Annual Report 2010 - ProCredit Bank

Financial Statements 61
Individual provisioning assessment (impairment)
Individual provisioning is calculated for clients whose total debt
amount to the Bank exceeds EUR 30,000 (31 December 2010: 1
EUR = 105.4982 RSD) at the moment of classification (incl. client
and all parties of related persons), and whose arrears exceed 30
days at the end of the quarter (refers to both standard and reprogrammed
loan). Condition satisfaction is evaluated one month prior
to the end of the quarter, so that the Bank’s employees could be able
to prepare the analysis by the deadlines envisaged for booking.
In case of a client who has already had individual impairment calculated,
fulfilment of the conditions and a new calculation are prepared
on a yearly basis.
Likewise, individual impairment can be calculated even in case
when the client is in arrears less than 30 days (over EUR 30,000
of total outstanding debt per group of related parties) if there are
indicators of changes in the client’s business, i.e. if the client is facing
certain problems in business and if the indicators show that the
loan will exceed 30-day arrears. When monitoring the borrower’s
financial position, whereby the frequency of monitoring is determined
by the credit committee in accordance with the Bank’s policies,
the credit committee assesses the credit risk pursuant to the
criteria defined by the Bank’s different rules and regulations.
The frequency of monitoring is determined by the credit committee
pursuant to credit rules, and it is no less than once per year for
credit clients of the Bank.
When monitoring any one borrower, all factors which may have
impact on aggravation of a client’s eligibility, or exacerbation of
the pledge quality are taken into account, which may lead to some
problems in claim collection, those factors being:
• Information about the borrower’s financial problems or potential
aggravation of the financial situation, from borrowers’ financial
reports monitoring
• Possibility of business cessation on account of financial problems,
owner’s death or illness, changes in management structure,
changes in buyer or supplier structure, changes in competition
that may have a considerable adverse effect on the
client’s business
• Decrease in pledge value or liquidity
• Historical trend of loan instalment payments, implying it is
not likely that the total loan amount will be returned by the
borrower
• Other factors, such as general economic conditions, region
risk, industry risk, regulatory risk, dependence on buyers and
suppliers, and the like.
The Credit Analysis Department, in cooperation with the responsible
Loan Officer, is in charge of preparation of the Impairment analysis
for such a loan, on the basis of which the weight for individual
provisioning is determined, taking also into consideration collection
through pledge, and it gives proposals to appropriate credit
committee level defined by credit rules, which makes the decision
on individual provisioning for the respective client.
Basis
In case of individual impairments, the basis represents total
amount of balance sheet receivables (due and undue principal, due
interests), without deduction for deposit amount.
Analysis of discounted cash flows (impairment analysis) – defining
individual impairment weights
Individual impairment of the book value of claim is determined on the
basis of net present value of future inflows.
Impairment analysis is performed at the level of the group of related
parties for all balance sheet receivables of the bank from that borrower.
Impairment analysis should be performed once per year for each
client for whom the decision to have provisions with individual weight
has been reached. If material changes occur during the quarter with
the respect to the moment when individual weight has previously
been determined, it is necessary to do a new analysis and determine
a new weight. Risk weight used in this case in the event of calculation
of provisioning presents potential loss for the bank in percentages.
Impairment analysis is prepared taking into account both qualitative
and quantitative criteria:
• Client’s (group of related parties) total debt with respect to all
credit (balance sheet) products in the bank, including bill of exchange
protests, but excluding potential liabilities (documentary
products) or ProCredit Leasing’s placements.
• Claimed amount monitored in the course of the analysis are total
due liabilities of the group of related parties (principal, due
interest and due booked penalty interest).
• Expected problems with loan collection, and problems client is
facing.
• Data on the pledge type and value, as well as pledge activation
possibility.
• Expected loan amount collection through borrower’s payments
or through enforced collection from loan collateral activation
in the next 3 years, and costs of activation.
It is executed at the annual level by monitoring cash flows (operating
cash flows that can be the source of loan repayment, sale of
property and sale of collateral items). By discounting the said cash
flows we obtain present value of future cash flows, and further potential
loss in percentages (compared to present value of receivables),
which is used as the provisioning weight.
For the purpose of determining weight for individual claim provisioning
from a particular borrower, it is necessary to:
• Prepare cash flow projection that will include data on loan instalment
maturity, as well as data about the expected loan collection
through borrower’s payments and collection from sale
of collateral items
• Future cash flows of the expected collection are discounted by
the weighted effective interest rate of the borrower’s total loans
• The projected loss is calculated, on the date of impairment
analysis, as a difference between receivables from borrower
and present value of the projected collection arising from
those receivables
The weight for individual provisioning of the borrower’s total
claims is calculated as a percentage of the projected Special rules
for loan classification during loan repayment period
The following cases require reclassification:
1. Irrespective of the number of days in arrears, an individual loan
will promptly be reclassified in class V pursuant to the credit
committee decision if the loan agreement has been terminated
(“Terminated“ status).
2. Portfolio management committee (a body founded in accordance
with ProCredit Bank’s procedures) has the right to pass
on a decision on change of loan risk class in its regular monthly
meetings, and on the basis of the proposal from the credit committee,
for an individual case with increase in credit risk exposure,
request impairment analysis on the basis of which the
client will be individually reserved.
Write-off policy
As a rule of thumb, ProCredit Bank writes off all loans in loan repayment
arrears for more than 360 days with the outstanding debt of