The Treatment of Nonperforming Loans in Macroeconomic Statistics

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The Treatment of Nonperforming Loans in
Macroeconomic Statistics
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Outline

• Look at the differences in approach to loan
  valuation taken by the SNA and the Banking and
  Accounting institutions.
• Definition of Nonperforming loans (NPLs)
• Valuation of NPLs
• Treatment of write-offs
• Treatment of interest
• The Electronic Discussion Group (EDG)

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SNA Approach

• SNA approach to loan valuation is based on the
  need
• For a sound basis for measurement
• To facilitate comparisons
• For valuation consistent with debtors obligations
• For recommendations to be useful in measures of
  solvency
• Leads to many cases where NPLs are not reflected
  in either interest flows or the balance sheets

4
SNA Approach

• Other relevant manuals tend to follow the SNA
• ESA,
• BPM5,
• GFSM,
• MFSM (most elaborate)
• International Statistics Manuals

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Banking and Accounting Institutions

• In many countries the authorities have introduced
  regulations relevant to the country situation.
• Prompted banking and accounting institutions to
  develop criteria and recommendations for
  international reporting.

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Definition of nonperforming loans

• International statistics manuals provide no
  criteria
• Loans are good until cancelled, written off or
  written down
• MFSM allows provisions under Other a/cs payable
  and memoranda items.
• Banking Accounting Institutions
• IAS says a financial asset is impaired if its
  carrying amount is greater than its estimated
  recoverable amount

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Definition of nonperforming loans

• Country practice varies.
• To help improve cross country comparisons, the
  IIF proposes the following categories for
  reporting
• Standard
• Watch
• Substandard
• Doubtful
• Loss

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Value of Loans

• International Statistics Manuals
• Cash, loans, deposits, advances remain constant,
  unless in foreign currency or de facto negotiable
• Loans are only revalued when they fail or are
  renegotiated
• Regularly traded securities valued at market
  price
• So marketability is the crucial factor
• There is a need for consistency between
  instruments as assets and liabilities
• (MFSM recommends memos on interest arrears and
  expected loan losses)

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Value of Loans

• B A Institutions
• Loans and debt held to maturity valued at
  amortized acquisition cost, less reductions for
  impairment
• Others at fair value
• No need for consistency between debtor and
  creditor valuations

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Cancellations, Write offs Impairment

• International statistics manuals
• Cancellation by mutual agreement capital
  transfer
• Writing off other changes in volume account
• Rescheduling. New nominal amount (holding
  gain/loss)
• Write downs - revaluation account
• B A Institutions
• Charge against current income, make a provision
  (liability)
• Charge against current income, but reduce value
  of assets
• Do not charge current income, but against capital

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Treatment of Interest on NPLs

• International statistics manuals
• Interest accrues by default as SNA doesnt
  recognize impairment
• MFSM explicitly states that overdue interest
  should be recorded.
• B A Institutions
• After write down, interest based on original rate
• Cease to accrue when impairment identified (sound
  banking practice)
• (Note that these practices are still evolving, so
  best practice has still to be decided on)

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Summary

• There are important differences between SNA and
  commercial book keeping
• SNA
• An instrument has the same value as an asset and
  a liability
• Price changes in traded instruments holding
  gain/loss
• Otherwise no price changes by definition. Write
  offs are in the Other Changes in Volume account
• No entries in income accounts regarding partial
  losses which reduces usefulness

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Issues for discussion

• Background paper
• Recommends Provide memoranda on the provisions
  that should be made to both face value of loans
  and accrued interest. Use commercial practices as
  guidelines.
• Raises issues
• What should be the definition of a NPL?

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Issues for discussion

• What is the best option?
• - continue the present SNA conventions
• - change the rules to reflect NPL provisions
• - continue the current approach but show
  provisions (memo)
• Should the manuals contain more criteria on
  write-offs?
• Should the manuals be changed to allow price
  fluctuations in loans expressed in national
  currency? If so, how?

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Issues for discussion

• Would it be more consistent to treat loan
  write-offs as price changes rather than other
  changes in volume?
• Should national accounts cease to record interest
  accrual on impaired loans?
• Should the manuals define an income concept
  including expected or actual losses on
  financial claims? If, so should there be a
  difference between normal and catastrophic
  losses?

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EDG

• Started July 2002.
• Difficult to get people to respond
• National accountants seem to think its not their
  problem
• Still looking for more contributions to a obtain
  balanced set of opinions
• The IMF has set up a working group to consider
  loan valuation and this report will be a
  contribution to the EDG

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EDG

• 21 responses so far but less than half address
  SNA issues
• Of those that do, all advocate some sort of
  changes to SNA
• About half suggest the presentation of both
  nominal and market values
• A similar number suggest adjusting income for
  expected losses

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EDG the way forward.

• A wide range of individuals and organizations
  have already been approached hopefully some of
  these will still provide contributions
• An additional range of statistics offices will be
  canvassed for their views on the issue