any financial assets of a bank arising from a direct or indirect payment of funds by a bank to a person (for example: loans and overdrafts made directly to a person or participation in such loan syndications or the purchase of loans from another bank on behalf of a person) or the payment of funds by a bank on behalf of a person (for example: payments under off- balance sheet commitments which includes the issuing letters of credit, issuing letters of guarantee, advance payments, etc.) that such funds shall be repaid to the bank, either on a specified date or installment dates or on demand, with or without interest. The term does not include accrued but unpaid interest. The term "person" as used in this Regulation means person and entity which includes individuals, groups of individuals, partnerships, and corporate entities or other similar business groups and companies.
2.3 "Large borrower" means loans to borrowers of ten percent (10%) of the bank's total capital.
2.4 "Non-accrual status" means that a loan has been placed on a cash basis for financial reporting purposes. Interest is no longer accrued on the books of the bank or taken into income unless paid by the borrower from his own funds in cash. All "non-performing loans" must be placed on non-accrual status and previously accrued but unpaid interest must be revered from the profit and loss statement; or interest should be placed in "suspended interest account".
2.5 "Non- performing loans" means loans that have been placed on non-accrual status and are not generating income. Loans are to be placed on non-accrual status and categorized as non-performing when:
According to the characteristics described above loans shall be classified as non- performing loans. Provided, the entire principal balance of loans exhibiting the characteristics described above shall be considered non-performing.
2.6 "Overdue" means:
According to the characteristics described above loans shall be classified as overdue loans. Provided the outstanding principal balance of loans shall be used in calculating the aggregate amount of overdue loans.
2.7 "Suspended interest account" means an account where previously accrued but unpaid interest on loans required to be placed on non-accrual status is reserved out of the profit and loss statement of the bank.
2.8 "Well-secured" means that a loan or a portion of a loan that is secured by cash, marketable securities approved by the Bank and Financial Institutions Supervision Department of the Bank of the Lao PDR, or the current market value of precious metals (gold, silver and platinum) that the borrower secures its loan with the bank.
The board of directors of each bank shall ensure that a review of the loan portfolio is conducted on a regular basis, but not less than once each calendar quarter-end (as of March 31st, June 30th, September 30th and December 31st). The review of the loan portfolio shall have the objective of classifying loans in accordance with the following criteria:
3.1.Loans that have the following characteristics shall be classified as Substandard:
3.2 Loans as prescribed in Article 3, item 3.1 of this Regulation, if they are over due as agreed in the terns of the loan agreement, whether in interest or principal from 180 (one-hundred eighty) days and are not well-secured shall be classified at Doubtful unless legal action, including proceedings to seize and sell the collateral in order to repay the loans, has commenced and the time needed to complete such legal action is not expected to exceed 180 days (one- hundred eighty) days from the date the legal action commenced shall be classified as substandard, but the bank shall maintain the documentation which clearly and unquestionably indicates the value of the collateral will be sufficient to repay the outstanding balance of the loan, all unpaid interest on the loan and all expenses of the bank connected with seizing and selling the collateral.
3.3.Loans having the following the characteristics shall be classified as Loss and written- off the books of the bank: a. any loan which is over due as agreed in the terms of the loan agreement, whether in interest or principal from 360 (three- hundred sixty ) days; b. any loan previously classified substandard but it has not been addressed as prescribes in Article 3.2 above, and the event has not been concluded within the required timeframe; c. any loan considered uncollectible or of such little value that their continuance as an asset on the books of the bank is not warranted.
3.4.Any loan, or that portion of the loan, that is well secured shall be excluded from classification
"Restructured loans" include new loans to repay any overdue loan, or any loan rescheduled, rolled-over, or otherwise modified because of weaknesses in the borrower's financial condition or inability to repay the loan according to the terms of the original loan agreement.
4.1.For each restructured loan, the following documents shall be maintained by the bank and made available to examining personnel of the Bank of the Lao PDR upon request:
4.2.Restructured loans in which the repayment terms are consistent with other similar loans made by the bank which have not been restructured shall be classified in accordance with the following criteria:
4.3 Restructured loans that meet the criteria for classification in accordance with Article 4, item 4.2 of this Regulation may be reclassified as performing loans if the borrower has paid at least six (6) consecutive months of principal and interest from his own funds in accordance with the terms of the restructured loan agreement. Any restructured loan which fails to meet the classification criteria provided in Article 4.2 shall be classified based on the overdue status of the original loan as of the date the original loan was restructured and in accordance with the classification criteria provided in Article 3 and provisions shall be calculated in accordance with the provisioning requirements under Article 7, item 7.4.
4.4 Any restructured loan which subsequently becomes overdue for the payment of principal or interest, in full or in part, from 90 days or more according to the terms of the restructured loan agreement shall be placed in non-accrual status and shall remain in non-accrual such status until the borrower pay all overdue principal and interest.
Any restructured loan that becomes nonperforming a second time and which the bank proposes to restructure a second time must have the prior written approval of the Bank of the Lao PDR and such approval shall be based on the criteria prescribed in Article 4, item 4.1.
Any loan denominated in a foreign currency, in which the borrower does not have a source of income denominated in the foreign currency or has not entered into a forward contract with the bank for the purchase of such foreign currency in sufficient amounts for such times as required to repay the loan in accordance with the terms of the loan agreement and which meets the definition of non-performing loans according to the Article 2, item 2.5 of this Regulation, the bank shall convert such loan into Lao Kip according to exchange rate of the date the loan is categorized as a non-performing loan and required to be placed on non-accrual status in accordance with Article 10 of this Regulation.
5.1 Any loan denominated in a foreign currency shall be converted and recorded in the books of the bank at the Lao Kip equivalent as prescribed in Article 5.0 Such loan shall remain denominated in Lao Kip and recorded in the books of the bank until the loan is fully repaid or written-off.
5.2 Any loan denominated in a foreign currency required to be converted and recorded in the books of the bank at the Lao Kip equivalent as prescribed in Article 5.0 of this Regulation which has had its terms restructured it shall continue to be denominated in Lao Kip and recorded on the banks of the bank until the loan is fully repaid or written-off.
If a bank has more than one loan outstanding to a borrower or companies direct or indirectly controlled by the same borrower, if one loan meets the criteria as a non-performing loan, then the bank shall prepare a written analysis of the borrower’s current financial condition and repayment prospects for the other loans of such borrower. If the analysis suggest that repayment of the other loans by the borrower is in question or not able to meet the repayment, then such loans to the borrower shall placed be placed on non- accrual status. Such “borrower” mentioned above includes individual and their spouse or individual as prescribed by the Law. Direct or indirect “control” means a borrower: (i) owner, or has the power to vote 20% (twenty percent) or more of the voting shares of a individual as prescribed by Law; (ii) has the power to control the election of a majority of the Board of Directors or the authorized person under the Law and (iii) who has power to intervene the management or to determine other policies over an individual as prescribed by Law.
Banks shall establish a Provision for Classified and Non-Performing Loans account in accordance with the following procedures:
7.1.Bank shall have a provision account for classified loans in accordance with the following procedures:
7.2.Adjustments to the Provision for Non-Performing Loans account and the Provisions for Classified Loans shall be through pre-tax adjustments to the profit and loss statement as follows:
7.3 Provisions for non-performing loans and provision for classified loans shall be “specific provisions” and shall be recorded on the asset side of the balance sheet and shall carry a credit balance;
7.4 Provisions for loans classified Substandard, Doubtful or Loss according to the criteria prescribed in this Regulation shall be determined by applying the following minimum percentages to the outstanding principal balance of a loan thereof classified:
Classification: Provision Requirement
7.5 The Governor, or Deputy Governor who is assigned by the Governor can instruct a commercial bank to maintain higher provisions for losses on classified and non-performing loans after taking into account such factors as the assessed condition of the loan portfolio, economic and financial trends in the country and in the region and the general quality of the management of the bank financial institution.
7.6 All documents relating to classified and non-performing loans shall be retained by the bank to verify the adequacy of the Provisions for Classified and Non-Performing Loans account and the provisions for Classified Loans account or use as evidence in the recovery of such loans or in case of the prosecution of the borrower.
Banks shall establish a General Loan Loss Reserve in accordance with the following procedures:
Banks shall establish and maintain a record of all loans written off by the bank to a borrower and the amount of all recoveries or payments subsequently received from such borrowers.
9.1.Loans classified Loss shall be written off the books of a bank in accordance with the following procedures, by not later than the end of the calendar quarter in which the loan is classified Loss:
9.2 Recoveries of loans written off the books of a bank shall be recorded in accordance with the following procedures:
Performing Loans account, such excess provisions shall be recovered as prescribed in Article 7, item 7.2.
Where a loan is required to be categorized as a non-performing loan:
10.1 In the event that any cash payment is received by the bank in respect of such loan required to be placed on non-accrued status, that amount shall be applied first to reduce the outstanding principal balance of the loan.
Banks shall not make any new loan or provide any financial accommodation whatsoever to a customer in respect of whom a loan has been categorized as non-performing until such borrower has repaid all overdue principal and interest in accordance with the agreed terms of the loan.
If a bank fails to comply with the requirements contained in this Regulation in a flagrant manner or submits statistical or other reports to the Bank of the Lao PDR which are materially inaccurate, the Governor of Bank of the Lao PDR may pursue any or all corrective actions as provided under New Article 66 of the Decree Law on Commercial Banks No.02/PR dated March 2000 and any amendments thereof, including a money penalty against the bank, or the officers, directors or employees of the bank, either individually or collectively, of up to the Kip equivalent of $1,000 (one thousand United States Dollars) in respect of each day in which the bank fails to comply with the requirements contained in this Regulation.
This regulation replaces Regulation No. 98/BOL dated 15 May 1998 with effect from the date of signature hereof and all guidelines and notices previously given which may be in conflict herewith are declared null and void.
Governor Bank of the Lao PDR
|Foreign currency required to be recorded into national currency||Requirement for banks to convert foreign currency denominated loans into Lao Kip in absence of income in foreign currency||Active|
|Requirement to establish loan reserves||Banks must establish a General Loan Loss Reserve||Active|
|Establishment of a general loan loss reserve||Commercial Banks shall establish a General Loan Loss Reserve in accordance with the prescribed procedures||Active|
|Establishment of a provision account||Commercial Banks shall have a provision account for classified and non-performing loans in accordance with the prescribed procedures described in this law.||Active|
|Prohibition on granting loan to customer where non-performing loan exists||Commercial Banks shall not make any new loans to a customer whose loan has been categorized as non-performing||Active|
|Retention of records of written of loan||Commercial Banks shall establish and maintain a record of all loans written off by the bank to a borrower||Active|