Dealing with vintage non-performing loans in Malta

Abstract

When reviewing the composition of the NPL ratio in Malta, it can be noted that a large proportion of the NPLs are vintage. Older NPLs impact banks’ performance more extensively. The study aimed to analyse the methods used by Maltese banks to deal with NPLs, with particular attention afforded to vintage NPLs. The impact of vintage NPLs on the banks and the economy were analysed. Furthermore, the causes behind such an accumulation of vintage NPLs were identified. This was done by conducting semistructured interviews with four core local banks and one regulator. The findings of this study showed that, in general, vintage NPLs are considered more problematic than relatively newer NPLs. This is mainly due to higher provisions and capital requirements, which impact profitability and lending behaviour. Maltese banks use internal recovery and write-offs as NPL management tools. NPLs are not clustered in terms of age, and older NPLs tend to end up in court or written off. This study highlighted that the inefficient judicial system results in NPLs ageing on the banks’ balance sheets, thus resulting in an accumulation of vintage NPLs. These findings are essential to tackle the build-up of NPLs, as they shed light on the current tools employed and their limitations. This is especially relevant in the context of the Covid-19 pandemic, since NPLs are expected to increase.