The calendar provisioning in effect it is a wrong rule, not because it requires banks to be classified as non-performing but because it requires banks to be rated on UTP and NPL credits so penalizing as to distort their business model, forcing them - if they want to continue disbursing finance to the real economy - to capital increases.
In particular, calendar provisioning:
a) requires banks to treat substandard loans (now called UTPs, unlikely to pay) and non-performing loans in the same way (i.e. to consider significant progressive losses). This is conceptually wrong and derives from the diffidence of the legislator who hypothesizes that banks would prefer to keep substandard rather than non-performing loans, to set aside less. There is a bad faith presumption in this which clashes with the regulator's ability to see in detail what banks are systematically doing. In short, it is useless and harmful to start from the culture of suspicion if you have all the elements to evaluate.
b) requires banks to write off non-performing loans after a period (3 years for unsecured, 7 to 9 years for secured) when we know that recoveries are certainly higher than zero which requires calendar provisioning. Automatically zeroing substandard and non-performing loans is a mistake very serious evaluation and management. Again, this prompts banks to sell loans with higher losses than they would if they managed non-performing loans. This changes the business model because banks tend not to give more loans to those who are weaker (i.e. to those who need it most), fearing deterioration and therefore having to sell the position with huge losses.
In short, calendar provisioning changes the business models of banks leading them not to provide credit to the weakest. But are we sure that this is what politically makes the most sense to us? This was a big pre-Covid question (a mistake in my opinion). With the pandemic, the regulator helps the banks with one hand so that they do not take on "procyclical" attitudes - that is, they tighten their shirts more now that the real economy needs it more - and with the other he lets calendar provisioning run, which goes into diametrically opposite direction. We need to find consensus to change this legislation which was wrong before and is a thousand times more so in times of Covid.
But you have to hurry. at least, calendar provisioning should be deferred and revised in the meantime. Both in the definitions of non-performing loans and UTPs, and in the assessments of the value of these loans. And summoning the regulator, banks but also companies to the discussion table.
