Problem Loan Workout Plan Template (EBA NPE and Forbearance, CRR)

Problem Loan Workout Plan: [Borrower name]

Bank-side plan for a distressed borrower: situation summary, causes of distress, viability and debt sustainability, options analysis with a net present value (NPV) comparison of forbearance, restructuring, enforcement and loan sale, the recommended strategy and term sheet, forbearance, non-performing exposure (NPE) and default classification, provisioning and capital impact, collateral and enforcement plan, milestones, exit criteria and approval. Built for EU credit institutions applying EBA/GL/2018/06 (management of non-performing and forborne exposures) and Regulation (EU) No 575/2013 (CRR) Articles 47a, 47b, 47c and 178 as amended by Regulation (EU) 2024/1623, with US rows for the 2023 interagency policy statement on commercial real estate loan accommodations and workouts (SR 23-5). Replace every [bracketed] value and every row marked Example. This is a document format, not financial, legal, accounting or regulatory advice. Requirements are referenced by number: obtain the regulation, guideline or standard for the normative text.

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Contents

• 1. Situation summary
• 2. Legal and supervisory basis
• 3. Exposure, security and status
• 4. Causes of distress
• 5. Viability and debt sustainability
• 6. Options analysis
• 7. Recommended strategy and term sheet
• 8. Regulatory classification
• 9. Provisioning and capital impact
• 10. Collateral and enforcement plan
• 11. Milestones, monitoring and exit criteria
• 12. Legal, accounting and conduct considerations
• 13. Risks and fallback strategy
• 14. Decision record
• 15. Glossary and references
• Standard and licence note

1. Situation summary

State the borrower, the total exposure, the current status, the root cause in one sentence, the recommended strategy, the expected loss under that strategy and the expected loss under the best alternative. Committee members should be able to decide whether to read further from this section alone.

Example narrative: Quillmoor operates a single 42,000 square metre warehouse that is mortgaged to Fernhollow Bank. Its main customer did not renew a five-year contract that ended in March 2026. Revenue fell from 11,800 to an annualised 8,300 and the borrower missed the June term loan instalment. Management has signed two smaller customers and the site is now 78% utilised, which supports a smaller debt. The workout unit recommends a restructuring that keeps the business running and preserves more value than enforcement or a loan sale.

2. Legal and supervisory basis

The plan sits inside a framework of prudential rules, supervisory guidelines and accounting standards. Obtain each text and read it before you rely on the summary below; this table is a navigation aid, as of 2026-10, and does not replace the official text. Check local law and the consolidated version of each regulation.

3. Exposure, security and status

Record every facility, the security package and the current arrears. The figures in this section are the baseline for every option in section 6, so they must match the ledger on the reference date.

Example simplification: the drawn balances include capitalised arrears, there are no fees, and the gross carrying amount equals the present value of the remaining contractual cash flows at the original EIR of 5.0%.

Loan to value on the reference date is 20,000 / 16,500 = 121.2%. The bank is therefore under-secured by 3,500 before costs of realisation, which drives the enforcement analysis in section 6.

4. Causes of distress

Describe what happened, in order, and classify each cause. The classification drives the choice between short-term and long-term measures: a temporary liquidity gap can justify a short-term measure, while a structural loss of earning power needs a lasting reduction in debt service. Support each statement with evidence such as management accounts, customer contracts, market data or the valuer's report.

Assess management. A workout that depends on the same management that caused the problem needs either evidence that they can execute the plan or a condition that strengthens the team, such as a chief restructuring officer or a new finance director. Record the shareholders' position too: a shareholder who can inject equity, provide a guarantee or subordinate a loan changes the options available to the bank.

5. Viability and debt sustainability

Forbearance is viable only when the bank can show, from objectively verifiable evidence, that the borrower can afford the new terms and that the plan reduces the exposure over time (EBA/GL/2018/06 section 6.1). Build a prudent cash flow available for debt service (CFADS) from the latest actuals and signed contracts, then size the sustainable debt from a minimum coverage ratio.

where $r$ is the loan rate per period and $n$ the number of periods.

Example sizing: with a minimum DSCR of 1.10x, maximum annual debt service is 2,660 / 1.10 = 2,418.2. The seven-year annuity factor at 5.0% is 5.7864, so sustainable debt is 2,418.2 x 5.7864 = 13,992.6, rounded to 14,000. An amortising 14,000 loan over seven years at 5.0% needs an annual payment of 2,419.5, which gives DSCR 2,660 / 2,419.5 = 1.10x. The full 20,000 repaid over the remaining six years would need 3,940.3 a year, a DSCR of 0.68x, so the existing debt is not sustainable without a reduction.

Run at least one downside case. In the Example, losing one of the two new customers would cut CFADS to about 2,100 and DSCR on the 14,000 loan to 0.87x. The plan therefore includes a cash sweep and an information covenant (section 7) so the bank sees a deterioration within one quarter.

6. Options analysis

6.1 Forbearance and resolution measures considered

Consider short-term measures (up to two years, such as interest-only periods or reduced payments) and long-term measures (maturity extension, rate reduction, principal reduction, debt-for-equity, sale of assets, consolidation) and combinations of them. EBA/GL/2018/06 Annex 5 lists possible forbearance measures by name; describe your own choice in your own terms.

6.2 Valuation method

Discount every option at the original EIR so the comparison is consistent with the accounting measurement, and weight each path by its probability.

where $p_s$ is the probability of path $s$ (for example performing or re-default), $CF_{s,t}$ the cash received in year $t$ on that path, $C_t$ the workout and legal costs, and $r$ the original EIR (5.0% in the Example). The expected loss of the option is the exposure minus its NPV.

Example assumptions shared by all options:

• Enforcement recovery: market value 16,500 less a 20% forced-sale discount gives 13,200; selling costs of 5% of the gross price (660) leave 12,540 net, received two years after enforcement starts; legal costs of 300 are paid one year after it starts.
• Re-default path: the borrower pays one year of debt service and then defaults; the bank enforces in year 2 and receives 12,540 in year 3, with legal costs of 300 in year 2.
• Re-default probability: 60% for OPT-A (debt service stays at 0.68x DSCR), 15% for OPT-B (1.10x DSCR, cash sweep, new customer contracts).
• B loan in OPT-B: 50% probability that the land plot is sold and the 6,000 is repaid in year 4.
• Re-default paths ignore the additional charge over the non-core land plot (TS-07); this is conservative and is stated so that reviewers do not count it twice.

6.3 Results

Check the arithmetic. OPT-A re-default path: one year of interest 1,000 discounted is 952.4; enforcement proceeds 12,540 / 1.05^3 = 10,832.5; legal costs 300 / 1.05^2 = 272.1; total 11,512.8. Its expected NPV is 0.40 x 20,000 + 0.60 x 11,512.8 = 14,907.7. OPT-B: the A loan annuity of 2,419.5 discounted over seven years equals 14,000.0; the B loan is worth 0.5 x 6,000 / 1.05^4 = 2,468.1; the re-default path is 2,419.5 / 1.05 = 2,304.3 plus 10,832.5 less 272.1, or 12,864.7; the expected NPV is 0.85 x 16,468.1 + 0.15 x 12,864.7 = 15,927.6.

Do not stop at the highest number. Check that the recommended option also passes the viability test in section 5, that the bank can execute it (legal capacity, people, systems), and that it fits the NPE strategy and risk appetite. Record a sensitivity: in the Example, OPT-B stays ahead of OPT-A unless the OPT-B re-default probability rises above about 43% (16,468.1 less 3,603.4 x p equals 14,907.7 at p = 0.433), which is far above the downside case.

7. Recommended strategy and term sheet

State the recommended option and why it is preferred, then the terms. The guideline expects the contract to let the bank review the measure if the borrower's situation improves and to attach consequences, such as more security, if the borrower fails to comply.

8. Regulatory classification

8.1 Forbearance

A measure is forbearance when the bank grants a concession to a borrower that is facing, or is about to face, financial difficulty (CRR Art. 47b). Assess financial difficulty from the borrower's own position, without regard to collateral or guarantees. Signs include being more than 30 days past due in the three months before the change, a rating downgrade, or inclusion on the watch list in that period. In the Example, all three apply and both OPT-A and OPT-B are forbearance.

8.2 Default and the distressed restructuring test

A distressed restructuring is an indication of unlikeliness to pay under CRR Art. 178. EBA/GL/2016/07 measures the diminished financial obligation (DO) and treats the obligor as defaulted when it exceeds a threshold of 1%:

where $\text{NPV}_0$ is the present value of contractual cash flows before the change and $\text{NPV}_1$ after it, both at the original EIR.

8.3 Non-performing status, probation and exit

9. Provisioning and capital impact

For a credit-impaired exposure the allowance equals the gross carrying amount less the present value of expected cash flows at the original EIR, weighted across plausible outcomes. When the contract is modified, IFRS 9 paragraph 5.4.3 adjusts the gross carrying amount to the present value of the modified contractual cash flows and recognises a modification loss; the allowance then covers the remaining expected shortfall. Follow the bank's accounting policy for presentation.

Capital: under the standardised approach, the exposure net of specific credit risk adjustments moves to the defaulted exposure class (CRR Art. 127) with a risk weight that depends on the level of provisions. Under IRB, the defaulted exposure uses the bank's LGD in default and expected loss best estimate. Compute the CRR Art. 47c backstop from the exposure's origination date, collateral type and years in non-performing status, and deduct any shortfall between the required coverage and the actual coverage from Common Equity Tier 1. The Example loan was originated in March 2021 and is therefore in scope; finance records the Art. 47c calculation in the COREP NPE loss coverage template.

10. Collateral and enforcement plan

EBA/GL/2018/06 section 9 expects the collateral of a non-performing exposure to be revalued individually when it is classified as non-performing and at least annually while it stays non-performing, with more frequent monitoring when the market falls. Link the latest review and record the realisation assumptions used in section 6.

Prepare the enforcement file in parallel: demand letters, instructions to counsel, receivership options and the expected court timetable. Keep the borrower informed in writing of the bank's position, and respect any standstill agreed in the term sheet.

11. Milestones, monitoring and exit criteria

Exit criteria close the case: the exposure returns to the relationship team once it has exited non-performing status, completed the probation period and passes the bank's standard credit review; or the case closes on full repayment, on sale of the loan, or on completion of enforcement and write-off of any remaining balance.

12. Legal, accounting and conduct considerations

Review the plan with legal and finance before it goes to committee. Check the following and record the conclusion in the table.

13. Risks and fallback strategy

Lessons for the bank: the 2021 credit memo sized debt on peak revenue with a single-customer concentration, and the Q1 2026 covenant waiver was granted without a remediation plan. Feed both into the origination policy and the early-warning indicators reviewed in Annual Credit Review (finance/annual-credit-review).

14. Decision record

15. Glossary and references

15.1 Glossary

15.2 References

Standard and licence note

Based on Regulation (EU) No 575/2013 as amended, Delegated Regulation (EU) 2018/171 and the EBA Guidelines EBA/GL/2016/07, EBA/GL/2018/06 and EBA/GL/2020/06 (EBA material may be reproduced with acknowledgement of the source; no text is reproduced here), the ECB Guidance to banks on non-performing loans, and the US Federal Reserve SR 23-5 interagency policy statement (a US government work). IFRS 9 and FASB ASC Topic 326 are cited by name and paragraph or topic number only; IFRS is a trade mark of the IFRS Foundation, and this template is not affiliated with or endorsed by the IFRS Foundation, the FASB, the EBA or the ECB. The structure, wording, worked example and all figures are original; Fernhollow Bank and Quillmoor Logistics GmbH are fictional. Check the current official and consolidated versions of every cited text before use. Template licence: MIT.