Introduction to Loan Loss Provisioning

The PV.LOAN.CLASSIFICATION id is the risk classification that indicates the risk level of the contract or the customer and will be used to allocate the percentage for provision. A risk classification will be assigned to the contract and customer by the classification process.

The rank is a unique number that indicates the risk level for each risk classification. This is used by the system to determine which classification is worst. The risk classification is defined as per the rank given. The table below provides an example of the list of risk classifications that can be created in the PV.LOAN.CLASSIFICATION table.

There are no global standards that define how to classify assets under credit risks. The criteria and rules for classifications may differ across countries or banks; hence a flexible mechanism is required to handle different rules and criteria for asset classification. Following two methods can be used to classify the credit risk in the PV module:

• Use the Temenos Transact rules engine.
• Write a local routine (API) which can be plugged into the PV module.

The Temenos Transact rules engine is used to establish the rules for classification and to determine the classification code (that is, PV.LOAN.CLASSIFICATION) to be assigned to each individual asset. To configure the rule or rules for classification, one or more contexts must be passed to the engine as these will contain the necessary criteria for classification. These criteria can be created from contract or arrangement and customer. For example, these may include:

• The days past due (this may be held in the contract or arrangement record)
• The debtor assessment , which can be a subjective rating (it may be held in the customer record)
• To establish rules in Temenos Transact Rules Engine, following parameters are required:
  • EB.CONTEXT
  • RULE DESIGNER
  • EB.RULES
  • EB.RULES.VERSION
  • EB.RULE.GATEWAY

For more details on how to set up theTemenos Transact Rules Engine, read the user guide.

EB.LOOKUP:

EB.LOOKUP is a generic template to hold all the lookups for data access service. The user can define EB.LOOKUP and use them as drop-down lists in applications without creating separate tables for each field. The ID of this file will be in the format virtual table name*real.key.

For standard provisioning, different provision percentages can be applied to different types of balance. A virtual table PV.PROVISION.TYPE, with the following records may be defined as:

• PV.PROVISION.TYPE*TOTALPVPRINCIPAL for Principal
• PV.PROVISION.TYPE*TOTALPVINTEREST for Interest

The following screenshot shows EB.LOOKUP record details:

AC.BALANCE.TYPE:

The source balance must be defined for each provision type. Source balance is the balance used for provision calculation. It is the link to the AC.BALANCE.TYPE application.

It may include a single financial component used in AA.ARRANGEMENT as shown below:

If the source balance includes more than one financial component, then the AC.BALANCE.TYPE record may hold the list of the existing AC.BALANCE.TYPE records and asset types from reporting (RE.TYPES) such as LIVEDB

The following screenshot shows the AC.BALANCE.TYPE record for the source balance for principal balance. It includes existing AC.BALANCE.TYPE records and non-AA asset types.

The provision profile (PV.PROFILE) contains definitions of the type of calculation to be performed, the base balance type for provision calculation and provision percentage applicable for the respective balance type and risk classification.

A contract can follow only one type of calculation, hence either the IFRS, Standard Provision Percentage or an API is allowed.

The PV.PROFILE table works as per the date. An additional reference table (PV.PROFILE.XREF) contains a list of the dates held for the provision profile.

The Class field in PV.PROFILE application, which refers to the risk classification, must be defined in ascending order of rank.

Provision management (PV.MANAGEMENT) defines when the provisioning process should be triggered, what products are subject to assessment, the rules used to determine the classification and the provision calculation. The system allows multiple PV Management records to be created, thus allowing different classification and provisioning rules for different groups of products. For example, commercial loans may be treated differently to personal loans.

It allows the users to define the parameters that controls the provisioning process. These parameters include the following:

• Frequency to run the provisioning process (this keeps track of the next classification date, which triggers the provisioning process).
• The number of days to delay the posting after the classification process.
• Selection criteria of contracts for each product.
• The level of classification ( classification at the contract level or worst classification for the customer).
• Classification rule (Temenos Transact rules engine) or API.
• Link to provisioning profile.

There are two process setups that are allowed in the system:

• A single PV.MANAGEMENT record SYSTEM is allowed for each lead company. It can also be shared within a multi-company environment. The provisioning management record is linked to one provisioning profile.

The following screenshot shows an example of the PV.MANAGEMENT record:

• Multiple PV.MANAGEMENT records can be defined for individual products. This allows the bank to set up classification and calculation rules per product. In the following example, records have been created for LD commercial loans and LD personal loans. A product category may only be specified in one PV.MANAGEMENT record. The PV.MGMT.PRODUCT.LIST is an internal table, which holds the list of category Range/Product Group/Product Line defined for an application in PV.MANAGEMENT.

Individual PV.MANAGEMENT records cannot be entered if a SYSTEM record is already created in the PV.MANAGEMENT application. The existing SYSTEM record needs to be reversed before entering new records.

The following screenshot shows the PV.MANAGEMENT record for commercial and personal loans:

Frequency

The frequency is the date that triggers the classification process. The following screenshot shows the Job Frequency updated as MO115 in the SYSTEM record. Thus the next processing date is the 15th of the following month if current date is greater than 15th.

Using the Class Frequency field, user can set the classification frequency to be different from the calculation and posting frequencies. If this field is set, it can be used to calculate the Next Class Date. The Next Calc Date and Next Post Date continue to use the Frequency field to determine their frequencies. In the following example (screenshot), the frequency for classification has been set to DAILY in the Class Frequency field.

If this field is not entered, then the classification frequency is determined using the Frequency.

The Job Frequency field also determines the time when the calculation and the posting processes are triggered. The calculation and posting processes can also be triggered on every business day by setting the Calc Post Freq field in the PV.MANAGEMENT record, corresponding to the types of product.

This overrides the frequency defined under Job Frequency for the calculation and posting processes.

The following screenshot shows that Calc Post Freq is set to BSNSS, which means that the calculation and posting is triggered on every business day. The frequency defined under the Job Frequency applies to the classification process.

Provisioning Profile:

The link to the provisioning profile (PV.PROFILE) is defined here, it indicates that the calculation method to be used for the Provision is as per defined in the PV.PROFILE record, here the link is to the PV.PROFILE record ‘IFRS’. The PV.MANAGEMENT record can be linked to only one PV.PROFILE record. Only a single Provision Profile is allowed; hence the Provision percentages for a specific classification is applied to all contracts falling under that classification. For example the Standard Percentage for “Doubtful” is 40%, then a provision percentage of 40% is applied to all contracts with classification 'Doubtful' irrespective of the types of product.

Posting Delay:

The only value allowed in Posting Timing field is DELAY. This field indicates that there is a delay between the calculation and the posting of provision. The window between calculation and posting is defined as number of days in the Posting Delay field. This window allows for any changes that may affect the provision amount to be posted.

In the above example, the posting delay is 1 day, which means that posting is done one day after the classification and calculation process is triggered. In this case, a recalculation takes place prior to the posting.

Classification Level:

The following classification level indicates the classification to be considered when calculating the provision:

• If the Class Level is set to LOAN, the classification assigned to the contract is used.
• If the Class Level is set to CUSTOMER, the worst classification for the customer is considered.

Selection of Contracts:

The contracts selected for the provisioning process are defined under each respective Product (AA, LD,MM,SL and PD allowed).

For the Product field in this record, the associated Category code range(s) are only valid for non-AA products such as LD, SL etc. The AA product accepts either the product line (PRODUCT.LINE) or one or more product groups (PRODUCT.GRP).

Classification Rule:

The classification rules must be defined for each product. It can be a link to the Temenos Transact Rules Engine in field Class Rule or by using an API as defined in field Class Api field. The value in Class Rule must be a valid Id to the EB.RULE.GATEWAY table.

The provision asset detail application (PV.ASSET.DETAIL) holds current and historical details pertaining to the automatic classification and provisioning of an asset.

The user can also manually override the auto classification or a provision amount for that contract.

PV.ASSET.DETAIL is updated during online authorisation of a record and also during COB processing. Initial creation of the PV.ASSET.DETAIL record occurs when the classification details are passed during the execution of the PV.CLASSIFICATION job described in the COB processing section of this document.

The contract Id passed is also the key to the EB.CONTRACT.BALANCES record.

Any PV.ASSET.DETAIL record is updated with the product. For records emanating from an AA contract both PRODUCT.GROUP and PRODUCT.LINE are updated. For other contracts, the CATEGORY is updated instead.

The following screenshot shows the PV.ASSET.DETAIL record for LD product:

Identifiers for related PV.MANAGEMENT and PV.PROFILE records are also updated here together with classification details.

The Manual Class field must contain the Id of a valid PV.LOAN.CLASSIFICATION record. An example of manual input to PV.ASSET.DETAIL is shown below.

Input to Manual Class, Reason, and the Man Prov Amt fields.

The provisioning details differ slightly based on the method used for calculation:

• IFRS
  • The last calculation Date
  • The base amount used for calculation
  • The calculated provision amount
• Standard Provisioning
  • The last calculation date
  • the provision Type
  • The associated base amount
  • The associated collateral amount
  • The calculated provision amount

User can manually override the automatic classification or the calculated provision amount for contract by inputting the classification or provision amount.

The PV.ASSET.DETAIL record also holds some static information such as:

• Product, Currency, Customer, Category for non-AA contracts and product. Group or product line for AA contracts.
• Identifiers for related PV.MANAGEMENT and PV.PROFILE records are also updated.

Any update to the classification or calculation details cause the existing details to be moved to the previous classification or calculation details.

The provision customer detail application (PV.CUSTOMER.DETAIL) holds current and historical details pertaining to the automatic classification for a customer. The classification held will be the worst classification from the selected contracts for the customer. PV.CUSTOMER.DETAIL record may be updated by the classification of multiple selections of records for one Customer.

User can also manually override the automatic classification for a customer by inputting a classification. Manual Class field must be entered with a valid PV.LOAN.CLASSIFICATION record. Updates to this application causes existing classification details to be moved to previous classification fields before the record is written using the customer ID. PV.CUSTOMER.DETAIL contains identifiers for related PV.MANAGEMENT and PV.PROFILE records.

The updates to the PV.CUSTOMER.DETAIL application, which excludes non-manual processing of records, are updated on the same day if the classification passed is worse than the existing one. This record shows the previous, last classification and classification dates.