Nonperforming Loans

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 (gt1 yr)
  (NPL)

9
Value of Loans

• SNA doesnt recognize impairment
• - same valuation for assets liab.
• - negotiable loans valued at market
• MFSM recs memo on arrears/losses
• BA 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 BA 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.
• BA 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 gt 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 gt 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/vulnerabilitie
  s
• 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