Past due criterion in the identification of default
On this provision: 1 EBA Q&A
Counting of days past due
For the purposes of the application of point (b) of Article 178(1) of Regulation (EU) No 575/2013, where any amount of principal, interest or fee has not been paid at the date it was due, institutions should recognise this as the credit obligation past due. Where there are modifications of the schedule of credit obligations, as referred to in point (e) of Article 178(2) of Regulation (EU) No 575/2013, the institution’s policies should clarify that the counting of days past due should be based on the modified schedule of payments.
Where the credit arrangement explicitly allows the obligor to change the schedule, suspend or postpone the payments under certain conditions and the obligor acts within the rights granted in the contract, the changed, suspended or postponed instalments should not be considered past due, but the counting of days past due should be based on the new schedule once it is specified. Nevertheless if the obligor changes the schedule, suspends or postpones the payments, the institutions should analyse the reasons for such a change and assess the possible indications of unlikeliness to pay, in accordance with Articles 178(1) and (3) of Regulation (EU) No 575/2013 and Section 5 of these guidelines.
Where the repayment of the obligation is suspended because of a law allowing this option or other legal restrictions, the counting of days past due should also be suspended during that period. Nevertheless, in such situations, institutions should analyse, where possible, the reasons for exercising the option for such a suspension and should assess the possible indications of unlikeliness to pay, in accordance with Articles 178(1) and (3) of Regulation (EU) No 575/2013 and Section 5 of these guidelines.
Where the repayment of the obligation is the subject of a dispute between the obligor and the institution, the counting of days past due may be suspended until the dispute is resolved, where at least one of the following conditions is met:
the dispute between the obligor and the institution over the existence or amount of the credit obligation has been introduced to a court or another formal procedure performed by a dedicated external body that results in a binding ruling in accordance with the applicable legal framework in the relevant jurisdiction;
in the specific case of leasing, a formal complaint has been directed to the institution about the object of the contract and the merit of the complaint has been confirmed by independent internal audit, internal validation or another comparable independent auditing unit.
Where the obligor changes due to an event such as a merger or acquisition of the obligor or any other similar transaction, the counting of days past due should start from the moment a different person or entity becomes obliged to pay the obligation. The counting of days past due is, instead, unaffected by a change in the obligor’s name.
The calculation of the sum of all amounts past due that are related to any credit obligation of the obligor to the institution, parent undertaking or any of its subsidiaries to this obligor and which institutions are required to calculate for the purpose of comparison with the materiality threshold set by the competent authority in accordance with point (d) of Article 178(2) of Regulation (EU) No 575/2013 should be performed with a frequency allowing timely identification of default. Institutions should ensure that the information about the days past due and default is up-to-date whenever it’s being used for decision making, internal risk management, internal or external reporting and the own funds requirements calculation processes. Where institutions calculate days past due less often than daily, they should ensure that the date of default is identified as the date when the past due criterion has actually been fulfilled.
The classification of the obligor to a defaulted status should not be subject to additional expert judgement; once the obligor meets the past due criterion all exposures to that obligor are considered defaulted, unless either of the following conditions is met:
the exposures are eligible as retail exposures and the institution applies the default definition at individual credit facility level;
a so called ‘technical past due situation’ is considered to have occurred, in accordance with paragraph 23.
Technical past due situation
A technical past due situation should only be considered to have occurred in any of the following cases:
where an institution identifies that the defaulted status was a result of data or system error of the institution, including manual errors of standardised processes but excluding wrong credit decisions;
where an institution identifies that the defaulted status was a result of the non-execution, defective or late execution of the payment transaction ordered by the obligor or where there is evidence that the payment was unsuccessful due to the failure of the payment system;
where due to the nature of the transaction there is a time lag between the receipt of the payment by an institution and the allocation of that payment to the relevant account, so that the payment was made before the 90 days and the crediting in the client’s account took place after the 90 days past due;
in the specific case of factoring arrangements where the purchased receivables are recorded on the balance sheet of the institution and where one of the following conditions is met:
the materiality threshold set by the competent authority in accordance with point (d) of Article 178(2) of Regulation (EU) No 575/2013 is breached but none of the receivables to the obligor is past due more than 90 days;
the obligor has not been adequately informed about the cession of the receivable by the factor’s client, and the institution has evidence that the obligor has paid the receivable to the client before it was past due more than 90 days;
in the case of undisclosed factoring arrangements, the institution has evidence that the obligor has paid the receivable to the client before it was past due more than 90 days.
Technical past due situations should not be considered as defaults in accordance with Article 178 of Regulation (EU) No 575/2013. All detected errors that led to technical past due situation should be rectified by institutions in the shortest timeframe possible.
In the case of institutions that use the IRB Approach, technical past due situations should be removed from the reference data set of defaulted exposures for the purpose of estimation of risk parameters.
Exposures to central governments, local authorities and public sector entities
Institutions may apply specific treatment for exposures to central governments, local authorities and public sector entities where all of the following conditions are met:
the contract is related to the supply of goods or services, where the administrative procedures require certain controls related to the execution of the contract before the payment can be made; this applies in particular to factoring exposures or similar types of arrangements but does not apply to instruments such as bonds;
apart from the delay in payment no other indications of unlikeliness to pay as specified in accordance with Article 178(1)(a) and 178(3) of Regulation (EU) No 575/2013 and these guidelines apply, the financial situation of the obligor is sound and there are no reasonable concerns that the obligation might not be paid in full, including any overdue interest where relevant;
the obligation is past due not longer than 180 days.
Institutions that decide to apply the specific treatment referred to in paragraph 25 should apply all of the following:
these exposures should not be included in the calculation of the materiality threshold for other exposures to this obligor;
they should not be considered as defaults in the sense of Article 178 of Regulation (EU) No 575/2013;
they should be clearly documented as exposures subject to the specific treatment.
Specific provisions applicable to factoring and purchased receivables
Where there are factoring arrangements whereby the ceded receivables are not recognised on the balance sheet of the factor and the factor is liable directly to the client up to a certain agreed percentage, the counting of days past due should commence from when the factoring account is in debit, i.e. from when the advances paid for the receivables exceed the percentage agreed between the factor and the client. For the purpose of determining items of the client of a factor that are past due, institutions should apply both of the following:
compare the sum of the amount of the factoring account that is in debit and all other past due obligations of the client recorded in the balance sheet of the factor, against the absolute component of the materiality threshold set by the competent authority in accordance with point (d) of Article 178(2) of Regulation (EU) No 575/2013;
compare the relation between the sum described in point (a) and the total amount of current value of the factoring account, i.e. the value of advances paid for the receivables and all other on-balance sheet exposures related with the credit obligations of the client, against the relative component of the materiality threshold set by the competent authority in accordance with point (d) of Article 178(2) of Regulation (EU) No 575/2013.
Where there are factoring arrangements where the purchased receivables are recognised on the balance sheet of the factor and the factor has exposures to the debtors of the client, the counting of days past due should commence when the payment for a single receivable becomes due. In this situation, for institutions that use the IRB Approach, by virtue of the fact that the ceded receivables are purchased receivables, where they meet the requirements of 154(5) of Regulation (EU) No 575/2013 or in the case of purchased corporate receivables the requirements of Article 153(6) of Regulation (EU) No 575/2013, the default definition may be applied as for retail exposures in accordance with Section 9 of these guidelines.
Where the institution recognises events related to dilution risk of purchased receivables as defined in point (53) of Article 4(1) of Regulation (EU) No 575/2013, these events should not be considered as leading to the default of the obligor. Where the amount of receivable has been reduced as a result of events related to dilution risk such as discounts, deductions, netting or credit notes issued by the seller the reduced amount of receivable should be included in the calculation of days past due. Where there is a dispute between the obligor and the seller and such event is recognised as related to dilution risk the counting of days past due should be suspended until the dispute is resolved.
Events recognised as related to dilution risk and hence excluded from the identification of default should be included in the calculation of own funds requirements or internal capital for dilution risk. Where institutions recognise significant number of events related to dilution risk, they should analyse and document the reasons for such events and assess the possible indications of unlikeliness to pay, in accordance with Articles 178(1) and (3) of Regulation (EU) No 575/2013 and Section 5 of these guidelines.
Where the obligor has been adequately informed about the cession of the receivable but has nevertheless made the payment to the client, the institution should continue counting the days past due according to the conditions of the receivable.
Setting the materiality threshold
Competent authorities should notify the EBA of the levels of the materiality thresholds that they set in their respective jurisdiction in accordance with point (d) of Article 178(2) of Regulation (EU) No 575/2013. After the entry into force of the regulatory technical standards developed in accordance with Article 178(6) of Regulation (EU) No 575/2013, where competent authorities set the relative component of the materiality threshold at a level different than the 1% referred to in those regulatory technical standards, they should provide the justification for this different level of the threshold to the EBA.
Institutions should apply the materiality threshold for past due credit obligations set by their competent authorities as referred to in point (d) of Article 178(2) of Regulation (EU) No 575/2013. Institutions may identify defaults on the basis of a lower threshold if they can demonstrate that this lower threshold is a relevant indication of unlikeliness to pay and does not lead to an excessive number of defaults that return to non-defaulted status shortly after being recognised as defaulted or decrease of capital requirements. In this case institutions should record in their databases the information on the trigger of default as an additional specified indication of unlikeliness to pay.