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Nonperforming Loans

Nonperforming Loans

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Nonperforming Loans

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  1. Nonperforming Loans Presentation For OECD National Accounts Expert Group Meeting October 2002

  2. Presentation Outline • Issues raised by Nonperforming Loans (NPLs) • Working Definition • Financial Soundness Indicators

  3. Nonperforming Loans EDG • April 2002, an EDG started on IMF website • Aims to settle how NPLs should be treated in all macro. statistics – NA, GFS, BOP and MFS • Background paper raises issues

  4. NPL Issues • Financial crises led to new interest • 1993 SNA treatment is based on - avoiding unsound entries - need for valid comparisons - consistent valuations - valid solvency measures

  5. NPL Issues • NA do not reflect NPL in flow or BS • Other manuals consistent with SNA • Some countries have NPL regulations, so BCBS, IASB and the IIF developed criteria and recommendations for international reporting

  6. NPL Issues Main issues of concern are: • Identification criteria • Valuation of such loans • Treatment of cancellations/write-offs • Treatment of interest Main impact on FIs, shareholders, and customers

  7. What causes NPLs? • There are “normal” levels of business failure covered by premiums in interest payments, but.... • Sudden crises can cause - reduced collateral value - reduced credit to good coys - a run on banks by depositors

  8. What are NPLs? • SNA says loans are good unless written off/down, but MFSM has loss provisions in “Other accounts payable” • IIF report outlines categories: - Standard : Full payment expected - Watch : Could raise concern - Substandard : Payment in doubt (NPL) - Doubtful : Payment improbable (NPL) - Loss : Virtually uncollectible (>1 yr) (NPL)

  9. Value of Loans • SNA doesn’t recognize impairment - same valuation for assets & liab. - negotiable loans valued at market • MFSM recs memo on arrears/losses • B&A I allow asset reductions for impairment, but not liabilities, so can be inconsistent

  10. Treatment of cancellations/write offs in the SNA • Cancellation (mutual) – capital trans. • Write-offs in OCV account • Rescheduled loans have new value, balanced by holding gains/losses • Write-downs affect revaluation a/c • Discounted loans quoted in sec. markets should be so valued, but creates asymmetries, requiring supp. data

  11. Treatment of cancellations/write offs in the B&A I • Comm. accounting - 3 approaches - Expense against income – add to liabilities (provisioning) - Ditto, but reduce asset value - Do not expense, but appropriate from retained earnings into reserves

  12. Treatment of Interest on NPLs • ISMs: - No guidelines as not recognized until “failure”, hence interest accumulates - Could argue FISIM is overstated or services provided but not paid for. Accruing interest that is unlikely to be collected does not make sense, but practical & theoretical problems. • B&A I: Rec. interest not accrue, but work continues to clarify and standardize

  13. Summary of Issues • 1993 SNA - records assets = liabilities - does not record provisions - impairment => holding gains/losses when traded but nothing when untraded until loss occurs (OCV) - an “all or nothing” approach. Need a link between micro-accounting and macro, perhaps by use of memoranda items. [Aim of EDG to settle this]

  14. Working Definition • Current int. practice, NPLs have: - Princ. & Int. overdue > 90 days, or rolled over by agreement - 90 days criteria OK, but other problems NPLs remain so until w/off or until P & I payments are received

  15. Financial Soundness Indicators (FSIs) • In 1999, IMF & WB launched FSAP • identify financial system strengths/vulnerabilities • develop appropriate policy responses • IMF developing a compilation guide • encourage compilation of FSIs • promote cross country comparability • assist compilers and users

  16. Nonperforming Loans EDG • Two additional papers - international impairment standards - BOP issues • Has 30 members from a range of int. orgs, stats offices, banks & individuals. • All members of the public are invited to contribute opinions via the IMF website

  17. Nonperforming Loans EDG • Access via IMF.org. - Go to site index... - NPL EDG - an online discussion group • The wider the discussion, the more representative the final decision