Page 36 - Agib Bank Limited Annual Report 2021
P. 36
A modification of a financial asset occurs when In the case where the financial asset is
the contractual terms governing the cash flows derecognised the loss allowance for ECL is re-
of a financial asset are renegotiated or measured at the date of derecognition to
otherwise modified between initial recognition determine the net carrying amount of the asset
and maturity of the financial asset. A at that date. The difference between this
modification affects the amount and/or timing of revised carrying amount and the fair value of
the contractual cash flows either immediately the new financial asset with the new terms will
or at a future date. lead to a gain or loss on derecognition.
In addition, the introduction or adjustment of The new financial asset will have a loss
existing covenants of an existing loan would allowance measured based on 12-month ECL
constitute a modification even if these new or except in the rare occasions where the new
adjusted covenants do not yet affect the loan is considered to be originated credit
cashflows immediately but may affect the cash impaired. This applies only in the case where
flows depending on whether the covenant is or the fair value of the new loan is recognised at a
is not met (e.g. A penalty will be charged when significant discount to its revised balance
covenants are breached). because there remains a high risk of default
which has not been reduced by the
The Bank renegotiates loans to customers in modification.
financial difficulty to maximise collection and
minimise the risk of default. A loan forbearance The Bank monitors credit risk of modified
is granted in cases where although the financial assets by evaluating qualitative and
borrower made all reasonable efforts to pay quantitative information, such as if the borrower
under the original contractual terms, there is a is in past due status under the new terms.
high risk of default or default has already When the contractual terms of a financial asset
happened and the borrower is expected to be are modified and the modification does not
able to meet the revised terms. result in derecognition, the Bank determines if
The revised terms in most of the cases include the financial asset’s credit risk has increased
an extension of the maturity of the loan, significantly since initial recognition by
changes to the timing of the cash flows of the comparing:
loan (principal and mark up repayment),
reduction in the amount of cash flows due • the remaining lifetime PD estimated based on
(principal and mark-up forgiveness) and data at initial recognition and the original
amendments to covenants. contractual terms; with
When a financial asset is modified the Bank • the remaining lifetime PD at the reporting date
assesses whether this modification results in based on the modified terms.
derecognition. In accordance with the Bank’s For financial assets modified as part of the
policy a modification results in derecognition Bank’s forbearance policy, where modification
when it gives rise to substantially different did not result in derecognition, the estimate of
terms. To determine if the modified terms are PD reflects the Bank’s ability to collect the
substantially different from the original modified cash flows taking into account the
contractual terms the Bank considers the Bank’s previous experience of similar
following: forbearance action, as well as various
• Qualitative factors, such as contractual cash behavioural indicators, including the borrower’s
flows after modification are no longer SPPI, payment performance against the modified
change in currency or change of counterparty, contractual terms.
the extent of change in mark-up rates, maturity, If the credit risk remains significantly higher
covenants. If these do not clearly indicate a than what was expected at initial recognition
substantial modification, then;
the loss allowance will continue to be
• A quantitative assessment is performed to measured at an amount equal to lifetime ECL.
compare the present value of the remaining The loss allowance on forborne loans will Annual Report and IFRS Financial Statements
contractual cash flows under the original terms generally only be measured based on 12-
with the contractual cash flows under the month ECL when there is evidence of the
revised terms, both amounts discounted at the borrower’s improved repayment behaviour
original effective rate. following modification leading to a reversal of
the previous significant increase in credit risk.
Agib Bank Annual Report 2021 www.agib.gm 36
