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PROSPECTS FOR IMPROVEMENT OF NON-PERFORMING LOAN
(NPL) RECOVERY PROCESSES IN COMMERCIAL BANKS
Kumakov Shavkat Norboevich
Head of the department for work with credit debt of the Joint Stock Commercial
Bank "Business Development Bank"
https://doi.org/10.5281/zenodo.14049393
In a market economy, one of the important factors of development is the
satisfaction of the needs of business entities and consumers for monetary
resources by commercial banks. By providing loans, commercial banks assume
the risks that arise in the process of interaction with the external environment.
This, in turn, is one of the biggest threats to their smooth operation.
In modern conditions, the problem of loan repayment is becoming
extremely urgent, and most banks record a deterioration in the quality of the
loan portfolio. Every fifth client of a commercial bank faces problems with loan
repayment. This trend may lead to an increase in the number of non-performing
loans in 2022-2023, and every third client may face difficulties in loan
repayment. This, in turn, has serious and negative consequences for credit
institutions. In such cases, one of the basic principles of lending - the principle of
"repayment" - may be violated. The bank will be forced to compensate for
additional costs of servicing problem loans and miss out on the projected profit.
Taking into account the above, it is necessary to emphasize that the
reduction of the share of non-performing loans (NPL), the elimination of the
factors of their occurrence and the improvement of the loan portfolio determine
the need to improve the mechanisms for managing NPL loans in commercial
banks, which is becoming one of the most pressing tasks for commercial banks
today.
Non-performing loan (NPL) management is a critical area of focus for
commercial banks as high NPL levels can undermine a bank’s profitability,
impact capital adequacy and reduce the institution’s ability to issue new loans,
thereby hampering economic growth (Beck et al., 2015; Louzis et al., 2012). An
increase in NPLs is often caused by various factors, including economic
downturns, inadequate credit assessment methods and lack of borrower
monitoring, which typically requires improving effective NPL management and
collection mechanisms (KPMG, 2017; Anastasiou et al., 2019). One of the main
strategies to address the NPL issue is regulatory intervention. The European
Central Bank (ECB, 2017) has set out comprehensive guidance on NPL
management, advocating for the development of bank-specific NPL strategies
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that include clear internal processes, improved loan monitoring and asset
resolution mechanisms. This guidance highlights the need for adequate
provisioning and the use of “bad banks” or asset management companies to
isolate and resolve problem assets. Research by Baudino and Yun (2017) further
supports the role of the regulatory framework, noting that effective NPL
management requires regulatory clarity and alignment with banks’ internal risk
practices, particularly in regions with high NPL levels. Technological advances,
particularly in big data and machine learning, are becoming transformative tools
in the NPL recovery process. Research by Accenture (2019) shows that
predictive analytics can improve credit risk early warning systems, allowing
banks to better anticipate borrower defaults and optimize recovery strategies.
By analyzing data trends and borrower behavior, machine learning algorithms
can identify high-risk loans at an earlier stage, allowing for timely intervention
and restructuring where possible. Moreover, digital tools streamline the
recovery process, reduce recovery times, and improve collection efficiency by
automating communications and using artificial intelligence to improve
customer engagement strategies (PwC, 2018). Operational improvements in
banks are also critical to NPL management. According to Louzis et al. (2012),
banks with robust loan assessment and monitoring processes tend to have lower
NPL ratios. Operational strategies such as reviewing credit risk models,
upgrading risk management staff, and implementing continuous loan
monitoring systems help reduce the risk of default. Additionally, Anastasiou et
al. (2019) discuss the importance of NPL restructuring as a proactive approach
to preventing loans from becoming non-performing. This restructuring may
involve adjusting loan terms, reducing interest rates, or extending repayment
schedules to make loans more manageable for borrowers.
Table 1. Information on Non-performing loans of commercial banks
as of March 1, 2024
Information on Non-performing loans of commercial banks
as of March 1, 2024
№
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Iranian Saderat bank in
Tashkent
Source: Developed by the author based on cbu.uz
A significant depreciation of the domestic currency may lead to an
increase in the share of non-performing loans in foreign currency. This is
because borrowers on loans in foreign currency earn in the domestic currency,
with the exception of export-oriented enterprises. As a result, if the exchange
rate depreciates sharply, borrowers may find it difficult to repay their loans, and
the share of non-performing loans in foreign currency may increase.
In summary, it can be concluded that there are multiple approaches for
handling non-performing loans (NPLs), and banks should choose the most
effective methods to enhance the productivity and quality of their credit
portfolios. Improving not only the quality of the credit portfolio but also the
bank’s financial performance, ensuring its stability, and establishing an effective
system for managing NPLs remain top priorities.
Based on the topic, the following set of measures is proposed to minimize
and manage the share of overdue and problem loans in commercial banks:
1.
Strengthen the capacity of divisions specifically dedicated to handling
NPLs.
2.
Develop streamlined procedures for loan restructuring to simplify the
process.
3.
Organize regular initiatives aimed at improving clients’ financial
literacy.
4.
Conduct systematic monitoring of the economic environment, national
conditions, and various macroeconomic processes.
5.
Continuously monitor the financial status of borrowers both during
loan disbursement and throughout the servicing period.
6.
Develop and enhance a comprehensive risk management system.
In conclusion, improving the situation with NPLs involves selecting appropriate
methods for managing overdue loans, making decisions that factor in the
assessment of risks, and ensuring a balanced structure within the credit
portfolio.
References:
1.
Accenture. (2019). Leveraging Predictive Analytics for NPL Management.
Retrieved from Accenture.
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2.
Anastasiou, D., Louri, H., & Tsionas, M. (2019). Non-performing loans in the
Euro area: Are core-periphery banking markets fragmented? International
Journal of Finance & Economics, 24(1), 97-112.
3.
Baudino, P., & Yun, H. (2017). Resolution of Non-performing Loans – Policy
Options. Financial Stability Institute, Bank for International Settlements.
Retrieved from BIS.
4.
Beck, T., De Jonghe, O., & Schepens, G. (2015). Bank competition and
stability: Cross-country heterogeneity. Journal of Financial Intermediation,
24(3), 243-253.
5.
European Central Bank (ECB). (2017). Guidance to Banks on Non-
Performing Loans. Retrieved from ECB.
6.
KPMG. (2017). Global NPL Outlook: Non-performing Loan Management in
Europe. Retrieved from KPMG.
7.
Louzis, D. P., Vouldis, A. T., & Metaxas, V. L. (2012). Macroeconomic and
bank-specific determinants of non-performing loans in Greece: A comparative
study of mortgage, business, and consumer loan portfolios. Journal of Banking &
Finance, 36(4), 1012-1027.
