Loan Loss Provisioning vs IFRS Country practice: Armenia MARIAM YEGHIAZARYAN CENTRAL BANK OF ARMENIA VIENNA Central Bank of Armenia

Legal framework 1.“Law on Accounting” – since stipulates that banks’ accounting and reporting practices should be in compliance with IFRS But at the same time in the field of prudential regulation 2.“Procedure on classification of loans and receivables and creation of possible loss reserves” – since 1999 sets very tough and fixed rules on provisioning, which generally are not in line with IFRS principles Central Bank of Armenia

Regulatory Framework  Five categories of asset classes: 1)Standard 2)Watch 3)Sub-standard 4)Doubtful 5)Loss  Two types of provisions: 1)The general provision for future non-apparent (unrevealed) losses of assets 2)The special provision for apparent (revealed) losses of problematic assets Central Bank of Armenia

Regulatory Framework The assets concurrently meeting the below given conditions shall be classified as unsecured (blank) assets and written-off: a) not secured by a collateral, a warranty, guarantee or budget guarantee of any legal entity, which has been operating with profit for at least the previous and current reporting periods, b) not provided with sufficient information on the financial condition (including cash flows) of the borrower, c) lack of information backing the collectability of the borrower’s debt(business plans, contracts, etc.), as well as essential documents, d) none advance payments or prepayments against the purchase of products,activities or services Central Bank of Armenia

Provisioning Asset classObjective criteria Provision AMD FX Standard asset A performing asset which is being repaid in accordance with the contract. 1%1.2% WatchIs non-performing up to 90 days 10%12% Sub-standard asset Is non-performing from 91 to 180 days 20%24% Doubtful asset Is non-performing from 181 to 270 days past due status 50% 60% LossWith a 271 days and more past due status 100% Central Bank of Armenia

Regulatory Framework  Asset classification might be based on objective and subjective criteria  Subjective criteria are based on the judgment and professional opinion of the individual banks and/or the supervisory service of the Central bank of Armenia.  In case of differences arising in the process of asset classification on the basis of objective and subjective criteria, the bank shall primarily base on the stricter criteria Central Bank of Armenia

Statistics Central Bank of Armenia IMF methodology

Statistics (Peer Group) Central Bank of Armenia Sourse: IMF FSI

Regulatory Framework  Procedure on Additional Provisioning without asset classification (since 2012) Supervisory tool Apply to a group of assets Based on the following criteria Deterioration of macroeconomic indicators Overvaluation of collateral Problems in internal control environment Non-compliance with the porpose initially stated in loan agreement, etc. Central Bank of Armenia

Main Issues with IFRS  According to IAS 39 “If there is objective evidence that an impairment loss on loans has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (including cash flows from collateral) discounted at the financial asset’s original effective interest rate”  While in our regulatory framework we have defined fix rates of impairment and Banks impair their assets without taking into account cash flows from the collateral.  At the same time some banks argue that they have strong procedures of collateral management and show good results of loss recovery Central Bank of Armenia

Questions  What mechanisms should be used by regulators to harmonize the regulatory approach with the IFRS requirements concerning collateral valuation and realization?  Should it be the same for all banks or differentiated approach is acceptable?  How the risk of asses overvaluation by banks can be mitigated? Central Bank of Armenia

Questions ? Central Bank of Armenia THANK YOU FOR ATTENTION