Delaying making charges

Under many regulatory regimes and accounting standards banks are not required to make any provisions for losses until the loans have been formally classified as non-performing. The level of provisioning required is also often defined in terms of collateral shortfall and NPL age. We have already considered some of the differences in definitions of problem loans that exist between countries. Within these definitions there is usually still room for management to delay classification. NPL definitions usually allow considerable latitude to bank management. Impairment, for example, is usually a subjective measure. Specific examples where judgment may be used include the following: A company is in arrears on one loan it has taken from the bank and this has been classified as non-performing. It also has other loans from the bank which it is servicing and are current. A company has defaulted on loans from other banks but remains current on loans from this bank. A guarantor of a loan has defaulted on loans from banks but remains solvent and there has been no move to liquidate the company. The borrower is servicing its loan and the loan is fully secured. Collateral cover has fallen from that agreed at the time that the loan was extended and the borrower cannot “top up” the collateral but collateral cover remains well above 100%. The loan is otherwise current. A company is servicing its loan but has only been able to because it has drawn down against facilities granted by the bank or by other banks or has taken out new loans from other banks. None of these actions break any loan covenants. Even when definitions appear to have hard criteria, such as day past-due, banks can often find ways such as evergreening to avoid having loans classified as nonperforming.

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