HSBC 2002 Annual Report Download - page 200

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
198
Specific provisions
Specific provisions represent the quantification of actual and expected losses from identified accounts and are
deducted from loans and advances in the balance sheet.
Other than where provisions on smaller balance homogenous loans are assessed on a portfolio basis, the amount
of specific provision raised is assessed on a case by case basis. The amount of specific provision raised is HSBC’ s
conservative estimate of the amount needed to reduce the carrying value of the asset to the expected ultimate net
realisable value, and in reaching a decision consideration is given, among other things, to the following factors:
− the financial standing of the customer, including a realistic assessment of the likelihood of repayment of the
loan within an acceptable period and the extent of HSBC’ s other commitments to the same customer;
− the realisable value of any security for the loan;
− the costs associated with obtaining repayment and realisation of the security; and
− if loans are not in local currency, the ability of the borrower to obtain the relevant foreign currency.
Where specific provisions are raised on a portfolio basis, the level of provisioning takes into account
management’ s assessment of the portfolio's structure, past and expected credit losses, business and economic
conditions, and any other relevant factors. The principal portfolios evaluated on this basis are credit cards and
other consumer lending products.
General provisions
General provisions augment specific provisions and provide cover for loans which are impaired at the balance
sheet date but which will not be identified as such until some time in the future. HSBC requires operating
companies to maintain a general provision which is determined taking into account the structure and risk
characteristics of each company’ s loan portfolio. Historical levels of latent risk are regularly reviewed by each
operating company to determine that the level of general provisioning continues to be appropriate. Where
entities operate in a significantly higher risk environment, an increased level of general provisioning will apply
taking into account local market conditions and economic and political factors. General provisions are deducted
from loans and advances to customers in the balance sheet.
Loans on which interest is being suspended
Provided that there is a realistic prospect of interest being paid at some future date, interest on non-performing
loans is charged to the customer’ s account. However, the interest is not credited to the profit and loss account
but to an interest suspense account in the balance sheet which is netted against the relevant loan. On receipt of
cash (other than from the realisation of security), suspended interest is recovered and taken to the profit and loss
account. A specific provision of the same amount as the interest receipt is then raised against the principal
balance. Amounts received from the realisation of security are applied to the repayment of outstanding
indebtedness, with any surplus used to recover any specific provisions and then suspended interest.
Non-accrual loans
Where the probability of receiving interest payments is remote, interest is no longer accrued and any suspended
interest balance is written off.
Loans are not reclassified as accruing until interest and principal payments are up-to-date and future payments
are reasonably assured.
Loan write-offs
Loans and suspended interest are written off, either partially or in full, when there is no prospect of recovery of
these amounts.
Assets acquired in exchange for advances
Assets acquired in exchange for advances in order to achieve an orderly realisation continue to be reported as