SIGNAL OR NOISE · THE BANK · ASSET QUALITY
A year ago a bank's watch list held 15 borrowers. It now holds 40. None has defaulted, and the bank's loss rate is unchanged.
// WORKED EXAMPLEHOW THE CLOCK RUNS
Forbearance Probation Period: How Long the Label Stays
A concession is granted in a day and worn for years.
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
When a bank restructures a loan for a borrower in difficulty, the loan usually looks current at once: the arrears are capitalised and the new instalments are smaller. Supervisors do not let the label change that quickly. The new terms have to be met for a set time, and the bank has to be satisfied the difficulty has passed, before the loan can leave non-performing status or lose its forborne flag. Australian rules ask for six months of timely payments; UK rules can keep a loan in the forborne category for three years. A second concession during probation usually starts the count again.
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
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// 01 — WHY A CONCESSION LEAVES A MARK
When a bank eases the terms of a loan because the borrower cannot meet them, the loan has not been repaired; it has been given time. A longer term, a payment holiday or arrears added to the balance can turn a missed instalment into a current account overnight. Supervisors therefore separate the moment the loan looks current from the moment it can be treated as sound, and the probation period is the gap between them. Until it ends, the loan stays in the bank's reporting of restructured or forborne exposures and, if it was non-performing when the concession was made, often stays there too.
The label is not cosmetic. It shapes the bank's non-performing figures, the scrutiny a loan receives at each review, and how a credit committee reads the borrower's next request. A concession is defined broadly in both markets the page covers: changing terms the borrower could not otherwise meet, or refinancing a troubled loan, where the bank would not have done so for a borrower in good health.
// 02 — HOW EACH MARKET RUNS THE CLOCK
Australia — APRA APS 220, paragraphs 95 to 103
non-performing → performing, restructured loan:
timely payments on the revised terms for at least 6 months
AND full repayment now likely AND nothing 90+ days past due
restructured label off:
6 months' timely payments, counted from the scheduled start
of payments on the revised terms, AND financial difficulty resolved
new concession, or non-performing again → probation restarts
UK — CRR article 47a; PRA reporting rules (FINREP, Annex V)
non-performing forborne → performing:
at least 1 year since the later of the concession and
the non-performing classification, no past-due amount,
no concern about full repayment
forborne label off:
2 years' probation from becoming performing, regular
payments in at least half of it, nothing more than
30 days past due at its end
new concession, or more than 30 days past due, during that
probation → non-performing again
The two rulebooks differ in more than length. Australia's count starts on the scheduled start of payments under the new terms, so a long full payment holiday delays the start. The UK's one-year wait runs from the concession or, if later, the non-performing classification, and the bank may treat concern about repayment as gone once the borrower's regular payments add up to the amount that was past due. APS 220 also lets a bank not report a business loan as restructured where the easing lasts less than twelve months, the borrower's long-term viability is unquestioned, full repayment is expected and no individual provision is held; it gives a farm in a bad season as the example. New Zealand's own prudential rules are not covered here. A New Zealand bank owned by an Australian group is also inside its parent's APRA group consolidation, where APS 220 applies, but its own classification answers to the Reserve Bank of New Zealand.
// 03 — THE EXAMPLE
A harbour-cruise operator, constructed for this page like every figure in it, has a US$6.0m term loan. Two poor tourist seasons leave it two quarterly instalments behind and non-performing. The bank restructures: the term is extended by three years, the next twelve months are interest-only, and the US$300,000 of arrears is added to the loan. The rate is the example's.
Month 0 concession; loan becomes 6,000,000 + 300,000 = 6,300,000
Month 1 first payment due: 6,300,000 × 8% ÷ 12 = 42,000
Month 8 payments to date: 8 × 42,000 = 336,000
(more than the 300,000 that was past due)
Australia UK
Performing, earliest month 7 month 12
Label off, earliest once difficulty month 36
is judged resolved
In Australia the six months run from the scheduled start of payments in month 1, so the earliest return to performing is month 7, and the operator is still interest-only. Its banker has to judge whether full repayment is now likely, and the restructured label comes off only when the financial difficulty is resolved, which in this file the bank concludes once principal payments resume and the next season's bookings are in. In the UK the earliest exit from non-performing is month 12, and the forborne label stays for a further two years.
Then the third season disappoints too, and in month 20 the bank defers principal again. In the UK the loan is still under probation, so the new concession takes it back to non-performing: the one-year wait starts again, and the earliest clean date moves from month 36 to month 56. In Australia the loan had already left both categories, so the deferral is a fresh restructure, assessed for non-performing status on its own facts, with a fresh six-month probation.
// 04 — HOW IT DIFFERS FROM THE ACCOUNTING CLOCK
The bank's accounts run a separate test. Under IFRS 9 and its NZ and Australian equivalents, a credit-impaired loan returns to earning interest on its full balance once its credit risk has improved objectively, with no minimum period written into the standard. So the cruise operator's loan can be out of stage 3 in the accounts while it is still forborne and under probation in the bank's regulatory reporting, and the two figures in a bank's results will not reconcile loan for loan.
Probation also differs from the default label itself. Default is set by the 90-day and unlikeliness-to-pay tests; the probation rules decide how long a loan that met them must wait, after a concession, before it can be treated as clear of them.
DEFINED IN ONE PARAGRAPH → · CREDIT-IMPAIRED (STAGE 3) → · UNLIKELINESS TO PAY →
// 05 — WHERE IT DECIDES A FILE
The probation rules reward a restructure that holds. A concession sized to the borrower's realistic recovery, with payments the business can meet from the start, can clear in the minimum time; one sized to the borrower's hopes risks a second concession, which in the UK puts the loan back to the beginning. A credit officer drafting the terms therefore reads the next two or three seasons, not the next quarter, and asks when the first payment under the new terms falls due, because in Australia that date starts the count.
For the borrower, the label lasts longer than the difficulty. While a loan is forborne the bank will usually review it more often and look harder at new money, and new money to a borrower in difficulty can itself be a concession. A business that expects to need help is better placed asking once, with a full plan, than asking twice. The workout guide follows the same file from the borrower's side.
// SOURCES
The documents the statements on this page rest on. Each was opened and checked when cited.
- Regulation (EU) No 575/2013 as retained in UK law (UK CRR), article 47a(3), (6) and (7) — non-performing exposures and forbearance — Sets the one-year wait (from the later of the concession and the non-performing classification) before a non-performing forborne exposure can be performing, the two-year probation with its half-period payment and 30-day tests, and the return to non-performing on a new concession or more than 30 days past due — sections 02 and 03.
- Prudential Regulation Authority, PRA Rulebook, Reporting (CRR) Part, Annex V Instructions for reporting on financial information (FINREP), in force from 1 January 2022 — Part 2, paragraphs 231, 232 and 256 to 261 — Applies article 47a's exit and probation conditions to the reporting of non-performing and forborne exposures, including the quarterly reassessment and when a forborne exposure counts as performing from the date of the concession — sections 02, 03 and the FAQ.
- Australian Prudential Regulation Authority, Prudential Standard APS 220 Credit Risk Management, in force 1 January 2023 — definition of 'restructured', reclassification to performing, restructured exposures and exit criteria — Sets the six-month probation from the first payment under revised terms, the restart on new forbearance or non-performing status, the twelve-month carve-out for viable business loans, and lists examples of concessions — sections 02, 03 and the FAQ.
// QUESTIONS PEOPLE ASK
- How long is the probation period for a forborne loan?
- It depends on who regulates the bank. Australia's rule counts six months of on-time payments under the revised terms, counted from the scheduled start of those payments, before a non-performing restructured loan can be reclassified; the restructured label also needs the bank to judge the difficulty resolved. UK rules count in two stages: at least a year in the non-performing category, then two years of probation as a performing forborne loan, so three years at the earliest from the concession.
- What restarts the probation period?
- A further concession, or the loan falling back into arrears. In Australia, new forbearance granted during probation restarts it, and so does the loan becoming non-performing. Under UK rules, a loan in probation after leaving non-performing status goes back to non-performing if it receives another concession or becomes more than 30 days past due, and must then wait out the one-year period again, after which a fresh two-year probation runs.
- Can a forborne loan be classed as performing?
- Yes. Forborne and non-performing are separate labels. A concession granted to a borrower whose loan was performing, and that does not make it non-performing, leaves it performing but forborne, and in the UK its two-year probation can start on the day of the concession. A loan that was non-performing when restructured must first leave that category, and only then does its probation begin.
- Does a payment holiday count as forbearance?
- It does when it is granted because the borrower is in financial difficulty and would not otherwise be offered. APS 220's examples of concessions include rescheduling payments, grace periods, interest-only conversions and capitalising arrears. A holiday offered to every customer as a product feature, to a borrower in good health, is not a concession. Australia also lets a bank not report a short easing for a business with unquestioned long-term viability, where full repayment is expected and no individual provision is held.
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