Changes to a contract that are related to a borrower’s credit rating are referred to as forbearance measures and thus, are business events in Forbearance measures consist of concessions extended to an exposure towards a debtor facing or about to face difficulties in meeting his financial commitments in order to avoid a foreclosure. Each forbearance measure can consist of several business transactions, e.g. a decrease of the annuity rate or a deferral. The execution of these business transactions leads to an adjustment of the payment plan.
This flag describes the loan officer’s assumption regarding the probability of default after restructuring. The flag is ‘inherited’ at the risk position, meaning that the information is stored at the loan up to the next forbearance measure and cannot be changed.
6. Advantages of forbearance measures
When analysing the advantages of such a measure, the defined forbearance measure is compared to other alternative methods. In particular, it should be examined whether cancelling the loan and liquidating the collateral would result in a higher fair value than if the loan were to continue under the forbearance measure.
The alternatives are to be compared using the fair value (Net present value approach). The measure resulting in the greatest fair value should be the most suitable and sustainable measure.
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It is important that an exposure can only be forborne if the debtor is facing financial difficulties which have led the bank to make some concessions. Hence, forbearance measures are the business transactions of a crisis-related restructuring process.
A change is made regardless of whether if it qualifies as a forbearance measure. For example, this means that a deferment affects the payment plan regardless of whether it is classified as a forbearance measure or not.
However, a forbearance measure can only be implemented if an enhanced data set has been captured and processed. This enhancement does not only entail simply marking a measure as a forbearance measure but it also involves data fields that are relevant for allocating the EBA status.
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The impairment trigger provides information on why a delay in payment is expected. This is selected by the user from a list of reasons that is stored in FlexFinance.
5. Flag ‘Impairment expected’
A forbearance measure can be performed regardless of the number of days past due or the existence of any open claims. In this case, the need to carry out a forbearance measure arises solely from the expectation of the debtor's ability to meet its obligations in the future.
Deals, for which a forbearance measure was performed, are referred to as forborne exposure. For more functional information please refer to section Forborne Exposures.
The following business transactions can be part of a forbearance measure for loans:
The following business transactions can be part of a forbearance measure for current accounts:
For each forbearance measure, the following two criteria are automatically checked:
- profitability of the forbearance measure
- significance of the forbearance measure
For more details on the profitability or the significance of forbearance measures, please refer to subsections Profitability of a forbearance measure or Significance of a forbearance measure, correspondingly.