The Treatment of Nonperforming Loans

in Macroeconomic Statistics

Outline

Look at the differences in approach to loan valuation

taken by the SNA and the Banking and Accounting
institutions.
Definition of Nonperforming loans (NPLs)
Valuation of NPLs
Treatment of write-offs
Treatment of interest
The Electronic Discussion Group (EDG)

SNA Approach
SNA approach to loan valuation is based on the need:

For a sound basis for measurement

To facilitate comparisons
For valuation consistent with debtors obligations
For recommendations to be useful in measures of
solvency

Leads to many cases where NPLs are not reflected in

either interest flows or the balance sheets

SNA Approach
Other

relevant manuals tend to follow the

SNA
ESA,
BPM5,
GFSM,
MFSM (most elaborate)
= International Statistics Manuals

Banking and Accounting Institutions

In many countries the authorities have

introduced regulations relevant to the
country situation.
Prompted banking and accounting
institutions to develop criteria and
recommendations for international
reporting.

Definition of nonperforming loans

International statistics manuals provide no

criteria

Loans are good until cancelled, written off or written down

MFSM allows provisions under Other a/cs payable and
memoranda items.

Banking & Accounting Institutions

IAS says a financial asset is impaired if its carrying amount is

greater than its estimated recoverable amount

Definition of nonperforming loans

i.
ii.
iii.
iv.
v.

Country practice varies.

To help improve cross country comparisons, the IIF
proposes the following categories for reporting:
Standard
Watch
Substandard
Doubtful
Loss

Value of Loans

International Statistics Manuals:

Cash, loans, deposits, advances remain constant, unless in

foreign currency or de facto negotiable

Loans are only revalued when they fail or are renegotiated

Regularly traded securities valued at market price

So marketability is the crucial factor

There is a need for consistency between instruments as

assets and liabilities
(MFSM recommends memos on interest arrears and expected
loan losses)

Value of Loans
B

& A Institutions:

Loans and debt held to maturity valued at

amortized acquisition cost, less reductions
for impairment
Others at fair value
No need for consistency between debtor and
creditor valuations

Cancellations, Write offs & Impairment

International statistics manuals

Cancellation by mutual agreement = capital transfer

Writing off other changes in volume account
Rescheduling. New nominal amount (holding gain/loss)
Write downs - revaluation account

& A Institutions

Charge against current income, make a provision (liability)

Charge against current income, but reduce value of assets
Do not charge current income, but against capital

Treatment of Interest on NPLs

International statistics manuals

Interest accrues by default as SNA doesnt recognize impairment

MFSM explicitly states that overdue interest should be recorded.

& A Institutions

After write down, interest based on original rate

Cease to accrue when impairment identified (sound banking
practice)
(Note that these practices are still evolving, so best practice has
still to be decided on)

Summary

There are important differences between SNA and

commercial book keeping
SNA:
An instrument has the same value as an asset and a
liability
Price changes in traded instruments holding
gain/loss
Otherwise no price changes by definition. Write offs
are in the Other Changes in Volume account
No entries in income accounts regarding partial
losses which reduces usefulness

Issues for discussion

Background
Recommends:

paper :

Provide memoranda on the

provisions that should be made to both face
value of loans and accrued interest. Use
commercial practices as guidelines.
Raises issues:
What should be the definition of a NPL?

Issues for discussion

What is the best option?

- continue the present SNA conventions
- change the rules to reflect NPL provisions
- continue the current approach but show provisions
(memo)
Should the manuals contain more criteria on writeoffs?
Should the manuals be changed to allow price
fluctuations in loans expressed in national currency?
If so, how?

Issues for discussion

Would it be more consistent to treat loan write-offs

as price changes rather than other changes in
volume?
Should national accounts cease to record interest
accrual on impaired loans?
Should the manuals define an income concept
including expected or actual losses on financial
claims? If, so should there be a difference between
normal and catastrophic losses?

EDG

Started July 2002.

Difficult to get people to respond
National accountants seem to think its not their
problem
Still looking for more contributions to a obtain
balanced set of opinions
The IMF has set up a working group to consider loan
valuation and this report will be a contribution to the
EDG

EDG
21

responses so far but less than half

address SNA issues
Of those that do, all advocate some sort of
changes to SNA
About half suggest the presentation of both
nominal and market values
A similar number suggest adjusting income
for expected losses

EDG the way forward.

A wide

range of individuals and organizations

have already been approached hopefully
some of these will still provide contributions
An additional range of statistics offices will be
canvassed for their views on the issue