Debt Arrears and Nonperforming Loans

1
Debt Arrears and Nonperforming Loans

• http//unstats.un.org/unsd/nationalaccount/AEG/pap
  ers/m2accrualprinciples.pdf
• http//unstats.un.org/unsd/nationalaccount/AEG/pap
  ers/m2loans.pdf
• http//unstats.un.org/unsd/nationalaccount/AEG/pap
  ers/m2FAWGCommentsLoans.pdf
• http//unstats.un.org/unsd/nationalaccount/AEG/pap
  ers/m3loans.pdf

2
Debt arrears

• Debt arrears are amounts that are past
  due-for-payment and still unpaid. They may refer
  to interest, principal, or a combination of both.
• Important issue in some countries
• Arrears by government
• Arrears by central bank
• Inter-company arrears.
• May wish to show separately.
• Used as a way of handling financial shortfalls.

3
Debt arrears

• Differences in recording debt arrears among the
  Manuals was an issue brought up during the
  revision of BPM5
• BPM5, External Debt Statistics, and the
  Government Finance Statistics Manual impute
  repayment of debt and the creation of a new
  short-term liability.
• SNA and Monetary and Financial Statistics Manual
  continue to record the same instrument until it
  is extinguished.

4
Debt Arrears decisions

• Conclusions BOP Committee and AEG
• The macroeconomic statistics should be
  harmonized
• No transactions should be imputed when a
  liability goes into arrears
• If the original contract provided for a change in
  characteristics, this should be recorded as a
  reclassification
• If the contract is renegotiated, this should be
  shown as new transactions extinguishing the old
  and creating a new instrument
• Integrate the above in the discussion on
  nonperforming loans.

5
Nonperforming loans

• Electronic Discussion Group during July 2002-July
  2004 http//www.imf.org/external/np/sta/npl/eng/d
  iscuss/index.htm.
• No standard definition. However, widely accepted
  is A loan is nonperforming when payments of
  interest and/or principal are past due by 90 days
  or more.
• Compilation Guide on Financial Soundness
  Indicators adds A loan also is nonperforming if
  interest payments equal to 90 days or more have
  been capitalized, refinanced, or delayed by
  agreement, or
• Payments are less than 90 days overdue, but there
  are good reasons (debtor filing for bankruptcy)
  to doubt that payments will be made in full.

6
Nonperforming loans

• Both NPLs and arrears are aspects of loan
  impairment.
• NPLs are different from arrears
• Arrears only part past due (NPL is whole debt)
• Arrears from Day 1 (NPL is usually after 90 days)

7
Nonperforming loans

• Nonperformance does not imply that losses will
  occur in all cases. Sufficient collateral may be
  available.
• International accounting and banking standards
  often refer to the slightly different concept of
  impairment of loans (indicating that probably
  that not all amounts due will be collected). The
  standards prescribe recognition by reducing the
  carrying amount and discontinuing interest
  accrual.
• Issue SNA records loans at nominal value
  irrespective of change in quality and continues
  to accrue interest.

8
Nonperforming loans pros and cons of current SNA

• Pro Reflects (legal) position of the creditor.
  Avoids debtors showing reduced obligations.
  Avoids imputing a valuation, which may be an
  ambiguous operation.
• Con The true financial positions are not
  reflected. In particular, too rosy picture of
  banks net worth and interest receivable on NPL.
  Financial crises of the 1990s and artificially
  high Thai GDP. Business accounting standards may
  adopt fair valuation (for assets).
• Accounting standards reduce carrying amount of
  assets but continue measuring liabilities at
  nominal values. Not possible in the SNA that
  needs full consistency.

9
Nonperforming loans change the SNA?

• Canvas undertaken by EDG in July 2004. Not
  everybody was happy with the procedures, but from
  the results the EDG moderator was able to
  conclude the following
• Broad consensus exist that information of loans
  at both nominal and market-equivalent values
  should be given.
• The accounts themselves should show nominal
  values
• Market-equivalent values of all loans and
  interest arrears on NPLs should be mandatory
  memorandum items
• After more experience has been gained, market
  valuation of loans should be considered in the
  accounts.
• AEG December 2004 Yes in principle, but please
  clarify several issues.

10
July 2005 AEG decisions after clarification by
IMF

• Use the Compilation Guide definition of
  nonperforming loans as guideline
• Supplementary valuation basis (market-equivalent
  value) should be fair value, or otherwise nominal
  value less expected losses
• These data should be standard items for
  financial institutions and government as
  creditors supplementary items for other
  sectors
• Further E-discussion on how to treat FISIM
• Further consideration how long interest should
  accrue
• The above applies in principle also to other
  instruments like trade credits and deposits.