Npl Non Performing Loan
Question 1:
Most of the financial institutions have the problem of non-performing loans. Basically, the non-performing loans (NPLs) mean that the loans in default, or is close to being in default according to Investopedia. In the contract terms, NPLs indicates the failure to promptly pay interest or principal when due. When the borrowers are unable to meet the legal obligation on making the required payment or are unwilling to honor the debt, the default will be taken place.
With the increase of NPLs, the level of market confidence will be affected. The effect of the banks’ bad-loan problems can be seen at the East Asian crisis which occurred in July 1997. During the crisis, banks’ balance sheets were deterioration due to the increasing of NPLs which showed in the Figure 1 below (Detragiache & Gupta). The problem was started as the deregulation was exercised in the financial markets. A lot of loan borrowings from the private nonfinancial business sector were easily being approved. But, the bank regulators failed to supervise the borrowers as there was a lack of expertise in screening and monitoring the borrowers at banking institutions. Hence, the default loans started to increase and the banks’ net worth (capital) became lesser. The bank would have lesser fund to lend. Then, the economic activity would be reduced due to the lack of funds (Mishkin and Eakins, 2000).
Figure 1: Changes of Non-performing Loans
( Source: Van Dijk and Fitch IBCA database)
In additions, the increase in uncertainty and a decrease in net worth caused a stock market declines. Then, the asymmetric information problems increased. It would become difficult to screen out good borrowers. The adverse selection and moral hazard problems increased seriously. With the increase of these problems, lenders were unlikely to lend out money and led to the decline of investment and the decrease of aggregate economic activity.
Due to the poor business situations and uncertainty about
Most of the financial institutions have the problem of non-performing loans. Basically, the non-performing loans (NPLs) mean that the loans in default, or is close to being in default according to Investopedia. In the contract terms, NPLs indicates the failure to promptly pay interest or principal when due. When the borrowers are unable to meet the legal obligation on making the required payment or are unwilling to honor the debt, the default will be taken place.
With the increase of NPLs, the level of market confidence will be affected. The effect of the banks’ bad-loan problems can be seen at the East Asian crisis which occurred in July 1997. During the crisis, banks’ balance sheets were deterioration due to the increasing of NPLs which showed in the Figure 1 below (Detragiache & Gupta). The problem was started as the deregulation was exercised in the financial markets. A lot of loan borrowings from the private nonfinancial business sector were easily being approved. But, the bank regulators failed to supervise the borrowers as there was a lack of expertise in screening and monitoring the borrowers at banking institutions. Hence, the default loans started to increase and the banks’ net worth (capital) became lesser. The bank would have lesser fund to lend. Then, the economic activity would be reduced due to the lack of funds (Mishkin and Eakins, 2000).
Figure 1: Changes of Non-performing Loans
( Source: Van Dijk and Fitch IBCA database)
In additions, the increase in uncertainty and a decrease in net worth caused a stock market declines. Then, the asymmetric information problems increased. It would become difficult to screen out good borrowers. The adverse selection and moral hazard problems increased seriously. With the increase of these problems, lenders were unlikely to lend out money and led to the decline of investment and the decrease of aggregate economic activity.
Due to the poor business situations and uncertainty about