Dependence of debt repayment on financial condition.

Dependence of debt repayment on financial condition.

Utkin E. A .: New financial instruments of the market, – M, 1997.

06/26/2011

Bank loans: provisions in case of loan default. Abstract

In order to increase the reliability and stability of the banking system, protect creditors and depositors of commercial banks and in accordance with Article 24 of the Law of Ukraine "On Banks and Banking" the National Bank of Ukraine establishes the procedure for forming and using the reserve to compensate for losses on banks

The formation of such a reserve is mandatory for autobiographical narrative ideas all loans in national and foreign currencies, institutions, enterprises, organizations and individuals, as well as for interbank loans is carried out only in the period before the full formation of the reserve by a commercial bank.

The reserve is used only to cover outstanding credit debt on the principal debt. There is no accrual on budget loans, as well as on loans and deposits between institutions in the system of one bank.

In order to accrue the reserve, commercial banks classify loans and assess credit risks taking into account the following criteria.

assessment of the borrower’s financial condition; repayment by the borrower of credit debt on the principal debt and interest thereon.

According to the assessment of the borrower’s financial condition and prospects for its development, loans can be classified into the following categories:

class "A" – financial activity is very good and allows you to repay the principal amount of the loan and interest on it in due time. At the same time, it can be concluded that financial activities will continue to be carried out at the same high level; Class "B" – financial activity is good or very good, but it can not be maintained at this level for a long time.

Class "G" – financial activity is unsatisfactory and there is a clear cyclicality over a short period of time;

Class "D" – financial activities indicate losses and it is obvious that the principal amount of the loan or interest on it can not be paid.

The borrower’s repayment of credit debt on the principal debt and interest thereon are:

good – if the debt on the loan and interest on it are paid in due time, and on the loan extended once for a period not exceeding 90 days; weak – if the overdue debt on the loan and interest on it is not more than 90 days, or debt on a loan extended for more than 90 days, if interest is paid; insufficient – if the overdue debt for the loan and interest on whom is more than 90 days and interest is not paid.

To determine the amounts of contributions to the reserve, the National Bank of Ukraine approved the following classification of loans depending on the level of their collateral:

secured loans – which have collateral in the form of liquid collateral, the real value of which exceeds the credit debt by at least 25%, or which have a guarantee of the Government of Ukraine or a bank guarantee;

insufficiently secured loans – those that have collateral in the form of liquid collateral, the real value of which is not less than 60% of the loan amount; loans in the insured order, and loans provided under guarantees, agreements – guarantees of legal entities.

Unsecured loans – unsecured, or the market value of the collateral is less than 60% of the loan amount. The real value of collateral is determined by the risk assessments of the loan.

According to the listed criteria, the bank’s loan portfolio is classified into the following groups:

Standard loans – loans, regardless of the type of collateral, the maturity of which has not come, for which timely and in full repayment of the principal debt, including loans extended in the prescribed manner but not more than twice with a total extension of not more than 180 days.

Loans under control – extended more than 2 times, or with a total extension period of more than 180 days; secured loans overdue for up to 60 days, as well as insufficiently secured loans overdue for up to 30 days.

Substandard – unsecured loans overdue for up to 30 days; overdue loans from 60 to 60 days are insufficiently secured, as well as overdue loans from 60 to 180 days are secured loans.

Doubtful – overdue from 30 to 60 days unsecured; overdue from 60 to 180 are insufficiently provided; as well as overdue loans over 180 days.

Bad – unsecured loans overdue from 60 to 180 days and insufficiently secured loans overdue for more than 180 days.

For each group of loans, the appropriate amount of reserves is formed, taking into account the degree of risk.

Based on the above criteria, you can make a table.

Table 1. Dependence of debt repayment on financial condition.

Debt repayment

 

Fine

Weak

Not enough

Financial position

 

 

 

AND

Standard

Under control

Substandard

B

Under control

Substandard

Questionable

IN

Substandard

Questionable

Hopeless

G

Questionable

Hopeless

Hopeless

D

Hopeless

Hopeless

Hopeless

 

When determining the amount of the reserve, the amount of debt for each borrower is separately reduced by the value of:

guarantees (guarantees of the Cabinet of Ministers of Ukraine; guarantees of banks registered as legal entities in the countries referred to category "A"); List of countries classified in category "A": Australia, Austria, Belgium, United Kingdom, Greece, Denmark, Ireland, Iceland, Spain, Italy, Canada, Luxembourg, Netherlands, Germany, New Zealand, Norway, Portugal, USA, Turkey, Finland, France, Switzerland, Sweden, Japan.

collateral (cash deposits and deposits of the borrower, which are placed in the bank providing loans; property and property rights of the borrower).

In the calculation of the amount of the reserve, the value of the mortgaged property (property rights) is included in the amount of not more than 50% of the value specified in the pledge agreement. The calculation of the amount of the reserve for loans secured by government securities includes the value of the collateral specified in the collateral agreement, but not more than the real value.

Given the changes in market conditions, a commercial bank is obliged once a year, as well as in the case of each extension of the loan agreement to review the value of the mortgaged property.

For loans classified as "bad" in determining the amount of the reserve is established the following procedure for taking into account the value of collateral:

for loans, if the overdue debt (or the total term of prolongation) is from 180 to 360 days before, the calculation is accepted no more than 25% of the value of property and property rights; on loans, if the overdue debt exceeds 360 days, the reserve is formed for the entire amount of the principal debt on the loan, regardless of the availability of collateral.

Based on the classification of loans, a commercial bank creates a reserve for each group of loans. Having determined the total amount of debt for each group and the corresponding amount of reduction, ie the difference is multiplied by the percentage of risk for each group of loans. This percentage is set by the NBU. (Table 2).

Table 2.

Loan groups

Reserve level (degree of risk)

Standard loans

2%

Loans under control

five%

Substandard

20%

Doubtful

fifty%

Hopeless

one hundred%

 

Then the amounts received for each group are added together and the bank receives the total amount of the insurance (reserve) fund to cover possible losses on loans.

It should be noted that provisions for credit risks are divided into general (under standard debt) and special (under non-standard debt).

General reserves are created for one type of active operations, namely the so-called standard loans. In this case, standard loans are considered only loans issued to borrowers of class "A" debt service and interest on which is considered good. (In our example, the borrower has a very stable financial position; according to the results of the assessment is classified as "A" in this regard is subject to deduction to the reserve fund 2% of the amount owed.)

Special reserves are created for all other loan groups on the basis of periodic review of the loan portfolio. A special reserve is a reserve created to compensate for losses already incurred by a commercial bank and the amount of which is subject to a reliable estimate. Special reserve, calculated taking into account the assessment of the loan portfolio of a commercial bank as of 01.07. 97., must be formed by 01.07. 99. according to the following schedule:

the reserve for bad loans in full must be formed by 01.01. 98. Ukrsotsbank formed it in full. In the future, a specific reserve for bad loans is formed in the next quarter after the loan is classified as "bad"; specific reserve for loans classified as "under control" "substandard" "doubtful" must be formed no later than 01.07. 99. equal shares of not less than 12.5% ​​quarterly:

S = 12.5% ​​* N * C,

Where 12.5 – a constant percentage that ensures the formation of the reserve in equal shares within the prescribed period (100%: 8 quarters);

N – the number of quarters from the beginning of the formation of the reserve, starting from 07/01. 97 RUR

C – the amount of the estimated reserve, which was set on the relevant quarterly date.

Regarding the practice of forming a special reserve, it should be noted that there are two approaches in the world: individual and portfolio.

An individual approach to redundancy involves the creation of a specific, special reserve for each case, even the same type of active operations. That is, if the bank has, for example, 10 issued loans, the reserve will be formed for each loan separately. This is achieved through the use of analytical accounting parameters, and at any given time you can find out what is the book value of each loan individually and the entire loan portfolio.