This module will not be further enhanced. Support is limited to defect fixing only.

Introduction to Provisioning and Collateral

This module provides different types of provision classification which is based on the repayment method. The classification process differs for assets backed by cash collateral.

Click here to understand the terms and abbreviations used in this module.

Collateral Management

In the lending business, different types of collateral are obtained as a risk mitigation strategy. Immovable property, movable machinery, personal guarantees, cash deposits, stock mortgages, etc. are some of these collateral types.

The bank may offer credit facilities to clients as a package of products or may finance a specific project of the client. When a credit package is offered to clients, the bank may obtain several types of collaterals to secure the credit package. The collateral obtained in such instances is referred to as pooled security. The collateral in a pool can be used to secure any of the products in the credit package and there will be no specific assignment of security at the facility level. For pooled security, collaterals are maintained at limits level.

In instances where the pooled security has been obtained, the collateral allocation priority has to be maintained at the collateral record level in order to allocate among the different products.

When the bank finances a specific project, the project assets are obtained as collateral. In such a scenario, the collateral is specific for a facility and will need to be assigned at the facility level.

Accordingly, Temenos Transact is enabled to maintain the different types of collateral with different data fields and rules defined for each collateral type. The details captured under the collateral types will be utilised for provision calculation, collateral management, and other reporting requirements.

When the facilities cross to non-performing, the provisions are made for the facilities based on the NPL stage. The provisions are made on the unsecured exposure of the client. In arriving at the unsecured exposure, the central bank of Sri Lanka has defined the allowable collateral types and haircuts that will apply to the valuation of the security.

As per the CBSL regulatory requirements, the provisions are made for on-balance sheet facilities with NPL substandard, doubtful, or loss status.

The unsecured exposure means the facility outstanding net of the realizable value of the security. The percentage of specific provision for each credit exposure is based on a graduated scale, based on the NPL category of the credit facility.

This functionality allows the user to capture the additional information available for a collateral.

The following new fields are added to the LKPVCO.COLLATERAL.DETAILS application to capture the additional collateral details:

• Interim Final Security: The user can select Interim or Final option.
• Limit: This field is vetted to the LIMIT application. This is a multi-value field, where the user can select a specific limit record.

The following new fields are added to the LKPVCO.PARAMETER,INPUT (Lkpvco Parameter Input) application to capture the NPL classification based on the overdue period.

• Collateral Type: This field is vetted to the COLLATERAL.TYPE application.
• Haircut Rate: The user can input a valid percentage in this field.
• Product: This field is vetted to the EB.PRODUCT application. The user can select a specific product.
• Sub Product: This field refers to the valid sub products. The user can capture product lines like lending and account.
• Ranking: This field refers to the ranking of the product for the purpose of allocation to collaterals.

Non-Performing Loan Parameters

The Non-Performing Loan Parameters functionality handles the classification of credit facilities like overdraft and loans as non-performing, based on specific conditions.

The non-performing loan (NPL) classification is initially made at a single facility level and then, at the client level based on the proportion of facilities classified as NPL out of the total credit portfolio of the client.

The rules on the classification of the facilities in NPL’s differ based on the repayment pattern of credit facilities. The declassification to performing status is made when the total arrears are settled in respect of the classified NPL facilities.

When the facilities are restructured or rescheduled, such facilities require to be monitored for settlements made by the customer post restructure or reschedulement, due to the implications that may arise on NPL status, due to the arrears position at the time of effecting the restructure or reschedulement.

When the facilities are classified as NPLs, the recognition of interest income to the profit and loss statement (P&L) is suspended. The suspended interest is recognized back to P&L only upon the settlements made by the customer, in respect of the facility arrears.

The core functionality allows banks to define conditions for the classification of credit facilities as non-performing.

The LKPVCO.OVERDRAFT.DETAILS new application will record the ageing days for overdraft facilities for a customer on a daily basis.

New fields are added to the LKPVCO.PARAMETER application for the specific non-fund based facilities to be considered for the overall exposure for 30:70 classification.

As part of the arrangement product condition for account property class, the Npl Status field is added to the AA.ARR.ACCOUNT application to capture the customer NPL status due to the customer level classification triggered based on the multiple OD classification and 30:70 rule for lending and overdraft arrangements.

The User Class new field is added to the PV.ASSET.DETAIL application to allow the user to manually upgrade or downgrade a facility. The value of this field is vetted to the PV.LOAN.CLASSIFICATION application. Also, the Manual Provision Amount new field in the PV.ASSET.DETAIL application will allow the users to capture manually the provision amount.

The following new fields are added to the Aa Prd Des Xlend Info Lkpvco Input (AA.PRD.DES.XLEND.INFO,LKPVCO.INPUT) external property class:

• Facility Status: This field indicates the status of the external arrangements.
• Overdue Amount: This field indicates the overdue amount for a facility. The excess utilization will be updated with a negative sign. A positive sign indicates underutilisation.

The Npl Status new field is added to the AA.PRD.DES.ACCOUNT application and allows the user to view the NPL status for an account which is updated by the system.

The benefits of the Non-Performing Loan Parameters functionality are:

• Classification or declassification of loans as per the set rules.
• Classification or declassification of overdrafts as per the set rules.