Download The Treatment of Nonperforming Loans

The Treatment of Nonperforming
Loans in Macroeconomic Statistics
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)
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
SNA Approach
Other relevant manuals tend to follow the
SNA
 ESA,
 BPM5,
 GFSM,
 MFSM (most elaborate)
= “International Statistics Manuals”

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.
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
Definition of nonperforming loans


i.
ii.
iii.
iv.
v.
Country practice varies.
To help improve cross country comparisons, the IIF
proposes the following categories for reporting:
Standard
Watch
Substandard
Doubtful
Loss
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)

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

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




Treatment of Interest on NPLs

International statistics manuals

Interest accrues by default as SNA doesn’t 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)

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
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?
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 writeoffs?
Should the manuals be changed to allow price
fluctuations in loans expressed in national currency?
If so, how?
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?
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
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”
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