Non-Performing Loans in CESEE

Vienna, September 23, 2014

James Roaf

Senior Resident Representative

IMF Regional Office for Central and Eastern Europe, Warsaw

High NPLs ratios need to be addressed

• Boom-bust cycle left a legacy of high NPLs

• Average level of 13 percent, higher in countries with

bigger credit cycle

• NPLs still rising in some, in others may have peaked but

limited and fragile reduction so far, outside Baltics

• NPLs raise concerns not so much for financial stability as

for growth:

– Impairing banks’ ability to resume lending

– Suppressing activity of overextended borrowers

0

2

4

6

8

10

12

14

16

18

20

2007 2008 2009 2010 2011 2012 2013

NPLs ratios have yet to stabilize

NPLs as percent of total loans

Baltics

SEE CE4

CIS

Sou

rce:

Fin

anci

al S

ou

nd

nes

s In

dic

ato

rs

NPLs inhibit credit growth

NPLs levels (2013) Real credit growth (2013)

NPLs inhibit credit growth

y = -0.4552x + 5.6967

R² = 0.1659

-15

-10

-5

0

5

10

15

20

0 5 10 15 20 25

Real cr

ed

it g

row

th in

2013 (

perc

en

t)

Non-performing loans as percent of total loans (latest available)

0

5

10

15

20

25

Est

on

ia

Latv

ia

Lit

hu

an

ia

Slo

vak R

ep

ub

lic

Cze

ch

Rep

ub

lic

Po

lan

d

Hu

ng

ary

Cro

ati

a

Slo

ven

ia

Bu

lgari

a

Ro

man

ia

Mace

do

nia

, FY

R

BiH

Mo

nte

neg

ro

Serb

ia

Alb

an

ia

Bela

rus

Ru

ssia

Mo

ldo

va

Ukra

ine

Regional differences are significant

So

urc

e: Fin

an

cial So

un

dn

ess

In

dic

ato

rs

Non-performing loans 2007-latest (percent of total loans)

Baltics CE4 SEE EU SEE non-EU CIS

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

-50 -40 -30 -20 -10 0 10 20 30 40 50

Credit contraction exacerbates the problem

Change in outstanding loans to GDP ratio 2010-latest (percent)

Ch

an

ge in

NP

Ls

to G

DP

rati

o 2

010-l

ate

st (

perc

en

t)

Credit expansion

Ass

et

qu

ality

dete

rio

rati

on

Romania Slovenia

Hungary Macedonia Croatia

Bosnia

Moldova

Russia Ukraine

Slovak Rep.

Poland

Czech Rep.

Lithuania

Estonia Latvia

Growth is a main facilitating factor

So

urc

e: Fin

an

cial So

un

dn

ess

In

dic

ato

rs, W

B D

oin

g B

usi

ness

, W

EO

data

base

Average annual real GDP growth 2010-2013 (percent)

Ch

an

ge in

NP

Ls

rati

o 2

010-l

ate

st (

pp

)

Latvia

Lithuania Estonia

Hungary

Poland Czech Republic

Slovak Republic

Albania

BiH

Bulgaria Croatia

Macedonia

Montenegro

Romania

Serbia

Slovenia

-15

-10

-5

0

5

10

15

-2 -1 0 1 2 3 4 5 6

Moldova

Russia

Ukraine

Belarus

Suppotive legal framework is important

So

urc

e: Fin

an

cial So

un

dn

ess

In

dic

ato

rs, W

B D

oin

g B

usi

ness

, W

EO

data

base

WB’s Resolving Insolvency rank, 2011-2013 average

Latvia

Lithuania

Estonia

Hungary

Poland

Czech Republic

Slovak Republic

Albania

BiH

Bulgaria

Croatia

Macedonia

Montenegro

Romania

Serbia

Slovenia

-15

-10

-5

0

5

10

15

0 5 10 15 20 25

Ch

an

ge in

NP

Ls

rati

o 2

010-l

ate

st (

pp

)

Better Worse

Moldova Russia

Ukraine

Belarus

What are the factors behind slow pace of

NPL disposal in CESEE?

Tax disincentives

Reliance on collateral (need to wait until end of

foreclosure procedure to write off)

Lack of “forcing mechanism” (regulatory disincentives/obstacles)

Limited incentives

Slow bankruptcy process

Lack of mechanisms to

overcome collective action

problem

Underdeveloped private

market for distressed assets (large pricing gap, etc )

Limited options

Findings of 2012 NPLs Report: Policy Factors behind slow resolution of NPLs include:

• Delays and weaknesses in enforcement of collateral

• Underdeveloped frameworks for going-concern or out-of-court

restructurings lead to lengthy and inefficient liquidations

• Absence of insolvency frameworks for natural persons leaves debt lingering

on bank books

• Weakness in legal institutional frameworks delay resolution and overload

court systems

• Tax systems provide incentives for delay in loss recognition

• Lax banking supervision provides disincentives for NPL resolution

• Underdeveloped markets for distressed assets

• Collective action problems

Need comprehensive, tailored, coordinated approach

Avoid direct government intervention/subsidy

Improve NPL transparency and data consistency

Thank you

Questions to consider for CESEE

Have tax (and other) disincentives been removed?

Is the current institutional and legal framework sufficiently

supportive?

What are the key obstacles for using “optimal” tools to deal with

specific NPL problem (HH, NFC, SME, real estate loans)?

What are the key obstacles for a well functioning distressed asset

market and how to overcome them? How to overcome pricing gap

(can harmonized NPL/collateral rules, AQRs help)?

What are pros and cons of using a market-based solution for

managing distressed assets (in each specific case)?

What should be the role of the public sector? How to limit moral

hazard risk?

2014 growth 2013 growth

Approach tailored to country specifics

In systemic banking crisis, for example, in

Korea, Japan, Sweden, US, and more

recently in Ireland and Spain

Rehabilitation of non-performing assets,

both in and outside crisis; requires well-

functioning insolvency system

Outside of a banking crisis; requires a

solid framework , proper incentives,

players, and history.

Private market for

distressed assets

Public asset

management

companies

Corporate

restructuring, incl.

out-of-court