Guidelines on Management of Problem Loans

Monitoring Arrangements for Restructured Loans Restructured borrowers should be subject to intensive monitoring to ensure their continued ability to meet their obligations, The specialized team should use the bank’s EWS system to alert business segments of any potential problems. All borrowers should be subject to periodic review, the timing of which and depth of analysis required should be proportional to the size of the loan together with the level of risk inherent in the credit. Those loans which are material in nature and pose the greatest risk to the bank should be reviewed monthly on an abbreviated basis focused on recent developments. More in-depth reviews would be done on a quarterly and annual basis in conjunction with receipt of interim and annual financial statements. Smaller loans might be monitored semi-annually for the first year with annual reviews thereafter. Finally, the smallest loans could be subject to an annual review of their financial statements. Senior management should also be monitoring closely the key performance indicators (KPIs) of specific portfolio segments to ensure that the goals embedded in the strategic plan are on track. Deviations from the plan should be identified and appropriate time-bound, corrective action plans put in place and monitored. A. Changing the risk rating of the loan All banks should have clear written policies and procedures in place which outline the specific criteria together with required cure periods which must be satisfied to upgrade (or downgrade) the risk rating on a loan. While the goal of the restructuring is to improve the loan's risk rating, the borrower must demonstrate its ability to meet the terms of the restructuring as well as show an improvement in its risk profile for a specified period of time before an upgrade is appropriate. It requires a one year waiting period after restructuring before a loan becomes eligible for consideration of an upgrade. It is important to realize that upgrade is not automatic after the one year period, but rather should be based on the borrower's current and expected future performance. The borrowers should demonstrate that financial difficulties no longer exist. The following criteria should be met in order to dispel concerns regarding financial difficulties: i. the borrower has made all required payments in a timely manner for at least one year; ii. the loan is not considered as impaired or defaulted; iii. there is no past-due amount on the loan; iv. the borrower has demonstrated its ability to comply with all other post restructuring conditions contained in the master restructuring agreement; and v. the borrower does not have any other loans with amounts more than 90 dpd or 180 dpd (as the case may be) at the date when the loan is reclassified. Particular attention should be paid to bullet and balloon loans (with reduced front payments). Even after one year of flawless performance, the repayment in full of a balloon loan that relies on a large payment at the end of repayment period can be questionable. B. Transferring the borrower back to the originating unit The following criteria should be applied when transferring a borrower back to the business unit: i. The borrower regularly meets all its obligations from the restructuring agreement; ii. At least one year has passed from the beginning of validity of the restructuring and iii. The borrower has repaid at least 10 percent of the restructured principal in that period; iv. The borrower's indebtedness, measured with the net financial liabilities/EBITDA indicator, etc.; v. The transfer had been approved on the basis of the analysis of the borrower's financial position by the competent committee of the bank. Once a borrower has demonstrated its ability to meet the all the terms of its restructured obligations for a period of at least one year, repaid at least 10 percent of its restructured loan, and no longer displays any of the signals which would cause automatic transfer to th