RBI Retail Loan Loss Provisioning - WB 2014 - World Bank

PLLP - Vintage Recovery Model

Vintage Recovery model estimates the recove

The output of VRM is a recovery ratio, which
payments (recoveries) after Losses divided by

Discount Factor must be taken 60%
into account 50%
40%
The discount rate to be used 30%
is the APR which was in force 20%
at the time the account 10%
entered Loss status
0%
1 35 7

Slide no.51

eries after Losses (180+)
h represents the portion of accumulated
y the amount that rolled into 180+

Recovery Rate

7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47
Time Since 180+

PLLP - Vintage Recovery Rate Calculat

Month, when account Account balance at roll to 180+; see also comm
rolled into 180+

Write off AmoWurnitte-off Months sincMe wonritthes-osfifnce Loss 3
1 2
Loss dadteate at Loasms ount

A1 A2 A3

C

D

Slide no.52

tion

ments to mortgage ptf.

345678

B

PLLP - Net Provisions Calculation

• Final (Net) provisions also consider the pay
• Recovery rates from Vintage Recovery mod
• Net Provisions = Gross Provisions before 18

February March •A
•G
Curr 251 353
•N
ExPpreocvtiesidoLnosss 1-30 239 337

31-60 205 295

61-90 171 221

91-120 160 190

121-150 152 173

151-180 133 154

181 new 128 134

180+ 3.120 3.248

Provisions BS 4.559 5.105

•P

Slide no.53

yments after 180+
del is applied
80+ * (1- Recovery Rate)
Assume that Recovery rate = 10%

Gross provisions before 180+ =
5.105 – 3.248 – 134 = 1.723

Net Provisions =
1.723 * (1- 0,1) = 1.551

Provisions = 1.551+ 3.248+134 = 4.933

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

Slide no.54

ment of RBI
w

Overview
trix – Definitions and Examples
t Provisions - Calculations

es

oup
dology in RBI Retail Portfolio

Risk Costs – Definition

• has an impact on the Income statement (P&
• also called Provisioning for Impairment Losse
• shown as the sum of “standard risk costs” an
• sum of Allocation, Release, Direct Write dow
• are calculated based on the result of the form
to release provisions no longer required

60

50 3 3

10 15

40

30 5
Release*
20 40

10

0

Provisions Allocation* Direct Write Usage (Net Pro
BOP
down* Write Off)

Slide no.55

&L)
es (P/L) in some financial reports
nd “risk results” (Controlling)
wns (Accounting)
mula bellow to built new provisions in B/S or

30 Risk costs =
+ EOP Provisions
ovisions – BOP Provisions
EOP + Usage (Net Write-offs)

BOP – Beginning of Period EOP – End of Period

Risk Costs – Example

February March

Curr 105.000 110.000
1-30
31-60 3.500 4.000
61-90
91-120 600 800
121-150
Balance 151-180 300 350
181 new
180+ 210 230

Curr 160 180
1-30
31-60 135 155
61-90
91-120 128 134
121-150
151-180 3.120 3.248
180+
Loss Factor 0,24% 0,32%
6,84% 8,43%
34,18% 36,86%
56,97% 63,19%
75,96% 82,42%
94,95% 96,16%
98,46% 99,26%
100,00% 100,00%

Slide no.56

February March

Curr 251 353

EPxrpoevcitsieodnLsoss 1-30 239 337

31-60 205 295

61-90 171 221

91-120 160 190

121-150 152 173

151-180 133 154

181 new 128 134

180+ 3.120 3.248

Provisions BS 4.559 5.105

Risk costs: 546

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 t
10 Future Plans for Loan Loss Provisioning Method

Slide no.57

ment of RBI
w

Overview
trix – Definitions and Examples
t Provisions - Calculations

the RBI Group

dology in RBI Retail Portfolio

Experience from the roll-out across th

 A Survey across all Network banks was p
components of Retail Provisioning Meth

 DPD
 Portfolio segmentation
 Restructuring
 FRM,TMM, Loss Rate Calculation
 Recovery Rate Calculation
 ILLP / Collateral Value

 Data processing and assessment (subjec

 Based on responses to questionnaire with
 NWUs were graded by the proximity of th
 Different topics were weighted to reflect
 ILLP and Restructuring topics got the high

the most important role regarding the pr
 Other topics had the weights of 5%-10%

Slide no.58

he RBI Group

performed recently, covering the following
hodology

ctive)

h pre-defined answers, where applicable
he local implementation to the Group Directive
t importance/sensitivity
hest weights (30% and 20%) as they are playing
rovision adequacy
%-15% depending on their importance

Experience from the roll-out across th

Private Individuals

NWB DPD Portfolio Restructuring Loss rate Reco
segmentation calculation cal

1 8 9 9 10
2 10 9 10 9
3 9 9
4 9 0 7 3
5 8 10 0 6
6 9 8 3 7
7 6 10 0 9
8 9 9 6 7
9 9 10 3
10 10 9 7 10
11 10 9 9 8
12 9 9 6 8
13 10 10 4 7
14 10 9 3 4
15 9 6 7
-
- - -

MicroSME

NWB DPD Portfolio Restructuring Loss rate Reco
segmentation calculation cal

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

Slide no.59

he RBI Group

overy rate ILLP (WCV) Overall Conservatism PI
lculation
8 8 .9 NWB
9 10 9 .4
8 7 .1 1
9 5 3 .3 2
0 4 6 4. 3
7 7 5 0. 4
6 6 7 3. 5
6 7 6 9. 6
8 8 7 .8 7
7 8 7 5. 8
7 6 7 .9 9
8 8 6 .2 10
0 8 6 1. 11
6 7 7 2. 12
8 7 13
- 14
- - 15

overy rate ILLP (WCV) Overall Conservatism
lculation
NWB Micro

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

Experience from the roll-out across th

 Most frequently observed challenge

a. Insufficient data or immaterial portfolios to
Solution: use of regional benchmarks

b. Collaterals not revaluated on an annual basi
c. Discount factor for Vintage Recovery Model
d. Impairment test not performed on restructu
e. “Freezing” of the DPD counter at time of res

implemented

 Solutions:

a. Use of regional benchmarks or benchmarks
b. Use internally developed price indices or ap
c. Use approximations from similar products
d. Pre-calculate impairment for the boundary c

with pre-defined restructuring instruments)
e. Closer observation of the performance of th

the restructuring instruments

Slide no.60

he RBI Group

es before the implementation

develop reliable flow-rates or recovery rates –

is
l cannot be calculated due to system limitations
ured accounts
structuring for the subsequent 3 months is not

from other similar products
pply a flat haircut of e.g. 10% p.a.

cases (retail restructuring is usually campaign driven
) and use averages
he restructured portfolio, pre-approval by the HO of

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 Provisioni

Slide no.61

ment of RBI
w

Overview
trix – Definitions and Examples
t Provisions - Calculations

oup

ing Methodology in RBI Retail Portfolio

Possible (Near) Future Approaches

 Different approaches for the netw
setup (“hierarchy of provisioning m

Provisioning based on Basel 2/3 fram

1  “Before” loss event: Portfolio-base

PLLP = Exposure * P

 “After” loss event: Individual impai

ILLP = Exposure * B

2 Provisioning based on “days-past-due

 Transition matrix model
 Flow rate model

Important: Reconciliation of approaches

LGD’ without down-turn adjustment. BEEL = Best est

Slide no.62

work units depending on available
methodologies”):

mework (if available):
ed impairments
PD * LGD' * LIP
irments:
BEEL

e grid”:

by benchmarking and backtesting

timate of expected loss

MIND STR

Slide no.63

RETCHERS

Mind stretchers

 Question 1:
Based on the methodology of flow-rate
strategies should a bank follow in order
possible:

 Answers:
A. Sell aggressively the collaterals
B. Focus the collection activities on the
C. Focus the collection activities on the

Slide no.64

model, which of the following
to keep its costs for PLLP as low as

e “early”- delinquencies
e “late” - delinquencies

Mind stretchers

 Question 2:

A Bank observes the an improvement the flow-ra
Feb’09. However, the PLLP for Mar’09 are higher
the monthly PLLP by average flow-rates based on
the most possible reason among the following lis

 Answers:
A. The portfolio of the bank has increas
B. The calculation team made a mistak
C. The month that was dropped from t

replaced by a month with “worse” r

Slide no.65

ates for all buckets for Mar’09 compared to
r than those for Feb’09. The Bank is caclulating
n last 12-month actual flow rates. What could be
sted?

sed significantly
ke
the average flow-rate calculation was
rates

Mind stretchers

 Question 3:

Following the RBI Retail Provisioning methodolog
180+ is 90%, what is the probability for an accoun
into Bucket 150-180?

 Answers:
A. 90%
B. 10%
C. 0%

Slide no.66

gy, if the flow-rate for Bucket 150-180 to Bucket
nt which is currently in Bucket 180+ to roll back

Mind stretchers

 Question 4:

If a Bank applying the RBI’s retail provisioning me
collateral linked to a mortgage account in Bucket
pools for the Mortgage portfolio will be affected?

 Answers:
A. PLLP
B. ILLP
C. Both PLLP and ILLP

Slide no.67

ethodology sells a Residential real estate
t 180+ DPD, which of the following provision
?

Mind stretchers

 Question 5:

On 25.05.2013 an unsecured account with curren
whereby during the impairment test it showed an
On 25.11.2013 the same had DPD = 85 and the B
whereby the impairment test showed loss of 5%.
account for the end of November 2013?
Additional information: The loss rate for Bucket 3
70%, the Recovery rate for unsecured accounts is

 Answers:
A. 5%
B. 35%
C. 100%

Slide no.68

nt DPD = 55 has been restructured by the Bank
n impairment of 2.5%.
Bank restructured the account for a second time,
. What should be the provisioning rate for this

30-60 is 30%, the loss rate for Bucket 60-90 is
s 50%.

Q&

Slide no.69

&A

THANK

Deyan IVANOV
Retail Risk Management
Methodology & Validation
Raiffeisen Bank International AG
Tel.: +43 1 71707-1962
Email: [email protected]

Slide no.70

K YOU