Unofficial Translation with the courtesy of The Foreign Banks' Association This translation is for the convenience of those unfamiliar with the Thai language. Please refer to the Thai text for the official version. ____________________________________________ BANK OF THAILAND 26 August 2004 To Managers All commercial banks registered in Thailand All foreign bank branches * No.SorNorSor. (21) Wor. 125/2547 Re: Sending of Notification of the Bank of Thailand Regarding Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks The Bank of Thailand is to circulate the Notification of the Bank of Thailand Re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks dated 23 August 2004 which has come into effect from 26 August 2004 onwards and is published in the Royal Gazette, (General Issue) Vol. 121 Special part 93 Ngor dated 25 August 2004. The essences of the notification are: 1. the Notification of the Bank of Thailand Re: Worthless or recoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks dated 28 February 2003 shall be repealed. 2. In this Notification, the essences have been amended from the former as follows: 2.1 amending regulations on provisioning for assets classified as doubtful of loss in case commercial bank has not undertaken debt restructuring or filed lawsuit against the debtors, by which the commercial bank shall increase the provisions for outstanding balance after being deducted with provisions already set. The rate of additional provisions is subject to overdue payment period. 2.2 regulations for collateral valuation and appraisal for the assets which have been valued or appraised over 12 months, as previously prescribed that it can be deducted from outstanding balance before provisioning by no more than 50% of valuation or appraised value shall be repealed. 2.3 regulations prescribing that the commercial bank is not permitted to transfer the provisions that is in excess of the minimum required provisions as of the later accounting period of year 2001 to income shall be repealed. 2.4 amending in case of apparent irregularities incurred from the debt restructuring, the Bank of Thailand has authority to order the commercial bank to make assets reclassification and provisioning for each debtors. Please be informed and comply accordingly. Yours sincerely, [signed] (Mr. Samart Buranawatanachoke) Senior Director, Financial institution policy group for Governor Enclosures The Notification of the Bank of Thailand Re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks dated 23 August 2004 Risk Supervision Policy and Analysis Department, Financial institution Policy Group Tel. 0-2283-5304, 0-2283-5303 Note [ ] The Bank of Thailand will arrange a meeting to clarify on.....at........... [X]No meeting for clarification will be arranged. Remark : * Excluding International Banking Facilities Notification of the Bank of Thailand Re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks _____________________ 1. Reason to issue the Notification Despite presently commercial banks have made provisions in sufficient level and in compliance with the guideline of the Thai Accounting Standard, of which the Bank of Thailand considers the outcome of such implementation is in satisfactory level, nevertheless, in order to enhance financial stability and strengthen potentiality of commercial banks, as well as to encourage commercial banks to speed up the completion of debt restructuring, the Bank of Thailand has thus amended this notification. 2. Statutory Power By virtue of the provisions of the first paragraph of Section 15 bis of the Commercial Banking Act B.E. 2505 as amended by the Emergency Decrees amending the Commercial Banking Act B.E. 2505, B.E. 2528, the Bank of Thailand, with the approval of the Minister of Finance, hereby issues the prescriptions regarding to Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks: 3. Scope of Application This Notification is applicable to all commercial banks under the commercial banking act, except for international banking facilities of foreign bank branches. 4. Contents 4.1 The Notification of the Bank of Thailand Re: Worthless or Irrecoverable Assets and Doubtful Assets that may be Worthless or Irrecoverable of Commercial Banks dated 28 February 2003 shall be repealed. 4.2 In this Notification: (1) Worthless or irrecoverable assets refer to assets classified as Loss; (2) Doubtful Assets that may be Worthless or Irrecoverable refer to: (a) Assets classified as Doubtful of Loss; (b) Assets classified as Doubtful; (c) Assets classified as Substandard; (d) Assets classified as Special Mention; (e) Assets classified as Pass. (3) Provisions refer to the reserves sets aside for allowances for bad debt or doubtful accounts, allowance for price reduction, allowance for impairment, and asset revaluation which may be worthless or irrecoverable. As such, commercial bank shall, at the minimum, provide the required provisions calculated from the asset classifications following the rates and rules specified in this Notification. 4.3 Assets classified as Loss, which shall be written off include: (1) Claims for which a reasonable action has been taken for the recovery of debt where there is no possibility of such debt being recovered, satisfying any one of the criteria below. (a) The debtor is dead, or adjudged of disappearance or there is evidence of disappearance, and there are no assets to repay the debt; (b) The debtor has dissolved his business and is in debt to other creditors with preferential rights over the whole of the debtor's assets where said creditors' total claims exceed the value of the debtor's assets; (c) The commercial bank has sued the debtor or has applied for participation in property in case other creditors have sued the debtor, where the court has ruled on the case, but the debtor does not have assets to repay the debt; or (d) The commercial bank has filed a bankruptcy suit against the debtor or has applied for participation in property with other creditors who have filed for bankruptcy, where the parties have agreed to restructure the debt with approval from the court, or where the debtor has been adjudged as bankrupt and the first distribution of property has taken place. (2) Claims which are irrecoverable by nature or circumstance; (3) Other assets which are impaired, damaged or have become worthless; ((4) Losses from debt restructuring carried out in accordance with the regulations and guidelines prescribed by the Bank of Thailand. 4.4 Assets classified as Doubtful of Loss are considered to comply with the following regulations: 4.4.1 Assets classified as Doubtful of Loss requiring 100% provisions shall satisfy one or a combination of the following criteria: (1) Debtor owing principal and/or interest payments for a cumulative period of 12 months or longer from the contractual due date regardless of whether it is in accordance with the conditions, contractual terms or the date the commercial bank makes the claim or call for repayment, excluding debtors classified as Loss. Overdraft debtor shall be classified according to (2). (2) Overdraft debtor without available credit line or whose facility has been revoked, or whose outstanding exceeds the contractual facility, or whose contract has expired and no funds has been credited into the account for repayment of principal and interest for a cumulative period exceeding 12 months from the date which the facility is revoked, or the date which credit outstanding exceeds the limit, or the maturity date of the contract whichever is earlier. (3) Where the book value of property acquired through debt repayment or public auction exceeds the value appraised by a valuer or independent appraiser carried out within the last 12 months, where estimated sales expenses have been deducted from the valuation or appraised value prior to comparing it to the book value. However, where commercial bank values/appraises the property longer than 12 months , only 50% of the valuation or appraised value may be used for the above criteria. In appraising the property value, the appraiser/ valuer must comply with the Bank of Thailand regulations on collateral valuation and appraisal for financial institution issued by the Bank of Thailand. The prescription stated in the said regulations concerning the criteria used for selecting the valuation method shall not be applicable, however, and commercial bank shall instead comply with the following rules. (a) The independent appraiser must appraise each piece of property received through debt repayment or public auctions whose book value equals or exceeds THB 50 million; (b) The independent appraiser or valuer may appraise each piece of property acquired through debt repayment or public auctions whose book value is lower than THB 50 million; (c) Where properties acquired through debt repayment or public auctions can not be separately disposed and have an aggregate book value equal to or exceeding THB 50 million, commercial bank shall proceed with the appraisal as similar to (3)(a). (4) Where the recorded book value of other assets exceeds the fair value or the expected recoverable value, the commercial bank must assign the fair value or the expected recoverable value for the assets following the rules prescribed by the accounting standards. (5) Assets or claims whose entire value are expected to be irrecoverable. (6) Losses as a result of debt restructuring carried out in accordance with the regulations and guidelines prescribed by the Bank of Thailand. (7) Where other factors indicate that assets or claims may not be fully recoverable as ordered by the Bank of Thailand. 4.4.2 Assets classified as Doubtful of Loss according to 4.4.1(1) or 4.4.1(2) that have not been undertaken debt restructuring or filed lawsuit against the debtors shall require provisions as follows: (1) Debtor owing principal and/or interest payments for a cumulative period of over 12 months but no longer than 24 months, the commercial bank shall deduct the fair market value of collateral which has been valued/appraisedin accordance with the Bank of Thailand's regulations for collateral valuation and appraisal of financial institution from the book value of debtors according to 4.12, and shall make provisions 100% (2) Debtor owing principal and/or interest payments for a cumulative period of over 24 months but no longer than 36 months, the commercial bank shall consider to make provisions in addition to that of prescribed in (1) at no less than 25% of outstanding balance after being deducted with provisions made for that debtor according to (1) (3) Debtor owing principal and/or interest payments for a cumulative period of over 36 months but no longer than 48 months, the commercial bank shall consider to make provisions in addition to that of prescribed in (1) at no less than 50% of outstanding balance after being deducted with provisions made for that debtor according to (1) (4) Debtor owing principal and/or interest payments for a cumulative period of longer than 48 months, the commercial bank shall consider to fully make provisions in addition to that of prescribed in (1) for the outstanding balance after being deducted with provisions made for that debtor according to (1) In case all provisions as required by the Bank of Thailand are fully made and incurred some exceeding provisions, the commercial bank is able to use such excess to deduct from the additional provisions if necessary in compliance with (2) (3) and (4) The commercial bank shall comply with new provisioning requirement according to (2) (3) and (4) from the later six-month accounting period of year 2004 onwards. For those debtors require additional provisions in accordance with regulations, procedures and conditions as stipulated above according to 4.4.2(2) (3) and (4), the commercial bank is not required to consider revaluation or reappraisal of collateral except where a case has been ordered by the Bank of Thailand. 4.4.3 In case the commercial bank already made provisions for assets classified as Doubtful of Loss in compliance with 4.4.2 and subsequently undertakes debt structuring according to the Bank of Thailand's regulation on debt restructuring or files lawsuits against debtors, the commercial bank shall not make additional provisions as stipulated in 4.4.2 (2) (3) and (4) and shall transfer required provisions as follows: (1) the commercial bank undertakes debt restructuring according to the Bank of Thailand's rules on debt restructuring after making provisions for assets classified as Doubtful of Loss in accordance with 4.4.2, the commercial bank shall comply with 4.11 and thus transfer that provisions which exceeds the required provisions to income. (2) in case that there is filing lawsuit against debtor after provisions are made for assets classified as Doubtful of Loss according to 4.4.2, the commercial bank shall maintain the said provisions made in compliance with 4.4.2 (1) for such debtors in the previous accounting entries, and the transfer of additional provisions according to 4.4.2(2)(3) and (4) to income is not permitted, but it can be used as provisions for other debtors. 4.5 Assets classified as Doubtful requiring a minimum of 50% provisions shall satisfy one or a combination of the following criteria: (1) Debtor owing interest and/or principal payments for a cumulative period of over 6 months from the contractual due date regardless of whether it is in accordance with the conditions, contractual terms or the date the commercial bank makes the claim or call for repayment, whichever is earlier, excluding debtors classified as Loss or Doubtful of Loss. Overdraft debtor shall be classified according to (2). (2) Overdraft debtor without available credit line or whose facility has been revoked, or whose outstanding exceeds the contractual facility, or whose contract has expired and no funds has been credited into the account for repayment of principal and interest for a cumulative period exceeding 6 months from the date which the facility is revoked, or the date which the credit outstanding exceeds the limit, or the maturity date of the contract whichever is earlier. (3) The debtor is under receivership by court order. (4) The debtor has ceased or dissolved his business operations or the business of the debtor is in the process of liquidation. (5) The debtor has delayed debt repayments, or has taken actions in order to prevent his creditors from receiving payment such as staying outside the Kingdom, or removing or disposing his assets. (6) The commercial bank is unable to contact or find the debtor or the debtor has left his domicile stated in the agreement without informing the commercial bank. (7) The business of the debtor is uncertain, or the debtor has not undertaken any business permanently, or the debtor has used the funds obtained for purposes other than for which they were meant. (8) The commercial bank has applied for participation in property with other creditors who have sued the debtor. (9) Assets or claims that are unlikely to be repaid in full (principal and interest). (10) Where other factors indicate that assets or claims may not be fully recoverable as ordered by the Bank of Thailand. 4.6 Assets classified as Substandard requiring a minimum of 20% provisions shall satisfy one or a combination of the following criteria: (1) Debtor owing interest and/or principal payments for a cumulative period of over 3 months from the contractual due date regardless of whether it is in accordance with the conditions, contractual terms or the date the commercial bank makes the claim or calls for repayment, whichever is earlier, excluding debtors classified as Loss, Doubtful of Loss, or Doubtful. Overdraft debtor shall be according to (2). (2) Overdraft debtor without available credit line or whose facility has been revoked, or whose outstanding exceeds the contractual facility, or whose contract has expired and no funds has been credited into the account for repayment of principal and interest for a cumulative period exceeding 3 months from the date which the facility is revoked, or the date which the debt outstanding exceeds the limit, or the maturity date of the contract whichever is earlier. (3) Where other evidences indicate there are difficulties in the recovery of assets or claims, or where said assets or claims do not generate a reasonable income as ordered by the Bank of Thailand. 4.7 Assets satisfying one or a combination of the following criteria shall be classified as Special Mention. These assets shall require a minimum of 2% provisions or lower where the rate shall be calculated following the rules, procedures and conditions prescribed by the Bank of Thailand by using the outstanding principal excluding accrued interest as basis in calculating provisions: (1) Debtor owing interest and/or principal payments for a cumulative period of over 1 month from the contractual due date regardless of whether it is in accordance with the conditions, contractual terms or the date the commercial bank makes the claim or call for repayment, whichever date is earlier, excluding debtors classified as Loss, Doubtful of Loss, Doubtful, or Substandard. Overdraft debtor shall be classified according to (2). (2) Overdraft debtor without available credit line or whose facility has been revoked, or whose outstanding exceeds the contractual facility, or whose contract has expired and no funds has been credited into the account for repayment of principal and interest for a cumulative period exceeding 1 months from the date which the facility is revoked, or the date which the debt outstanding exceeds the limit, or the maturity date of the contract whichever is earlier. 4.8 Assets satisfying one or a combination of the following criteria shall be classified as Pass, and shall require a minimum of 1% provisions or lower where the rate shall be calculated following the rules, procedures and conditions set out by the Bank of Thailand by using the outstanding principal excluding accrued interest as basis in calculating provisions: (1) The debtor has no overdue payment. Overdraft debtor shall be classified according to (2). (2) Overdraft debtor who have not fully drawn down the facility or whose facility has not reached maturity or overdraft debtors with accrued interest no longer than 1 month. (3) Other debtors not classified as Loss, Doubtful of Loss, Doubtful, Substandard, or Special Mention 4.9 The commercial bank shall classify credits by account without having to assign the same classification to debtors within the same group or to related debtors. 4.10 Where a debtor has documents from a government bureau stating the bureau's acceptance of completed works by the debtor dated within 6 months following the rules/regulations of that bureau, the loan(s) covered by said documents shall be classified as Pass. 4.11 Where commercial bank has undertaken debt restructuring following the Bank of Thailand guidelines for debt restructuring, it shall comply with the followings. (1) The commercial bank shall write-off losses or make provisions as follows. (more)