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Different types of provisions

Significant loans > = IDR 15 bio Not-significant loans < IDR 15 bio

impairment trigger event yes no no

impairment trigger event yes

Individual loan assessment (specific allowance) Present value of future cash flows Calculate unwinding for each single loan Stop regular interest accrual

Assessment for impairment on a portfolio basis considering the loss identification period (LIP) (portfolio allowance for non-impaired loans) Exposure x PD x LGD x LIP No unwinding, as long as it is not material Continue to accrue interest on a regular basis (contractually agreed interest)

Collective loan assessment (portfolio allowance for insignificant loans) EXP x PD x LGD Calculate unwinding on a portfolio basis Stop regular interest accrual

Slide 1

Interest income recognition

When a loan is classified as impaired, interest ceases to be recognised on a regular accruals basis Interest which previously had been accrue have to reverse back Recognize new interest income by using effective interest rate based on present value of loans carrying value after consider any impairment (unwinding income)

Slide 2

Interest income recognition Unwinding IA


Case: Bank grants a 4 year 10% loan for 1,000 with principal repayable at the end of year 4. Bank has objective evidence of impairment at the end of year 1. It expects to recover all the contractual interest payments but only 50% of the principal amount at maturity. The carrying value of the loan is 1,000. The recoverable amount is 624 based on discounted cash flows using the original effective interest rate of 10%. The impairment loss is therefore 376. Banks management experiences no changes in the expected cash flows in years 2 & 3. At the end of year 4, the scheduled interest payment is paid and 50% of the principal is repaid.

Slide 3

Interest Income recognition Unwinding IA

Interest income recognition Unwinding IA


End of year 1 Dr. Cash Cr. Interest income Dr. Impairment loss on loans Cr. Provision End of year 2 Dr. Cash Cr. Interest income Cr. Loans 100 62* 38** 376 376 100 100

* original effective interest rate of 10% times the recoverable amount of 624 ** being cash of 100 less interest income of 62
Slide 5

Interest income recognition Unwinding IA


End of year 3 Dr. Cash Cr. Interest income Cr. Loans 100 59 * 41

* being original effective interest rate of 10% times the carrying amount of 586 = 624-38

End of year 4 Dr. Cash Cr. Interest income Cr. Loans Dr. Cash Cr. Loans Dr. Provision Cr. Loans

100 55 45** 500 500 376 376

**being original effective interest rate of 10% times the carrying amount of 546 = 587-41
Slide 6

Interest income recognition Unwinding CA

Unwinding Income = (EAD Provision) * EIR