Nonperforming loans (NPLs) are divided into three categories: bad, unlikely to be paid and past due. The first category includes loans whose interests and principal will not be paid by the borrower. The second one leaves a remote possibility while the third one includes loans with a delay of more than 90 days in payments.
The NPLs are a serious phenomenon in Italy – they amounted to €360bn at the end of 2015, a third of the total outstanding loans. Moreover, half of them are bad loans. Hence, the situation is quite alarming as they are causing lots of troubles to Italian banks.
The Specifics Of Italian NPLs
The NPLs are mainly related to the corporate sector. In Italy, there is a large number of small-medium enterprises, and a significant proportion of them are micro-firms with less than ten employees. These suffered during the crisis of 2008, and some of them defaulted. Furthermore, there is a bigger concentration of NPLs in the southern regions.
There are both macro factors and banks’ specificities which contribute to the increase of NPLs. There is empirical evidence that a decrease in GDP growth and real estate prices, together with an appreciation of the euro have contributed in the past to the development of the phenomenon. Looking at banks’ specificities, the relevant factors were a decrease in profitability (ROE) and an increase in lending.
Finding A Solution
It is necessary to remove uncertainty, improve banks ability to deal with NPLs, strengthen supervision, give tax incentives to write-off NPLs from the balance sheet and create a market for restructuring NPLs.
The Italian government has developed some reforms in this direction. What is more, the Atlante fund was created by the largest Italian banks with a small contribution from the Cassa Depositi e Prestiti, a governmental institution. The aim of this fund is to recapitalise banks in trouble and be the lender of last resort for NPLs junior tranches. The GACS was also created as a mechanism for the securitisation of NPLs in which the senior tranches are guaranteed by the government.
From a legal point of view, there are two possible directions: the enforcement method and the contractual approach. It is clear that the first one supports the second one. If the tranches are the guarantee, it is easiest to sell them in the market even if the market price does not change. That is the logic behind the GACS.
NPLs are negatively affecting the Italian banking sector. A significant number of reforms have been introduced in order to give banks incentives to write-off NPLs from their balance sheets and to form a market for them. Some legal reforms were taken as well to decrease the bureaucracy time. However, all these measures will not solve the problem, only somewhat reduce it. Therefore, stronger aids and reforms will have to be introduced to help the banking sector become stronger.