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Nonperforming Loans

Nonperforming Loans. Presentation For OECD National Accounts Expert Group Meeting October 2002. Presentation Outline. Issues raised by Nonperforming Loans (NPLs) Working Definition Financial Soundness Indicators. Nonperforming Loans EDG. April 2002, an EDG started on IMF website

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Nonperforming Loans

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  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 (>1 yr) (NPL)

  9. Value of Loans • SNA doesn’t recognize impairment - same valuation for assets & liab. - negotiable loans valued at market • MFSM recs memo on arrears/losses • B&A 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 B&A 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. • B&A 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 => 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 > 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/vulnerabilities • 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

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