Bad debt provisioning
When a loan falls behind, part of it may never come back. A provision recognises that expected loss now, instead of waiting for the loss to happen. Here every loan carries its own provision, recalculated every day — so the provision figure in your general ledger always ties back to the exact loans behind it.
You rarely have to do anything. The system stages each loan, works out the provision, and books the movement at end of day. Your job is the exceptions: loans you judge differently, and loans in trouble that the arrears numbers cannot see yet.
How a provision is worked out
Each loan product has a provision matrix. The matrix bands loans by how many days they are past due. Each band carries a coverage percentage and a stage — the three stages of IFRS 9, from performing (Stage 1) to credit-impaired (Stage 3).
Every day, for every loan:
flowchart LR
A[Days past due] --> B[Matrix band]
B --> C["Coverage %"]
C --> D["Provision =<br/>coverage % × exposure"]
D --> E[Difference from yesterday<br/>booked automatically]Exposure is what the customer owes. The movement books in either direction — provisions rise as a loan deteriorates and release as it recovers, with no manual journal in between.
An example matrix for a personal loan:
| Days past due | Stage | Coverage | Probation |
|---|---|---|---|
| Up to date | 1 | 1% | — |
| 30 or more | 2 | 20% | 3 days |
| 90 or more | 3 | 50% | 6 days |
Probation stops the provision bouncing when a chronic late-payer dips in and out of arrears. A loan only moves back down a band after that many consecutive days clear of it.
A worked example
A Woodgrove Bank customer owes 1,000 on the matrix above.
- While the loan is up to date it sits in Stage 1 at 1%. Provision held: 10.
- The loan falls 35 days past due. It moves to the 30-day band — Stage 2 at 20%. Provision held: 200. The 190 difference books that evening.
- The customer catches up. Nothing releases yet: the loan is on 3 days’ probation, and the provision holds at 200.
- After the third clean day the loan returns to Stage 1. Provision held: 10, and 190 releases.
The Provision panel
Every covered loan has a Provision panel. What the rows mean:
| Row | What it tells you |
|---|---|
| Stage | The stage in force. A “Pinned” badge means someone overrode the ageing — see below. |
| Bucket | The matrix band and its coverage, for example “30+ days at 20%”. |
| Days past due | The arrears count driving the band. |
| Cure probation | How far through probation a recovering loan is, for example “2 of 3 days clean”. |
| Exposure | What the customer owes — the amount the coverage applies to. |
| Matrix provision | What the matrix says the provision should be. |
| Assessed provision | A manual figure overriding the matrix, if one is set, with its reason. |
| Provision held | The provision actually booked. If it differs from the target, the panel says what it moves to at the next day end. |
| Interest in suspense | Interest charged but not yet counted as income — see below. |
If the panel says the product is not covered by a provisioning matrix, that product does not carry provisions. Adding it is configuration, not a change request.
When you know better than the matrix
Sometimes you have information the ageing does not: a distressed sale in progress, a payment arrangement, security worth less than its valuation. Select Assess and enter the provision you judge right, with a reason.
- The assessed figure replaces the matrix figure from the next day end.
- It never exceeds what the customer owes. If the customer pays down below your assessment, the provision follows the debt down.
- It never releases on its own. The loan stays at your figure until you select Clear Assessment — recovery is your judgment to make, not the system’s.
For example: you assess 500 against a loan of 1,000. The customer repays 700, so they now owe 300. The provision held becomes 300 — an assessment can never exceed the debt it provides against.
Assessments, stage pins, and their clearances can require a second approver — see countersign.
Flagging trouble the arrears cannot see
A loan can be fully up to date and still doomed — a business rescue, a deceased estate, a customer on a watch list. Select Pin Stage to hold the loan at a stage regardless of its arrears, with a reason that stays on the record.
The pin dialog also asks for an assessed provision. Enter one: a loan pinned to Stage 3 but still provided at its up-to-date percentage is almost never what you mean. The pin and the assessment remain separate afterwards — Clear Pin returns the stage to the ageing, but your assessed figure stays until you clear it too.
Interest on impaired loans
While a loan is in Stage 3, interest is still charged to the customer — the balance grows and the statement is unchanged. But that interest is not counted as income. It is held in suspense, and the panel shows the running amount.
If the loan cures, the whole suspense balance is released to income at once. If it never cures, the suspense is reversed when the loan is written off — income that was never real is never booked.
The Provisions register
Open Accounts → Provisions for the whole book on one screen: every covered loan with its stage, band, days past due, exposure, provision held, and interest in suspense. The totals tie to the provision balance in the general ledger — this is the drill-down from the number in the accounts to the loans behind it, and the audit trail of every stage move sits on each loan’s own record.
Writing a loan off
When nothing more will be collected, the loan is written off against the provision it already carries. The Write Off button appears on the Provision panel once a loan is in Stage 3.
Writing off is derecognition, not forgiveness. The customer still owes the debt, and it moves to a salvage account you can still collect on. See writing off a bad debt.
What your organisation configures
- The matrix, per product — the bands, coverage percentages, stages, and probation days. Repricing risk appetite is configuration, not a release.
- The exposure measure — by default, everything the customer owes less interest held in suspense. A different base, such as netting off cash collateral, is one configured expression.
- Which products are covered — a product with no matrix carries no provisions.
One warning for administrators: changing a matrix reprices the entire book at the next day end, in one attributed movement. That is correct behaviour — the provision is a point-in-time measure — but expect the swing in the ledger.