RBS 2013 Annual Report Download - page 252
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Business review Risk and balance sheet management
250
Credit risk continued
Early problem identification and problem debt management continued
Recoveries
Once a loan has been identified as impaired it is managed by divisional
recoveries functions. Their goal is to collect the total outstanding and
reduce the Group’s loss by maximising cash recovery while treating
customers fairly. Where an acceptable repayment arrangement cannot
be agreed with the customer, litigation may be considered. In UK Retail
and Northern Ireland, no repossession procedures are initiated until at
least six months following the emergence of arrears. In the Republic of
Ireland, new regulations prohibit taking legal action for an extended
period. Additionally, certain forbearance options are made available to
customers managed by the recoveries function.
Group impairment loss provisioning
Impaired definition
A financial asset is impaired if there is objective evidence that an event or
events since initial recognition of the asset, has adversely affected the
amount or timing of future cash flows from it. The loss is measured as the
difference between the carrying value of the loan and the present value of
estimated future cash flows discounted at the loan’s original effective
interest rate.
For both wholesale and retail exposures, days-past-due measures are
typically used to identify evidence of impairment. In both corporate and
retail portfolios, a period of 90 days past due is used. In sovereign
portfolios, the period used is 180 days past due. Other factors are
considered including: the borrower’s financial condition; a forbearance
event; a loan restructuring; the probability of bankruptcy; or any evidence
of diminished cash flows.
Provisioning methodology
If there is objective evidence that an impairment loss has been incurred,
the amount of the loss is measured as the difference between the asset
carrying amount and the present value of the estimated future cash flows
discounted at the financial asset’s original effective interest rate. The
current net realisable value of the collateral will be taken into account in
determining the need for a provision. No impairment provision is
recognised in cases where amounts due are expected to be settled in full
on realisation of the security. The Group uses one of the following three
different methods to assess the amount of provision required: individual;
collective; and latent.
Individually assessed provisions
Loans and securities above a defined threshold deemed to be individually
significant are assessed on a case-by-case basis. Assessments of future
cash flows take into account the impact of any guarantees or collateral
held. Projections of cash flow receipts are based on the Group’s
judgement and facts available at the time. Projected cash flows are
reviewed on subsequent assessment dates as new information becomes
available.
Collectively assessed provisions
Provisions on impaired credits below an agreed threshold are assessed
on a portfolio basis, reflecting the homogeneous nature of the assets.
The Group segments wholesale and retail portfolios according to product
type, such as credit cards, personal loans and mortgages. The approach
taken to assess impaired assets in collections differs from the
approach taken to assess those in recoveries (refer to page 245 for
further details on collections and refer to above for recoveries).
Provisions are determined based on a quantitative review of the relevant
portfolio. They take account of the level of arrears, the value of any
security, and historical and projected cash recovery trends over the
recovery period. The provisions also incorporate any adjustments that
may be deemed appropriate given current economic conditions. Such
adjustments may be determined based on a review of the latest cash
collections profile and operational processes used in managing
exposures.
Latent loss provisions
In the performing portfolio, latent loss provisions are held against losses
incurred but not identified before the balance sheet date. Latent loss
provisions reflect PDs and LGDs as well as emergence periods. The
emergence period is defined as the period between the occurrence of the
impairment event and a loan being identified and reported as impaired.
Emergence periods are estimated at a portfolio level and reflect the
portfolio product characteristics such as coupon period and repayment
terms, and the duration of the administrative process required to report
and identify an impaired loan as such. Emergence periods vary across
different portfolios from 2 to 225 days. They are based on actual
experience within the particular portfolio and are reviewed regularly.
The Group’s retail businesses segment their performing loan books into
homogeneous portfolios such as mortgages, credit cards or unsecured
loans, to reflect their different credit characteristics. Latent provisions are
computed by applying portfolio level LGDs, PDs and emergence periods.
The wholesale calculation is based on similar principles but there is no
segmentation into portfolios. PDs and LGDs are calculated on an
individual basis.
Refer to pages 299 to 317 for analysis of impaired loans, related
provisions and impairments.