ELECTRONIC transaction platforms can help reduce non-performing loans (NPLs) and prevent them from undermining bank lending and the recovery in developing countries, according to experts from the Asian Development Bank (ADB).
In an Asian Development Blog, ADB Economic Research and Regional Cooperation Department Director for Regional Cooperation and Integration Cyn-Young Park and East Asia Department Finance Sector Specialist Peter Rosenkranz said NPLs in Asia’s developing countries were “persistently high.”
Park and Rosenkranz said NPLs held by banks in Asia totaled $794 billion at the end of 2021, according to official figures. This increased from $766 billion in 2020 and $692 billion in 2019.
“To avoid rising non performing loan ratios, diminishing bank lending capacity and worsening economic performance, it is important to strengthen the way nonperforming loans are repaid or resolved,” the authors said.
Potential policy support, the ADB experts said, could lead to the establishment of a nonperforming loan transaction platform in the region—or a network thereof—that features common standards.
“Setting regional standards to support cross-border transactions could maximize the reach of the nonperforming loan transaction platform and enhance its effectiveness,” they said.
Park and Rosenkranz said e-transaction platforms can reduce impediments when resolving or repaying NPLs. Some of the known impediments include a limited number of active investors and scarce information around market prices and volumes.
The authors also said the institutional environment plays an important role, with poor legal framework legislation, weak collateral enforcement and insolvency proceedings adding to the market imperfections.
These impediments create gaps, Park and Rosenkranz said, between the price investors are willing to pay and the price banks are willing to accept for NPLs.
“E-transaction platforms for nonperforming loans can address some of these market impediments more efficiently. Such platforms would create an online marketplace, bringing together buyers and sellers in the digital space, and help information flows,” Park and Rosenkranz said.
The authors explained that e-transaction platforms can improve information flows since sellers would have more knowledge about the value of assets being sold.
This can be done, the ADB experts said, through data review, validation, and warehousing functions. Standardized NPL data templates, they said, can help enhance granularity, quality, transparency, and comparability of NPL information accessed by potential investors.
Park and Rosenkranz also said e-transaction platforms can also make resolving NPLs more efficient and less costly. They said anecdotal evidence estimates that e-platform operators could offer a 55 percent to 90 percent reduction in processing time.
“Small investors could also find it easier to join this marketplace, helping broaden the investor base. Pricing mechanisms can also be facilitated through e-platforms, improving pricing efficiency,” they said.
The ADB experts also said e-transaction platforms can attract foreign investors. There are e-trading platforms in the European Union that facilitate both domestic and cross-border trades of nonperforming loans.
However, the authors said, existing nonperforming loan markets in Asia remain dominated by domestic players. There are legal impediments such as restrictions of foreign ownership.
The authors said there is a need to create the enabling legal framework and infrastructure to use e-transaction platforms in resolving NPLs.