Specific Provisions for Bank Loans in Selected Countries
|Number of loan categories||Provisions (in percent)||Provisions (in percent)||Months overdue||Provisions (in percent)||Months overdue||Provisions (in percent)||Months overdue||Provisions (in percent)||Months overdue|
|France3||3||—||—||Up to 3||—||—||0-100||Over 3||—||—|
|Hong Kong SAR||5||1||2||Up to 3 (unsecured), up to 12 (secured)||Loan by loan5||Over 3 (unsecured), over 12 (secured)||Loan by loan||Over 6 (unsecured)||100||—|
|Japan||5||—7||—7||Up to 3||15||Up to 68||70||—||100||—|
|Korea, Rep. of||5||0.5||2||—||20||—||50||—||100||—|
|Singapore10||5||Up to 3||—||—||At least 10||3 or more||At least 50||Over 3||100||—|
Banks are allowed to determine their provisioning policy in consultation with external auditors.
Loans have to be classified as nonperforming (substandard, doubtful, and loss) once principal or interest is past due for three months or more.
Loans can also be classified as doubtful if a bank decides that there is a probable risk of default or the loan is the subject of legal proceedings. Special-mention loans are called past-due loans.
Loans with no discernible risks, loans with increased latent risk, loans categorized as nonperforming, and bad debt (losses).
A benchmark of 20-25 percent could be used.
Nonperforming loans are grouped by decreasing order of risk into bad debts, substandard loans, loans being restructured, and restructured loans. Unsecured loans to borrowers from high-risk countries are treated as nonperforming. Bad debts are claims on insolvent borrowers. Substandard loans are claims on borrowers in temporary difficulty where at least 20 percent of the exposure is more than 6-12 months past due. Loans being restructured are loans where the debtor is indebted to several banks and has applied for consolidation in the previous year. Restructured loans are loans granted a moratorium on repayment and renegotiated at below-market rates.
Based on the actual losses over the past three years of each category.
The use of classification is not a legally binding requirement but rather a supervisory recommendation.
For the amount of the loan that is not expected to be recovered.
Banks are required to classify accounts based on the borrower’s financials, creditworthiness, and repayment capability. Loans have to be classified as nonperforming once principal or interest is past due for three months or more.
At a minimum, banks must use these five classification categories but are encouraged to use a larger number, particularly in the pass category.