Key questions from several readers this week focused on the restructuring of loans
As written into my original loan agreement, a ‘grace period’ has been approved which has now expired. If the grace period is extended, will the loan be classified as non-performing?
The loan will be classified as restructured. Based on the data given, it cannot be adjudicated whether the loan will be classified as performing or non-performing. For the loan to be classified as non-performing certain criteria should be met. For example, the restructured loan at the time of restructuring was already classified as non-performing, or presented arrears/excesses for a period more than 60 days or has been restructured more than once in an 18 months period, etc.
Will the security (collateral) gap be calculated on the balance of the account (capital plus interest) or on the limit of the account?
The security gap is calculated on the balance of the account (capital plus interest). The security gap is the difference between the up-to-date loan balance (capital + interest) minus the mortgage collateral (tangible assets such as real estate, cash collateral, etc).
A grace period for interest payment has been approved for my loan. Capitalisation of the interest of the approved grace period has resulted in an excess over the “limit”. Will the account be classified as non-performing? When will days in arrear be counted from?
According to the Central Bank (2013) Directive, the above does not constitute an excess over the “limit”. For loan accounts the meaning of “limit” as we know it for overdraft accounts does not exist. When a grace period for interest payment is approved, the bank is aware that the balance of the loan account may exceed the original loan amount. Counting of days in arrears start from the date the loan instalment was due (capital and interest).
Can you clarify the Central Bank’s (2013) Directive on the definitions of Non-Performing and Restructured Credit Facilities under which a non-performing loan is defined as “…a restructured facility which at the time of restructuring was classified as non-performing, or presented arrears/excesses for a period of more than sixty days”?
Suppose that a bank is about to restructure a loan. Before carrying out any intervention of its internal systems it should consider two criteria. The first is whether the facility meets any of the criteria of Part III of the directive on the definitions of non-performing and restructured credit facilities. The second is whether the facility is in arrears/excesses for more than 60 days.
In case that at least one of the above applies, then the facility should be classified as non-performing.
Let’s look at an example. An overdraft with a limit of €80,000 is in excess by €20,000 and is non-performing. The account is restructured by increasing the limit to €100,000. Restructuring date is July 10, 2013.
The account is classified as non-performing for at least six months from restructuring date, i.e. until 10/1/2014. Let’s say that the interest of €4,000 is due 31/12/2013 and is paid by 31/01/2014, then on 31/1/2014 the account will be classified as performing. If the interest is not paid, the account will continue to be classified as non-performing.
In case the interest is paid on 25/04/2014, then on 30/04/2014 the account will be classified as performing. After the first classification of the account as performing, the account will be checked if it is to