|Publications & StatisticsMonetary PolicyFinancial RegulationLegislationFinancial IntelligenceMedia ReleasesAbout Us||
Large Credit Exposures
Prudential Guideline No. 5 - download the PDF version.
1. This Prudential Guideline is applicable to all financial institutions [as defined in the Financial Institutions Act 1998, a financial institution “includes any body corporate doing banking business” in the Solomon Islands] licensed by the Central Bank of Solomon Islands (CBSI).
Purpose of Prudential Guideline
2. Excessive exposure to a single customer or group of customers is a significant risk for financial institutions and the CBSI sees it as highly important to protecting the safety and soundness of financial institutions to prevent excessive investments in or loans to any one person or group of interrelated persons who are financially interdependent and to promote diversification in order to reduce credit risk in a financial institution‟s loan portfolio.
3. It is the responsibility of the board of directors and managing officers of each financial institution to adopt policies and procedures which are adequate and which ensure that all exposures comply with the limits set forth in the Financial Institutions Act of 1998 and this Prudential Guideline, and are made and administered in accordance with prudent lending practices.
4. “affiliate” – means a person wherein another person‟s shareholding is at least 20% (twenty per cent) of the outstanding voting stock or where that other person has the power to exercise influence over the policies of management of the person;
5. “capital” – For the purposes of determining large credit exposure limit, total capital for licensed financial institutions incoporated in Solomon Islands, as determined by CBSI is defined in the Prudential Guideline No. 1.
For financial institutions incoporated outside Solomon Islands, capital for the purpose of determining a single borrower or group of related borrowers limit under this guideline shall include the sum of the global consolidated issued paid-up capital and published reserves of that licensed financial institution as shown in the most recent annual report published by the financial institution.
6. “cash deposit” – means a sum of money held by the lending financial institution in a deposit account at the lending financial institution and the owner of the money has pledged the funds in writing as security for a loan from the financial institution.
7. “common enterprise” – a common enterprise exists when:
(a) the expected source of repayment is the same or substantially the same for advances made to different but related borrowers;
8. “control” – for purposes of this Prudential Guideline, control is presumed to exist when
(a) one or more persons acting together directly or indirectly own, control, or have power to vote 20% or more of the voting shares of another person; or
9. “corporate group” – means a corporation plus all its subsidiaries and affiliates;
10. “direct benefit” – means that the proceeds of a loan, or assets purchased with loan proceeds, are transferred to or for the benefit of another person unless the transfer is part of a normal business transaction where the proceeds are used to acquire property, goods or services in a bona fide arm's length transaction.
11. “exposure” – means any loan or advance, funded or unfunded, given to a person on the basis of an obligation to repay or which is repayable from specific property pledged by or on behalf of a person; the term exposure also include indirect exposures as defined below.
(a) funded exposures are those for which the financial institution has provided funds to the borrower or to a third party on behalf of the borrower;
12. “large exposure” - means any direct exposure to a single borrower or to a group of related borrowers which, in aggregate, equals or exceeds 10% of capital.
13. “person” means an individual or any legal entity.
14. “related persons” – two persons will be considered to be related if one person has the ability, directly or indirectly, to control the other person or to exercise significant influence over the financial and operating decisions of the other person, or if both persons are subject to common control or common significant influence.
15. “group of related borrowers” - means two or more persons which are closely related through common ownership, control, management, financial inter-dependence or crossguarantees. The definition also includes persons who are family members that are financially inter-dependent upon one or more persons within the group.
16. “significant influence” – means the ability to participate in a material way in the financial and operating policies and decisions of another person; the absence of absolute control does not preclude the ability to exert significant influence over the policies and decisions of another person. If one person holds, directly or indirectly through subsidiaries, 10% or more of the voting power over another person, it will be presumed that the first person exerts or has the ability to exert significant influence over the second person. Conversely, if a person holds, directly or indirectly through subsidiaries, less than 10% of the voting power over another person, it will be presumed that the first person does not exert or have ability to exert significant influence unless there are compelling circumstances to the contrary. A substantial or majority ownership in one person by second person does not preclude a third person from having significant influence over the first person.
17. “subsidiary” – means a person in which another person owns, directly or indirectly, more than fifty per cent of the outstanding voting stock
Limits on Loans and Advances
(a) Single Borrower Limit: The total direct exposure at any time, funded or unfunded by a financial institution to a single person or group of interrelated persons shall not exceed 25% of capital.
Exceptions to Limits on Loans and Advances
19. The following exceptions shall apply to the limits in paragraph 18 above:
(a) Interbank Transactions: Transactions between financial institutions or between the branches of a financial institution shall be exempt;
20. Combining Loans to Separate Persons: An exposure to one person will be attributed to and aggregated with the exposures to another person for purposes of determining compliance with the limits in paragraph 18 when:
(a) the proceeds from the credit facility are re-loaned or given to another person (i.e. accommodation);
21. Loans to partnerships:
22. Loans Written Off: The limits in paragraph 18 above will apply to all exposures, including any loans and advances which have been written off in whole or in part, or against which the financial institution has raised specific provisions for losses. Loans and advances that have been discharged by a court or that are no longer legally enforceable shall not be included in the total for determining compliance with the limits in paragraph 18.
23. Loan Participations: Any exposure or portion thereof that has been sold as a participation to another financial institution shall not count against the limits in paragraph 18. For this exception to apply, the participation must be covered by a written agreement which specifies that (i) the interest rate on the portion of the exposure sold under the participation agreement is equal to or less than the interest rate shown in the contract between the lending financial institution and the borrower, (ii) the maturity of the portion of the exposure sold under the participation agreement is not longer than the maturity shown in the contract between the lending financial institution and the borrower, and (iii) in the event of a default both financial institutions will share in payments and recoveries on a pro rata basis according to their respective participation percentages at the time of default.
24. Loan Syndications: When two or more financial institutions grant an exposure to a single borrower under a single credit facility (e.g. a syndicated credit), the limits in paragraph 18 above apply only to the funds provided by each financial institution and representing that financial institution‟s pro rata share of the total credit facility. For this exception to apply, the syndication agreement must be in writing and must specify explicitly the terms and exposures of each financial institution in the syndicated credit.
25. Capitalized Interest: Accrued but uncollected interest is not subject to the limits in paragraph 19. Capitalized interest, interest which has been added to the outstanding principal balance of a credit facility as a result of a renewal or restructuring of the credit facility and which has not been reversed or otherwise suspended from income, however, will be considered when determining compliance with the limits in paragraph 18.
26. Nonconforming Exposures – Exposures which do not conform to the limits in paragraph 18 when this Prudential Guideline comes into effect, or which subsequently become nonconforming, will be treated as follows:
(a) Exposures made prior to the date of this Prudential Guideline which exceed the limits in paragraph 18 will not be cited in contravention of this Prudential Guideline but will be noted as “nonconforming”. A financial institution may renew, extend the maturity of, or restructure a nonconforming exposure without contravening this Prudential Guideline provided the financial institution makes a documented good faith effort to bring the exposure into conformance with the requirements of this Prudential Guideline, unless:
27. Each financial institution will submit returns in respect of exposures in the form and frequency as the CBSI may prescribe.
Enforcement and Corrective Measures
28. A financial institution which fails to comply with the requirements contained in this Prudential Guideline or submits reports to the Central Bank of Solomon Islands which are materially inaccurate will be considered as following unsound and unsafe practices as provided in Section 16 (1) (a) of the Financial Institutions Act 1998.
29. The Central Bank of Solomon Islands may pursue any or all corrective measures as provided in Section 16 of the Financial Institutions Act 1998 to enforce the provisions of this Prudential Guideline including:
(a) issuance of an order to cease and desist from the unsound and unsafe practices and
30. This Prudential Guideline is applicable to all financial institutions licensed by the Central Bank of Solomon Islands (CBSI)and shall be effective in force from 2nd December 2011.
Issued this 18th day of November, 2011