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    Central Bank of Ireland on Resolving Non-Performing Loans of SMEs

    October 17, 2019

    The Central Bank of Ireland published a financial stability note that highlights the recent progress of Irish retail banks in resolving non-performing loans (NPLs) of Irish Small and Medium Enterprises (SMEs). The note also provides a breakdown of NPL balances by loan and borrower characteristics; this includes information on loan arrears, forbearance, and sectoral breakdowns. The note examines the relationship between the current NPL ratios and the recent developments in economic conditions at the county and sector levels. The results show that NPL ratios are best suited for analyzing the health of bank portfolios, not economic conditions in a particular sector or region. The note also analyzes aggregate supervisory data, which suggest that the Irish SME NPL ratio continued to fall in the first half of 2019.

    The analysis used loan-level data from AIB, Bank of Ireland, and Ulster Bank to examine the progress in resolving NPLs of Irish SMEs. These three institutions provide 90% of the new Irish bank lending to Irish SMEs. The data include information on each loan’s outstanding balance, performance status, days past due, borrower county, and borrower sector. The note highlights that the NPL ratio of retail banks in Ireland is down substantially from its crisis peak, but remains one of the highest in Europe. The key findings of the financial stability note include the following:

    • 11.1% of Irish SME loan balances at the country’s three main small business lenders were non-performing in December 2018, down from 17.5% in June 2018. Key drivers of this decrease include the clearing of arrears by borrowers and improvement in the expected repayment capacity of borrowers into the future.
    • 4.5% of Irish SME balances have been in arrears for over two years and some loans have been in arrears for up to ten years. 3.9% of balances are non-performing under supervisory definitions, but are not in arrears.
    • NPL ratios are not a reliable guide to economic conditions in a particular county or sector. The NPL ratio within a given segment of the economy can become divorced from current economic conditions due to company liquidations, court proceedings, loan restructuring, loan sales, and new lending. 
    • Aggregate supervisory data suggest that the Irish SME NPL ratio continued to fall in the first half of 2019.


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    Keywords: Europe, Ireland, Banking, SME, NPLs, Financial Stability, Credit Risk, Central Bank of Ireland

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