Loan Loss Provisioning Practices

by Assoc. Prof. Dr. Mohd Yaziz Mohd Isa, Dr. Yap Voon Choong and David Yong Gun Fie

Journal of Modern Accounting and Auditing, (2013) Vol. 9, No. 6, Pages 814-822

Abstract

The purpose of this paper is to come up with factors in loan loss provisioning practices on commercial banks that reflect on collectability of defaulted loans. The need for this research is due to failures in the loan loss provisioning practices which resulted in loan loss provisions (LLP) not reflecting on collectability of the defaulted loans.

As a consequence, the banks do not capture their loss expectations and do not continuously reassess their loss expectations as the conditions affecting their borrowers may change. Henceforth, in their financial reporting, the banks do not represent relevantly and faithfully their true underlying credit risks conditions. When the banks do not represent relevantly and faithfully their true underlying risk conditions, they contradict the objectives of useful financial reporting.

The results showed that among explanatory variables, bad debt recoveries as a factor in loan loss provisioning practices that reflect on collectability of defaulted loans was rejected. Bad debt recoveries was a biased variable and inconsistent estimator. In context of perceived credit risks as the basis to make credit judgments, an estimate of bad debt recoveries had not fulfilled the criteria.

On the other hand, non-performing loans (NPL) as a factor in loan loss provisioning practices was not rejected.

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