A distressed lending also issue credit , toxic credit or colloquially lazy credit ( English non-performing loan , abbreviated NPL) is a credit , in which the debtor with the debt service in residue device and therefore, in default of payment located in, so that the credit from Creditors must be adjusted individually .

## General

There is no German legal definition of the term. The term bad credit is common in the banking industry, but it is also commonly used to refer to any debt on which the debtor is in default. Since the designation is of particular importance in banking, the classification under banking law and banking operations is shown. The banking supervisory authority BaFin has defined a loan as non-performing since 2009 if it is “in default or has been written down”. The International Monetary Fund defines a loan as non-performing if there is a delay in interest or principal payments for at least 90 days or if there are good reasons for fear of non-payment in the event of a delay of less than 90 days.

Even with consideration of all possible credit risk -factors ( creditworthiness , credit standing ) during the credit check one can bank or other creditor does not completely rule out that the granted loan at maturity the borrower is not recycled or can be. A loan becomes non-performing if it turns out after the loan has been granted that the scheduled payment of the debt service ( loan interest and repayment ) can no longer be expected. The first indicators for this are overdrafts of the current account without credit line or beyond the credit line, return of direct debits , change in payment behavior , late or incomplete submission of required credit documents ( proof of income , balance sheets ) or an accumulation of requests for information . Other credit events such as cross-default or a significant deterioration in the rating can also be signs of increasing credit risks.

## Demarcation

The umbrella term for all loans for which the timely and complete debt service can no longer be expected is the English distressed debt . These include the Sub-Performing Loans (SPL) and the non-performing loans. SPL: (also English under-performing though or impaired loans) there is a deterioration in the financial situation, but the conditions for are credit termination not yet fulfilled. In particular, there is still a limited payment of the debt service, but possibly not on time.

## causes

The main cause is the significant deterioration in the financial situation or the intrinsic value of the loan collateral in accordance with Section 490 (1) and (3) BGB . In private households, this can be triggered by unemployment , incapacity for work , illness , divorce , uninsured liability for damages , unexpected additional payments ( operating costs or taxes ), excessive debt servicing for loans as a result of over-indebtedness or other general life risks . When companies can corporate crises of illiquidity lead.

## consequences

There are civil and regulatory implications for bad loans.

### civil right

The termination requirements for late payment for installment loans and loans secured by real estate are based on Section 498 (1) and Section 498 (3) BGB. Irrespective of the default in payment, the bank has an extraordinary right of termination. Credit claims of the credit institutions can be terminated without notice and extraordinarily in accordance with Section 490 (1) or (3) BGB in conjunction with No. 26 (2) AGB -Sparkassen or No. 19 (3) AGB-Banken if there is a significant deterioration in the financial situation of the Borrower and / or the loan collateral has occurred or threatens to occur and a reasonable period for the creation or strengthening of loan collateral has passed without success. The focus should be on an existing termination option and not on termination that has already taken place. With these, the borrower has not (yet) been in default of payment.

In the loan agreements , fixed dates for the payment of loan interest and repayment are usually provided. Can the borrower these times because of financial difficulties do not comply, they run automatically - and without warning - according to § 286 para 2 BGB in. Payment default . The non-performing loan status is linked to this fact . In the case of non-performing loans, a loan notice has been given or can be given.

### Banking regulatory law

The Kapitaladäquanzverordnung (abbreviation CRR) requires credit institutions by the legally prescribed risk parameters (especially the default loss rate and its complement recovery rate ) a constant default and loss estimates in the lending business . According to Art. 128 para. 1 CRR are a particularly high risk of associated risk exposures with a risk weight to be considered 150%, which is also under Art. 128 para. 3 CRR for positions with a high risk of loss due to default by the debtor. According to Art. 178 (1) CRR, a default is irrefutably presumed if the repayment of a loan - without the realization of loan collateral - becomes unlikely or a material liability of the debtor is more than 90 days overdue. Any loan collateral may not be taken into account in the default status. If the debt servicing of a loan fully secured by bank balances is more than 90 days overdue, there is a default, even if in this case the recovery rate is 100%. Otherwise, however, a very low recovery rate is an indication of loans at risk of default.

From a regulatory perspective, these regulations mean that banks have to back “bad” loans with more capital than normal loans, and from a banking perspective, the credit risk has increased. The risk policy of credit institutions usually aims at a loan portfolio with acceptable credit risks, so that non-performing loans are sold whenever possible.

Since 2003, credit institutions have been selling more and more credit claims to other financial service providers. In December 2003, Hypo Real Estate -Bank transferred an NPL portfolio of 490 million euros to Lonestar , followed by a further 3.6 billion euros in September 2004. The Deutsche Bundesbank estimated the volume for 2004 at 12 billion euros. Overall, estimates assume that the NPL market in Germany comprised around 300 billion euros in 2012, i.e. 5% of the existing loan volume.

## The banks' options for action

Non-performing loans have as doubtful accounts of credit institutions at the expense of their profit or loss increasing impaired be. In order to avoid or minimize a loss from the credit exposure, banks have the following options when dealing with non-performing loans:

## Accounting

Receivables are considered non-performing if there is a sufficient probability of default . In the case of non-performing receivables, the failure of interest and / or repayments is to be expected, so that debt servicing appears to be endangered. Depending on the type of loan , an individual value adjustment (in the case of a money loan ) or a provision ( loan loan ) must be made. In the case of loans that are overdue or impaired , analytical information must be provided in the annual financial statements in accordance with IFRS 7.37 .

In general, loans can be divided into at least four credit ratings : loans without recognizable default risks, loans that require notification, non-performing loans, and bad loans. Those in need of comment are under special observation, but do not yet require any individual value adjustments, which are only required for those in need. Bad loans are to be completely written off as bad debts . Since the Audit Report Ordinance of November 2009, defaulted loans, for which no individual value adjustment has yet been made, have also been classified as non-performing loans.

## identification number

To determine the non-performing asset parts ( English non-performing assets , NPA), the non-performing loans, non-performing lease receivables and other non-performing interest-bearing products (particularly securities ) added. The value adjustments / provisions made on this are then deducted from the resulting net NPA:

${\ displaystyle {\ text {Netto-NPA}} = {\ frac {{\ text {Non-performing loans}} + {\ text {Leasing receivables}} + {\ text {other interest-bearing products}} + {\ text {non-performing securities }} - {\ text {Value adjustments}}} {\ text {Balance sheet total}}} \ cdot 100 \, \%}$

The higher the net NPA at banks, the higher the risk of a banking crisis .

## meaning

According to a report by the European Banking Authority (EBA), non-performing loans account for 5.6% of total assets in all EU member states, while smaller banks are disproportionately represented with 18%, while large banks only own 4%. The EBA joins for the definition of "non-performing exposure " in its report of the legal definition of failure of the CRR and also includes impaired ( english impaired ) loans and all loans, according to National Accounting are or supervisory regulations as being in default , on bad loans. The NPL rate was highest for non-banks at 10%, 4.8% for private households and only 2.2% for financial institutions outside the credit institutions, it is close to zero for municipal loans ( 0.3%) and credit institutions (0.2%) ). According to country, Cyprus led with a rate of 48.6% , followed by a certain distance by Slovenia (28.4%), Spain (21.5%), Italy (16.7%), Portugal (16.3%), Austria (8.0%), Spain (7.1%) or Germany (3.4%). The Nordic countries Finland (1.7%), Norway (1.4%) and Sweden (1.1%) have the lowest NPL rates .

## The market potential of non-performing loans in Germany

The market potential describes the (estimated) volume of the portfolio of non-performing loans. The volume actually traded deviates significantly downwards, as the banks in the past regularly only actually sold a small proportion of their non-performing loans. The expansion of the terminology of the non-performing loan since 2009 tends to lead to a higher number of non-performing loans. The figures since 2009 are therefore only partially comparable with the historical volumes. The market potential for non-performing loans since 2003 in Germany developed as follows:

year volume
2003 227 billion euros
2004 211 billion euros
2005 190 billion euros
2006 158 billion euros
2007 135 billion euros
2008 141 billion euros
2009 200 billion euros
2009 210 billion euros
2010 210–225 billion euros
2011 250 billion euros

## Worldwide non-performing loans market potential

The global market potential of non-performing loans is predominantly an expression of the national creditworthiness of the debtor.

The European Banking Authority (EBA) regularly publishes data on non-performing loans in the European Union (EU). It shows a volume of non-performing loans of 813 billion euros for the end of 2017.

 State in the euro area Total non- leading loans (€ billion) NPL share (%) as of December 31, 2017 Belgium 17.4 2.6% Germany 49.6 1.9% Estonia 0.4 1.7% Ireland 22.9 10.4% Greece 100.8 44.9% Spain 106.2 4.5% France 135.5 3.1% Italy 186.7 11.1% Cyprus 16.8 38.9% Latvia 0.2 2.3% Lithuania 0.6 2.8% Luxembourg 1.0 0.7% Malta 0.5 3.5% Netherlands 38.3 2.3% Austria 17.3 3.7% Portugal 30.7 15.2% Slovenia 1.8 10.5% Slovakia 1.3 3.4% Finland 2.2 1.5%

France In 2008, loans amounting to around 50 billion euros were considered non-conducting. In 2009 this value rose to around 80 billion euros and by 2010 to around 88 billion euros. At the end of 2017, the EBA put the value of emergency loans for French banks at 135.5 billion euros.

Italy As in other countries, the volume of non-performing loans has risen sharply in Italy since the crisis year 2008. In 2008 it was 40 billion euros and in 2010 it was 80 billion euros. At the end of 2017, the EBA put the value of emergency loans for Italy's banks at € 186.7 billion.

Spain In 2008, loans amounting to around 70 billion euros were considered non-conducting. In 2009 this value rose to approx. 100 billion euros, in 2011 to approx. 130 billion euros. By the end of 2017, the sum had shrunk to 106.2 billion euros.

United Kingdom While in the years 2001 to 2006 the volume of NPLs was below 40 billion euros, this figure was around 50 billion euros in 2007 and rose in 2008 and 2009 to over 80 billion euros and almost 160 billion respectively Euro. In 2010 and 2011 similar values ​​were recorded with volumes of around 160 billion euros.

China Since only a few Chinese banks are subject to European or US stock exchange or statutory disclosure requirements, only a minority publishes data on loan defaults. Estimates range from $400 billion to$ 572 billion.

USA The market potential for 2012 is estimated at around 300 billion US dollars.

## literature

• Richard Scholz: Transaction management in the sale of individual receivables and portfolios: bidding process due diligence purchase agreement . In: Richard Scholz, Stefan Hofmann (eds.): (Partial) outsourcing of non-performing loans . Finanz Colloquium Heidelberg, Heidelberg 2006, ISBN 3-936974-35-7 , p. 239-343 .

## Individual evidence

1. Article from January 25, 2009 Unknown poison in the Tagesspiegel
2. Methodological explanations of the IMF ( Memento of the original from June 19, 2012 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice.
3. BaFin Annual Report 2010, p. 169
4. ^ Alfred Jahresig / Hans Schuck, Handbuch des Kreditgeschäfts , 1975, p. 295
5. Peter Rösler / Thomas Mackenthun / Rudolf Pohl, Handbook of Credit Business , 2002, p. 891
6. Alfred Jahresig / Hans Schuck, Handbuch des Kreditwesen , 1975, pp. 301 ff.
7. Nicholas Richter, Possibilities and Limits of Distressed Debt Investing in Germany , 2006, p. 12
8. ^ Robert Froitzheim, Non Performing Loans (NPL) in Germany , 2006, p. 38
9. Günther M. Bredow / Hans-Gert Vogel, Loan Sales in Practice - Cases of Abuse and Current Reform Approaches , Working Paper Series 82, 04/2008, April 2008, p. 3
10. Mirja Tieben, The three-pillar system of the banking market as a regulatory control resource , 2012, p. 360
11. ^ Deutsche Bundesbank, Financial Stability Report , November 2005, p. 67
12. Mirja Tieben, The three-pillar system of the banking market as a regulatory control resource, 2012, p. 360 FN 1
13. Hartmut Bieg, bank accounting according to HGB and IFRS , 2011, p. 408
14. ^ IDW Institut der Wirtschaftsprüfer , BFA statement 1/1978: On the final examination at credit institutions , in: WPg 1978, p. 490
15. ^ IDW Institut der Wirtschaftsprüfer, BFA statement 1/1978: On the final examination at credit institutions , in: WPg 1978, p. 490
16. European Banking Authority of November 24, 2015, Report - 2015: EU-wide transparency excercise , p. 7
17. European Banking Authority of November 24, 2015, Report - 2015: EU-wide transparency excercise , p. 25
18. European Banking Authority of November 24, 2015, Report - 2015: EU-wide transparency excercise , p. 26
19. BaFin Annual Report 2009, p. 154
20. page no longer available , search in web archivesInfo: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice. (PDF; 6.5 MB). EY , p. 36.
21. PWC, In 2011 there will be movement in the market for non-performing loans
22. RISK DASHBOARD DATA AS OF Q4 2017 . In: European Banking Authority (EBA) , Department Oversight - Risk Analysis Unit
23. At the crossroads - Real estate non-performing loan investor survey ( Memento of the original dated June 16, 2012 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. (PDF; 1.6 MB). EY, p. 26.
24. A growing non core asset market - European outlook for non core and non performing loan portfolios ( Memento of the original from October 30, 2012 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. (PDF; 6.2 MB). PricewaterhouseCoopers, p. 14.
25. James Seward: Are China's Banks having a "good" crisis? blogs.worldbank.org.
26. Bad loans - China is also threatened with debt chaos . In: Focus Online , June 28, 2011.
27. At the crossroads - Real estate non-performing loan investor survey ( Memento of the original dated June 16, 2012 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. (PDF; 1.6 MB). EY, p. 14.