Barclays 2010 Annual Report Download - page 94

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 strong chance that they will be
able to meet their contractual obligations in the foreseeable future.
For the majority of products, the standard period for charging off accounts
is 180 days past due of contractual obligation. However, in the case of
customer bankruptcy or insolvency, the associated accounts will be
charged off within 60 days. Within UKRB Local Business, accounts that
are deemed to have a heightened level of risk, or that exhibit some
unsatisfactory features which could affect viability in the short to medium
term, are transferred to a separate ‘caution’ stream. Accounts on the
caution stream are reviewed on at least a quarterly basis, at which time
consideration is given to continuing with the agreed strategy, returning the
customer to a lower risk refer stream, or instigating recovery/exit action.
In the retail portfolios, forbearance programmes assist personal customers
in financial difficulty through agreements to accept less than contractual
amounts due where financial distress would otherwise prevent satisfactory
repayment within the original terms and conditions of the contract. These
agreements may be initiated by the customer, Barclays or a third party and
include approved debt counselling plans, minimum due reductions,
interest rate concessions and switches from capital and interest
repayments to interest-only payments.
In the wholesale portfolios, Barclays will on occasion participate in debt for
equity swaps, debt for asset swaps, debt standstills and debt restructuring
agreements as part of the business support process. Debt restructuring
agreements may include actions to improve security; such as changing an
overdraft to a factoring or invoice discounting facility or moving debt to
asset owning companies. Consideration is also given to the waiving or
relaxing of covenants where this is the optimum strategy for the survival
of our client’s businesses and therefore Barclays loans and advances.
Loans in forbearance programmes are still subject to impairment in line
with normal impairment policy.
For personal customers, the Group Retail Impairment Policy outlines
the methodology for impairment of assets that are categorised as under
forbearance. Identified impairment is raised for such accounts, recognising
the agreement between the bank and customer to pay less than the
original contractual payment and is measured using a future discounted
cash flow approach comparing the debt outstanding to the expected
repayment on the debt. This results in appropriately higher provisions
being held than for fully performing assets.
For wholesale customers, impairment is raised for any portion of
restructured debt that Barclays does not expect to recover. Sufficient
identified impairment will be raised to cover the difference between
the loan and the present value of future cash flow discounted at the
contractual interest rate.
H. Identifying potential credit risk loans
In line with disclosure requirements from the Securities Exchange
Commission (SEC) in the US, the Group reports potentially and actually
impaired loans as Potential Credit Risk Loans (PCRLs). PCRLs comprise
two categories of loans: Potential Problem Loans (PPLs) and Credit Risk
Loans (CRLs).
PPLs are loans that are currently complying with repayment terms but
where serious doubt exists as to the ability of the borrower to continue
to comply with such terms in the near future. If the credit quality of a
loan on an early warning or watch list deteriorates to the highest category
(wholesale) or deteriorates to delinquency cycle 2 (retail), consideration
is given to including it within the PPL category.
Should further evidence of deterioration be observed, a loan may move
to the CRL category. Events that would trigger the transfer of a loan from
the PPL to the CRL category include a missed payment or a breach of
covenant. CRLs comprise three classes of loans:
– ‘Impaired loans’ comprise loans where an individual identified
impairment allowance has been raised and also include loans which
are fully collateralised or where indebtedness has already been written
down to the expected realisable value. This category includes all retail
loans that have been charged off to legal recovery. The impaired loan
category may include loans, which, while impaired, are still performing.
– The category ‘accruing past due 90 days or more’ comprises loans
that are 90 days or more past due with respect to principal or interest.
An impairment allowance will be raised against these loans if the
expected cash flows discounted at the effective interest rate are less
than the carrying value.
– The category ‘impaired and restructured loans’ comprises loans not
included above where, for economic or legal reasons related to the
debtor’s financial difficulties, a concession has been granted to the
debtor that would not otherwise be considered. Where the concession
results in the expected cash flows discounted at the effective interest
rate being less than the loan’s carrying value, an impairment allowance
will be raised.
I. Allowances for impairment and other credit provisions
Barclays establishes, through charges against profit, impairment
allowances and other credit provisions for the incurred loss inherent in
the lending book. Under IFRS, impairment allowances are recognised
where there is objective evidence of impairment as a result of one or more
loss events that have occurred after initial recognition, and where these
events have had an impact on the estimated future cash flows of the
financial asset or portfolio of financial assets. Impairment of loans and
receivables is measured as the difference between the carrying amount
and the present value of estimated future cash flows discounted at the
financial asset’s original effective interest rate. If the carrying amount is less
than the discounted cash flows, then no further allowance is necessary.
Impairment allowances are measured individually for assets that are
individually significant, and collectively where a portfolio comprises
homogenous assets and where appropriate statistical techniques are
available. In terms of individual assessment, the principal trigger point for
impairment is the missing of a contractual payment which is evidence that
an account is exhibiting serious financial problems, and where any further
Risk management
Credit risk management continued
92 Barclays PLC Annual Report 2010 www.barclays.com/annualreport10