The Non-performing Loans (NPL) have been for months the subject of great attention from the media and market investors.
What are the Non-performing loans? What are the countries that ‘suffer’ more of NPL?
‘Non-performing loans are assets that are no longer able to repay the capital and interest owed to creditors. In practice these are credits for which the collection is uncertain both in terms of deadline and entire amount’.
This is the definition of the Italian Stock Exchange. The choice of such definition is not a coincidence because the NPL are a thorn in the side especially for the Italian banking system.
The balance sheets of Italian banks are rather burdened by the amount of non-performing loans. The Italian banking system in fact holds a quantity of LPG more than three times the European average, which is not a good especially during the bail-in times.
The ECB had rebuked some of the most in crisis Italian banks for the presentation of a plan that has as its focus on the management of Non-performing loans.
The NPL are divided into various categories, but the most important are the substandard and non performing loans.
Substandard loans represent loans for people in situations of objective difficulty, but temporary. They represent a milder form of NPLs but usually are seen as the beginning of the non performing loans. It is supposed that such debt may be collected in a first future.
Non-performing are loans where the borrowers are in default or in similar situations. The insolvency should not have to be ascertained by a court.
There are other types of NPL such as restructured and past due loans. The first are loans that have undergone a change in the contractual conditions by the creditor bank due to difficulties of the debtor. The second do not fit into the above categories and are not honored for more than 180 days.
The Italian banks hold a large number of performing and doubtful loans and this is why they are trying to find a solution. The difficulties of the Italian banks are linked to 2 reasons: bad management, which allowed a credit to financially doubtful people and poor financial conditions of companies and Italian families.
But to suffer from this serious disease, it is not only the Italian banking system but also one of the most powerful countries in the world: China. Any private investor should be aware of the delicate situation they are experiencing major Chinese banks and the role they can play in the world economy.
Stewart Paterson, fund manager at Tiburon Partners, puts on alert the investors about the situation of the four major Chinese banks, considered by Forbes the largest in the world by revenue, profits, capital and market value.
These banks are parts of the Chinese state and now find themselves managing a huge amount of non-performing loans, which may soon lead to a stronger recapitalization of the sector, with direct consequences to all other foreign economies.
During the years of the financial crisis the biggest banks in China have been used by the national government as a vehicle to inject liquidity into the real economy. The result has been an increase of debts for local governments and companies owned by the state.
So, what could be the solutions for these two countries?
As for Italy, the government will have to make some reforms, as explained by the president of the ECB, Mario Draghi, otherwise any attempt to solution to the NPL would be useless.
According to Paterson, however, in China there will be necessary the cancellation of many debts and a strong recapitalization of the banking sector.