Nonperforming Loans in CESEE – What Do They Comprise?

This study attempts to shed comparative light on nonperforming loans (NPLs) by analyzing the loan classification systems in ten Central, Eastern and Southeastern European (CESEE) countries, namely Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, Russia, Serbia, Slovakia and Ukraine. Comparing NPL data across countries is often found to be difficult. Three approaches are used to identify a loan as nonperforming. First, the most widely known NPL definition, which is based on the IMF Financial Soundness Indicators (FSIs) Compilation Guide, is simple and clear: “principal or interest 90 days or more overdue.” The IMF strives to present cross-country comparative time series of NPL and other prudential indicators on the FSI website. With respect to nonperforming loans, the FSI website as yet lacks comprehensive data coverage, and comparability is in fact restrained. Therefore, we propose to take stock of national definitions, for which more extensive time series of data are available. Second, national supervisors’ NPL definitions mostly relate to the commonly used credit quality categories proposed by the Institute of International Finance (IIF), whose weakest three categories (“substandard – doubtful – loss”) are typically identified as nonperforming loans. Third, NPL definitions of CESEE and other countries regularly refer to the existence of a “well-defined weakness” of the loan or the borrower in addition to some other factors. Based on these criteria, with priority given to the 90days+ rule, we arrive at an NPL threshold, which includes in some cases NPL bands. We hope this threshold is applicable in such a way that it enables meaningful cross-country comparisons. Finally, the study takes a rough comparative snapshot of the development of NPLs (based on the derived threshold) in the CESEE countries from 2005 to 2010.