At the latest since the 2008 global financial crisis, the ECB has been declaring war on non-performing loans (NPLs). But how do banks get to grips with their NPL ratio? The solution is to sell non-performing loan portfolios.
Why too high a level of NPLs damages your business.
Is your bank’s inventory of NPLs or bad debts, e.g. from enforceable receivables, getting bigger and bigger? In the long term you are not just losing out on interest payments but also any kind of flexibility. The missing revenues mean that you have to cut back on issuing new loans, and the establishment of reserves also ties up other capital that is then not available for your day-to-day business. For the banks affected, an excessive inventory of NPLs and enforceable receivables not only impairs profitability in the long term but also causes problems with balance sheet and equity.
“What is a non-performing loan (NPL)?”
The European Central Bank (ECB) defines a non-performing loan as a bank loan where the borrower is in default with their payments. According to the ECB’s definition, a loan is deemed to be non-performing as soon as the delay in payments of principal and interest exceeds 90 days. In Germany, non-performing loans are also designated ‘bad loans’.
Clean balance sheets thanks to sale of NPLs.
Your objective should be to keep the NPL ratio, i.e. the proportion of NPLs in your overall balance, as low as possible. The simplest and probably most lucrative option for reducing non-performing loans and enforceable receivables is to combine them and sell them as a debt portfolio.
Selling non-performing loans offers many advantages:
To enjoy these advantages over the long term, it is worth concluding what is known as a forward flow deal, in which non-performing loan portfolios are transferred to a buyer at regular intervals. This allows you to keep your NPL ratio at a consistently low level. In addition, in the event of revolving sales, the risk is calculable, because fixed purchase price rates are agreed. This makes lending much easier to calculate for banks.
EOS – your expert for NPL sales.
EOS was setting benchmarks as far back as the 1980s, as the first financial services provider in Germany to purchase one-off and revolving portfolios (NPL). As a subsidiary of the Otto Group, we now operate worldwide and have specialized in the valuation and acquisition of secured and unsecured debt portfolios. The book value of the portfolios reported in the balance sheet at the end of fiscal 19/20 in Germany alone was EUR 668 million. Using modern data analysis, we determine the fair value of an NPL portfolio and guarantee that it will be processed in a professional manner that ensures defaulting payers are treated with respect.
