Guidelines on Management of Problem Loans

When Restructuring Fails It is to be expected that a certain number of restructurings will fail. If the restructured borrower does not perform his obligations, the bank needs to quickly assess if the problem is temporary in nature and easily corrected (e.g., a temporary slowdown in sales to a major customer who is moving to a new location) or more permanent in nature (e.g., the company's major product has been rendered obsolete by regulations). If the company is still viable in the long term and the problem can be easily corrected, the borrower could be allowed to restructure the terms of repayment one more time. In general, however, multiple restructurings can be an indication that the borrower is no longer viable and that there are problems in the approval process. If the problem is of a more permanent nature (e.g., as evidenced by second payment default), the borrower should be deemed non-viable and promptly referred for legal proceedings. The bank should closely monitor failed restructurings to determine the reasons behind them and assess the appropriateness of its strategies. Appendix 1: Samples of Early Warning Signals The Following are illustrated for indicative purposes and are not intended to be prescriptive, as stated in the rules of Management of Problem Loans , banks should establish EWS that are suitable to their portfolio: EWS At Borrower Level from External Sources Debt and collateral increase in other banks Past-due or other NP classifications in other banks Guarantor default Debt in private central register (if any) Legal proceeding External Sources Bankruptcy Changes in the company structure (e.g. merger, capital reduction) External rating assigned and trends Other negative information regarding major clients/counterparties of the debtor/suppliers EWS at a borrower level from internal sources Negative trend in internal rating Balances not appearing in current account / lower balances in Margin account / Negative own funds Significant change in liquidity profile Liabilities leverage (e.g. equity/total < 5% or 10%) Number of days past due Companies Number of months with any overdraft/overdraft exceeded Profit before taxes/revenue (e.g. ratio < -1%) Continued losses Continued excess in commercial paper discount Decrease of turnover Reduction in credit lines related to trade receivables (e.g. year- on-year variation, 3m average/1y average) Unexpected reduction in undrawn credit lines (e.g. undrawn amount/total credit line) Negative trend in behavioral scoring Negative trend in probability of default and/or internal rating Mortgage loan installment > x time credit balance Mortgage and consumer credit days past due Decrease in the credit balance > 95% in the last 6 months Average total credit balance < 0.05% of total debt balance Forborne Exposures Nationality and related historic loss rates Individuals / sole proprietors Decrease in payroll in the last 3 months Unemployment Early arrears (e.g. 5-30 days of past due, depending on portfolio/borrower types) Reduction in bank transfers in current accounts Increase of loan installment over the payroll ratio Number of months with any overdraft exceeded Negative trend in behavioral scoring Negative trend in probability of default and/or internal rating EWS at a portfolio/segment level Size distribution and concentration level Portfolio Distribution Top X (e.g. 10) groups of connected borrowers and related risk indicators Asset class distribution Breakdown by industry, sector, collateral types, countries, maturities, etc. Risk parameters PD/LGD evolution (overall and per segment) PD/LGD forecasts and projections Default loan Volumes and trends of significant risk provisions on individual level NPL/restructuring status/foreclosure NPL volume by category (>90 past due, etc.) Restructuring volume and segmentation ( workout, forced prolongation, other modifications, deferrals, >90 past due, LLP) Foreclosed assets on total loans NPL ratio without foreclosed assets EWS by speci