Non-Performing Loans (NPLs) and Secured Loans are terms from the field of banking and credit risk management. Let me explain how these terms come about and what they mean.
Non-Performing Loans (NPLs):
Non-performing loans are loans where the borrower no longer meets the agreed interest or principal payments and is therefore in default. A loan is classified as “distressed” or “non-performing” if the borrower has failed to meet its payment obligations for a specified period of time, which may vary by country and jurisdiction. This can happen due to financial difficulties, bankruptcy or other reasons.
Such loans can become a problem for banks and lending institutions as they increase the risk of default and credit losses. Managing NPLs often requires specific actions, such as restructuring loans or taking legal action to recover the outstanding amounts.
Secured Loans:
Secured loans are secured loans where the borrower provides assets as collateral for the loan. These assets can be, for example, real estate, vehicles, securities or other valuable items. The provision of this collateral gives the lender (usually a bank or credit institution) the opportunity, in the event of a default by the borrower, to use the collateral to pay off the outstanding debt.
Secured loans provide lenders with a level of security as there is less chance of losses in the event of a default when the loans are backed by sound collateral. Borrowers can benefit from secured loans as they often offer lower interest rates and can be more accessible, especially if the borrower has valuable assets.
Kerstin Bontschev: In summary, non-performing loans are credits for which the agreed payments are no longer made and are therefore considered “non-performing”. Secured loans are loans backed by assets to minimize the risk of default.
Banks sell such NPL*s to investors, what is the advantage for banks and for the investor?
The sale of non-performing loans (NPLs) and secured loans from banks to investors has different backgrounds and motivations. Let me explain to you why banks sell such loans and what the buyers do with them.
Background to the sale of NPLs and secured loans by banks:
- Risk Reduction: Banks want to minimize their credit risk. When borrowers default and NPLs arise, the risk of losses for the bank increases. By selling NPLs to external investors, banks can reduce the risk of future defaults and free up their balance sheets.
- Liquidity requirement: Banks often need liquidity to sustain their operations. Selling delinquent loans allows banks to quickly raise capital without having to wait for the loans to be repaid.
- Regulatory requirements: Regulators can require banks to clean up their balance sheets and deleverage distressed assets to improve their financial stability. Selling NPLs can help meet these regulatory requirements.
What Buyers Are Doing With NPLs and Secured Loans:
- Specialized Investors: Investors who specialize in buying NPLs can acquire these loans at a discount and then use various strategies to generate returns. This includes restructuring the loans, negotiating new repayment agreements with the borrowers or even enforcing the claims in court.
- Receivables management: Investors can purchase NPLs and Secured Loans to operate receivables management. You can try to find repayment solutions with the borrowers and agree on payment plans.
- Realization of collateral: With secured loans, investors have the option of realizing the collateral provided if the borrower defaults on payments. This may include the sale of real estate, vehicles or other assets.
- Yield: Investors can take advantage of the discounts on the notional amounts of the loans and seek to make a profit by successfully recovering the outstanding amounts and/or realizing the collateral.
Kerstin Bontschev: In summary, the sale of NPLs and secured loans allows banks to reduce their risk and generate liquidity, while investors have the opportunity to benefit from the servicing and recovery of these loans.
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2023-08-25 10:05:31
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