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Non-Performing Loans and the EBA Considerations

Is your bank struggling with NPL management? Find out how to tackle it effectively in this latest blog.


Experienced regulatory consultant with 25+ years in Financial Services. Versatile in Compliance, Conduct Risk, and Programme Management across all lines of defense.

Neil Jones
Managing Consultant

A revisit of Non-Performing Loans and the EBA Considerations

The European Banking Authority (EBA) has drawn significant attention to non-performing loans (NPLs) in recent years, following a series of Europe-wide banking financial crises in the last decade. The EBA issued its final guidelines on the management of non-performing and forborne exposures in 2018/19.

Reminder: NPLs are loans where the borrowers are not fulfilling their financial commitments to repay in accordance with their contractual agreements.

In this article, we revisit some of the key challenges NPLs present within a bank's risk and controls framework. These key steps have become our clients' major success factors in ensuring their NPL portfolios are managed appropriately, allowing both the Banks and the impacted consumers to achieve good outcomes.

To find out about how we can support you, contact us and speak directly to one of our experts.

Is your bank struggling with NPL management? Here’s how to tackle it effectively:

1. Define Your NPL Strategy
Assess the impact on BAU teams, including resourcing and capacity. Identify which NPLs are involved and ensure your review and remedial solution align with the bank’s broader strategies. Implement initial and ongoing enhancements to manage NPL populations.

2. Segment the Portfolio
Identify key factors across the lending portfolio and categorise them into broader loan groups, considering performance status, borrower characteristics (including; age,  person or business etc), collateral details (location and type), and loan-to-values (LTVs). Effective data collation, management, and reporting are critical.

3. Discovering the Path to ‘Recovery’ or ‘Exit’

  1. Recovery: Explore work-out options to maintain lending, such as restructuring loans (either differing terms or new lending against alternative equity), repossession (as a last resort, taking back the asset with the borrowers constent to redeem the loan), out-of-court settlements (a variance on the restructuring INSOL principles), and cash settlements (either disposal of the underlying asset of alternative assets or cash resources available to borrower).
  2. Exit: When no economic work-out options are available, consider moving to insolvency (following appropriate activities to liquidate the asset through formal administration and disposal), in-court restructuring, or enforcement actions (if the borrower is being uncooperative).

4. Align the BAU Team Target Operating Model (TOM) to NPL Solutions
Ensure that the BAU teams' considerations align with the new NPL TOM and the bank’s wider strategy. Temporary operational changes for the NPL solution should be reverted or absorbed into BAU once implemented. Apply learnings to future NPL management, such as earlier borrower intervention to limit NPL inflow.

5. Develop Policies, Procedures, and Oversight
Create, review, or amend policies to incorporate the bank’s approach to NPL management. Update Standard Operating Procedures (SoPs) accordingly as related policies are revised. Establish oversight and reporting approaches for future NPL portfolio management and new NPL inflow.

6. Measure, Monitor, and Adapt Strategies
It is crucial to ensure you regularly measure the impact of changes on consumers and the bank’s loan books. It is important to consistently monitor both the NPL solution and new BAU NPL inflow to manage risks effectively. Adaption of new strategies based on ongoing robust feedback through effective governance mechanisms is crucial. This is not a once and done exercise, instead you should facilitate ongoing strategy development and benefit from lessons learned.