Our questions refers to the border case, where a bank modifies terms and conditions in favour of a debtor who is in financial difficulties, but where - at the same time - the new terms and conditions are still less favourable or equal to the standard terms and conditions of the bank for comparable debtors. The matter might become clearer through a specific example: A debtor of a performing loan is in financial difficulties (let's say 25 days past due). Due to the existing financial problems the bank reduces the interest rate to a rate which is still above the standard interest rate for debtors with a similar risk profile of the bank. The bank has no doubt about the debtor being able to pay it's debt. Is this measure to be considered a forborne measurement? Paragraph 163 lays down, that forbearance measures consist of concessions towards a debtor that is experiencing or about to experience difficulties in meeting its financial commitments (“financial difficulties”), i.e. it states two conditions for a forbearance: a) a concession has taken place b) the concession refers to a debtor in financial difficulties There is no doubt, that the debtor in the above mentioned example is in financial difficulties, but is the above stated measure also a concession? paragraph 165 says: 165. Evidence of a concession includes the following: (a) a difference in favour of the debtor between the modified terms of the contract and the previous terms of the contract; (b) inclusion in a modified contract of more favourable terms than other debtors with a similar risk profile could have obtained from the same institution at that time. Our example meets only condition a) not condition b). This may lead to the conclusion that it is not a concession and therefore the above stated case does not refer to a forbearance measure. Paragraph 164 on the other hand lays down "...that would not have been granted had the debtor not been experiencing financial difficulties". If we view this statement individually, we may come to the conclusion that a concession has taken place; on the other hand it is somewhat contradictory to 163 and 165, from where one may deduct that a concession is a separately defined component of a forbearance measure. If we interpret this statement in the light of paragraph 165 b), i.e. that terms and conditions should not be more favourable than those applied to other comparable debtors the measure may not be a forbearance measure.
In our opinion your answer is highly relevant for the process for identifiying forbearance measures: If NO: The bank may check if a concession has taken place. If no, the process stops there. If YES: The bank has in any case to go ahead and check possible financial difficulties. Besides: If NO: the conditions under paragraphs 172 and 174 would ONLY be considered if a concession according to paragraph 165 has taken place.
According to paragraph 242 of Annex V of the Regulation (EU)n°680/2014 (ITS on Supervisory Reporting), “evidence of a concession shall include at least any of the following:
(a) a difference in favour of the debtor between the modified terms of the contract and the previous terms of the contract;
(b) inclusion in a modified contract of more favourable terms than other debtors with a similar risk profile could have obtained from the same institution at that time.
This means that anyone of those conditions shall be met and not necessarily both of them.
In that specific case, condition under point a) is met. Consequently, the exposure shall be classified as forborne.