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Key Outlines

To understand:
Non-Performing Loans
How non-performing loans affect banks
What banks do with non-performing loans
Banks non-performing loans in Malaysia
Factors influencing Non-Performing Loans
in Commercial Banks
Identifying Non-Performing Loans in Banks
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What Are Non-Performing Loans?(1/2)

• A non-performing loan, or NPL, is one that is in


or close to default. This typically happens when
principal and interest payments on the loan are
overdue by 90 days or more.
• Non-performing loans are generally considered
bad debt because the chances of repaying the
loans are minimal.
• The more non-performing loans a bank has on
its books, the more its stock price is likely to be
affected.

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What Are Non-Performing Loans? (2/2)

• When banks lend out money, they do so with


the hope that borrowers will make their
payments as scheduled.

• But that doesn't always happen. Sometimes


borrowers run out of money or fall into
situations where they can't repay their debt, and
that's how non-performing loans become a
problem for so many banks.

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How non-performing loans affect banks (1/2)

• A large percentage of non-performing loans can affect


a bank negatively, but it can also affect outside would-
be borrowers.

• When loans become non-performing, banks stop


collecting interest on them, which is how they make
money.

• When a bank has too many non-performing loans on


its books, it doesn't just lose money, but it also has less
money available for new loans, which can leave
prospective borrowers with fewer options.

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How non-performing loans affect banks (2/2)

• Banks with a large amount of non-performing loans


relative to their total assets are also a less attractive
stock investment than those whose books paint a more
favorable picture.

• If a bank's percentage of non-performing loans


increases, it could cause its stock price to go down.

• Banks that see an increase in non-performing loans


should reevaluate their lending practices and take steps
to better vet their borrowers to protect their own best
interests and those of their stockholders. 

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What banks do with non-performing loans (1/2)

• There's always technically a chance that a debtor will


start making payments again on a non-performing
loan, but most of the time, it doesn't happen.

• Banks that hold non-performing loans have the option


to take steps to recover what they're owed.

• For loans that are backed by specified assets, banks


can pursue avenues such as foreclosure for homes and
repossession for vehicles.

• For loans that aren't backed by specified assets, banks


often have a harder time recouping what they're owed.
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What banks do with non-performing loans (2/2)

• Banks also have the option to sell non-performing


loans to outside investors or collection agencies.

• With the latter, what typically happens is that the debt


is sold at a reduced price to the agency, which then
attempts to collect that debt and make money on non-
performing loans that are eventually repaid.

• Banks can also partner with collection agencies, which


often agree to pursue bad debts in exchange for a
percentage of whatever amount is recouped.

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Banks non-performing loans in Malaysia (1/3)

• Malaysia: Non-performing loans as percent of all bank


loans: For that indicator, The World Bank provides
data for Malaysia from 2005 to 2018.

• The average value for Malaysia during that period was


3.61 percent with a minimum of 1.46 percent in 2018
and a maximum of 9.39 percent in 2005.

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Banks non-performing loans in Malaysia (2/3)

• The percent non-performing loans in Malaysia reflects


the health of the banking system.

• A higher percent of such loans shows that banks have


difficulty collecting interest and principal on their
credits.

• Consequently, that may lead to less profits for the


banks in Malaysia and, possibly, bank closures.

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Banks non-performing loans in Malaysia (3/3)

• Definition: Bank nonperforming loans to total gross


loans are the value of nonperforming loans divided by
the total value of the loan portfolio (including
nonperforming loans before the deduction of specific
loan-loss provisions).
• The loan amount recorded as nonperforming should be
the gross value of the loan as recorded on the balance
sheet, not just the amount that is overdue.

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Factors Influencing Non-Performing Loans in


Commercial Banks (1/5)
• Standard of living

• Economy of the country

• Consumers’ income

• Bank interest rates

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Factors Influencing Non-Performing Loans in


Commercial Banks (2/5)
• Standard of living:

• The reason underlays this argument is that nowadays, products


such as electronic goods like Smartphones – Samsung products
such as Samsung Galaxy series, Note series, and Apple
products like – I Phone, I Pad, etc – are rampantly available and
highly used in daily life.
• This phenomenon has set off a continual upgrading of the
function, usage, design of the products by the producers on an
annual basis to be launched in the following year as brand new
versions.
• As the result, customers will keep purchasing the newest
version of smartphones available in the market every year
which affect loan repayment.
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Factors Influencing Non-Performing Loans in


Commercial Banks (3/5)
• Economy of the country:

• There are four main categories under the economic system,


traditional economy, market economy, mixed economy, and
lastly command economy.
• In traditional economy, the consumer follow their own opinion
or decision to purchase goods and services, and hardly follow
the decision of the government.
• At the same time, the suppliers can decide the types and
quantity of the products to produced and determine the best
production method to be applied. In a market economy, the
price of goods and services are not controlled or subsidized by
the government. Governments is only in charge on creating a
stable economy for the market to operate properly.
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Factors Influencing Non-Performing Loans in


Commercial Banks (4/5)
• Consumers’ income:

• Customer’s income has a direct relationship with non-


performing loan. If the customer’s income is either
low or high and, they need to purchase a house and a
cars they might require borrowing money from the
bank.
• But at the same time, the loan might go default easily
because the spending is higher than the earnings.

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Factors Influencing Non-Performing Loans in


Commercial Banks (5/5)
• Bank interest rates:

• Bank Interest rate can generally be defined as the


profit of the bank earned from the customers by
borrowing the customers’ money.
• Usually, pressure on businessmen and households –
comes from the interest rate accruing in their loans,
mortgage and credit cards.
• If the interest rates have decreased, the consumers will
refinanced their house to get a lower interest rate on
their mortgage loan, for more affordable housing
payment.
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Other Factors Influencing Non-Performing Loans


(1/2)
• Choosing the wrong customer:
• The most frequent cause of NPL is due to choosing the
wrong customer at the time of loan sanction.
• In many cases banks fail to identify the right customer
and take wrong decision in customer selection.
• This chance is taken by the habitual defaulter. They
take loans from the bank with the intention of not to
adjust or repay the loan.
• This type of customers divert fund from their business
to use it outside regular business. Mostly the diverted
fund is used for fixed investment which could not
generate income for the payment of loan interest.
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Other Factors Influencing Non-Performing Loans


(2/2)
• Aggressive, unscrupulous and target oriented banking:

• Aggressive, unscrupulous and target oriented banking


indirectly increases NPL.
• The bankers do not scrutinize and fine tune the loan
file due to pressure of achieving target. The unhealthy
and bad competition and practices are exercised
between the banks and between the bankers.

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Identifying Non-Performing Loans in Banks (1/4)

• The recurring role of asset quality problems in


triggering financial crises has shined a spotlight on
crisis prevention measures, including the need to
ensure the timely identification and measurement of
NPLs.
• In Asia and the LAC region, regulatory asset
classification frameworks play a key role in the NPA
identification process.
• While the number of risk buckets used varies across
sampled jurisdictions, one common feature is that the
most severe classification categories are typically
considered as NPA proxies.
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Identifying Non-Performing Loans in Banks (2/4)

• Accounting standard setters play an important role


in the NPL identification and measurement process
• Applicable accounting standards prescribe the
financial asset valuation principles, which form the
basis to determine whether an exposure is “impaired”,
and to set the requisite provisions needed to absorb
losses.
• For banks, the reported stock of impaired assets and
associated provisioning requirements can heavily
influence their published financial statements, which
are used by market participants to assess an
institution’s credit risk profile, earnings performance
and future prospects.
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Identifying Non-Performing Loans in Banks (3/4)

• Supervisory authorities typically supplement


accounting standards with different forms of
regulatory guidance
• One reason why supervisory guidance may be
necessary is because accounting standards are
principles-based and are applicable to all industries,
not just banks
• In practice, it means that banks – whose main area of
focus remains the origination, identification and
management of credit risk – might require more
detailed guidance than what is provided under
applicable accounting standards.
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Identifying Non-Performing Loans in Banks (4/4)

• The supervisory application of NPL identification


and measurement requirements entails significant
judgment
• While national authorities typically prescribe both
quantitative and qualitative criteria, the extent to
which supervisors rely on past-due or qualitative
criteria can materially impact when an exposure is
placed on NPL status.

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Preventing Non Performing Loan 1/2


Character – Specific Purpose of Loan and Serious
Intent to Repay Loan
Capacity – Legal Authority to Sign Binding Contract
Cash – Ability to Generate Enough Cash to Repay
Loan
Collateral – Adequate Assets to Support the Loan
Conditions – Economic Conditions Faced By
Borrower
Control – Does Loan Meet Written Loan Policy and
How Would Loan Be Affected By Changing Laws and
Regulations
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Preventing Non Performing Loan 2/2


Putting sound credit risk management in place.
Set up experience debt management recovery
committee.
Avoid bad lending practices (e.g. overvaluing assets
pledge as collateral).
Regular review of the borrowers financial
statements (e.g. cash flow statement) to monitor
capacity to pay.

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Quick Quiz
Explain Non-Performing Loans
How does non-performing loans affect banks?
What do banks do with non-performing loans?
Describe banks non-performing loans in Malaysia
What are the factors influencing Non-Performing Loans in
Commercial Banks?
How to Identify Non-Performing Loans in Banks?

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END

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