Non-performing loans – the legacy of crisis
The build-up of non-performing loans caused by the 2008 financial crisis led European NPL stock to peak at EUR 1.2 trillion in 2015. Banks have been dealing with the headache ever since. But what are non-performing loans and how are they categorised?
Non-performing loans (NPLs) are loans where the borrower, whether an individual or a company, cannot meet their financial obligations. These loans will therefore be paid late, in part or not at all. Since the global economic crisis of 2008-2009, NPLs have been a major headache for Europe’s banks – especially in Greece, Italy and Spain.
In the wake of the crisis, borrowers struggled to repay, and economic pressure increased unemployment and corporate bankruptcies. As a result, the volume of NPLs rose dramatically – more so in Europe than in other places.
Loan stages
Since 2018, International Financial Reporting Standard (IFRS) 9 has specified how loans should be classified. The classification affects a bank’s balance sheet. When borrowers cannot meet their obligations, the bank has to increase the amount of capital it holds to reflect the risk posed.
Stage one: performing loan.
The borrower is meeting their obligations. Banks estimate Expected Credit Loss (ECL) for the next 12 months only, limiting the capital needed.
Stage two: underperforming.
The borrower is not meeting their obligations. Loans that are 30 days past due should be moved to stage two. This means that the bank has to consider estimated losses over the lifetime of the loan and make greater provision, locking up capital on the balance sheet.
Stage three: impaired.
The borrower is far from being able to meet their obligations. Loans that are 90 days past due are moved to stage three and the estimated losses rise, increasing the capital provisioning needed.
At Intrum, we work on behalf of banks and other businesses to recover money from individuals and organisations to keep the economy flowing. As well as doing this on an outsourced basis, we buy portfolios of non-performing loans, allowing banks to release them from their balance sheets. Our ethical approach means lenders can be confident their customers are supported and a sustainable payment plan is agreed upon.
Download our latest Economy in Focus issue
The latest edition was published in September 2023 and takes a closer look at the economic phenomenon of NPLs – non performing loans – how they function and what the future development might look like.
