| Partial or total debt forgiveness | The 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. |