It is asked whether different possible cases of Arrangement to Pay should (or not) be classified into the forbearance category:

1. An Arrangement to Pay for a counterparty in financial difficulties to ensure the counterparty will not become 90 days past due (90DPD);
2. An Arrangement to Pay for a counterparty in financial difficulties which postpones payments to after the 90DPD;
3. An Arrangement to Pay for a counterparty already 90DPD.

We understand that Arrangements to Pay are agreements by which a bank agrees to a postponement of payments due a date after the normal due date of the contract. The modalities of this postponement seek to maximize the ability of the counterparty to service its debt. Following the Arrangement, if the counterparty is allowed to repay the amounts due in one payment only, the Arrangement is called a Promise to Pay. Contracts under Arrangements to Pay may be classified as defaulted or impaired.

For the purpose of Template F 19.00 Paragraph 163 of the EBA Final draft ITS on Supervisory reporting on forbearance and non-performing exposures under article 99(4) of Regulation (EU) No. 575/2013 (CRR) defines forbearance measures as "concessions towards a debtor facing or about to face financial difficulties in meeting its financial commitments".

According to , paragraph 164 (a)  "a concession refers to...a modification of the previous terms and conditions of a contract the debtor is considered unable to comply with due to its financial difficulties ("troubled debt") to allow for sufficient debt service ability, that would not have been granted had the debtor not been in financial difficulties". In order for a concession to be identified, the modification of the previous terms and conditions of a contract shall be linked to the financial difficulties of the debtor, and it has for purpose to enable sufficient debt service ability.

Paragraph 165 then provides examples of what a concession includes. These examples are however non-exhaustive. In general, the classification as forborne should consider the substance of the agreement rather than the "formal" modification of the terms and conditions (i.e. an agreement by a lender to extend the payment date of a contract beyond the originally contractually agreed due date is a modification, even if the contract is not formally modified).

On the basis of paragraphs 163 and 164, two conditions shall be satisfied in order for an exposure to be classified as forborne: 1) the financial difficulties of the debtor and 2) a modification of the previous terms and conditions of a contract due to the debtor's situation.

In addition, paragraph 172 specifies four situations that have to be treated as forbearance measures as, in these situations, the two above conditions are considered met:

(a) a modified contract was classified as non-performing or would in the absence of modification be classified as non-performing;

(b) the modification made to a contract involves a total or partial cancellation by write-offs of the debt;

(c) the institution approves the use of embedded forbearance clauses for a debtor who is under non-performing status or who would be considered as non-performing without the use of these clauses;

(d) simultaneously with or close in time to the concession of additional debt by the institution, the debtor made payments of principal or interest on another contract with the institution that was non-performing or would in the absence of refinancing be classified as non-performing.

Based on the examples provided by the submitter, our understanding is that Arrangements to Pay or Promises to Pay are extended to borrowers in state of financial difficulties and allow them to postpone the contractually-agreed date of their payments due to a later date in order to maximise their ability to service their debt. We understand that Arrangements or Promises to Pay are an arrear management tools and are extended to borrowers that are in financial difficulties. The two conditions (financial difficulties and concessions) identified in paragraphs 163 and 164 are therefore satisfied and Arrangements to Pay and Promises to Pay qualify forbearance measures.

Especially, in the three cases on which guidance is asked:

1. An Arrangement to Pay for a counterparty in financial difficulties to ensure the counterparty will not become 90 days past due: this is a concession extended to a borrower in state of financial difficulties as per paragraph 172a. To assess whether the counterparty would become non-performing in the absence of Arrangement or Promise to Pay, the lender should evaluate whether it would lead to the counterparty to be classified as non-performing, i.e. defaulted, impaired, more than 90 days past-due or otherwise "unlikely to pay")
2. An Arrangement to Pay for a counterparty in financial difficulties which postpones payments to after the 90DPD: this is a concession as the borrower is in state of financial difficulties and the payments are postponed beyond their due date to address these difficulties. This situation is covered by paragraph 172a
3. An Arrangement to Pay for a counterparty already 90DPD: this situation is covered by paragraph 172a

The classification as forborne exposure is unrelated to the classification of this exposure as defaulted, impaired, or non-performing: exposures with forbearance measures can be performing forborne or non-performing forborne, according to the conditions detailed in paragraphs 157, 164 and 172.

DISCLAIMER:

The present Q&A on Supervisory reporting is provisional. It will be reviewed after the respective Implementing Regulation is in force and published in the Official Journal, which may differ from the text of the relevant draft ITS to which  it relates