Barclays 2009 Annual Report Download - page 99

www.barclays.com/annualreport09 Barclays PLC Annual Report 2009 97
Monitoring weaknesses in portfolios
Whilst the basic principles for monitoring weaknesses in wholesale and
retail exposures are broadly similar, they will reflect the differing nature of
the assets.
As a matter of policy all facilities granted to corporate or wholesale
customers are subject to a review on, at least, an annual basis, even when
they are performing satisfactorily.
Corporate accounts that are deemed to contain heightened levels of
risk are recorded on graded early warning lists or watchlists comprising three
categories graded in line with the perceived severity of the risk attached to
the lending, and its probability of default. These are updated monthly and
circulated to the relevant risk control points. Once an account has been
placed on watchlist (WL) or early warning list (EWL), the exposure is carefully
monitored and, where appropriate, exposure reductions are effected.
Should an account become impaired, it will normally have passed
through each of the three categories, which reflect the need for increasing
caution and control. Where an obligor’s financial health gives grounds for
concern, it is immediately placed into the appropriate category. While all
obligors, regardless of financial health, are subject to a full review of all
facilities on, at least, an annual basis, more frequent interim reviews may
be undertaken should circumstances dictate.
Specialist recovery functions deal with clients in default, collection or
insolvency. Their mandate is to maximise shareholder value via the orderly
and timely recovery of impaired debts. Accounts can stay in Recoveries for
up to two years unless a longer-term strategy has been agreed.
Within the retail portfolios, which tend to comprise homogeneous
assets, statistical techniques more readily allow potential weaknesses to be
monitored on a portfolio basis. The approach is consistent with the Group’s
policy of raising a collective impairment allowance as soon as objective
evidence of impairment is identified.
Retail accounts can be classified according to specified categories of
arrears status (or cycle), which reflects the level of contractual payments
which are overdue on a loan.
The probability of default increases with the number of contractual
payments missed, thus raising the associated impairment requirement.
Once a loan has passed through all six cycles it will enter recovery status,
having been charged off. In most cases, charge-off will result in the account
moving to a legal recovery function or debt sale. This will typically occur after
an account has been treated by a collections function. However, in certain
cases, an account may be charged off directly from a performing (up to
date) status, such as in the case of insolvency or death.
As a general principle, charge-off marks the point at which it becomes
more economically efficient to treat an account through a recovery function
or debt sale rather than a collections function. Economic efficiency includes
the (discounted) expected amount recovered and operational and legal
costs. Whilst charge-off is considered an irreversible state, in certain cases, it
may be acceptable for mortgage and vehicle finance accounts to move back
from charge-off to performing or delinquent states. This is only considered
acceptable where local legislation requirements are in place, or where it is
deemed that the customer has a renewed willingness to pay and there is a
Monitoring weaknesses in portfolios
Wholesale account status Retail account status
Default (Recovery) Default (Charge-off) (Recovery)
Arrears Status 6+
Performing
Including EWL 1-2, WL 1-3
Performing (Current)
Arrears Status 0
Write Off
Business Support
EWL 3, WL 3.5
Delinquent (Collections)
Arrears Status 1- 6
– Watchlist Committee
flags client on the basis
of evidence of financial
difficulty.
– Customer’s financial
difficulty requires a
decision on the form
of future relationship.
– Business support assists
the client to return to in
order position.
– Customer misses
contractual payment
and moves to
collections function.
– Customer reaches high
arrears status and is moved
to the recovery function
where legal action is taken.
– Customer pays total
overdue payments
and returns back
to in order position.
– Asset is considered
irrecoverable and
is written off.
– Asset is considered
irrecoverable and
is written off.
Increasing state of delinquency Increasing state of delinquency