When banks lend money to customers, there is generally a risk of not being able to collect the money, so the original book assets will be impaired. What does loan impairment loss mean?

What is loan impairment loss?

Loan impairment losses refer to estimated losses on commercial bank loan assets, and the amount of the loss is recognized in the profit and loss statement on the balance sheet date. On the balance sheet date, commercial banks should check the book value of the loan. If there is objective evidence to prove that the loan is impaired, it should be recognized as an impairment loss and make loan loss provisions.

Commercial banks estimate the present value of the expected future cash flow of the loan through impairment testing on the balance sheet date. The difference between the present value of the expected future cash flow and the book value of the loan is recognized as an impairment. The value loss shall be included in the current profit and loss.

What is loan loss provision?

Loan loss provisions are the loan loss impairment provisions that banks draw in accordance with regulations in this account. No loan loss provisions are made for entrusted loans that the bank does not bear risks.

The scope of assets for which loan loss provisions are made includes:

1. Customer loans;

2. Discounted assets;

3. Lending funds;

4. Syndicated loans;

5. Trade financing;

6. Credit card overdrafts, etc.

In addition, impairment provisions for corporate (insurance) policyholder pledged loans are also accounted for through the loan loss provision account. Loan loss provisions should be calculated in detail according to the asset category for which loan loss provisions are made. The credit balance at the end of this account reflects the balance of loan loss provisions that the bank has made.

What is the subject of loan impairment?

What is loan impairment provision?

Loan impairment reserves refer to the reserves set aside by commercial banks to resist loan risks to make up for loan losses that the bank cannot recover when due. It can be understood as the provision for bad debts that cannot be recovered after the bank lends housing to customers.