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NONPERFORMING LOANS EDG: SOUTH AFRICA
When is a loan to be considered nonperforming?
It is suggested that a specific loan be considered nonperforming if payment is overdue by 3 months or more, or if other information (such as liquidation or qualification of accounts by external auditors) clearly indicates inability to repay.
How should such loans be treated in macroeconomic statistics?
The general direction which is suggested is to record gross balances, emphasizing legal positions. It is suggested that in macroeconomic statistics gross legal position claims and gross specific provision balances be reported at each balance sheet date. This would create explicit building blocks to analyse loan performance and nonperformance. Users can net the provisions against gross claims to calculate estimated net claims.
Similarly, for income statement purposes, it is suggested that the contractual interest accruing on nonperforming loans be separately identified and that a provision of the same amount be raised during each accounting period as an ?interest income provision? until legal certainty has been obtained with the legal process completed and benefits realized, rights expired or surrendered as the loan is finally written off, or control is lost. The net of such interest accruing and the provision raised would obviously be nil. Additional gross specific provisions raised would also flow through the income statement as the capital amount of a loan is written down.
Countries should be encouraged to provide additional memorandum item information regarding loan health, for example loan balances per class. In South Africa banks already report according to the framework indicating standard, special mention, substandard, doubtful and loss loans. Country practices and frameworks may of course differ in this regard.
It could be helpful if countries were also encouraged to provide memorandum-type information showing each of the income statement items related to loan provisions and recoveries and the related interest accruals and provisions.
Here it would be helpful if this could be reported as a separate item under capital and reserves.
Johan van den Heever
Head: Financial Analysis and Public Finance
South African Reserve Bank
The views expressed are those of the author, and do not necessarily agree with those of the South African Reserve Bank.