MUSCAT — In its ongoing endeavours to maintain a sound financial system, the Central Bank of Oman (CBO) has tightened norms governing the loan classification and provisioning of finance and leasing companies (FLCs).
Hamood Sangour Al Zadjali, executive president of the CBO, said the apex bank has modified the guidelines and norms that govern finance and leasing companies with regard to classification and provisioning of loans.
The decision comes after the apex bank reviewed and recognised the specific nature of assets and collateral that supports the exposure of finance and leasing companies in Oman.
Accordingly, with immediate effect, finance and leasing companies will have to cease recognising interest as income when the accounts are overdue for 90 days and over, and the interest will be held in a reserve interest account.
The interest reserved in the reserve account can be discharged and credited to the income account only after the classified accounts are recovered in cash, CBO sources told Times Business.
Accounts should be considered as specially mentioned when they remain overdue for 90-179 days and should attract five per cent provision. Accounts are classified as substandard when they remain overdue for 180-269 days and they should attract 25 per cent provision, the CBO added.
Accounts will be classified as doubtful when they remain overdue for 270-364 days and will attract 50 per cent provision. Accounts would be classified as loss when they remain overdue for 365 days or more and would attract 100 per cent provision. Further, reserve interest will be deducted from the outstanding amount before calculating the provision amount.
In accordance with the new directive, in the case of substandard, doubtful and loss accounts, finance and leasing companies have to maintain a minimum 25 per cent cash provision on the net amount, irrespective of the value of collateral. The value of collateral should not be reckoned for determining provisions against assets classified as substandard, the apex bank added.
In line with the straight-line depreciation method for leased assets, a life span of five years is considered for the calculation of depreciation on motor vehicles. The value of the vehicle will be treated as 100 per cent of sale price (after discount, etc.) during the first year from the date of registration, 80 per cent during the second year, 60 per cent during the third year, 40 per cent during the fourth year, 20 per cent during the fifth year and zero per cent from the sixth year onwards. A life span of eight years is considered for the calculation of depreciation on heavy equipment/ machinery.
The value of such leased assets will be treated as 100 per cent of cost on the asset (after discount, etc.) during the first year from the date of sale, 87.5 per cent during the second year, 75 per cent during the third year and, thereafter, continue to reduce by 12.5 per cent each year of the original sale price. These norms will be applicable only to assets classified as doubtful or loss.
The CBO said finance and leasing companies are encouraged to insist on insurance of the leased assets, through out the currency of the exposure. In cases where valid comprehensive insurance polices are held on record, 100 per cent of the depreciated value of leased assets will be reckoned against the required provisions. Otherwise, only 50 per cent of the depreciated value of leased assets will be considered for determining provisions.
The CBO said it would continue to review prudential standards from time to time and they would be strengthened to meet specific situations. The financial sector that includes the finance and leasing sector is exposed to the changes in the macro-economic conditions. FLCs are encouraged to built-in adequate general loan-loss provisions to meet possible losses in future.
Oman has six finance and leasing companies — United Finance, Al Omaniya Financial Services, Muscat Finance, National Finance, Oman Orix Leasing and the youngest Taageer Finance and Leasing. Except Taageer, all the five are listed on the Muscat Securities Market