BoA adopts new credit risk management regulation

TIRANA, Oct. 18 – The rising trend in non-performing loans has forced the Bank of Albania to adopt a new regulation on credit risk management determining risk assessment criteria and calculations for provision coverage. The new regulation foresees that the 16 commercially banks operating in Albania, must establish a system on credit risk management based on the volume and complexity of their financial activity to assess the quality of their loans in time and determine the provision coverage. The regulation foresees banks must establish the necessary structures for the assessment, measurement and control of credit risk, based on the concentration according to sectors, geography/areas, currencies, kind of credit etc. The supervisory board of the bank or the competent body of the mother bank are responsible for the approval of the strategy and policies on credit risk management and their implementation as well as examining stress test result every six months to review policies. Under the regulation, banks are obliged to carry out stress tests at least twice a year but the central bank may require them to do them more often based on scenarios such as economic downturn, a sudden change in market conditions resulting from exchange rate, and interest rates. The regulation also foresees clear rules for the classification of credit into standard, watch, substandard, doubtful and lost, with the last three calculated as non-performing loans. The provision coverage ratio is not less than 20 percent for sub-standard loans, not less than 50 percent for the doubtful category and 100 percent for the loss category, says the new regulation. The regulation comes at a time when latest Bank of Albania data show bad loans at the end of the second quarter of this year climbed to 16.61, up from 14.42 percent in the first quarter of 2011 and 12 percent in the second quarter of last year. Meanwhile, banks’ net profit during the first half of this year dropped to 1.123 billion lek ( USD 11.23 million, Euro 8 million), down from 3.6 billion lek (USD 36 million, Euro 25.7 million) in the first half of 2010. Latest data by Albania’s Association of Banks show bad loans reached 18 per cent of the total credit portfolio in August, the highest level to date. Bad loans, which the central bank and financial experts describe as the key risk to Albania’s banking sector, have more than doubled during the past couple of years. BoA statistics show bad loans doubled to 6.5 percent at the end of 2008, reflecting the first impacts of the global financial crisis. At the end of 2009, bad loans further climbed to 10.5 percent before reaching 13.61 percent at the end of 2010.