Chapter I: Theoretical concept of bad credits

1.1 General notions and the causes of appearance of bad credits

Bank credit is the main source of funds necessary to ensure the activity of various sectors of
national economy. Bank credit has an important role in promoting international economic relations and
also has a significant role in raising living standards. It is true that credit can be very useful and can
generate many benefits but also credit can be very dangerous when is not used in accordance with its
principles and requirements of financial and economic balance. A risk can be the so-called over-
crediting which lead to large economic, financial and monetary disequilibrium. Another risk can be
under-crediting that stipulates the use of credit in order to finance some economic activities that are
insufficiently grounded and this may cause structural disequilibrium in entire economy. Crediting
activity can generate not only good credits but also bad one because of the wrong management risk.
Bad credit is a term used to describe a poor credit rating.
Non-performing assets, also called bad credits, are credits, made by a bank or finance company,
on which repayments or interest payments are not made on time. Banks usually treat assets as bad if
they are not serviced for some time. If payments are late for a short time the credit is classified as past
due. Once a payment becomes really late (usually 90 days) the credit is classified as bad. The issue of
bad credits has gained increasing attentions in the last few years. The immediate consequence of large
amount of bad credits in the banking system is bank failure. Many researches on the cause of bank
failures find that asset quality is a statistically significant predictor of insolvency and that failing
banking institutions always have high level of bad credits prior to failure. It is argued that bad credits
are one of the major causes of the economic stagnation problems. If these credits are kept existing and
continuously rolled over, the resources are locked up in unprofitable sectors thus, hindering the
economic growth and impairing the economic efficiency.
There are many factors that could generate the appearance of bad credits. The appearance of
bad credits is rather the result of action of more combined factors than only one single. Many of these
factors are out from the sphere of control of the bank. A single factor - the mistakes committed by the
bank employee - can be kept at a minimum, only if the credit officer analyzed attentively each stage of
the crediting process. It is known that there are many causes that can favor the appearance of bad
credits but still the most important remains the unqualified bank staff. The main causes of appearance
of bad credits are presented in the next scheme (scheme 1.1.1):
 Scheme 1.1.1
The main causes of appearance of bad credits

I II III

Errors committed by Insufficient business Appearance of

the creditor experience unfavorable situations

An inadequate interview Inadequate Environmental factors

Management

Inappropriate financial
analysis Inadequate initial Economic Recession
capitalization

Ignorance of customer Lack of marketing Strong competition

activity activity

Wrong guarantee of
Inappropriate
credit
financial control

Incorrect or incomplete
documentation
Source: elaborated by the author

For a better understanding we will analyze each of them separately:

1. Errors committed by the creditor (bank-credit officer)

Avoiding the appearance of bad loans begins with a careful evaluation of credit application. Every
stage of the lending process improperly executed, an unsatisfactory interview or an inadequate
monitoring of the loan process may result in the appearance of a bad loan. Some of the most common
mistakes committed during the loan process are:
a) An inadequate interview
Preliminary discussions held with the client prove to be inadequate when the credit officer, instead to
focus on real questions, with the purpose of finding out information about the financial situation of the
client prefers a friendly conversation with him. Another shortcoming is the inability to put significant
questions or to follow a certain line, when the presented answers are wrong or ambiguous. Preliminary
interview is the best opportunity where the credit officer can assess the client's character traits. If the
interview is performed improperly, it can lead to wrong conclusions regarding the client's good
intention to repay the loan.
b) Inappropriate financial analysis
Many of the bad loans occur when the credit officer does not consider that financial analysis is an
important factor in making the final decision. Nothing can replace a complete financial analysis in the
loan process. An inadequate financial analysis reflects a superficial interpretation of the balance sheet,
of the profit and loss account and also the non-verification of financial accounting situations.
c) Ignorance of customer activity
Problems arise when the credit officer doesn’t know anything about customer activity and under which
conditions it takes place. If these things are unknown it is difficult to anticipate future financing needs,
determine the most appropriate type of credit and repayment conditions. For many beneficiaries of
loans, even if they have a good financial situation, it is difficult to meet its liabilities if loans maturity
doesn’t correspond with cash flow cycles.
d) Wrong guarantee of credit
Another issue that causes losses in lending activity is the establishment of inadequate guarantees for
granted loans. Acceptance of guarantees that were properly evaluated in terms of possession, value and
possibility of realization may put the bank in a situation poorly protected or unprotected if the client
can no longer meet its obligations.
e) Incorrect or incomplete documentation
Lack of proper documentation under the credit agreement, which to provide exactly bank obligations,
as well as customer, can lead to the occurrence of bad loans.

2. Insufficient business experience

Many of the bad loans can be attributed to lack of business experience that a customer has.
a) Inadequate management
A common cause of bad loans is the poor management activity. For example, even if in an enterprise
decisions are taken by one person, it will be a point where it will be necessary to employ some new
decisions factors for specific areas: financial, marketing and sales- as the infusion of ideas and
creativity is required for performing an activity, although sometimes it may be insufficient the number
of managers for an effective work in the company. But the main issue in the failure of an activity
represents an incompetent or indifferent management.
b) Inadequate initial capitalization
Small businesses often have trouble even immediately after its establishment due to inadequate
capitalization. Business owners underestimate business costs and overstate the speed with which they
can obtain profit. They recognize their problems, after a time, when their capital is worn-out and
lenders refuse to grant additional credits.
c) Lack of marketing activity
Bad loans may occur if the company does not carry an appropriate marketing activity. A business must
have a definite plan on advertising, sales volume and the distribution of products. Lack of this activity
will lead invariably to a decrease in sales volume and as a consequence will decrease the profitability.
Another reason for the occurrence of bad loans is the inability to anticipate the evolution of market and
adapting to its changes.
d) Inappropriate financial control
An insufficient financial control often represents the main cause of collapse of many societies.
3. Appearance of unfavorable situations
a) Environmental factors
Another cause which can lead to bad loans is the incapacity of the loan beneficiary to cope with the
consequences of natural disasters.
b) Economic Recession
Declines in economic activity may hinder the ability of the credit beneficiary to honor its debts. For
example, during periods of recession, many companies are facing liquidity shortages caused by lower
sales, with increased flow caused by late payments and rising costs.
c) Strong competition
A strong competition can create difficulties for other companies when they operate on the same market.
The main causes which can lead to the appearance of imbalances in the financial situation of some
banks and than their entry in insolvency can be grouped into 3 categories:
1. Policy and strategy mistakes;
2. Avoiding the banking prudential requirements;
3. Not following the analysis requirements and even the own rules concerning:
- credits approval
- following how the clients respect the approved conditions
- following the loan repayment and collecting the interest income
As we can see, bad credits appear due to some causes that can happen from the creditor or from
the debtor part. For avoiding some of them it is necessary to evaluate more attentively the situation and
to take the possible measures for diminishing the negative consequences that could happen. Further we
will analyze the classification of bad credits and its characteristics.

1.2 Bad credits classification.

Detection and elaboration of solving strategies for bad credits

According to prudential requirements stipulated in the Financial Institutions Law in order to

protect its own capital and deposits of natural persons and legal entities, banking companies have the
obligation to determine and provide reductions for credits losses, limiting credit risk by covering
potential losses from un-recovered credits. This requirement derives from the features of the crediting
activity which involves a risk that the bank takes from each credit granted. Credits and investments
classification is made through simultaneous application of the following criteria: debt service; financial
performance; initiating legal proceedings. The credits management proceedings must be specific for
each credit and client individually. Each type of credit has its own characteristics, and in this way
according to the international standards the credits granted by the Commercial Banks are evaluated
and included in one of the following categories of credits represented in scheme 1.2.1:
Scheme 1.2.1

Categories
Good Of Bad
Credits Credits Credits

Under- Substandar
Standard supervision d Doubtful

Compromised

Source: elaborated by the author

Further we will analyze more thoughtfully the bad credit category. Each bad credit according to
the level of risk must be included by the bank in one of the next groups:
* Substandard credits- this are credits which are granted to the customers with a satisfactory
economical-financial situation, but now the worsening trend of activities is obvious and there also
exists a risk of inability to fully repay its debt to the bank. There exists the risk that losses will be
higher than the credit and this risk can be caused by one of the next factors: the financial situation of
the debtor is unfavorable or it is worsening; credit insurance is insufficient or it is worsening; other
unfavorable factors, concerning the debtor's inability to repay the loan in accordance with existing
conditions for repayment. Typically, substandard credits take the form of long term credits granted to
customers of whose cash flows might be insufficient for satisfying their obligations or the outstanding
credits, and also take the form of short term credits granted to customers that are significantly
undercapitalized. Substandard credits could also include short term credits granted to customers for
which the cycle stocks-receipts are insufficient for credit repayment at maturity. Such credits require a
special attention from the bank management, because exists the probability that the bank will face
losses if shortcomings will not be removed.
* Doubtful credits- are uncertain loans in terms of repayment of loans and interest payment. Borrowers’
activity is unprofitable so they can not ensure the necessary funds for honoring their debts. Probability
of loss is extremely high, but there are important factors, concrete and well argued and soon they will
be able to contribute on improving the situation of loan repayment.
* Compromised credits (losses) - are those loans that present a risk to the bank. Unprofitable activity of
the borrowers determines their incapacity to honor their obligations to the bank and consequently the
bank will not be unable to protect against the risk of non-payment. The amount of resources necessary
for reservation in accounts of reduction for losses on credits is formed from the amount of credits from
each category of classification in the following sizes:
A – Standard – 2%
B –Under-supervision – 5%
C – Substandard – 30%
D – Doubtful – 60%
E – Compromised – 100%
According to reimbursement deadlines established through contracts the credits can be:
- Current, on which the set terms through contract and the related interests haven’t reached the maturity
or the rates have been paid to the terms agreed in the contract;
- Credits with delayed maturity, on which the due rates or the interest haven’t been paid at the
contractual deadline, being delayed by up to 30 days;
- Outstanding credits, on which the interest rates of the credit exceeded the deadline with more than 30
days.
 Table 1.2.1

The classifications presented so far can be traced in the following table:

Loan category Current loan Loan with delayed Outstanding loan

maturity

1. Category A Standard credits Under-supervision Outstanding credits

credits

2. Category B Under-supervision Substandard credits Doubtful credits

credits

3. Category C Substandard credits Doubtful credits Compromised

credits

4. Category D Doubtful credits Compromised Compromised

credits credits

5. Category E Compromised Compromised Compromised

credits credits credits

Source: elaborated by the author based on the book Money, Credit, Banking by Basno
Caesar, Dardac Nicolae, Constantin Floricel, E.D.P. Bucharest, 1999

The evaluation of financial performance of borrowers will be based on different criteria,

adapted to each type of client. Depending on the total score obtained by cumulating the points assigned
to each indicator borrowers will be included in categories A, B, C, D, and E. It is essential that the
assessment of each borrower's financial performance to be as realistic it is possible, because of the
decisive weight of the criteria for determining the specific risk provisions.
Granting credits is the basic function of commercial banks. For most banks credit accounts are
no less than half of total assets and 2/3 of revenues. When at the banks appear financial problems
usually they are caused by the credits granted without a deep financial analysis of the client and hasty
decisions when granting the credit. For determining the degree of risk that the bank assumes and the
size of credit which can be granted it are necessary to assess the financial situation of the economic
agent.
Before granting to the client the amount requested it is necessary to know him very well. These
data banks are accumulating by studying the reports and analyzing the results of the economic activity
of the economic agent, convincing by his good financial situation. Bad credits are those that generate
the highest expenses of risk management. The maximum level of expenses is reached when credits are
passed to losses, from this credits nothing can be recovered and these losses are covered from reserve
fund or from risk fund. Their covering lead to a corresponding decrease of the assets and liabilities of
the bank and as a result restricting the volume of activity. Even if bad loans are costly for the bank and
their volume should be reduced, it must be established a balance between the need for prudent lending
policies and procedures and assuming risks that are directly proportional to bank profitability. All costs
related to management of bad credits are very high for the bank and include the following aspects:
~ Increased administrative costs - a bad loan requires a great deal of attention from bank employees.
Thus, the banks, particularly large ones, have been forced to set up specialized departments for
following and recovering bad credits. Practice shows that the time consumed with the pursuit of a bad
loan is the same with pursuing ten current credits. These costs may appear in the form of opportunity
costs or like an additional expense. The opportunity cost appears when the bank staff offers a huge
attention to these loans, without ensuring a big profit to the bank. More time is consumed for direct
contacts with the clients, analysis and additional verifications. Additional expenses appear only if the
bank appeals to third parties for resolving certain specialized problems: assessment services,
consulting, lawyers.
~ Increased spending for initiation and conducting of court proceedings for debt recovery - big banks,
along with a large legal department, have created a body of court executors for recovering bad debts.
There are situations where, as a result of forced execution, it recovers a lower value because the main
priority is to recover court expenses.
~ Increased spending due to the introduction of new procedures and regulations - in the event of a high
portfolio of bad loans, the commercial bank is subject to the controls carried out by National Bank,
many reports and explanations are necessary which means additional expenses for the bank. A bank is
forced to take additional prudential measures in issuing new loans, which can lead to loss of customers
dissatisfied with the delays caused by new measures involving the centralization of skills.
~ Deterioration of the image and reputation of the bank - as it is known, the success of a bank is
insured by the trust which inspires to investors and clients. On this basis, the bank can attract funds
from the market and to develop their activity. Rumors of improper management of these funds and the
existence of a significant portfolio of bad loans cause customers to withdraw their deposits, which
ultimately leads to insolvency and bankruptcy.
~ Decreasing the employees’ morale – A bank which becomes unprofitable due to bad debts is unable
to reward employees and, even more, there are situations when they are fired. And in this situation the
best employees’ ”leave the boat”. So the bank must hire new employee’s and to pay for their training
other employees or to offer high salaries in
order to attract employees from outside the bank.
It is known that bad credits cause many problems to business environment, leading to financial
blockage and to increased costs because of the necessity to attract new sources due to the reduction of
money in circulation. The end is keeping the economy into a long recession, and the solution can be
only the elimination of bad loans manufacturers.
Credits rarely become bad overnight. There is almost always a gradual deterioration in credit quality,
accompanied by numerous warning signals. This signals are numerous, so it is indicated for the credit
officer to know this signs and at them appearance to take immediate actions. Bellow are presented the
main warning signals (scheme 1.2.2):
Scheme 1.2.2

Types of
Warning Signals

General Management Technical Other

Warning Signs And Signals
Signs Commercial
Signs

Source: elaborated by the author

1. General warning signals

The credit officer must receive regularly from the credit beneficiary financial statements about his
activity. Related to this, there are warning signs about the problems that may arise in the future:
• Investing in fixed assets without appropriate funding;
• A low level between the own capital and the borrowed one;
• Substantial increases in long-term liabilities;
• High growth of reserves;
• Significant changes in balance sheet structure;
• Deterioration of liquidity or of the position of the circulating capital;
• Increasing the average duration of debt collection;
• Increased level of losses from credits;
• Significant changes in the structure of the profit and loss account;
• Increasing costs and decreasing the profit margins;
• Increased sales and profits decline;
Thus, the unfavorable evolution of economic and financial results and, moreover, economic and
financial results weaker than to other companies in the same field are clear signs of appearance of bad
loans.

2. Management signals
• Previous bankruptcy;
• Missing or frequent changes in the structure of society;
• The company is fragmented into smaller departments interconnected operational poorly;
• Changes in attitude toward the bank or toward the credit officer, especially the lack of cooperation;
• Ungrounded answers at the bank signals;
• Changing the management personnel, the owners or the key personnel;
• Illness or death of the key staff;
• Problems with labor force;
• Failure of business planning;
• Misunderstandings between the management or between partners;
• Venturing into new, uncertain operations;
• Negative publicity.

3. Technical and commercial signals

• Setting unrealistic prices for goods and services;
• Delayed reaction to the unfavorable economic conditions;
• Loss of the main lines of production, distribution rights, "franchises" or supply sources;
• Loss of one or more of the customers which are financially strong;
• The appearance of strong competitors and the loss of a very large market segment;
• Speculative purchases of stocks, which seems to have no connection with the business;
• Unjustified stagnation of the production process.
• Unfavorable changes in business profile.
4. Other signals
- Direct contacts with the customer - maintaining a communication channel opened at all times between
the bank and the credit beneficiary is a very good practice for several aspects, particularly because it
brings together all non-financial information that could indicate a possible occurrence of a bad loan.
- Indications provided by third parties - transactions between the client and third parties can provide to
a discreet credit officer, an intuitive picture about the occurrence of a bad loan. For example, the credit
officer would be able to observe in the financial picture the occurrence of other creditors or can receive
calls from suppliers requesting information about the credits situation in order to analyze the client.
- Accounting situation – can appear deterioration signs of the clients’ accounting situation.
Applications for new credits or expansion of the existing ones are also a clear indicator.
Once the credit is granted, the credit officer is responsible to monitor borrower activity. The
aim is to detect problems before they become too serious. If problems are detected at time, the credit
officer can take actions in order to prevent the aggravation of the problem or at least to minimize the
loss that the bank can register. A number of actions that must be undertaken by the credit officer
concern the guidance and support of the borrower to take actions for improving its financial situation.
In general, before he couldn’t repay the credit, the borrower is going through an acute cash crisis.
Unfortunately, the bank which does not follow closely the performance of the borrower is often the last
to know that such a crisis exists. There are 3 distinct phases of cash problem:
1. Maintaining with difficulty the liquidity- stocks are starting to accumulate and the speed of
collection of debts slows. And as a result the borrower is not paying at time to the suppliers and tends
to reduce the expenses.
2. Cash management becomes a priority- are imposed limits of expenses, employees are left to seek
other jobs, no more investment. The relations of the borrower with the bank are deteriorating because
he tries to obtain an additional credit while he violate the terms of existing credit.
3. Threat of bankruptcy- the borrower uses all sources of cash from the accounts and is not paying
any debt or obligation. His last choice is to declare bankruptcy or find a partner with which to unite.
In order to prevent the occurrence of bad credits, it is necessary to conduct a prudential activity
of credit approval, as defining and achieving realistic measures of following credits performance and
resolving the problems that may occur. The general principle that should be taken into account is that
the bank should not grant credit until it can be properly estimated the recovery at maturity or when it
decides, for some reasons, to withdraw the credit. A correct estimation of repayment ability is often
more important than credit insurance with material collaterals. Once the causes of bad loans have been
detected, it is easier to establish ways and means to prevent them, as follows:
a) A correct estimation of the borrower credit requirements and repayment terms. We must remember
that the risk of non-repayment of a loan exists in both situations, where is required a too small credit
and when a customer borrows too much money. In the first case, the risk occurs due to lack of funds
needed for the planned production volume in order to achieve the expected profit and revenues
necessary for the payment obligations. In the second case, the risk appears because of a high financial
indebtedness. Also very important are the repayment terms.
b) Correlation the loan destination with the source of repayment- the financed transaction through
credit must generate revenues so much as to be able to pay the loan and interest. If the transaction fails,
it will be difficult to find an alternative source and in this way will appear many problems. For
example, a company asked for a medium-term credit in foreign currency for the import of production
equipment which to ensure a more effective production for the export orders that are in operation.
Unfortunately, over a year the export contract was not renewed, the machines couldn’t find a better use
for the internal production; also appeared the exchange rates and the credit became outstanding and
nonperforming. Most unpleasant was that updated debt in domestic currency exceeded the value of
machinery at the market prices, and this lead to not so friendly negotiations concerning the collateral
filling.
c) Existence of two possibilities for the recovery of debts unrelated between them but existing from
the beginning. In the case described above, both the borrower and the bank relied on the continuation
of foreign trade relations with traditional partners, with no certainty in this respect. On the other hand,
even if it was accessible, the guarantee hasn’t presented the required characteristics necessary for being
easy evaluated. In the world of banking, it says that the most effective guarantee is the collateral on the
car of the General Director and the mortgage on the administrative building, and here appear the
constraining psychological factor. It is very important that this second source of repayment, to be an
asset that in addition to liquidity and his maintaining at the market value in time, to be easy accessible,
meaning that it reevaluation will not affect negatively the production process of the loan and the
enforcement will not be required.
d) The agreement of a credit contract with insuring clauses- for protecting the own interests, the bank
can include into the credit contract insuring clauses through which to diminish the risk and to oblige the
borrower to be solvent.
There are 2 types of clauses:
> Positive - are those with which the borrower must agree
> Negative - are those that impose financial restrictions or prohibitions
 As the positive and the negative clauses are included into the contract stipulations the borrower
must agree with all of them, and not only to agree but also to respect. The borrower can’t have secrets
in front of the bank and when he decides for example to make mergers or acquisition he can’t do it
without the bank approval. Also he must present the information required by the bank. For a better
understanding of the positive and negative clauses we propose the next table (table 1.2.2):
Table 1.2.2

Types of clauses Characteristics

1. Positive - The borrower will provide financial and accounting statements

to the bank on agreed deadlines;
- The borrower will maintain the liquidity, solvency, degree of
indebtedness, speed of rotation of working capital and cash flow
above certain minimum values;
- The borrower will allow to the bank to make visits to his office
in order to follow the production process;
- The borrower shall maintain in a good condition of operating
the fixed assets, will pay all taxes on time, will inform the bank
about any issue which may diminish the patrimony and affect the
performance.

2. Negative - Investments in fixed assets will not exceed a certain amount;

- Wage fund will not exceed a certain line;
- Will not be pledged or mortgaged assets;
- Without the approval of the bank will not be made mergers and
acquisitions;
- Will not sell or rent more than a certain percentage of the
existing fixed assets.

Source: elaborated by the author

These clauses must be respected because otherwise it can result the contract termination.

The appearance of many bad credits can be avoided by a prompt identification of the difficulties
and through their remediation. When the credit officer confronts with the appearance of a bad credit, he
must take immediate actions according to the bank rules. The bad credits management procedures must
be specific for each credit and customer individually.

Typical solving strategies for bad credits are the following:

* Reducing the exposure to the credit risk of a bank, for example, putting the client to bring in addition
– capital, funds, real or personal guarantees.
* Collaboration with the client, in order to evaluate the problems and to identify the solutions necessary
for improving the repayment capacity through: providing consulting assistance, elaboration of a
program of reducing the expenses and/or for increasing the revenues, debt restructuring or amendment
of the loan terms, selling of assets.
* Mediation of customer acquisition or takeover by a person with a high reliability or soliciting a
partnership under the form of joint ventures.
* Liquidation of risk through an extra-judicial agreement or through a legal action, by executing the
personal guarantees or forced execution of those real.
If legal proceedings were initiated, all granted credits, regardless of the customer's financial
performance are considered “losses”.

1.3 Methodological issues regarding bad credits

Crediting activity is the most important banking operation. The way the bank allocates the
funds that it manages can decisively influence the economic development at local or national level. On
the other hand, any bank assumes some risks when grants credits and, obviously, all banks are currently
recording losses on credit portfolio, when some borrowers do not honor their obligations. Whatever the
level of risk assumed would be, credit portfolio losses can be minimized if crediting operations are
professionally organized and managed. It is important to analyze each credit according to the risk in
order to know its quality and in which group to include a specific credit. According to the risk an
analysis of credit portfolio can provide information about the accuracy of models of estimation the
credit risk, and this in the stage of granting credits it’s a post-fact of analytical action. For estimating
the overall level of credit risk, assumed by the bank, it can be calculated the insurance coefficient
against the credit risk by reporting the risk fund formed through the breakdowns of those five types of
credits classified on reduction for losses on assets and the provisions for losses on conditional
engagements:

Fund risk
K1 = * 100% (1)
Credit portfolio
 This coefficient can be used for detecting the credit risk in the collaboration stage with the
debtor, at the moment of evaluating the minimum amount of the fund risk. A positive trend in credit
risk management at a portfolio level constitutes the reduction of this coefficient over the analyzing
period of the banking activity. According to the international requirements of crediting the global fund
risk must be < or = to 15%, because the credit portfolio is very risky. The situation of this indicator
between the limits 10-15% will describe exposure of the credit portfolio at a high risk, between the
limits 5-10% will be at an acceptable level and till to 5% is a safe portfolio.
The level of credits classified as bad represents the total sum of credits classified in the
categories substandard, doubtful and compromised. A comparison of the level of credits classified bad
over an analyzing period it will indicate the negative trends in the credit portfolio quality and this may
require an increase in the breakdowns on reduction for losses on assets and the provisions for losses on
conditional engagements.
Bad credits
K2 = * 100% (2)
Credit portfolio
In order to be more clearly, we must compare the value of bad credits with Total
Normative Capital and Total Assets.
Bad credits
K3 = * 100% (3)
TNC

Bad credits
K4 = * 100% (4)
Total Assets

A current rule, in Republic of Moldova, at the actual moment, consists that if the total credits
classified as bad exceed 50% from the TNC, then the quality of assets is categorically lower.
Another helpful analysis of the coefficient is to compare the level of expired credits with total
credits. Normally, when the expired credits represent 20% or more from the credit portfolio of the
bank, then the quality of assets is lower and any percentage over 40% it’s a serious problem for the
bank.
Expired credits and those in conditions of non accumulating interest are:
• Doubtful and compromised credits;
• Credits with the expired term of 60 days or more;
 • Credits payable at sight, at which the first payment of interest it was expired;
• Credits repaid by equal partial payments, on which the amortization rate of the credit was
expired.
Expired credits
K5 = * 100% (5)
Credit portfolio

By analyzing these formulas we can draw a conclusion about how well a bank conducts its
activity, how looks her credit portfolio and if it is a safe one.