+Annex 5 – Possible forbearance measures
---+1. Interest only During a defined short-term This measure should be considered viable period, only …
---+2. Reduced payments Decrease in the amount of See ‘1. Interest only’. repayment instalments over a …
---+3. Grace An agreement allowing the See ‘1. Interest only.’ period/payment borrower a defined delay …
---+4. Arrears/interest Forbearance of arrears and/or The measure should be capitalisation accrued …
---+5. Interest rate Permanent (or temporary) Exposures with high interest rates are one reduction …
---+6. Extension of Extension of the maturity of the If the borrower is subject to a compulsory …
---+7. Additional collateral Additional liens on This measure is not a viable standalone unencumbered …
---+8. Sale by The credit institution and the Credit institutions should restructure any …
---+9. Rescheduled The existing contractual Different repayment options may include: payments repayment …
---+10. Conversion of When the currency of the Credit institutions should explain fully to currency …
---+11. Other alteration of When the credit institution contract discharges the borrower of …
---+12. Refinancing/new Providing new financing This is usually not a viable standalone credit …
---+13. Debt consolidation Combining multiple exposures This is usually not a viable standalone into a …
---+14. Partial or total debt The credit institution forfeits the This measure should be used where the …

Annex 5 – Possible forbearance measures

Forbearance measure DescriptionViability and other important considerations

1. Overview

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1. Interest only During a defined short-term This measure should be considered viable period, only …
Interest onlyDuring a defined short-term period, only interest is paid on credit facilities and no principal repayment is made. The principal amount thus remains unchanged and the terms for the repayment structure are reassessed at the end of the interest-only period, subject to the assessed repayment ability.This measure should be considered viable only if the credit institution can demonstrate (based on reasonable documented financial information) that the financial difficulties experienced by the borrower are of a temporary nature and that after the defined interest-only period the borrower will be able to service the loan at least to the extent of the previous repayment ability. The measure should generally not exceed a period of 24 months and, in the case of construction of commercial property and project finance, 12 months. Once the defined period of this forbearance measure is over, institutions should reassess the borrower’s debt-servicing capacity in order to proceed with a revised repayment schedule that is able to account for the unpaid capital element during this interest-only period. In most cases, this measure will be offered in combination with other measures of a longer-term nature to compensate for the temporary lower repayments (e.g. extension of maturity).
2. Reduced payments Decrease in the amount of See ‘1. Interest only’. repayment instalments over a …
Reduced paymentsDecrease in the amount of repayment instalments over a defined short-term period in order to accommodate the borrower’s affected cash flow situation, before continuing with the repayments on the basis of projected repayment ability. The interest remains to be paid in full.See ‘1. Interest only’. If the amount of the payment reduction is moderate and all other conditions mentioned above are met, this measure could be applied for a period longer than 24 months.
3. Grace An agreement allowing the See ‘1. Interest only.’ period/payment borrower a defined delay …
Grace period/payment moratoriumAn agreement allowing the borrower a defined delay in fulfilling the repaymentSee ‘1. Interest only.’ Viability and other important
Forbearance measureDescription obligations, usually with regard to the principal and interest.considerations
4. Arrears/interest Forbearance of arrears and/or The measure should be capitalisation accrued …
Arrears/interest capitalisationForbearance of arrears and/or accrued interest arrears by the addition of those unpaid amounts to the outstanding principal balance for repayment under a sustainable rescheduled programme.The measure should be granted/considered viable only where the institution has assessed that the borrower’s verified income/expenditure levels (based on reasonable documented financial information) and the proposed revised repayments are sufficient to enable the borrower to service the revised loan repayment on a principal and interest basis for the duration of the revised repayment schedule, and where the institution has formally sought confirmation that the borrower understands and accepts the capitalisation conditions. Arrears capitalisation should be provided only selectively in cases where the recovery of historical arrears or payments due under the contract is not possible and capitalisation is the only option realistically available. Institutions should generally avoid offering this measure to a borrower more than once, and the measure should be applied only to arrears that do not exceed a predefined size relative to the overall principal (which should be defined in the credit institution’s forbearance policy). The institution should assess the percentage of arrears being capitalised compared with the principal and interest repayments as adequate and appropriate for the borrower.
5. Interest rate Permanent (or temporary) Exposures with high interest rates are one reduction …
Interest rate reductionPermanent (or temporary) reduction in interest rate (fixed or variable) to a fair and sustainable rate.Exposures with high interest rates are one of the common causes of financial distress. The financial difficulties of a borrower may partly derive from the fact that the interest rates are excessively high compared with the income of the borrower or from the fact that the evolution of interest rates, as opposed to a fixed rate, has resulted in the borrower receiving finance at an exorbitant cost, compared with prevailing market conditions. In such cases, an interest rate reduction could be considered. Viability and other important
Forbearance measureDescriptionconsiderations If affordability can be achieved only at below-risk or below- cost rates, this should be clearly flagged. This measure could be applied also as a short-term measure.
6. Extension of Extension of the maturity of the If the borrower is subject to a compulsory …
Extension of maturity/termExtension of the maturity of the loan (i.e. of the last contractual loan instalment date), which allows a reduction in instalment amounts by spreading the repayments over a longer period.If the borrower is subject to a compulsory retirement age, term extension should be considered viable only where the institution has assessed and can demonstrate that the borrower can, through a pension or other sources of verified income, service the revised loan repayments on an affordable basis. Term extension should be considered viable only where it is in line with the life cycle of existing collaterals or proper substitution of the existing collaterals occurs.
7. Additional collateral Additional liens on This measure is not a viable standalone unencumbered …
Additional collateralAdditional liens on unencumbered assets are obtained as additional collateral from the borrower in order to compensate for the higher risk exposure and as part of the restructuring process.This measure is not a viable standalone forbearance measure as it does not in itself resolve the presence of arrears on a loan. It usually aims to improve or cure LTV ratio covenants. Additional collateral may take many forms, such as a pledge on a cash deposit, assignment of receivables or a new/additional mortgage on immovable property. Institutions should value second and third liens on assets as well as personal guarantees with care.
8. Sale by The credit institution and the Credit institutions should restructure any …
Sale by agreement/assisted saleThe credit institution and the borrower agree to voluntarily dispose of the secured asset(s) to partially or fully repay the debt.Credit institutions should restructure any residual debt post the assisted sale with an appropriate repayment schedule in line with the borrower’s reassessed repayment ability. For forbearance measures that may require the sale of the property at the end of the term, credit institutions should conservatively consider the future approach to any shortfall that could remain after the sale of the property and address it as early as possible. For exposures that are repaid by repossession of collateral at a predefined moment, the repossession does not Viability and other important
Forbearance measureDescriptionconsiderations constitute a forbearance measure unless it is exercised ahead of the predefined moment due to financial difficulties.
9. Rescheduled The existing contractual Different repayment options may include: payments repayment …
Rescheduled paymentsThe existing contractual repayment schedule is adjusted to a new sustainable repayment programme based on a credible, current and forecasted assessment of the borrower’s cash flowDifferent repayment options may include: i. Partial repayment: when a payment is made against the exposure, for example from a sale of assets that is lower than the outstanding balance. This option is applied to significantly reduce the exposure at risk and to enable a sustainable repayment programme for the remaining outstanding amount. This option should be preferred to the bullet and step-up options described below. ii. Balloon or bullet payments: when the rescheduled repayment ensures a large payment of the principal at a later date before loan maturity. This option should be used/considered viable only in exceptional circumstances and when the institution can duly demonstrate future cash flow availability by the borrower to meet the balloon or bullet payment. iii. Step-up payments: credit institutions should consider a solution including this option viable only when they can ensure, and are able to demonstrate, that there is good reason to expect that future increases in payments can be met by the borrower.
10. Conversion of When the currency of the Credit institutions should explain fully to currency …

Conversion of When the currency of the Credit institutions should explain fully to currency exposure is aligned with the borrowers the risks of foreign exchange currency of the cash flow. and should also refer to currency conversion insurance.
11. Other alteration of When the credit institution contract discharges the borrower of …
Other alteration of contract conditions/covenantsWhen the credit institution discharges the borrower of covenants or conditions included in a loan agreement not listed above.
12. Refinancing/new Providing new financing This is usually not a viable standalone credit …
Refinancing/new credit facilitiesProviding new financing arrangements in order to support the recovery of a distressed borrower.This is usually not a viable standalone forbearance measure; it should be combined with other forbearance measures addressing existing arrears. It should be applied only in exceptional cases. Viability and other important
Forbearance measureDescriptionconsiderations New credit facilities may be granted that may entail the pledging of additional collateral. In the case of inter-creditor arrangements, the introduction of covenants may be necessary to compensate for the additional risk incurred by the credit institution. This measure may be more suitable for corporate exposures; a thorough assessment of the borrower ’ s ability to pay should be performed, including sufficient involvement of independent sectoral experts to judge the viability of business plans and cash flow projections provided. This measure should be considered viable only when the thorough affordability assessment demonstrates repayment capacity in full.
13. Debt consolidation Combining multiple exposures This is usually not a viable standalone into a …
Debt consolidationCombining multiple exposures into a single exposure or a limited number of exposures.This is usually not a viable standalone forbearance measure; it should be combined with other forbearance measures addressing existing arrears. This measure is particularly beneficial in situations where combining collateral and secured cash flow provides greater overall collateral coverage for the entire debt, for example, by minimising cash leaks or by facilitating reallocation of cash flow surplus between exposures.
14. Partial or total debt The credit institution forfeits the This measure should be used where the …
Partial or total debt forgivenessThe credit institution forfeits the right to legally recover part or the whole of the amount of the debt outstanding from the borrower.This measure should be used where the credit institution agrees to a ‘reduced payment in full and final settlement’ whereby the credit institution will forgive all of the remaining debt if the borrower repays the reduced amount of the principal balance within an agreed timeframe. Credit institutions should apply debt forgiveness options carefully, since the possibility of forgiveness can give rise to moral hazard and thus might encourage ‘strategic defaults’. Therefore, institutions should define specific forgiveness policies and procedures to ensure strong controls are in place.

1.1 References

1.2 Identified Requirements

1.3 Related Standards

2. Identified Requirements

Requirements

3. Related Standards

Standards
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