What is a forbearance agreement?

A document in which a lender agrees, for a set period and on conditions, not to exercise rights it would otherwise have, usually after a default or in expectation of one. It typically has the borrower acknowledge the debt, reserves the lender's position, sets out milestones and reporting, and says what ends the arrangement. The name varies: a waiver and amendment letter or a restructuring deed can do the same work. For reporting, what matters is the substance, difficulty plus concession.

Does forbearance make a loan non-performing?

Not by itself. The bank has to ask whether the loan would have been non-performing had the concession not been granted, and if so, the loan is treated as non-performing even where the concession created a new contract. A loan already non-performing stays that way until it meets the exit tests. Forbearance can therefore sit on either a performing or a non-performing loan, which is why banks track it as a separate marker.

What is the difference between forbearance and restructuring?

In ordinary use a restructuring is any substantial change to a debt's terms, and forbearance is the part of that granted because the borrower is in difficulty. A healthy company refinancing at market terms is restructuring its debt without any forbearance. Terminology differs by supervisor, though: Australia's APS 220 uses restructured for what the Basel guidelines call forbearance, so the word has to be read in the document it appears in.

How long does a loan stay classified as forborne?

Under the Basel guidelines, until payments on the revised terms have been made on time for a continuous period of at least one year and the borrower has resolved its difficulty. Australia's APS 220 sets at least six months with the same second condition. In both, a new concession during that period starts the clock again. Other supervisors set their own periods, and a bank's policy can be stricter than the minimum.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Forbearance: a Worked Example

A concession buys time. The file has to show what the time is for.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

A bank that grants forbearance has concluded that a struggling borrower is worth more with time than with a demand, and has put that conclusion in writing. Two facts make it forbearance: the borrower is in financial difficulty, and the bank gives something it would not otherwise give. The concession changes how the loan is reported as well as how it is repaid. A strawberry grower whose debt service cover falls to 0.52 times after a poor season can be carried back to 1.35 times, if the next season is normal, at a cost of one more year of debt.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 09 — The Tuesday List. Eight dashboards. Two intensive-care slots. Portfolio triage, Tuesday 8:30am. Your call first, then the senior banker's.

Read the file →

PART OF When Your Loan Goes to the Workout Team

// 01 — WHAT COUNTS AS FORBEARANCE

Lenders change loans all the time. A sound borrower that negotiates a longer term on market conditions has not received forbearance. The Basel Committee's guidelines apply the label when two facts meet: the counterparty is having difficulty meeting its financial commitments, and the bank grants a concession it would not otherwise consider. Difficulty can exist with no arrears at all, where forecast cash flow will not cover the debt.

The Committee's examples include a longer term, rescheduled payments, a grace period, a below-market rate, capitalised arrears, forgiven or deferred amounts, a switch to interest-only, released collateral, debt converted to equity, deferred recovery action and eased covenants. Refinancing with a new contract can qualify too, even on terms no better than the old one. Australia's APS 220, which uses the word restructured for the same idea, puts that on its list.

The Basel text is guidance for supervisors, not law in any of the three markets. A bank applies its own supervisor's wording. In the UK, article 47b of the Capital Requirements Regulation defines a forbearance measure and reaches a borrower likely to experience difficulty as well as one already in it. The Prudential Regulation Authority has said the European guidelines on forborne exposures do not apply there, while describing their prudential content as broadly good credit risk management. This page is about business lending; consumer hardship has its own rules in each market.

// 02 — HOW IT IS WRITTEN AND CLASSIFIED

The document is usually a letter or deed in which the borrower acknowledges the debt and any existing default, the bank reserves its rights, and the concession is tied to conditions: new equity, no distributions, tighter reporting, milestones and a date on which it ends. Australian banks must also hold a current, documented credit evaluation of the borrower's prospects under the new terms, and the concession needs approval at the right level of management.

Difficulty + concession = forborne

Without the concession, would the loan

have been non-performing?

yes = non-performing and forborne

no = performing and forborne, on probation

Forbearance does not by itself make a performing loan non-performing, and it does not cure one that already is. Under IFRS 9 and its New Zealand and Australian equivalents, a concession granted because of the borrower's difficulty is also one of the listed signs that a loan may be credit-impaired, so the same letter can move the provision.

// 03 — THE EXAMPLE

A strawberry grower, constructed for this page like every figure in it, owes US$4.8m on a term loan at 8%, repaying US$800,000 of principal after each harvest. In a normal season it generates US$1.6m of cash after capital spending. A wet spring cuts that to US$620,000. No payment has been missed, but the principal falls due in ten weeks.

Normal Poor season Poor season,

season with concession

Cash available 1,600,000 620,000 620,000

Interest at 8% 384,000 384,000 384,000

Principal 800,000 800,000 0

Debt service 1,184,000 1,184,000 384,000

Cover 1.35× 0.52× 1.61×

Cash after debt 416,000 (564,000) 236,000

The bank defers the year's principal and adds a year to the term. In exchange the owners inject US$200,000, distributions stop and the grower reports monthly through winter. Is the loan also non-performing? Without the deferral the grower would have been US$564,000 short, so the bank has to decide, and record, whether full repayment was still likely without selling the farm. The new equity and the normal-season record are what it would point to for performing and forborne. That reading is the example's. The deferral has a price, shown here on annual balances:

Original: 4.8 + 4.0 + 3.2 + 2.4 + 1.6 + 0.8 = 16.8m of balances

Forborne: 4.8 + 4.8 + 4.0 + 3.2 + 2.4 + 1.6 + 0.8 = 21.6m of balances

Interest, original 16.8m × 8% = 1,344,000

Interest, forborne 21.6m × 8% = 1,728,000

Cost of the extra year = 384,000

The case rests on whether US$1.6m is a fair assumption. At that level the concession is a bridge. If a normal season really produced US$900,000, cover would be 0.76 times even in a normal season, and the same letter would only postpone a loss. These levels are the example's, not a market norm.

Under the Basel guidelines the loan stays forborne until payments have been made on time for at least a year and the difficulty is resolved. APS 220 asks for at least six months and the same resolution. It also allows a business loan placed on restructured terms for under twelve months not to be reported as restructured, where long-term viability is unquestioned, the bank is reasonably confident of full performance and no individual provision is held. Its own illustration is a farm with a bad season, though a deferral that also lengthens the loan may not fit.

// 04 — HOW IT DIFFERS FROM ITS NEIGHBOURS

A covenant waiver forgives one test, and given to a borrower in difficulty it can count as a concession. A standstill is a short agreed pause while lenders work out what to do; a long deferral of recovery action falls on the concession list. Evergreening uses the same tools, a renewal or capitalised interest, without conditions or a way back. What separates them is the substance of the arrangement and the honesty of its reporting, not the name on the document.

DEFINED IN ONE PARAGRAPH → · FORBEARANCE, SIGNAL OR NOISE → · PROBLEM LOANS AND WORKOUT →

// 05 — WHERE IT DECIDES A FILE

The decision is a comparison: what the bank expects from the plan, allowing for the chance it fails, against what a sale would recover today. The workout guide sets that out. Forbearance earns its place when the plan wins and the borrower's own cash can return to servicing the debt.

Timing matters to both sides. A concession agreed before arrears leaves more options than one negotiated after a demand. And a second request tells a lender something: under the Basel guidelines and APS 220, new forbearance during the probation period restarts the clock, and the file now has to explain why the first diagnosis was wrong.

PROVISION COVERAGE, WORKED → · WHEN YOUR LOAN GOES TO WORKOUT →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Basel Committee on Banking Supervision, Basel Consolidated Guidelines, chapter PAP10 (Prudential treatment of problem assets) — paragraphs 10.26, 10.30, 10.33, 10.35 to 10.37 — Defines forbearance as difficulty plus a concession, lists example concessions and sets the one-year exit test — sections 01, 02 and 03.
Australian Prudential Regulation Authority, Prudential Standard APS 220 Credit Risk Management (in force from 1 January 2023) — paragraphs 13(c), 98, 99, 102 and 103 — Australia's definition of a restructured exposure, the documented evaluation, the six-month probation and the under-twelve-months carve-out — sections 01, 02 and 03.
Prudential Regulation Authority, Statement on EBA Guidelines relating to the management of non-performing and forborne exposures, May 2022 — States that the European guidelines do not apply in the UK and that their prudential aspects broadly represent good credit risk management — section 01.

// QUESTIONS PEOPLE ASK

What is a forbearance agreement?: A document in which a lender agrees, for a set period and on conditions, not to exercise rights it would otherwise have, usually after a default or in expectation of one. It typically has the borrower acknowledge the debt, reserves the lender's position, sets out milestones and reporting, and says what ends the arrangement. The name varies: a waiver and amendment letter or a restructuring deed can do the same work. For reporting, what matters is the substance, difficulty plus concession.
Does forbearance make a loan non-performing?: Not by itself. The bank has to ask whether the loan would have been non-performing had the concession not been granted, and if so, the loan is treated as non-performing even where the concession created a new contract. A loan already non-performing stays that way until it meets the exit tests. Forbearance can therefore sit on either a performing or a non-performing loan, which is why banks track it as a separate marker.
What is the difference between forbearance and restructuring?: In ordinary use a restructuring is any substantial change to a debt's terms, and forbearance is the part of that granted because the borrower is in difficulty. A healthy company refinancing at market terms is restructuring its debt without any forbearance. Terminology differs by supervisor, though: Australia's APS 220 uses restructured for what the Basel guidelines call forbearance, so the word has to be read in the document it appears in.
How long does a loan stay classified as forborne?: Under the Basel guidelines, until payments on the revised terms have been made on time for a continuous period of at least one year and the borrower has resolved its difficulty. Australia's APS 220 sets at least six months with the same second condition. In both, a new concession during that period starts the clock again. Other supervisors set their own periods, and a bank's policy can be stricter than the minimum.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit risk analystSets and monitors the standard the lending line works to — policy, appetite, ratings and the models underneath them.
Portfolio managerOwns the credit on a book after the money is out — reviews, covenants, ratings and early warning.
Model validatorIndependently checks that the bank's models do what they claim, before anyone relies on them.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE FIRST QUESTION · THE BANK · ASSET QUALITY

Under expected-loss accounting, a performing loan is moved to the stage for a significant increase in credit risk. The borrower has missed no payment, but the provision against the loan jumps.

Why does it jump before any payment is missed?

5 MORE ON THE BANK · ASSET QUALITY →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHForbearance What is forbearance on a business loan?