RBI Retail Loan Loss Provisioning - WB 2014 - World Bank

Loan loss provisio
an example from

Deyan IVANOV
Retail Risk Methodology and Va
Raiffeisen Bank International AG

oning of a retail portfolio -
m RBI AG

alidation
G

RBI at a glance (data as of 1Q2014)

A leading corporate and investment bank for A
Western European commercial customers
A leading universal bank in CEE with the larges
Home market Austria and Central and Eastern
15 markets in CEE
~14.5 milion customers
~ 3000 business outlets
> 57 000 employees
Market capitalization ~ EUR 7.1 bilion
Listed on the Vienna Stock Exchange

Slide no.2

Austria‘s Top 1,000 companies and for
st network of any Western banking group
Europe (CEE) with further focus on Asia

Agenda

1 Types of Loan Loss Provisions in the R
2 Individual Loan Loss Provisions (ILLP) - Overview
3 ILLP – Treatment of Restructured Accounts
4 ILLP – Calculation steps

5 Portfolio-based Loan Loss Provisions (PLLP) - O

6 PLLP – Flow Rates, Loss Factors, Transition Mat

7 PLLP – Gross Provisions, Recovery Models, Net

8 Risk Costs – Definitions and Examples

9 Experience from the roll-out across the RBI Gro
10 Future Plans for Loan Loss Provisioning Method

Slide no.3

Retail Segment of RBI

w

Overview
trix – Definitions and Examples
t Provisions - Calculations

oup
dology in RBI Retail Portfolio

Types Of Loan Loss Provisions in RBI

• Loan Loss Provisions must be created at a le
adequate protection against Incurred Losses
•Portfolio-based loan loss provisions

• Flow rate model or Transition Matrix m
• Vintage Recovery model – to calculate

• Individual loan loss provisions
• Accounts in Loss (in retail defined as 18
• Early Losses (Frauds, Bankruptcy, etc.)
• Some Restructured loans (if NPV is low

Slide no.4

evel believed to be sufficient to provide
(credit risk losses) as defined in IAS 39

model – to calculate “Gross Provisions”
final “Net” Provisions

80+ =>Absorbing status)

wer than actual balance)

Types Of Loan Loss Provisions in RBI (

Balance

New volume

Accounts with no
delinquencies

1_90 accounts
90_180 accounts

180+ accounts N

360+ accounts

Slide no.5

(cont’d) Provisions

PLLP No provisions
Accounts with
NPL
ILLP no
delinquencies

1_90 accounts

90_180
accounts

180+ accounts

360+ accounts

Agenda

1 Types of Loan Loss Provisions in the Retail Segm
2 Individual Loan Loss Provisions (ILLP)
3 ILLP – Treatment of Restructured Accounts
4 ILLP – Calculation steps

5 Portfolio-based Loan Loss Provisions (PLLP) - O

6 PLLP – Flow Rates, Loss Factors, Transition Mat

7 PLLP – Gross Provisions, Recovery Models, Net

8 Risk Costs – Definitions and Examples

9 Experience from the roll-out across the RBI Gro
10 Future Plans for Loan Loss Provisioning Method

Slide no.6

ment of RBI

) - Overview

Overview
trix – Definitions and Examples
t Provisions - Calculations

oup
dology in RBI Retail Portfolio

Individual Loan Loss Provisions (ILLP)

If objective significant evidence of loss exists
from Portfolio based Loan Loss Provisions and
individually

ILLP are calculated at RBI Group for the follo

Accounts in Loss Early Losses
status (180+ dpd) -Frauds
-Bankruptcie
- Recovery collection -Deceased
starts at this point customers

Slide no.7

) - Overview

s individually such accounts are excluded
d these accounts must be evaluated

owing cases:

s: Restructured loans:
-Re-agings

es -Extensions
-Rewrites

ILLP - Accounts In 180+ dpd

 Individual Loan Loss Provisions at 100% o

exposure which is 180 days past due

 If there is a mortgage pledge or a vehicle

repossessed (and not sold yet) at those ac
Exposure (Gross Exposure reduced by disc

 If the collateral is other than real estate o

reduced as we believe that non-repossess
suggests one of the following problems:
 no possession of collateral
 the collateral is not liquid
 operational breakdown

Slide no.8

of gross exposure must be applied for any

(or other assets in case of leasing) is
ccounts, Provisions are set at 100% of Net
counted Weighted Collateral Value)

or repossessed asset, Gross Exposure is not
sion of the collateral before 180+ (7 months)

ILLP - Early Losses

 The accounts which are identified as unco

very low)

 ILLP at 100% of the exposure must be se

by discounted WCV of real estate or alrea

 Typical examples of Early Losses are:

 Frauds – there are some evidence (re
fraudulent activities of the customer,
(e.g. at underwriting)

 Bankruptcy – a court decision is avai
 Deceased customers – there are offi

Slide no.9

ollectible (likelihood that a loan will be paid is

et up at identified accounts, it may be reduced
ady repossessed assets

eceived official information) about a
, our partners or internal fraud is detected
ilable
icial information

Agenda

1 Types of Loan Loss Provisions in the Retail Segm
2 Individual Loan Loss Provisions (ILLP) - Overview
3 ILLP – Treatment of Restructured Acc
4 ILLP – Calculation steps
5 Portfolio-based Loan Loss Provisions (PLLP) - O
6 PLLP – Flow Rates, Loss Factors, Transition Mat
7 PLLP – Gross Provisions, Recovery Models, Net
8 Risk Costs – Definitions and Examples
9 Experience from the roll-out across the RBI Gro
10 Future Plans for Loan Loss Provisioning Method

Slide no.10

ment of RBI
w

counts

Overview
trix – Definitions and Examples
t Provisions - Calculations

oup
dology in RBI Retail Portfolio

ILLP – Treatment of Restructured Acc

 Restructuring is a change in the original terms of
overcome a financial difficulty.

 Distressed restructuring is a restructuring, which
by a material forgiveness, or postponement, of p

 Re-aging refers to returning a delinquent revolvi
amount being paid and with no significant chang

 Deferral refers to deferring due payment(s) on a
the loan. A maximum of three contractual payme
while other instalments remain the same.

 Extension - the missed payments are added to th

 Rewrite refers to underwriting a due existing ins
including payment amounts, interest rates, amor
is to improve the borrower’s ability to service the

Slide no.11

counts

f a lending contract in order to help the borrower to

h is likely to result in a expected economic loss caused
principal, interest or (where relevant) fees.

ing account to a current status without the overdue
ges to the account terms.

an instalment loan without changing the maturity of
ents can be postponed for a fixed period of time

XXX

he end of the loan thereby extending the term.

X

stalment loan by materially changing its terms,
rtization schedules, or its final maturity. The intention
e obligation.

X

ILLP - Basic Rules In The Restructuring

 In order to prevent artificial improvement of
activities, RBI has set the following rules for re

 borrower must show a renewed willingness an
 the willingness and ability to pay is observed fo

extended by any period of significant reduction
 account can not be restructured (except for de

and twice within any 3-year period => If breac
 additional funds/limit can not be advanced to
 A newly opened account which replaces the o

restructured account as well

 Definition of Significant reduction:

 The new instalment is lower than the interest
 For FX denominated loans – out of devaluatio

the original one
 The new reduced instalment caused extension

by RBI Retail Credit Policy

 The maximum period of temporary significan

Slide no.12

g Process

f the portfolio quality out of restructuring
estructured accounts:

nd ability to repay the loan;
or at least three months after the restructuring and is
n* of the instalment
eferrals) more than once within any 12-month period
ched, ILLP at 100% on the net exposure.
o enable new payment;
old account as a result of restructuring is considered a

only payment
on of the LCY the new instalment in EUR is lower than

n of the tenor beyond the maximum product tenor set

nt reduction may not exceed 12 months!

ILLP - Impairment of restructured acc

 Restructured loans other than Defe
impairment:

 if the interest rate is lower than it was
interest rate is decreased in order to c

 if maturity is extended and the instalm
 if there is a reduction in the amount o

reduction is not charged off against P

If NPVn (Net present value of new insta
it must be booked 100% provision for N

Slide no.13

counts

errals are always to be checked for

s upon account opening (except where the
conform to current market conditions);
ment amount is unchanged;
of debt (principal, interest, fee) and this
P&L.

alment plan) < NPVo of old instalment plan,
NPVo-NPVn !!!

ILLP - DPD Treatment Of Restructured

 After restructuring the account should be kep
to the restructuring for at least three months
DPD counter and “freeze” the restructured d

 Any new delinquency (DPDc) during the obse
date of restructuring and thus the provisionin
observation period is restarted until 3 consec
(DPD=DPDr+DPDc)

 If a customer has paid all due payments withi
the current bucket and added to the portfolio
impairment due to restructuring) and the dpd

 If the account was in 180+ dpd before restru
DPD (calculated according to p.2 above reach
will stay in 180+

 If the customer breaches the new conditions
paid), the account shall roll down in dpd buck
and dpd will not go back to current bucket aft

Slide no.14

d Exposures

pt in the same delinquency bucket it was prior
s of observation period – introduce a parallel
dpd (DPDr)

ervation period is “added” to the DPD at the
ng bucket is determined. Respectively, the
cutive instalments are repaid in time and in full.

in the observation period, the account is put to
o assessment (! – provided there was no
d before restructuring is no longer maintained.

ucturing, OR during the observation period its
hed 180+) it can not go to current bucket but

s (at least one new agreed instalment is not
kets depending on the dpd counter definition
ter three months.

Agenda

1 Types of Loan Loss Provisions in the Retail Segm
2 Individual Loan Loss Provisions (ILLP) - Overview
3 ILLP – Treatment of Restructured Accounts
4 ILLP – Calculation steps
5 Portfolio-based Loan Loss Provisions (PLLP) - O
6 PLLP – Flow Rates, Loss Factors, Transition Mat
7 PLLP – Gross Provisions, Recovery Models, Net
8 Risk Costs – Definitions and Examples
9 Experience from the roll-out across the RBI Gro
10 Future Plans for Loan Loss Provisioning Method

Slide no.15

ment of RBI
w

Overview
trix – Definitions and Examples
t Provisions - Calculations

oup
dology in RBI Retail Portfolio

Overview ILLP Calculation

I Individual Loan Loss Provisions ILLP1 ( Ear
Net Provisions = 100% of Exposure

II Individual Loan Loss Provisions ILLP2 ( Ear
Net Provisions = 100% of Exposure – discou
repossessed

Market value must be estimated at the tim
WCV is calculated according to GD Collatera
WCV must be further discounted to conside
(time value of the money)

III Individual Loan Loss Provisions ILLP3 ( che
Net Provisions = PLLP before restructurin
+ Impairment due to a r

Slide no.16

rly losses, 180+ accounts -unsecured)=>

rly losses,1 80+ accounts - secured)=>
unted WCV for Mortgages,
Vehicles and leasing assets
me of entering 180+ (or not older than 6 months)
al evaluation using some discounts
er the time when we plan to sell the collateral

eck Restructured Loan for Impairment)=
ng (using special DPD and observation period)
restructuring

Agenda

1 Types of Loan Loss Provisions in the Retail Segm
2 Individual Loan Loss Provisions (ILLP) - Overview
3 ILLP – Treatment of Restructured Accounts
4 ILLP – Calculation steps
5 Portfolio-based Loan Loss Provisions
6 PLLP – Flow Rates, Loss Factors, Transition Mat
7 PLLP – Gross Provisions, Recovery Models, Net
8 Risk Costs – Definitions and Examples
9 Experience from the roll-out across the RBI Gro
10 Future Plans for Loan Loss Provisioning Method

Slide no.17

ment of RBI
w

s (PLLP) - Overview

trix – Definitions and Examples
t Provisions - Calculations

oup
dology in RBI Retail Portfolio

Portfolio-based Loan Loss Provisions

Flow AVG
Rate Flow

Rate

Gross Recovery Pro
Provisions Rate

Risk
Costs

Slide no.18

(PLLP) - Overview

Loss Flow rate
Factor model

Net Provisioning
ovisions calculation

Influence
on P/L

Agenda

1 Types of Loan Loss Provisions in the Retail Segm
2 Individual Loan Loss Provisions (ILLP) - Overview
3 ILLP – Treatment of Restructured Accounts
4 ILLP – Calculation steps
5 Portfolio-based Loan Loss Provisions (PLLP) - O
6 PLLP – Flow Rates, Loss Factors, Tran
7 PLLP – Gross Provisions, Recovery Models, Net
8 Risk Costs – Definitions and Examples
9 Experience from the roll-out across the RBI Gro
10 Future Plans for Loan Loss Provisioning Method

Slide no.19

ment of RBI
w

Overview

nsition Matrix – Definitions and Examples

t Provisions - Calculations

oup
dology in RBI Retail Portfolio

PLLP - Flow Rate – Definition

Flow rate is calculated as a ratio – the balan
balance in the previous dpd bucket from prev

It is based on the assumption that an accoun

Bucket (i) Previous month Cu
balance Bi(t-1) b

Current (1) B10[1]

1-30 dpd (2) B20

31-60 dpd (3) B30

61-90 dpd (4) B40

91-120 dpd (5) B50

121-150 dpd (6) B60

151 - 180 dpd (7) B70

180+ (8) B80

[1] B10 – balance of loans in the category (Current Bucket) in

[2] B21 – balance of loans in the category (1_30) in month “t”

[3] FR1– Flow rate (%) of rolling from Current bucket to 1-30
reporting is done.

Slide no.20

nce in dpd bucket from actual month over the
vious month (maximum 100%)

nt either flows down or is paid out

urrent month Monthly Flow rate (%) FR
balance Bi(t)

B11 FR1[3] = min(100%; B21/B10)

B21 [2] FR2 = min(100%; B31/B20)

B31 FR3 = min(100%; B41/B30)

B41 FR4 = min(100%; B51/B40)

B51 FR5 = min(100%; B61/B50)

B61 FR6 = min(100%; B71/B60)

B71 FR7 = min(100%; B81/B70)

B81 100%

n month “t-1” (previous month)

” (current month – for which the reporting is done)

dpd bucket corresponding to the actual month (t) for which the

PLLP - Flow Rates – Example

January February

Curr 100.000
1-30
31-60 3.000
61-90
91-120 500
121-150
Balance 151-180 280
181 new
180+ 200

Curr 140
1-30
31-60 130
61-90
91-120 120
121-150
151-180 3.000
181 new
Flow Rate -
-
-
-
-
-
-
-

Slide no.21

March April May

PLLP - Flow Rates – Example

January February

Curr 100.000 105.000
1-30
31-60 3.000 3.500
61-90
91-120 500 600
121-150
Balance 151-180 280 300
181 new
180+ 200 210

Curr 140 160
1-30
31-60 130 135
61-90
91-120 120 128
121-150
151-180 3.000 3.120
181 new
Flow Rate -
-
-
-
-
-
-
-

Slide no.22

March April May

PLLP - Flow Rates – Example

January February

Curr 100.000 105.000
1-30
31-60 3.000 3.500
61-90
91-120 500 600
121-150
Balance 151-180 280 300
181 new
180+ 200 210

Curr 140 160
1-30
31-60 130 135
61-90
91-120 120 128
121-150
151-180 3.000 3.120
181 new
Flow Rate --
- 3,50%
-
-
-
-
-
-

Slide no.23

March April May

PLLP - Flow Rates – Example

January February

Curr 100.000 105.000
1-30
31-60 3.000 3.500
61-90
91-120 500 600
121-150
Balance 151-180 280 300
181 new
180+ 200 210

Curr 140 160
1-30
31-60 130 135
61-90
91-120 120 128
121-150
151-180 3.000 3.120
181 new
Flow Rate --
- 3,50%
- 20,00%
-
-
-
-
-

Slide no.24

March April May

PLLP - Flow Rates – Example

January February

Curr 100.000 105.000
1-30
31-60 3.000 3.500
61-90
91-120 500 600
121-150
Balance 151-180 280 300
181 new
180+ 200 210

Curr 140 160
1-30
31-60 130 135
61-90
91-120 120 128
121-150
151-180 3.000 3.120
181 new
Flow Rate --
- 3,50%
- 20,00%
- 60,00%
-
-
-
-

Slide no.25

March April May