7.1.3 Identification of Concession
Effective from Nov 23 2020 - Jun 30 2021
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| Concessions are special contractual terms and conditions provided by the finance company to a borrower facing financial difficulty so that the borrower can sufficiently service its financial commitment. The main characteristic of these concessions is that the finance company would not extend exposures or grant commitments to the borrower on such modified terms and conditions under normal market conditions. | ||
| Concessions can be triggered by: | ||
| i. | Changes in the terms and conditions of the existing exposure contract by giving considerably more favorable terms to the borrower that otherwise would not be considered; | |
| ii. | A supplementary agreement, or a new contract to refinance on concessionary terms, the current transaction; or | |
| iii. | The exercise of clauses embedded in the contract that enable the borrower to change the terms and conditions of the exposure contract or to take on additional exposures or commitments at its own discretion. These actions should only be treated as concessions if the finance company assesses that the counterparty is in financial difficulty. | |
| There are many types of concession granted to borrowers. However, not all concessions will cause a reduction in the net present value of the exposure and such concessions do not lead to the recognition of a loss by the finance company. Such concessions would cause a stage 2B forborne exposure to retain its stage 2B status and not migrate to stage 3 as a credit impaired exposure. A concession is granted only when the borrower is experiencing financial difficulty. Examples of potential concessions (not complete exhaustive list) include the following: | ||
| i. | Extending or rolling over the exposure term over 1 year and easing covenants; also includes if rolled over for more than 2 times; | |
| ii. | Supplementary agreement or new contract to refinance current transaction. Rescheduling the dates of principal or interest payments i.e. changes in conditions of existing contract, giving considerably more favorable terms to obligor; | |
| iii. | Granting new or additional periods of non-payment (grace period/moratorium); | |
| iv. | Reducing the interest rate, concession in interest rate, resulting in an effective interest rate below the current interest rate that borrowers with similar risk characteristics could obtain from the same or other institutions in the market; | |
| v. | Capitalizing arrears; | |
| vi. | Forgiving, deferring or postponing principal, interest or relevant fees; | |
| vii. | Changing an amortizing exposure to an interest payment only; | |
| viii. | Releasing collateral or accepting lower levels of collateralization; | |
| ix. | Repayments linked to disposal of assets or non-operating events; | |
| x. | Allowing the conversion of debt to equity of the counterparty; | |
| xi. | Deferring recovery/collection actions for extended periods of time; and | |
| xii. | Exercise of clauses in agreement that enables obligor to change terms and con ditions. | |
| Refinancing an existing exposure with a new contract due to the financial difficulty of a borrower should qualify as a concession, even if the terms of the new contract are no more favorable for the counterparty than those of the existing transaction. Such arrangement is treated as forbearance and the Rules specified in this Section are applicable. | ||