Nonperforming Loans in CESEE - What Do They Comprise?
In this
study, in an attempt to overcome this obstacle at least up to a point, we strive to
perform an analytical stocktaking exercise with respect to NPLs in Central, Eastern
and Southeastern Europe (CESEE).
Another motive is to look at credit developments before, during and after the crisis from a comparative NPL viewpoint.
Given their swift and steep increase, nonperforming loans had turned into one of
the focal points of attention during the crisis and have since remained relatively
high or have only been declining at a slow pace.
Coming to terms with the non performing loans problem appears essential, given that NPLs may compromise
financial stability and macroeconomic recovery simultaneously.
Section 2 presents the international NPL definition recommended by the IMF
FSI Compilation Guide plus FSI data, and national NPL definitions plus national
data as can be found in ten of the largest CESEE economies.
Given that national
NPL definitions, as will be shown, are not substantially at variance with international guidelines and given the still inadequate range and depth of data based on
the international definition, it is decided here to concentrate further on available
national NPL data series, which are essentially based on national credit quality
classification schemes.
This, however, should not be taken as lack of support for
any attempts (already at the national level) at further harmonizing standards for
the reporting of asset quality (and in particular NPLs) on the basis of binding
international norms and definitions.
On the contrary: Doubtlessly, there are caveats
involved in trying to derive comparable NPL indicators from data reflecting
differing national loan classification schemes, as is also acknowledged in this study.
Where it appears necessary in the interest of comparability, we suggest adjustments of a given NPL definition to be able to carry out the comparison exercise in
a more effective way.
In section 3, we undertake such a comparison exercise, providing a brief
descriptive overview and discussion of the evolution of NPLs and some subcategories
in Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, Russia, Serbia,
Slovakia and Ukraine from 2005 to 2010. Section 4, finally, presents a summary
of the study and an assessment of its results.
Definitions, Data Availability and Comparability of Nonperforming Loans
The most widely known international definition of nonperforming loans was
developed by the IMF in the framework of the Financial Soundness Indicators
(FSIs) endorsed by the IMF Executive Board.
The FSI Compilation Guide of March
2006 (IMF, 2006, p. 46) “recommends that loans (and other assets) should be
classified as NPL when (1) payments of principal and interest are past due by three
months (90 days) or more, or (2) interest payments equal to three months (90 days)
interest or more have been capitalized (re-invested into the principal amount),
refinanced, or rolled over (i.e. payment has been delayed by arrangement).
The
90-day criterion is the time period that is most widely used by countries to determine whether a loan is nonperforming. (…) Indeed, the Guide regards the guideline of 90 days past due as an outer bound and does not intend to discourage stricter
approaches.”
Apparently in an attempt to further facilitate cross-country comparability of
measurement, “the series ‘nonperforming loans’ are redefined” in the updated
November 2007 version of the Compilation Guide (IMF, 2007, p. 6) “on the basis
of a uniform criterion of ‘principal or interest payments 90 days overdue’. (…) .
This implies that the amended definition would not include, as the previous one in
the Guide, stricter approaches.”
A major advantage of this definition is that it provides a simple, clear and
uniform yardstick to which national practices may further converge in the future.
Also, the cross-country comparative presentation of NPL time series (and of time
series of a number of other prudential data) on the FSI website (http://fsi.imf.org)
brings more international transparency into financial soundness indicators that are
pivotal to assessing economic developments in a financially not so stable world.
However, the NPL data presented on the FSI website are not yet comprehensive,
and time series are limited to five years, and in the case of Serbia, to three years.
As is evident from table 1, only annual data are available, save the most recent data
entry for 2011, for a number of countries (Bulgaria, Croatia, Serbia, Slovakia and
Slovenia).
Even where quarterly data are found, they cover less than a year (Poland,
Romania and Russia) or up to four years (Czech Republic and Hungary). Moreover, the FSI website consists of two NPL data subsources, the FSI database
(http://fsi.imf.org) with country data tables and the GFSR FSI tables (http://fsi.
imf.org/fsitables.aspx), which are mostly – but not entirely – consistent with each
other.
Nonnegligible discrepancies in annual NPL data between the two subsources
show up for the Czech Republic, Slovenia and Ukraine (see table A1 in the annex).
Subcategories of NPLs (e.g. doubtful or loss, NPLs relating to retail or wholesale
credits) are not available.
Finally, despite the fact that the reporting countries
are encouraged to follow the guidelines laid out in the FSI Compilation Guide, compilation practices may vary across countries, which limits cross-country
comparability (Babihuga, 2007, p. 6; IMF, 2011b).
Here, the FSI database might
be made more user-friendly by identifying more clearly data adjustments made to
national sources.
It therefore seems more promising to give a detailed look at national definitions of NPLs.
This is not to suggest that the scrutiny of existing national NPL data
is the optimal path. It would rather appear to be a second-best solution as long as
no consensus on the introduction of binding international (or at least regional)
norms and definitions for the reporting – also at the national level– of asset quality
(and in particular nonperforming loans) has been reached.
Any initiatives in this
direction (e.g. the Vienna Initiative Working Group on NPLs) should be welcomed.
In this vein, this study could make a contribution to indicating aspects that may be
in need of international harmonization. If and when international reporting
standards will be established and applied, there will still be the need to address the
data previously reported.
National Classifications and Definitions: Comparability in Need, but Sufficient Data to Work with
In practically all IMF member countries, the financial supervisory agency has the
legal authority to issue prudential regulations regarding the classification of loans.
Such lower-level legislation is liable to change relatively frequently, thus making
the full consistency of time series uncertain.
While not devoid of statistical breaks
and other possible problems, time series based on national definitions are evidently
longer and much more extensive than what is available on the FSI website.
As can
be seen from table 2, most national definitions relate to the commonly used loan
quality classification (standard – watch – substandard – doubtful – loss), whose
weakest three categories (substandard – doubtful – loss, in the following called:
“s-d-l”) are typically identified as a nonperforming loan (see e.g. IMF, 2005,
p. 396).
But the concept of NPLs goes much beyond adding up subcategories
published by supervisory authorities.
NPL definitions based on national credit quality classifications of CESEE
countries5
largely appear to be comparable: First, they bear important similarities
to the above-mentioned international definition: As can be gleaned from table 3
as well as from its immediate source, table A2 in the annex, the majority of
the NPL definitions of the countries dealt with in this study are based on the
90-day-past-due (in the following called: “90days+”) criterion and no national
definition is contradictory to this yardstick.
Second, another common characteristic
is reference to the existence of “well-defined weaknesses” or a similar formulation
as a trait of a nonperforming loan or borrower. The NPL definitions of practically
all countries analyzed here include this element in one way or another.
A kind
of model classification was drawn up by the Institute for International Finance
(IIF, see table A2). Some other criteria also play a role (e.g. the downgrade requirement and the treatment of restructured loans, as explained in the next
subsection).
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