What are non-performing loans and why they were formed
With the term Non Performing Loans (nPL, in Italian impaired loans) means loans whose collection by the banks is uncertain. In reality they are in turn a part of a larger whole, the Non Performing Exposures which are divided into three categories according to the different probabilities of recovering the credits:
- Past Due, or loans or credit lines that have expired for more than 90 days
- Unlikely to Pay, or the exposures in which there is a suspicion that the debtor cannot fully fulfill its obligations.
- Non Performing Loans, or the actual non-performing loans, exposures to subjects that are in a state of insolvency.
The long crisis that has affected the economies of the whole world since 2007 has led to a surge in non-performing loans, trivially companies and individuals were no longer able to meet their financial commitments depriving the banking system of a substantial part of its revenues following the failure to return the loaned capital and the related interest, and at the same time causing serious problems in the accounting of these Npl. But if the economic crisis has played a fundamental role in the growth of Npl in banks around the world, many believe that the phenomenon has been aggravated by some factors specific to our country.
First among these non-rigorous loan granting practices, emerged in all their evidence recently also following the known banking scandals that hit various credit institutions, where the money was often granted more for "political" reasons than by following strict accounting criteria. Furthermore the length of bureaucratic practices and Italian justice, has led to very long times for the recovery of these credits, just think that it takes several years to close a bankruptcy procedure, and even in the presence of real guarantees such as loans secured by real estate, the time for the expropriation and the sale of these assets are really too long. For all these reasons it is very difficult for banks to "break free" in short times of the Npl afflicting their budgets.
Because the ECB wants to keep them under control: the Banking Union project
The ratio between Npl and total credits reached its peak within the European Union at the end of 2011 when it reached 7.5%, or for every 100 euros of loans within the European banking system more than seven they were considered uncollectible. Since then things have improved substantially because of both a more or less forced disposal as we will see later from the banks of these credits, both from a general decrease in the credits granted by the banks, which have become much more careful as it is to lend money. The ECB believes that large volumes of Npl are the cause of the banks' lower profitability, and consequently can make the banking system less efficient in financing the real economy. To date this ratio between Npl and total loans has fallen to 3.5% on a European scale, still very far from 1% in Japan or the United States, but more than the average figure is the heterogeneity of this percentage of the individual states to cause greater concern.
The countries most affected by the credit crisis, such as Greece and Cyprus, have an NPL / total credit ratio of 45% and 34% respectively, Portugal 12.4%. Italy now stands at 9.5% having made rapid improvements considering that in 2016 it was well over 16%, but with almost 200 billion Npl on a European total close to 600 billion, it remains the main holder of non-performing loans in Europe.
In the context of the European Union, a homogeneous reduction in the mass of Npl is seen by some nations, mainly Germany, as a necessary condition for arriving at community guarantee mechanisms against potential defaults, and the only way to complete a true and proper own "Banking Union". And this is the main game being played. The development of a European policy aimed at reducing non-performing loans is in fact part of a broader plan aimed at creating a real union of the capital market. For this reason, the European institutions are studying a series of measures such as the review of capital requirements for banks, the creation of a secondary market for Npls, the reform of laws on insolvency proceedings and debt recovery. To date there is not a common vision on the creation of European guarantee mechanisms that go to drastically decrease the risk of bank insolvency in the individual member states; but the line that would grant these guarantees only prevails, however, to those nations that reach very low levels of non-performing loans.
In other words, any European Banking Union will not give any help to banks in difficulty in those countries that have not necessarily achieved a certain ratio between Npl and total credits and this is certainly not good news for the banking systems of Southern European countries such as Italy and Greece but also Spain and Portugal.
Npl in Italy and the real economy
If the intentions of the European Union appear clear, it becomes more difficult to understand how it is possible to arrive at a drastic reduction of credit risk in a difficult economic situation, with a probable recession or a slowing of the economy at the gates, the uncertainties deriving from the war trade between the United States and China, and a monetary policy characterized by low interest rates.
The experience of recent years has indeed shown that the much hoped for decrease in impaired positions that it should have put pressure on the banks and thus freed resources to support our economy, has actually led to extremely modest results in terms of economic growth.
The reasons for this relatively small impact are essentially two: a certain reluctance of Italian banks, above all small and medium-sized ones, to deprive themselves of credits which according to their judgment have recovery rates higher than those offered by the market, and a greater attention to the concession of the financings that have led to a better efficiency in the management of the credits, but at the same time have made more complicated for Italian companies and companies to resort to bank credit.
For many critics European regulations have been tailored to the great European banking groups, a model far removed from the Italian one based on a widespread network of popular and cooperative credit banks that with their attention to the territory have always given fundamental support to small and medium enterprises, the true economic strength of our Nation. The rates of suffering of these realities are much lower than the average of the system e the forced sale of the Npl is causing considerable financial damage to traditionally very solid banks, severely testing their relationship with local companies and consequently slowing down the economic recovery.