Difference between revisions of "NPL Life Cycle"

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(NPL Life Cycle Phases)
 
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During this phase, the focus is on initial engagement with the borrower for early recoveries and on collecting information required for a detailed assessment of the borrower’s circumstances (e.g. financial position, status of loan documentation, status of collateral, level of cooperation, etc.). The information collection will allow appropriate borrower segmentation, which ultimately determines the most suitable workout strategy for the borrower.  
 
During this phase, the focus is on initial engagement with the borrower for early recoveries and on collecting information required for a detailed assessment of the borrower’s circumstances (e.g. financial position, status of loan documentation, status of collateral, level of cooperation, etc.). The information collection will allow appropriate borrower segmentation, which ultimately determines the most suitable workout strategy for the borrower.  
  
This phase might also involve short-term forbearance options with the aim of stabilising the financial position of the borrower before establishing a suitable workout strategy. In addition, the bank should seek options to improve its position (for instance by signing new loan documents, perfecting outstanding security, minimising cash
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This phase might also involve short-term forbearance options with the aim of stabilising the financial position of the borrower before establishing a suitable workout strategy. In addition, the bank should seek options to improve its position (for instance by signing new loan documents, perfecting outstanding security, minimising cash leakage, taking additional security if available)
leakage, taking additional security if available)
 
  
 
=== Late arrears / Restructuring / Forbearance ===
 
=== Late arrears / Restructuring / Forbearance ===

Latest revision as of 20:56, 7 November 2019

Definition

NPL Life Cycle is the description of the different possible stages and outcomes of a Non-Performing Loan or exposure.[1]

NPL Life Cycle Phases

The following is a description of the NPL life cycle from the perspective of the lender:

Early Arrears (up to 90 days past due)

During this phase, the focus is on initial engagement with the borrower for early recoveries and on collecting information required for a detailed assessment of the borrower’s circumstances (e.g. financial position, status of loan documentation, status of collateral, level of cooperation, etc.). The information collection will allow appropriate borrower segmentation, which ultimately determines the most suitable workout strategy for the borrower.

This phase might also involve short-term forbearance options with the aim of stabilising the financial position of the borrower before establishing a suitable workout strategy. In addition, the bank should seek options to improve its position (for instance by signing new loan documents, perfecting outstanding security, minimising cash leakage, taking additional security if available)

Late arrears / Restructuring / Forbearance

This phase is focused on implementing and formalising restructuring/forbearance arrangements with borrowers. These restructuring/forbearance arrangements should be put into place only where the borrower affordability assessment concluded that viable restructuring options indeed exist. Post completion of a restructuring/forbearance arrangement the borrower should be constantly monitored for a clearly defined minimum period (recommended to be aligned with the cure period in the EBA definition of NPE, i.e. at least 1 year), given their increased risk, before they can eventually be transferred out of the NPL Workout Units if no further NPL triggers are observed.

Liquidation / Debt Recovery / Legal Cases / Foreclosure

This phase focuses on borrowers for whom no viable forbearance solutions can be found due to the borrower’s financial circumstances or cooperation level. In such cases, banks should initially perform a cost-benefit analysis of the different liquidation options including in-court and out-of-court procedures. Based on this analysis, banks should speedily proceed with the chosen liquidation option. Dedicated legal and business liquidation expertise is crucial for this phase of the NPL life cycle. Banks that are engaged in extensive use of external experts here should ensure that sufficient internal control mechanisms are in place to ensure an effective and efficient liquidation process. Aged NPL stock should be given special attention in this regard. A dedicated debt recovery policy should contain guidance on the liquidation procedures.

References

  1. ECB: Guidance to banks on non-performing loans, March 2017

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