90 Days Past Due: a Worked Example

A bank's own view of a struggling borrower tends to be hopeful. Supervisors write a mechanical test beside that judgement, so that a loan which has gone unpaid for three months is counted as defaulted whether or not anyone at the bank agrees. The label moves the loan into the bank's non-performing figures, usually into the credit-impaired stage of its loss accounting, and into a heavier capital charge. In New Zealand, for example, a standardised bank weights the unsecured part of a 90-day past-due non-mortgage loan at 150% where the loss allowance held against it is below 20% of the loan.

In Australia the test for a business borrower is applied to the whole borrower, not facility by facility; the UK and New Zealand's IRB banks do the same outside the retail class, where small-business lending may be assessed facility by facility. One account past the line can then put everything the business owes that bank into default.

The three rulebooks share a skeleton. The days run from the first amount not paid when due and, for an overdraft, from the day the balance went over its advised limit or the bank advised a limit lower than the balance. They differ on the trigger day, on how much must be overdue, and on what else must be true.

The UK and New Zealand IRB wording follows the international capital framework's 'more than 90 days'; Australia's '90 days or more' triggers a day earlier. The UK ignores trivial sums on business lending. Australia's double test means one missed monthly instalment, with every later one paid, does not by itself reach 90 days past due, because the arrears stay at one month's worth. New Zealand's IRB rule lets the bank choose its measure and leaves 'material' to its own policy. Banks watch the 30- and 60-day bands closely for the same reason: the line itself does not move.

A civil contractor, constructed for this page, borrows from one bank on a term loan of US$1.6m, paid monthly and fully up to date, and an overdraft with an advised limit of US$250,000. A council's progress payment arrives late and the overdraft goes to US$282,000. The bank honours the payments, and for three months the balance moves between US$282,000 and US$296,000 without coming back under the limit.

No instalment was missed, yet the term loan goes into default with the overdraft, because the test is applied to the borrower (a New Zealand standardised bank classifies only the overdraft). Even counting only the US$32,000 above the limit, the arrears clear both parts of the UK materiality test. Australia's second condition, the 90 days' worth of payments, is written for loans with a repayment schedule; an overdraft has none, and its count runs from the breach of the advised limit.

Change one fact. The overdraft stays inside its limit, but a US$350 fee charged to the term loan goes unpaid for 120 days while every monthly instalment of US$28,000 is met. In the UK, US$350 is below the fixed amount and about 0.02% of the exposure, so the clock does not start. In Australia US$350 is nowhere near 90 days' worth of instalments, so the second test fails. A New Zealand IRB bank applies its own materiality policy. The fee belongs on the arrears report, not in the default count.

A contractual event of default for non-payment arises under the facility agreement, often after a grace period of a few business days, and gives the bank rights against the borrower. Ninety days past due is a regulatory classification inside the bank: it changes how the bank reports, provides for and holds capital against the loan, not what the contract lets it do. A loan reaches non-performing status through 90 days past due or through unlikeliness to pay, so a loan can be non-performing with every payment made.

The accounting count is separate again. IFRS 9, used in the UK and through equivalent standards in Australia and New Zealand, presumes that credit risk has risen significantly once payments are more than 30 days past due, and that default has happened by the time they are 90 days past due, unless the lender can show otherwise. The prudential count and the accounting presumptions usually point the same way, but different rules set them.

DEFINED IN ONE PARAGRAPH → · UNLIKELINESS TO PAY → · WHEN A LOAN GOES BAD →

In the contractor's file the decision came on the first day, not the ninetieth. An overdraft excess is approved, returned or cleared the day it happens, and the daily limit excess report is where the count first shows. A banker who approves the excess each morning without asking why is starting a clock the credit department will later have to explain. The useful question that first morning is whether the need is temporary, a late receipt with a date attached, or permanent, an overdraft carrying hardcore that belongs in a term product.

Raising the limit takes the balance back inside it and stops the count, which is why an increase granted to a borrower already in difficulty is read as a concession rather than a fix. Supervisors treat such concessions as forbearance, and the probation rules decide how long the label stays. For the borrower, the time to ask for a temporary limit is before the receipt is late, not after the bank has found the excess.

PRODUCT FILE: THE OVERDRAFT → · WHEN YOUR LOAN GOES TO WORKOUT →