Full annual report - African Bank - Investoreports

Notes to the group annual financial statements continued
9. Net advances continued
Impairment provisions are based on an incurred loss model per IAS 39 – Financial instruments: recognition and
measurement. Estimated future cash flows for loans and advances considered to be impaired are discounted using the
original effective interest rate.
During the year, the group rehabilitated onto the statement of financial position R1 871 million (2011: R1 269 million) of
loans previously written off. The policy regarding rehabilitation of written off loans requires such loans to be performing
above minimum criteria, with a regular payment profile, before they qualify for reinstatement onto the balance sheet,
together with the appropriate impairment provisions. Partially written off advances are reinstated at their net recoverable
value determined on a discounted cash flow basis.
The impairment provision for gross advances is classified into two categories, i.e. specific impairments and portfolio
impairments (IBNR). The specific impairments provision of R8 863 million (2011: R6 567 million) is in respect of the nonperforming
loan book whilst the portfolio impairments provision of R162 million (2011: R121 million) is in respect of the
performing loan book. The portfolio provision covers losses actually incurred but not yet recorded in relation to customers
who may have already suffered stress in making contractual payments, but such information has not been formally
conveyed to the group. The performing loan book does have arrears of up to three cumulative instalments which do not
necessarily indicate that all these loans are non-performing, in terms of the group’s definition of non-performing loans.
The gross amount owing on the partially written off book is R12,3 billion (2011: R10,9 billion).
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9.1 Credit risk
Credit risk management
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to
the group. The group’s primary focus is the underwriting of unsecured loans and accordingly, credit risk features as a
dominant financial risk within the group. The credit risk management framework outlining the policies and procedures
applied by the group is set out in the risk report (refer page 106).
The group continually monitors the performance of each loan. Where payments are missed, the loan repayment
period might be extended with a view to recovering all required instalments. In other circumstances the group may
be required under law to renegotiate a loan. However, these loans remain either past due or impaired and therefore
the group does not provide a separate analysis of renegotiated items in terms of IFRS 7.
IFRS 7 requires disclosure of the fair value of collateral for those items considered impaired. The group currently takes
collateral only in very limited circumstances (for example, within the Ellerines business unit outside South Africa where
the credit has been granted by Ellerines as opposed to African Bank). The collateral predominantly takes the form of
non-financial assets being the furniture and appliances sold on credit, the nature of which renders it impracticable to
determine their fair value.
The carrying amount of financial assets recorded in the financial statements, which is net of impairment losses,
represents the group’s maximum exposure to credit risk.