NPE recognition

For the purpose of implementing forbearance measures, credit institutions should be able to identify signs of possible future financial difficulties at an early stage. In order to do so, the assessment of the financial situation of the borrower should not be limited to exposures with apparent signs of financial difficulties. An assessment of financial difficulties should also be conducted for exposures with regard to which the borrower does not have apparent financial difficulties but in relation to which market conditions have changed significantly in a way that could impact the borrower’s ability to repay (e.g. bullet loans the repayment of which will depend on the sale of immovable property or foreign currency loans).

The assessment of any financial difficulties on the part of a borrower should be based on the situation of the borrower only, disregarding collateral or any guarantees provided by third parties. When assessing the financial difficulties of the borrower, credit institutions, in accordance with Annex V (opens EUR-Lex in a new tab) to Commission Implementing Regulation (EU) No 680/2014 (opens EUR-Lex in a new tab), should consider at least the following rebuttable circumstances:

a) borrower/facility more than 30 days past due during the three months prior to its modification or refinancing;

b) increase in probability of default (PD) of credit institution’s internal rating class during the three months prior to its modification or refinancing;

c) presence on a watch list during the three months prior to its modification or refinancing.

Exposures should not be identified as forborne when concessions are made to borrowers who are not in financial difficulties. Credit institutions should distinguish, based on a detailed financial assessment, between renegotiations or rollovers granted to borrowers not in financial difficulties and forbearance measures such as concessions granted to borrowers in financial difficulties, in accordance with Annex V (opens EUR-Lex in a new tab) to Commission Implementing Regulation (EU) No 680/2014 (opens EUR-Lex in a new tab).

Granting new conditions such as a new interest rate more favourable than the rate borrowers with a similar risk profile could obtain may be considered an indication of such a concession when the credit institution determines that the reason for the new rate is the financial difficulties of the borrower. The provision of more favourable new conditions than those practised by the market should not be considered a prerequisite for the identification of concessions and therefore forbearance. In line with Annex V (opens EUR-Lex in a new tab) to Commission Implementing Regulation (EU) No 680/2014 (opens EUR-Lex in a new tab), when a borrower is in financial difficulties, a change in conditions in line with what other borrowers with a similar risk profile could get from the credit institution should qualify as a concession, including when borrowers are included in public forbearance schemes that are offered by credit institutions.

Borrowers may request modifications in the contractual conditions of their loans without facing or being about to face difficulties in meeting their financial commitments. Credit institutions should perform an assessment of the borrower’s financial situation when such modifications to contractual conditions have an impact on payment performance.

When granting forbearance measures to performing exposures, credit institutions should assess whether these measures lead to a need to reclassify the exposure as non-performing. Granting forbearance measures to NPEs does not clear their non-performing status: the exposures should continue to be identified as non-performing for at least one year of the cure period after the granting of the forbearance measures, as specified in Annex V (opens EUR-Lex in a new tab) to Commission Implementing Regulation (EU) No 680/2014 (opens EUR-Lex in a new tab) and in section 7.3.3.

When assessing if FBEs should be classified as non-performing, credit institutions should assess if exposures:

a) are supported by inadequate payment plans (either initial or subsequent payment plans, as applicable) that encompass, inter alia, a repeated failure to comply with the payment plan, changes to the payment plan to avoid breaches or the payment plan’s resting on expectations that are not supported by macroeconomic forecasts or by credible assumptions on the repayment capability or willingness of the borrower;

b) include contract terms that delay the time for the regular repayment instalments on the transaction, in such a way that its assessment for a proper classification is hindered, such as when grace periods of more than two years for the repayment of the principal are granted;

c) include de-recognised amounts that exceed the accumulated credit risk losses for NPEs with a similar risk profile.

Credit institutions should reclassify NPEs, including FBEs, as performing in accordance with Annex V (opens EUR-Lex in a new tab) to Commission Implementing Regulation (EU) No 680/2014 (opens EUR-Lex in a new tab). Credit institutions should perform a financial analysis of the borrower to establish the absence of concerns regarding the borrower’s ability to pay its credit obligations.

Credit institutions’ policies for the reclassification of non-performing FBEs should specify practices for dispelling concerns regarding the borrower’s ability to comply with the post-forbearance conditions set out in Annex V (opens EUR-Lex in a new tab) to Commission Implementing Regulation (EU) No 680/2014 (opens EUR-Lex in a new tab). These policies should establish criteria in terms of payments made during the cure period of at least one year and define the borrower’s ability to comply with post-forbearance conditions (to the extent that full repayment of the debt is likely) without being reliant on the realisation of collateral at least by demonstrating payments of a not insignificant amount of principal. These policies should require payments of both principal and interest.

In addition, where a borrower has other exposures to a credit institution that are not the subject of a forbearance measure, the credit institution should consider the impact and the performance of these exposures in its assessment of the borrower’s ability to comply with post-forbearance conditions. The consideration of arrears should not change the level of application of non-performing status, in accordance with Annex V (opens EUR-Lex in a new tab) to Commission Implementing Regulation (EU) No 680/2014 (opens EUR-Lex in a new tab), and only exposures to which forbearance measures have been applied should be identified as FBEs.

The existence of contract terms that extend the repayment period, such as grace periods for the principal, should confirm the classification of these FBEs as non-performing until the requirements of Annex V (opens EUR-Lex in a new tab) to Commission Implementing Regulation (EU) No 680/2014 (opens EUR-Lex in a new tab) have been satisfied. The fact that the one-year cure period has elapsed should not automatically lead to reclassification to performing unless regular payments have been made over these 12 months and an assessment of unlikeliness to pay has been concluded with no indication of unlikeliness to pay.

Once FBEs are classified as performing, either because they have met the conditions for being reclassified from the non-performing category or because the granting of forbearance measures did not lead to the classification of the exposure as non-performing, they should continue to be identified as forborne until all the conditions for the discontinuation of the classification of exposures as forborne under paragraph 256 of Annex V (opens EUR-Lex in a new tab) to Commission Implementing Regulation (EU) No 680/2014 (opens EUR-Lex in a new tab) have been met.

Credit institutions’ policies for identifying performing FBEs should specify practices for dispelling concerns regarding the borrower’s financial difficulties. Credit institutions’ policies should require the borrower to have settled, by means of regular payments, an amount equal to all the amounts (principal and interest) that were previously past due or de-recognised at the time of the concession, or to otherwise demonstrate its ability to comply with the post-forbearance conditions under alternative objective criteria that include a repayment of principal.

In accordance with paragraph 260 of Annex V (opens EUR-Lex in a new tab) to Commission Implementing Regulation (EU) No 680/2014 (opens EUR-Lex in a new tab), new forbearance measures granted to performing FBEs that have been reclassified out of the non-performing category will entail the reclassification of these transactions to the non-performing category. The same should apply when these exposures become more than 30 days past due.