A comparative study of prudential regulation on loan classification and provisioning of the South East European countries

Abstract

This paper has been prepared to describe the regulatory measures regarding Loan classification and provisioning of South East Europe countries like Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Macedonia, Montenegro, Serbia, and Slovenia. A proper loan classification and provisioning system ensures credibility of the financial system that in turn restores trust and confidence in the mind of depositors. Determining what constitutes an adequate level of provisions to absorb credit losses is often subject of debate between banks and supervisors, as changes in provisioning estimate an immediate impact in bank earnings and, eventually, regulatory capital. A comparative analysis in this study between South East Europe (SEE) countries shows that countries have the regulatory measures which correspond with international standards. However, the criteria for classifying and provisioning loan portfolios depend on the prudential policies of the central banks. In the area of NPL definition, we find that almost all of the countries in the region have some type of asset classification system in place covering all types of borrowers. Non performing exposures in the region are generally defined three criteria: 90 days past due status, borrower bankruptcy, and the significant financial difficulty of the borrower. Countries with the highest rate of non-performing loans (2005 - 2015) are Serbia, Montenegro, Albania, while the countries with the highest percentage of coverage with provisions are: Kosovo, Macedonia and Serbia.