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
Source: Financial Soundness Indicators NPLs ratios have yet to stabilize 20 NPLs as percent of total loans 18 16 14 12 Baltics 10 8 6 4 SEE CIS CE4 2 0 2007 2008 2009 2010 2011 2012 2013
NPLs inhibit credit growth NPLs levels (2013) Real credit growth (2013)
Real credit growth in 2013 (percent) NPLs inhibit credit growth 20 y = -0.4552x + 5.6967 R² = 0.1659 15 10 5 0-5 -10-15 0 5 10 15 20 25 Non-performing loans as percent of total loans (latest available)
Estonia Latvia Lithuania Slovak Republic Czech Republic Poland Hungary Croatia Slovenia Bulgaria Romania Macedonia, FYR BiH Montenegro Serbia Albania Belarus Russia Moldova Ukraine Source: Financial Soundness Indicators Regional differences are significant Non-performing loans 2007-latest (percent of total loans) Baltics CE4 SEE EU SEE non-eu CIS 25 20 15 10 5 0
Change in NPLs to GDP ratio 2010-latest (percent) Asset quality deterioration Credit contraction exacerbates the problem 60 50 Romania 40 Hungary 30 20 10 0-10 -20-30 -40-50 -60 Lithuania -70 Latvia -80-90 Slovenia Croatia Macedonia Bosnia Poland Moldova Czech Rep. Ukraine Russia Slovak Rep. Estonia Credit expansion -50-40 -30-20 -10 0 10 20 30 40 50 Change in outstanding loans to GDP ratio 2010-latest (percent)
Change in NPLs ratio 2010-latest (pp) Source: Financial Soundness Indicators, WB Doing Business, WEO database Growth is a main facilitating factor 15 10 Slovenia Hungary Albania Romania 5 Croatia Serbia Bulgaria 0 BiH Czech Republic Ukraine Macedonia Poland Belarus Moldova -5 Montenegro Slovak Republic Russia Lithuania Estonia -10 Latvia -15-2 -1 0 1 2 3 4 5 6 Average annual real GDP growth 2010-2013 (percent)
Change in NPLs ratio 2010-latest (pp) Source: Financial Soundness Indicators, WB Doing Business, WEO database Suppotive legal framework is important 15 10 Slovenia Albania Romania 5 Hungary BiH Bulgaria Croatia 0 Czech Republic Belarus Macedonia Serbia -5 Slovak Republic Lithuania Russia Poland Montenegro Estonia Moldova Ukraine -10 Latvia -15 0 5 10 15 20 25 Better Worse WB s Resolving Insolvency rank, 2011-2013 average
What are the factors behind slow pace of NPL disposal in CESEE? Limited incentives Limited options Tax disincentives Slow bankruptcy process Reliance on collateral (need to wait until end of foreclosure procedure to write off) Lack of mechanisms to overcome collective action problem Lack of forcing mechanism (regulatory disincentives/obstacles) Underdeveloped private market for distressed assets (large pricing gap, etc )
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?
2013 growth 2014 growth
Approach tailored to country specifics Public asset management companies In systemic banking crisis, for example, in Korea, Japan, Sweden, US, and more recently in Ireland and Spain Corporate restructuring, incl. out-of-court Rehabilitation of non-performing assets, both in and outside crisis; requires wellfunctioning insolvency system Private market for distressed assets Outside of a banking crisis; requires a solid framework, proper incentives, players, and history.