52.1.4 Credit risk related to loans granted

Loans measured at amortised cost

As far as granted loans measured at amortized cost are concerned, the Group assesses the risk of insolvency on the part of the borrowers based on the ratings assigned to the counterparties using an internal scoring model. The individual ratings are assigned with the probability of default, implied by the quotation of Credit Default Swap instruments (denoting the market macroeconomic environment), in terms of time perspective and averaged for the counterparties rated under a given rating. The expected credit loss is calculated based on the time value of money.

As part of the model used, the Group continuously analyses the level of credit risk of financial assets and possible changes in the level of this risk. For the purpose of identifying a significant increase in credit risk, the Group aggregates financial assets that have similar characteristics. Based on changes in the credit risk of financial assets since the moment of their initial recognition, financial assets are assigned to one of the following levels:

  • level 1 – financial assets for which no significant increase in credit risk has been identified and assets that have a low level of credit risk as at the balance sheet date,
  • level 2 – financial assets where a significant increase in credit risk has been identified,
  • level 3 – financial assets found to be impaired.

For assets allocated to level 1, the allowance for expected credit losses is estimated on the basis of a 12-month period. For assets allocated to levels 2 and 3, the allowance for expected credit losses is estimated on the basis of the entire expected lifetime of the asset.

As at each reporting date, the Group analyses the occurrence of indications resulting in the classification of financial assets into the levels mentioned above.

If a counterparty has an investment grade rating as at the reporting date, it is assumed that the counterparty’s credit risk has not increased significantly. For the purposes of determining the calculation horizon for expected credit losses, material credit risk increases related to certain financial assets are analysed beginning from the initial recognition of a given asset.

When analysing a significant increase in credit risk related to such assets, the Group considers among others the following indications:

  • the counterparty’s internal or external rating as at the reporting period end having deteriorated by more than two rating levels compared to its rating upon initial recognition;
  • the counterparty’s probability of insolvency projected within one-year horizon as at the reporting period end being at least twice higher than as at the initial recognition date;
  • receivables related to a given asset being overdue by more than 30 days.

If a given counterparty’s receivables are overdue by more than 90 days, they are classified as bad debt, i.e. the 100% probability of insolvency is assigned to that counterparty. The loans granted by the Group as at 31 December 2020 and 31 December 2019 were not overdue.

Loans measured at a fair value

The measurement of the loan granted to the joint venture, Elektrociepłownia Stalowa Wola S.A., classified as financial assets measured at fair value through profit or loss, with the carrying amount of PLN 72 523 thousand, includes credit risk effects. The loan is collateralized with a blank promissory note accompanied by a promissory note agreement.