Clarifications are requested surrounding the classification of a borrower into default status and therefore into non-performing status, when the borrower is a developer / construction company and hence relies on the realisation of collaterals to repay his loans.

Article 178 of Regulation (EU) No 575/2013 (CRR) states that a default is considered to have occurred with regards to a particular obligor, when the institutions considers that the obligor is unlikely to pay its credit obligation without recourse by the institution to actions such as realising security.

Also, paragraph 213, Annex V, Part 2 of Commission Implementing Regulation (EU) No 680/2014, as amended (ITS on supervisory reporting), states that non-performing exposures are those that satisfy either of the following criteria: (a) material exposures which are more than 90 days past due, (b) the debtor is assessed as unlikely to pay its credit obligations in full without realisation of collateral.

In addition, as per clarifications provided in Q&A 2016_2842 “fully collateralized exposures in unlikely-to-pay situations should be classified as non-performing, even when it is assumed that the customer is willing to realize the collateral on a voluntary basis in order to avoid a legal enforcement by the credit institution”.

Having in mind the above, how should a bank handle the exposures of developers / construction companies, which were granted for financing the development / construction of real-estate buildings and which by default these properties were used as collaterals? Should these exposures remain indefinitely into non-performing status, because their repayment relies (again, by default) on the sale of the mortgages properties, regardless of whether the borrowers have made material payments of a non-insignificant amount of principal and all other exit conditions, as described in the relevant paragraphs of the ITS on supervisory reporting, have been met?

Paragraph 213, Annex V, Part 2 of Commission Implementing Regulation (EU) No 680/2014, as amended (ITS on supervisory reporting), states that “non-performing exposures shall be those that satisfy any of the following criteria:

a. material exposures which are more than 90 days past due

b. the debtor is assessed as unlikely to pay its credit obligations in full without realisation of collateral, regardless of the existence of any past due amount or of the number of days past due.”

Moreover, paragraph 215 clarifies that “[e]xposures in respect of which a default is considered to have occurred in accordance with Article 178 of CRR […] shall always be considered as non-performing exposures”.

The question concerns an obligor falling into a default status according to Article 178 of Regulation (EU) No 575/2013 (CRR), where the default is considered to have been occurred at obligor-level. In this case, the exposure shall be classified as non-performing until all the conditions below are met (paragraph 228, Annex V, Part 2 of ITS on supervisory reporting):

1. the exposure meets the exit criteria applied by the reporting institution for the discontinuation of the impairment and default classification according to the applicable accounting framework and Article 178 of the CRR respectively;
2. the situation of the debtor has improved to the extent that full repayment, according to the original or where applicable the modified conditions, is likely to be made;
3. the debtor does not have any amount past-due by more than 90 days.

Therefore, as long as the obligor is in default status, all exposures to this obligor shall be classified as non-performing, regardless of any repayments of the principal or the meeting of any other conditions 2-3 above.

Based on this, if the bank deems the developer not unlikely to pay anymore (condition 1-2), and there are no past due exposure (condition 3), the developer can be re-classified as performing.