Not surprisingly, the longstanding economic crisis in the whole European area has been seriously affecting credit quality. Following the 2008/09 period, non-performing loans (NPLs) increased rapidly across Central and Eastern European (CEE) countries (from 3.5% before the crisis to over 11% at the end-of 2011 in regional average). The asset deterioration continues in a large number of countries, particularly in South-Eastern Europe (SEE) where the recovery is still late and weak.
NPL ratios are continuing to increase in South-Eastern Europe (7.3% on average in Q1 2012, showing an additional 2.5% compared to 2009). In Romania, Q1 2012 figures for NPL ratios show the worst values in the region: 20.1% from 15.6% in 2011 and 7.2% in 2009.
In terms of recovery actions,at European level, banks are more oriented towards adjusting payment terms – generally avoiding interest capitalization or refinancing – rather than towards selling NPL portfolios or enhancing collection activities, which are still relatively rare.
In times of economic slowdown, efficient portfolio & workout management becomes a key profitability driver. A sophisticated management of non-performing loans means building a mechanism able to take into account a variety of parameters, each oriented to answer to a specific need, and creating portfolio segmentation consistent with the internal strategies of customer and risk management.
EUROGROUP CONSULTING and ENSIGHT MANAGEMENT CONSULTING have developed an approach which is based on a four-step process, aiming at offering banks the opportunity to make decisions coherent with both commercial and risk purposes:
A. Well-based portfolio segmentationis a key factor to early manage complexity and ease the further steps.
EUROGROUP CONSULTING has developed an evaluation model that, starting from the assets analysis and taking into account several variables, permits to categorize in detail the “non-performing loan” portfolio. The proposed segmentation is oriented to identify clusters of loans and their related value, and supports the creation of an action plan for each family. Although historical collection data is important, each model must be fine-tuned with specific environmental parameters reflecting standard typologies of client behavior. The NPL portfolio valuation model is based on probability, time and percentage of recovery, as well as on the characteristics of the economic environment.
B. NPL management strategy must be pragmatically defined, cost-effective and result-driven.
The definition of a NPL management strategy should start with the analysis of the external environment and continue with the cost/revenues structure and collection team efficiency review. Only based on this, the future solutions should be determined and prioritized.
C.Collection processes, both internal and external, deserve a typical “total quality” approach, always looking for enhancements and better achievements.
A disciplined, rigorous collection process can bring a significant degree of performance improvement, orchestrating physical and virtual channels through accurately defined activities. In addition to this, many organizations possess significant opportunities of untapped performance due to a variety of factors, such as: multiple and under-integrated systems and vendor relationships, product silos, ineffective processes and procedures or underutilization of effective performance metric analyses, effective preventative measures or collections and recovery technology. An integrated view of all the involved factors helps building excellence in bad debt management.
To strengthen the NPL management system, key activities concern operational, technological and quantitative review of the overall collection process, while follow up actions are typically implemented in order to enhance standardization and automation of the system.
D. Performance monitoringis fundamental in order to identify the optimum strategy, providing a rapid adaptation to dynamics of environment and to changes of portfolio characteristics.
The financial system has introduced the so-called Bad Bank resolution tool to separate and manage bad assets from good assets. Bad Bank solutions can be defined according to their legal structure and balance-sheet de-consolidation.
In order to set up a proper Bad Bank structure, an extensive plan is needed based on: pools definition, regulatory framework, strategic and economic impact and operating dimension. The process of building such a structure should be based on a thorough analysis and would include: assets selection, legal structure review, evaluation (business case), capitalization methods analysis and organizational structure review.
