While there is no standard or accepted definition of a Non-Performing Loan (NPL), an NPL is a loan that is several months overdue or in default. It may be the result of economic misfortune, but it is more than just an indicator of a debtor’s inability (or unwillingness) to pay; for both the debtor and creditor, a non-performing loan may be a burden. Commercial Loans are usually considered non-performing if the loan is 90 days past due or the borrower has made no interest or principal payments within 90 days. Consumer Loans are deemed as NPLs if the loans are due past 180 days.
The odds of a loan being paid off are significantly lower if a loan becomes non-performing. However, a loan becomes re-performing if the debtor resumes payments again on an NPL, even if the debtor has not caught up on all the payments they missed.
NPLs became a relevant problem after the global financial crisis. In 2014 there were 32 countries where more than 10 per cent of total credit was not being repaid on schedule; the NPL ratio was above 15 per cent for 20 of them. What is even more striking is that some of the worst cases of NPLs were in advanced economies: 34% of all loans by Greek lenders and 17% of all Italian borrowings were non-performing. In India, most NPLs are prevalent in the agricultural sector where farmers are unable to pay off any debts under their name.
Banks face various issues with regards to NPL Management. The principle factors behind the high NPL distribution in banks can be either incorrect credit risk management, reckless borrowing/lending or economic downturn in a nation. Other potential reasons could be poor supervision and administration, belligerent lending and acquisition, high exposure to areas that were generally affected by the financial crisis, and careless credit controls. Another hindrance in the process of NPL management are the directions given to banks and other financial organizations to downplay the extent of the NPLs present to avoid social, economic and political repercussions.
NPLs are bad news for both banks and debtors. An NPL restricts a borrower’s collateral and the unresolved debt makes it more difficult to obtain new capital and make investments. When it comes to banks, NPLs consume capital, require management time and attention that diverts attention from the bank’s core activities. NPLs also increase the operational costs of the bank and decrease profitability. They may even undermine the viability and sustainability of the bank. Even if banks perform proper background checks of their debtors and ascertain their credibility, there always is a chance for their assets to lose value over time.
NPL problems are tackled in India by the way of “Centralization” or “Decentralization. In Centralization, all of the involved parties, which includes the banks, regulators and governmental authorities, get collectively to find solutions. This is usually done by forming an Asset Management Company (AMC). Decentralization mainly involves the banks being left alone to manage bad loans arising from bad lending by offering them various incentives, legislative powers or various accounting/fiscal favours. Other methods to solve NPL-related issues can be client profiling, defining a retail strategy library, optimising legal services, redesigning the operating model for corporate loans, launch a Collateral Recovery Data Quality Program, proper collateral management and using predictive analytics to make early warning & forward looking models.
