An analysis of how banks mitigate risks arising from non-performing loans

Abstract

In March 2017 the ECB issued guidelines about the management of NPLs. This was due to the fact that there were a lot of European banks which had high NPLs, and some banks still have old NPLs in their books. This research will be based on local banks to seek out how they are handling new regulations and how they are managing these NPLs. This study will be conducted into two parts; quantitative and qualitative part. Quantitative by working out the NPL ratio, Coverage NPL ratio and Forbearance ratio of the banks being interviewed comparing them to the EU average and local average. In the qualitative part, the banks interviewed gave an overview of how the banks are proceeding with the management of NPLs. From the quantitative part shows the banks being interviewed are almost within the NPL ratio benchmark set by the ECB. This is due to that presently local economy is healthy. One should note that in the NPL ratio in the denominator the ECB deposits have not been included. In the qualitative part banks shows they are abiding with the regulations. In addition to that certain banks are staging loans into more stages than that required. This gives more detailed indication of EWI, and thus they can prepare to manage those NPLs before they fall in category of NPLs. Some banks shows concern on the recovery of money from NPLs, and also the costs regarding the introduction of new regulations about management of NPLs. Concluding from this thesis, the regulatory body should be responsible on the recovery of money from NPLs. Small banks find introduction of new regulations expensive. If they have already good practices of management of NPL, the ECB should give the options that some regulations would not be implemented on these small banks. Lastly banks should make clear in their financial statements the number of NPLs and they should include their ECB deposit in their loans to know the true value of the NPL ratio.