Problem Loan Management and Recovery
What the exam tests
This domain tests recognition, classification, provisioning, restructuring, and recovery of impaired credits. It rewards early action and realistic recovery assumptions, and penalizes evergreening.
Core rules
- Classify by days past due and credit indicators: substandard at 90 days, doubtful at 180 days, lost at 360 days, subject to the applicable prudential regime.
- Provisioning follows classification and expected recovery; under IFRS 9, use lifetime expected credit losses for deteriorated exposures.
- Restructuring must address the cause of distress; a new maturity date without new cash flow or concession is usually evergreening.
- Recovery options include negotiated settlement, collateral realization, receivership, litigation, and sale of exposure.
- Document forbearance decisions, recovery estimates, and legal steps.
Worked example
A ₦100m term loan is 200 days past due. It is classified doubtful, requiring a 50% provision of ₦50m on the prudential approach. If recovery work indicates ₦30m is realistically recoverable from collateral after costs, the expected loss is higher and the file should reflect that in impairment. Restructuring by extending tenor without new cash flow would not cure the classification.
Traps
Evergreening through rollovers; restructuring without a viability assessment; overstating collateral recovery; missing limitation periods; and failing to recognize impairment because the borrower promises to pay. Also avoid releasing provisions without evidence of recovery.
Key points
- Classify by days past due and credit indicators.
- Restructuring must fix the cause of distress, not just the maturity date.
- Recovery estimates should be net of costs and realistic.
- Evergreening conceals loss and is a supervisory concern.