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Nonperforming Loan Disposals Without Resolution

Author

Listed:
  • Ben Charoenwong

    (National University of Singapore Business School, Singapore 119245, Singapore)

  • Meng Miao

    (Renmin University of China School of Finance, Beijing 100872, China)

  • Tianyue Ruan

    (National University of Singapore Business School, Singapore 119245, Singapore)

Abstract

Using proprietary data on nonperforming loan (NPL) transactions in China, we document that banks conceal NPLs in disposal transactions that are supposed to resolve NPLs. In these transactions, banks provide financing and retain the credit risks and debt collection obligations. Transaction prices contradict underlying credit risks: Despite being delinquent for 4.5 years, the median NPL package is sold at face value with zero haircut. The majority of NPL packages are resold at a premium to banks’ non–government-owned borrowers, further supporting the concealment view. Banks under stricter regulation conceal NPLs more and engage in more illicit concealment. NPL-concealing banks increase zombie lending, suggesting that an ineffective resolution exacerbates credit misallocation. Recognizing the hidden NPLs implies the total NPLs in China is two to three times the reported amount.

Suggested Citation

  • Ben Charoenwong & Meng Miao & Tianyue Ruan, 2025. "Nonperforming Loan Disposals Without Resolution," Management Science, INFORMS, vol. 71(1), pages 898-916, January.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:1:p:898-916
    DOI: 10.1287/mnsc.2022.02163
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