Barclays 2013 Annual Report Download - page 397

Wholesale portfoliosa
Within the wholesale portfolios, the Basel definitions of default are used
as default indicators which have been aligned to the IAS 39 objective
evidence of impairment. A default is triggered if individual identified
impairment is recognised. Barclays definitions of default used are:
1. Bank puts the credit obligation on a non-accrued status.
2. Bank makes a charge-off or account specific identified impairment
resulting from a significant perceived decline in credit quality.
3. Bank sells the credit obligation at a material credit-related economic
loss.
4. Bank consents to a distressed restructuring of the credit obligation
where this is likely to result in a diminished financial obligation
caused by the material forgiveness or postponement of principal,
interest or fees.
5. Bank triggers a petition for obligor’s bankruptcy or similar order.
6. Bank becomes aware of the obligor having sought or having been
placed in bankruptcy or similar protection where this would avoid or
delay repayment of the credit obligation to the banking group.
7. Bank becomes aware of an acceleration of an obligation by a firm.
8. Where the obligor is a bank – revocation of authorisation.
9. Where the obligor is a sovereign – trigger of default definition of an
approved external credit assessment institution (i.e. a rating
agency).
10. Obligor past due more than 90 days on any material credit
obligation to the banking group.
Wholesale accounts that are deemed to contain heightened levels of
risk are recorded on graded early warning lists (EWL) or watchlists
(WL) comprising three categories graded in line with the perceived
severity of the risk attached to the lending, and its probability of
default. Examples of heightened levels of risk may include, for example:
 a material reduction in profits;
 a material reduction in the value of collateral held;
 a decline in net tangible assets in circumstances which are not
satisfactorily explained; or
 periodic waiver requests or changes to the terms of the credit
agreement over an extended period of time.
These lists are updated monthly and circulated to the relevant risk
control points. Once an account has been placed on WL or EWL, the
exposure is carefully monitored and, where appropriate, exposure
reductions are effected. Should an account become impaired, it will
normally, but not necessarily, have passed through each of the three
categories, which reflect the need for increasing caution and control.
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 higher levels of EWL/WL, default,
collection or insolvency. Their mandate is to maximise shareholder
value ideally via working intensively with the client to help them to
either return to financial health or in the cases of insolvency obtain the
orderly and timely recovery of impaired debts. Where an obligor’s
financial health gives grounds for concern, it is immediately placed into
the appropriate category.
Retail portfolios
Within the retail portfolios, which tend to comprise homogeneous
assets, statistical techniques more readily allow potential credit
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. An outstanding balance is deemed to be
delinquent when it is one day or one penny down and goes into default
when it moves into recovery, normally 180 days. Impairment is
considered from entry into delinquency.
The probability of default increases with the number of contractual
payments missed, thus raising the associated impairment requirement.
Once a loan has passed through a prescribed number of cycles
(normally six) it will charge-off and enter recovery status. ‘Charge-off ’
refers to the point in time when collections activity changes from the
collection of arrears to the recovery of the full balance. 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 status, such as in the case of
insolvency or death.
The timings of the charge-off points are established based on the type
of loan. For the majority of products, the standard period for charging
off accounts is six cycles (180 days past due date of contractual
obligation). Early charge-off points are prescribed for unsecured assets.
For example, in case of customer bankruptcy or insolvency, associated
accounts are charged off within 60 days of notification.
Identifying potential credit risk loans
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
wholesale loan on an EWL or WL deteriorates to the highest category
or a retail loan deteriorates to delinquency cycle 2, 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 individually 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
category may include loans, which, while impaired, are still
performing;
 Accruing past due 90 days or more: comprise 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; and
 Impaired and restructured loans: comprise 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. See Forbearance and other concession programmes on
page 400 for more detail.
Note
a Includes certain Business Banking facilities which are recorded as Retail for
management purposes.
barclays.com/annualreport Barclays PLC Annual Report 2013 395
The Strategic Report Governance Risk review Financial review Financial statements Shareholder informationRisk management