HSBC 2011 Annual Report Download - page 194

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Credit risk
192
Renegotiated loans and forbearance
(Audited)
A range of forbearance strategies are employed in order to improve the management of customer relationships,
maximise collection opportunities and, if possible, avoid default, foreclosure or repossession. They include extended
payment terms, a reduction in interest or principal repayments, approved external debt management plans, debt
consolidations, the deferral of foreclosures, and other forms of loan modifications and re-ageing.
Our policies and practices are based on criteria which enable local management to judge whether repayment is likely
to continue. These typically provide a customer with terms and conditions that are more favourable than those
provided initially. Loan forbearance is only granted in situations where the customer has showed a willingness to
repay the borrowing and is expected to be able to meet the revised obligations.
For retail lending our credit risk management policy sets out restrictions on the number and frequency of
renegotiations, the minimum period an account must have been opened before any renegotiation can be considered
and the number of qualifying payments that must be received. The application of this policy varies according to the
nature of the market, the product and the management of customer relationships through the occurrence of
exceptional events.
Credit quality classification of renegotiated loans
(Audited)
Under IFRSs, an entity is required to assess whether there is objective evidence that financial assets are impaired at
the end of each reporting period. A loan is impaired, and an impairment allowance is recognised, when there is
objective evidence of a loss event that has an effect on the cash flows of the loan which can be reliably estimated.
When we grant a concession to a customer that we would not otherwise consider, as a result of their financial
difficulty, this is objective evidence of impairment and impairment losses are measured accordingly.
A renegotiated loan is presented as impaired when:
• there has been a change in contractual cash flows as a result of a concession which the lender would otherwise
not consider, and
• it is probable that without the concession, the borrower would be unable to meet contractual payment obligations
in full.
This presentation applies unless the concession is insignificant and there are no other indicators of impairment.
The renegotiated loan will continue to be disclosed as impaired until there is sufficient evidence to demonstrate a
significant reduction in the risk of non-payment of future cash flows, and there are no other indicators of impairment.
For loans that are assessed for impairment on a collective basis, the evidence typically comprises a history of
payment performance against the original or revised terms, as appropriate to the circumstances. For loans that are
assessed for impairment on an individual basis, all available evidence is assessed on a case by case basis.
For retail lending the minimum period of payment performance required depends on the nature of loans in the
portfolio, but is typically not less than six months. Where portfolios have more significant levels of forbearance
activity, such as that undertaken by HSBC Finance, the minimum repayment performance period required may be
substantially more (see further detail on HSBC Finance on page 131). Payment performance periods are monitored to
ensure they remain appropriate to the levels of recidivism observed within the portfolio. These performance periods
are in addition to the receipt of a minimum of two payments within a 60 day period which must be received for the
customer to initially qualify for the renegotiation (in the case of HSBC Finance, in certain circumstances, for
example where debt has been restructured in bankruptcy proceedings, fewer or no qualifying payments may be
required). The qualifying payments are required in order to demonstrate that the renegotiated terms are sustainable
for the borrower. For corporate and commercial loans, which are individually assessed for impairment and where
non-monthly payments are more commonly agreed, the history of payment performance will depend on the
underlying structure of payments agreed as part of the restructure.
Renegotiated loans are classified as unimpaired where the renegotiation has resulted from significant concern about
a borrower’s ability to meet their contractual payment terms but the renegotiated terms are based on current market
rates and contractual cash flows are expected to be collected in full following the renegotiation. Unimpaired
renegotiated loans also include previously impaired renegotiated loans that have demonstrated satisfactory