Non performing loans
In laymans language, it can be said that non-performing loan is that type of loan in which the borrower has defaulted in making repayments. Both types of loans, in which the borrower has defaulted or in which he is very close to being defaulted are included in the category of non-performing loans. As per the existing laws, any loan that remains in default for 3 months is considered as a non-performing loan. The actual period reckoned for classifying a loan as non-performing one differs.
There are many other factors like contract terms etc that have to be considered. In technical terms, it can be said that non-performing loans are those types of loans in which the principal and interest payments remains past due by 90 days at least. If there are any particular clauses in the contract agreement, a loan may not be classified as a non-performing loan even after 90 day default.
Non-performing loans in the present scenario
Banks and other financial institutions that provide different types of loans are now in a better position regarding the non-performing loans. These institutions have seen worst period in terms of non-performing loans in 1990s, when the problem was quite acute. Each bank and other financial institution was adversely affected by non-performing. In the year 1997, overall non-performing loans in the Japanese banking sector amounted to $1 trillion. Similarly, other nations were also badly hit by non-performing loans. Thus, need for the securitization of non-performing loans was being felt. It happened in year 1999 when securitization of these loans became possible. Asian Countries were mostly hit by non-performing loans and many countries in the Asian continent are able to do better in terms of non-performing just because of securitization of these loans. Since non-performing loan does not earn any income, it is not profitable at all. The newest hot non-performing loan market in Asia has been recognized as Malaysia. Other countries are striving to do better in terms of non-performing loans. These countries include Thailand, Korea, China, Philippines etc.
As per HKMA or Hong Kong Monetary Authority, non-performing loans have proved to be a hindrance in the economic growth and stability of the region. There are many types of methods that are being employed by many economies to come out of non-performing loans as soon possible. As per HKMA, the real test is not only to come out of these loans but to prevent further building of such loans. If the whole Asian Region has to post good economic growth, it is very necessary that all the countries take effective steps for non-building of non-performing loans.
One of sectors of economy that is required to play a major role in preventing the build up of non-performing loans is the banking sector. It is important for the reader to understand here that in the years 1997 and 1998, there was a huge build up of non-performing loans in almost all the Asian countries and this has resulted in slowed down of these economies. In the past few years, a major progress has been made by banks and other financial institutions in the field of non-performing loans. Political and financial sources have shown equal enthusiasm towards the problem and as on today, problem of non-performing loan has been content to a good extent. Banks are the most important channel for passing financial assistance for growth of economy and these were not effective in the recovery of loans provided by them, which ultimately resulted in building huge levels of non-performing loans.
The reader may like to know how it has been made possible in the past few years to address to this problem in a successful manner. Though there were many efforts taken by each country, there was one common feature found in all the countries suffering from non-performing loans. This feature is the creation of an Asset Management Companies. These companies are commonly called as AMC and the major role of these companies have been to use the public funds in writing off the non-performing loans from the books of various financial institutions like banks etc. Let us try to understand this with the help of an example. In Korea, Korea Asset Management Corporation was formed and this organization bought about 80% of the overall non-performing loans from all the banks. These loans were bought at the market value after the financial crisis occurred in the country. Similarly, in another important Asian country, Malaysiaplace>, a national Asset Management Company called as Danaharta bought about 40% of total non-performing loans present in the banking sector so as to help the economy in cleaning these growth obstructing loans. Apart from national AMCs mentioned above, there were also many bank-specific asset management companies formed in various countries. No doubt, it is not at all commendable to use the public money in cleaning the banking sector, but since this sector is the backbone of economy, it became inevitable.
From the above discussion, the reader may think that problem of non-performing loans is now over. But it is not so. These loans would continue to occur in future whenever the borrower would make default in making repayment. Banks and other financial institutions cannot put an end to lending. Thus, it is very much desired that banks and other financial institutions that provide different types of loans confirms that all the loans are being repaid in the required manner and there is no fresh build up of non-performing loans. This also ensures that public money would not be used in future to clean up non-performing loans.
Specific efforts are being made by economies in three areas to prevent building of non-performing assets. These areas are the corporate governance enhancement, credit information enhancement and prudential supervision enhancement. If the efforts in these three areas are able to do well, I am sure that problem of non-performing loans would be reduced to a great extent. Recycling of funds is very important for any economy and this is possible only when it is ensured that there is no creation of non-performing loans.
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