France: Guidelines For Provisions For Credit Portfolios

Last Updated: 20 April 1995


The French Banking Commission instruction No. 91-05 enforces new reporting requirements (DREP), which specify that banks must systematically downgrade to doubtful accounts any loans showing any of the following three features, including guaranteed loans:

	Probable or certain risk of partial or total non recovery.

	In the event of an installment being more than three months 
	overdue (for all types of credit or movable property leasing) 
	or more than six months overdue (for real estate credits or 
	leasing operations)

	Of a contentious nature (in France: warning proceedings, object 
	of a judgement 	declaring legal reorganization, liquidation 
	proceedings, personal bankruptcy, liquidation of property, 
	legal settlement, etc.).

However, the French Banking Commission, in its note No. 92-03, allows the downgrading of loans outstanding for more than the prescribed time limits to be delayed in exceptional circumstances and subject to approval by its General Secretariat.

Furthermore, in cases where recovery of outstanding amounts becomes regular, the bank may reclassify a doubtful account as a healthy account, "even if the amount and dates of repayment are renegotiated". (see below)

The DREP also specify that banks must take the necessary action to ensure that "the classification as doubtful of a loan to a person or legal entity gives rise to the transfer of all that person or entity's healthy loans or commitments to doubtful account".

This principle (known as "contagion") applies whatever individual guarantees may exist, except "exceptional and duly substantiated cases".This is particularly the case of loans granted to real estate operators, for whom the Banking Commission will make an exception if the overall financial situation of the borrower can be considered healthy.


Provision for doubtful loans can be made for each individual loan (specific or appropriated provision) or for the loans as a whole (either at a flat rate or statistically). Specific provisions are set up in the amount of the risks involved, i.e. by taking account of the loan (capital, interest, accrued and due, commission due) and recovery prospects (repayments expected and calling on guarantees).

The regulations also state that:

	Interest outstanding for more than three months (six months for 
	real estate loans) must be detailed in the accounts or otherwise 
	and fully provided for, if they are taken into income.

	In the case of an overall provision (capital and interest) the 
	amount of the provision must be at least equal to that of the 
	interest shown in the income statement.

The amount of the provision must be periodically reviewed and adjusted to take account of the development of the risk and the chances of recovery. "When all means of recovery have been exhausted for a contentious affair, and no recovery is foreseeable, the loss should be taken into account in the income statement."

French accounting doctrine also accepts that provisions can be calculated using a statistical approach. Such provisions can either replace or complement individual provisions. Use of this method is possible if the bank can substantiate it with statistics on past defaults. The actual proceeds of the loans serves as a basis for a provision covering future risks calculated by reference to statistics.

Although this approach would be difficult to apply to a general banking establishment, it could justifiably be used by banks specialised in consumer credit and home purchase credit (small amount value, numerous and homogenous credits).

In France however, tax audits sometimes question the deductibility of standard provisions on small affairs and also the deductibility of insufficiently substantiated statistical provisions. Consequently, certain French banks have abandoned these methods and reverted to specific provisions.


Country risks are defined by the French Banking Commission as "the total amount of the loans, whatever their term or nature, of private or public debtors residing in countries considered to involve risks". Loans or undertakings relative to these risks remain however under the original balance sheet headings, excepting those considered to be doubtful.

The provisioning of country risks is determined after taking account of guarantees set out by Banking Commission instruction No. 90-04 (real guarantees, guarantees given by OECD states, the World Bank group, American Treasury Bonds, etc.).

The reserve ratio is defined as the sum of provisions and below par ratings (in the case of loans acquired on the second market) brought down to the outstanding loan or commitments serving as the basis for the provision. The Banking Commission requires a rate of provision per country at least equal to the average reserve ratio of main French banks for the preceding year.

For certain types of loans, the below par rating on the second market can constitute a factor in setting the rate of provision. Lastly, these rules for country risk provisions do not exclude an additional specific provision, due to individual risks involved.


French banking regulations do not precisely define the treatment of debt restructuring, whereas they are becoming more frequent, both for country risks and individual risks. The U.S. rule FAS No. 114 defines impaired debts as being those resulting from contractual restructuring of the credit to take account of financial difficulties of the client (reduction in interest rate, respreading of payments, time extension).

It should be noted that such loans differ from doubtful loans. Hence, impaired debts remain classified as healthy assets unless a probable or certain risk remains of total or partial non-recovery of the principal.

Finally, FAS No. 114 specifies that in the case of a significant difference between the actual value of the cash flows before and after restructuring, a provision should be made for the future loss of earnings.

In this respect, the position of the Banking Commission differs, since Bulletin No. 5 specifies that only the risk of signature (i.e. the non-recovery of the capital and not a loss of earnings due to the renegotiation of a new interest rate) can give rise to a provision. This viewpoint entails therefore the recording of reduced income for the residual term of the loan (this applies particularly in the case of debt restructuring under the "Neiertz law").

From a tax viewpoint, it is furthermore impossible to restate non-productive long-term loans (or those with a low interest rate) at their actual value unless the bank can establish the likelihood of sale of the loan before its maturity for an amount lower than the nominal value.


(A separate complete note will be devoted in the near future to problems regarding real estate.)

For more information, please contact Olivier Drion or Joel Chapellier on 33 1 49 01 33 25

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions