Guidelines on management of non-performing and forborne exposures (EBA/GL/2018/06)

1. Compliance and reporting obligations

2. Subject matter, scope and definitions

3. Implementation

4. NPE strategy

5. NPE governance and operations

6. Forbearance

7. NPE recognition

8. NPE impairment and write-offs

9. Collateral valuation of immovable and movable property

10. Supervisory evaluation of management of NPEs and FBEs

Annex 1 – Sample criteria for grouping retail NPEs

Annex 2 – Benchmarks for NPE monitoring metrics

Annex 3 – Other monitoring metrics

Credit institutions should develop, regularly review and monitor their adherence to policies related to the NPE management framework.

The following policies should be established, taking into account the principle of proportionality, aiming to achieve the implementation of the strategy of the credit institution (including its NPL strategy and operational plan where relevant).

Arrears management policy

This policy should set out the credit institution’s NPE operating model (see section 5.2), including at least the following elements:

•  the structure and responsibilities of the NPE WUs, with clear handover triggers and a link to the grouping of exposures (see section 5.2.3);
•  the procedure to be followed by the functions involved, to include at a minimum:
• - the procedure and handover criteria to be followed for each stage of arrears, early

arrears and late arrears;

• - the procedure to be followed where a borrower is classified as non-cooperating and/or non-viable, and the criteria for the borrower to be classified as such;
• - the communicationwith the borrower at each step, which should be aligned with the legislative framework of the country of operation (e.g. code of conduct);
• - monitoring tools and methods to be applied;
•  the human and technical resource requirements;
•  the reports to be produced internally for monitoring purposes and for regular updates to the management body.

Credit institutions, when developing their arrears management policy, should take into account Article 28 of Directive 2014/17/EU and in particular the provisions of the EBA Guidelines on arrears and foreclosure.

Forbearance policy

The forbearance policy described in section 6.2.1 should set out at least:

•  The necessary financial and non-financial documentation to be requested and provided by the different types of borrowers in order for the responsible credit officer to demonstrate repayment capacity on a principal and interest basis.
•  The minimum key financial repayment capacity metrics and ratios to be applied by the credit officer, detailed on a portfolio-/product-/sector-specific basis, in order to fully assess the borrower’s repayment capacity; sector-specific guidelines for establishing key financial metrics and ratios on a sector-specific basis (SMEs and corporates).
•  The process for determining and implementing the most appropriate forbearance solution for a borrower:
• - For retail customers, decision trees are to be used. The process for retail customers should be in line with the provisions of the EBA Guidelines on arrears and foreclosure. For non-retail borrowers, if a decision tree approach is not appropriate, then the policy should provide clear instructions to the credit officer on how to assess the suitability of a forbearance treatment.
• - In the case of borrowers for whom no solution can be reached (non-viable and/or non-cooperating borrowers), a time-bound process and procedure should be established for the transfer of these borrowers to the NPE WUs responsible for liquidation.
•  A toolkit of forbearance measures with short-term and long-term time horizons, as outlined in section 6.
•  Clear instructions to the credit officer regarding the requirements for revaluation of collateral in line with section 9.
•  The decision-making process, approval levels and procedures for each type of forbearance measure and size of exposure.
•  The process and procedure for the monitoring of the forbearance solutions granted and borrower performance following the completion of a restructuring, including frequency of the review of the borrower, the re-default definition, the process for reassessment and requirements for reporting of re-defaults.
•  The pricing policy for each forbearance measure and type of borrower.

Debt recovery/enforcement policy

The NPE WUs responsible for debt recovery should take the most appropriate actions in a timely manner to effectively reduce NPEs over a defined time horizon. The debt recovery policy, in accordance with the NPL strategy, should address, at a minimum:

•  The range of available options for each collateral type. Indicatively, the following could be considered (not in any particular order):
• - voluntary asset sale (borrower re-engages and agrees to sell the asset);
• - forced asset sale via receivers/court proceedings (assets are not held on the balance sheet of the credit institution);
• - foreclosure of asset (assets are held on the balance sheet of the credit institution);
• - debt collection (internal or external);
• - debt to asset/equity swap;
• - sale of loan/loan portfolio to a third party.
•  The procedure to be followed to select the most appropriate recovery option and the team of internal and external experts to be involved in taking the decision.
•  The recovery option should take into account the existence of collateral, type of legal documentation, type of borrower, local market conditions and macroeconomic outlook, the legislative framework in place, and potential historical recovery rates for each option versus the costs involved for each option.
•  A clear definition of non-cooperating borrowers or a link to related policies including such a definition.
•  A clearly defined approval process for each stage of the debt recovery process for the different recovery options available to the credit institution.
•  The role of risk control and internal audit departments in the procedure and in the monitoring process.

With respect to the liquidation of collateral, the following should be defined in the policy:

•  The valuation approach to be followed in respect of the asset (in line with section 9.7) including the liquidation costs to be applied. The liquidation costs should be in line with requirements set out in section 9.3.3
•  Involvement of internal or external experts.
•  Limits
• - to the amount of assets that can be held by the credit institution at any point of time, taking into account the large exposure limits specified in the CRD and industry concentration risk, for example in the real estate sector;
• - to the amount of repossessed or foreclosed assets that can be acquired by the credit institution within a certain time period.
•  The procedure to be followed post repossession or foreclosure to develop and implement a sale strategy, and the unit within the credit institution responsible for undertaking the management of the assets concerned (this may also be defined in a separate foreclosed/repossessed asset policy).

Credit institutions should consider the interaction with other creditors for NPE borrowers with multiple creditors, usually corporate borrowers. Therefore, credit institutions should put in place a clear procedure for negotiating and interacting with other financial institutions (or other third parties) to whom the borrower is indebted.

Collateral policies

Given the importance of credit risk mitigation in the NPE workout process, credit institutions should develop clear and consistent collateral policies, including policies for foreclosed assets. These policies should comprehensively cover the management, valuation and reporting of all collateral types. Given the complexity and specialisation of some types of collateral, credit institutions should seek external expertise in drafting and reviewing these policies. Credit institutions should ensure a consistent approach to managing and valuing similar collateral across the portfolio, as per section 9.

NPE monitoring policy

A dedicated policy should be established specifying, inter alia:

•  the types of actions required in response to the different types of findings;
•  escalation procedures;
•  key elements, frequency and recipients of the reporting;
•  handover criteria/a link to NPL procedures.

Outsourcing/NPL servicing policy

A dedicated policy should be established for the outsourcing of services to third parties if this is relevant. This needs to include the required procedures for the selection of outsourcing partners, the required legal contract content and the decision-making process for outsourcing agreements, as well as the monitoring of those agreements.