NPE impairment and write-offs

In accordance with the EBA Guidelines on credit risk management practices and accounting for expected credit losses,⁽³⁷⁾ uncollectability should be recognised in the appropriate period through loss allowances or write-offs. When the credit institution has no reasonable expectation of recovering contractual cash flow of the exposure it should lead to a partial or full write-off of the exposure (IFRS 9.B3.2.16.r).

A write-off may be done before legal actions against the borrower to recover the debt have been concluded in full. A write-off should not be considered to mean that the credit institution has forfeited the legal right to recover the debt; a credit institution’s decision to forfeit the legal claim on the debt is debt forgiveness.

Write-offs constitute a de-recognition event (IFRS 9.5.4.4). If cash or other assets are eventually collected, these collections should be directly recognised as income in the statement of profit or loss.

Credit institutions should maintain detailed records of all NPE write-offs performed on a portfolio-level basis.

Credit institutions should include in their internal policies guidance on the timeliness of impairments and write-offs, acknowledging external circumstances and factors such as ongoing judicial procedures. In particular for exposures or parts of exposures that are not covered by collateral, credit institutions should consider suitable maximum periods for full impairment, coverage and write-off. For parts of exposures covered by collateral, the establishment of a minimum impairment level should take the type of collateral into account. Empirical evidence should be applied when calibrating the impairment and write-off periods referred to above. When assessing the recoverability of NPEs and in determining internal NPE write-off approaches, credit institutions should pay particular attention to the cohorts listed below, as they may have higher levels of permanent uncollectability.

a) Exposures with prolonged arrears: different thresholds may be appropriate for different portfolios. Credit institutions should assess the recoverability of NPEs if the borrower has been in arrears for a prolonged period of time. If, following this assessment, it is concluded that there is no reasonable expectation of recovering an exposure or part of an exposure, a full or partial write-off should be performed.

b) Exposures under an insolvency procedure: where the collateralisation of the exposure is low, legal expenses often absorb a significant portion of the proceeds from the bankruptcy procedure, and therefore estimated recoveries can be expected to be very low.

c) A partial write-off may be justified when there is evidence that the borrower is unable to repay the amount of the exposure in full, meaning that there is a reasonable expectation of recovering a part of the exposure.

Credit institutions should adopt, document and adhere to sound policies, procedures and controls for assessing and measuring loss allowances and write-off on NPEs in accordance with the EBA Guidelines on credit risk management practices and accounting for expected credit losses. Credit institutions should back-test their loss allowance estimations against actual losses.

These methodologies should also include policies and procedures on write-offs and recoveries as defined in the EBA Guidelines on credit risk management practices and accounting for expected credit losses. The policy on write-offs should include indicators used to assess expectations of recovery and detailed information on those exposures that have been written off but are still subject to enforcement activity.

In accordance with the EBA Guidelines on credit risk management practices and accounting for expected credit losses, credit institutions should have in place common processes, systems, tools and data.

A credit institution’s internal audit function should verify the methodologies used in accordance with the EBA Guidelines on internal governance.⁽³⁸⁾