The decrease in Non-Performing Loans in Italy

The deep and prolonged recession that recently hit the Italian economy and the slow procedures for debt collection contributed to determine a high level of Non-Performing Loans (NPL) in the Italian bank system.

The stock of non-performing loans in Italy started a reduction phase in 2016. In most recent years, in fact, there was a considerable improvement both in debt collection capacities of Banks and with regard to the probability of default.

This positive trend can be ascribed to the increasing awareness of credit institutions on the management of credit and to the effect of the closure of operations concerning the transfer of NPLs through different instruments.

The analysis carried out (based on statistical data of the Bank of Italy) clearly shows this trend.

In particular, the amount of non-performing loans in Italy in quarter 3, 2017 was equal to € 274 billion.

Analysing the trend of NPLs in quarter 3 of years 2015, 2016 and 2017, as already mentioned, a considerable decrease in the stock of non-performing loans can be observed, from € 340 billion to € 274 billion.

The clustering of data divided by region and by economic event[1] shows that the decrease is mainly due to the decline in probable default and in bad debts, partly transferred to specialized operators or to investors, and their subsequent exit from the financial system.

It can also be noted that bad debts, though they have reduced considerably in their absolute value, represent the most significant part of NPLs, equal to 58%, 60% and 62% of  total non-performing loans registered, respectively, in quarter 3 2015, 2016 and 2017.

In such a macroeconomic landscape, in January 2018, the Bank of Italy published the final version of the Guidelines for Less Significant Italian banks concerning the management of non-performing loans, in line with the "Guidance to banks on non-performing loans" addressed to Significant banks published by the Single Supervisory Mechanism on 20 March 2017.

The document is not binding, though it represents the expectations of the Single Supervisory Mechanism on the management of NPLs and invites so-called Less Significant banks to formalize and implement a strategy to optimize the management of NPLs, and invited the so-called “Less significant” banks to formalize and adopt a strategy to optimize their management, to be integrated in the business strategic and management processes, and aimed at maximising the value of collections. Therefore, it will be necessary to implement short and middle/long period operating plans aimed at a significant reduction in NPLs.