4.3 Performance Management
Effective from Jan 06 2020 - Jun 30 2020
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For Workout Unit (WU) staff involved in the management of Nonperforming Loans (NPLs), proper performance metrics should be established which should cater not only to the individual’s performance but also assess the performance of the team as a whole. Further, the performance of the Workout Unit should be monitored and measured on a regular basis. For this purpose, an appraisal system tailored to the requirements of the NPL Workout Unit should be implemented in alignment with the overall NPL strategy and operational plan.
Further to quantitative elements linked to the bank's NPL targets and milestones (probably with a strong focus on the effectiveness of workout activities), the appraisal system may include qualitative measurements such as level of negotiations competency, technical abilities relating to the analysis of the financial information and data received, structuring of proposals, quality of recommendations, or monitoring of restructured cases.
It should also ensure that the higher degree of commitment, usually required of NPL WU staff is inculcated in the agreed working conditions, remuneration policies, incentives, and performance management framework.
As part of the performance measurement framework, it is recommended that banks' management should include specific indicators linked to the targets defined in the NPL strategy and operational plan. The importance of the respective weight given to these indicators within the overall performance measurement frameworks should be proportionate to the severity of the NPL issues faced by the bank.
Finally, given that the important role of efficient addressing of pre-arrears is a key driver for the reduction of NPL inflows, a strong commitment of relevant staff regarding the addressing of early warnings should also be fostered through the remuneration policy and incentives framework.
Technical resources
| One of the key success factors for the successful implementation of any NPL strategy option is an adequate technical infrastructure. In this context, it is important that all NPL-related data is centrally stored in robust and secured IT systems. Data should be complete and up-to-date throughout the NPL workout process. | ||
| An adequate technical infrastructure should enable NPL WUs to: | ||
| i. | Easily access all relevant data and documentation including: | |
| a) | current NPL and early arrears borrower information including automated notifications in the case of updates; | |
| b) | loan and collateral/guarantee information linked to the borrower; or connected borrowers; | |
| c) | monitoring/documentation tools with the IT capabilities to track restructuring performance and effectiveness; | |
| d) | status of workout activities and borrower interaction, as well as details on restructuring measures, agreed, etc.; | |
| e) | foreclosed (foreclosure is the repayment of the outstanding loans to the extent possible through, legal enforcement by a bank) assets (where relevant); and | |
| f) | tracked cash flows of the loan and collateral. | |
| ii. | Efficiently process and monitor NPL workout activities including: | |
| a) | automated workflows throughout the entire NPL life cycle; | |
| b) | automated monitoring process ("tracking system”) for the loan status ensuring a correct flagging of non-performing and forborne loans; | |
| c) | industrialized borrower communication approaches, e.g. through call centers (including integrated card payment system software on all agent desktops) or internet (e.g. file sharing system); | |
| d) | incorporated early warning signals (see also EWS section); | |
| e) | automated reporting throughout the NPL workout lifecycle for NPL WU management, senior management, and other relevant managers as well as the regulator; | |
| f) | performance analysis of workout activities by NPL WU, sub-team and expert (e.g. cure/success rate, rollover information, effectiveness of restructuring options offered, cash collection rate, vintage analysis of cure rates, promises kept rate at call center, etc.); and | |
| g) | evolution monitoring of portfolio(s) / sub-portfolio(s) / cohorts / individual borrowers. | |
| iii. | Define, analyze and measure NPLs and related borrowers: | |
| a) | recognize NPLs and measure impairments; | |
| b) | perform suitable NPL segmentation analysis and store outcomes for each borrower; | |
| c) | support the assessment of the borrower's personal data, financial position and repayment ability (borrower affordability assessment), at least for non-complex borrowers; and | |
| d) | conduct calculations of (i) the net present value (NPV) and (ii) the impact on the capital position of the bank for each restructuring option and/or any likely restructuring plan under any relevant legislation (e.g. foreclosures law, insolvency laws) for each borrower. | |
| The adequacy of technical infrastructure, including data quality, should be assessed by an independent function on a regular basis (for instance internal or external audit). | ||