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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