The Reditus ecosystem surrounds loans such as Non-Performing Loans (NPLs), as mentioned in previous articles — but what exactly are NPLs?
What is an NPL?
NPL is a classification for loans which are in default or in arrears on scheduled payment of principal or interest on the ledger of financial institutions. When a borrower is not able to pay the agreed installments or interests to the lender within 90 days, the loan will be considered non-performing. These are also known as ‘bad debts’.
How big is the NPL market?
Many people do not realise this, but according to the European Banking Authority, there is almost €780 billion worth of NPLs in the European economy alone. This alone indicates the huge and underrated NPL market which individuals could possibly be missing out on, due to difficulties in participating in the traditional bonds market.
In 2018, according to the International Finance Association (IIF), global debt reached a record high of US$247 trillion in the first quarter of this year. With an extremely high debt-to-GDP ratio at 318%, it indicates that the economy is unable to produce and sell goods and services sufficiently to pay back debts without incurring further debt. This implies that the size of bad debts in the economy is ample to result in a cumulative effect on debts incurred, slowing down the entire economic growth.
Referring to a recent statistics in 2017, a worldwide average of 7.21% of bank loans are NPLs. Specifically in South Korea alone, the amount of bonds issued has reached KRW600 trillion as of end-2017. This number excludes personal loans and account receivables which official statistical data are difficult to collect. Adding on, the rate of increase of bonds in S. Korea is expected to be similar to the global environment.
So, what causes NPLs?
NPLs are a result of many variables in the economy, ranging from behavioural factors to market changes.
Many NPLs are caused by debtor’s short-sighted decisions. Most debtors, when in need of cash, would opt for a loan without too much consideration for the future such as if they would be able to pay the loan off within the indicated period. This behaviour and mindset could also be caused by the desire to have a higher standard of living, without taking into account their personal financial capabilities. As a result, many debtors are unable to pay off their debts, resulting them to be labeled as NPLs.
We could potentially see an increase in this as firstly, it is a cultural behaviour, which means it would be difficult to change, and secondly, this is the social media age where people are obsessed with showing off their wealth and success online, leading to more competition and people turning to different methods to increase their temporary wealth.
Sudden market changes
When situations in the market change abruptly, such as an increase in prices of products due to shortages or greater demand, it will result in debtors having less money to pay off their loans, and eventually turning their debts into NPLs.
Real Estate Changes
The real estate market and mortgages are closely connected. When prices in the real estate market drop, this means that houses now sell for less. This leads to decreased recoups of creditors, having to seize properties from defaulted loans. Creditors now lose more money than making it, resulting in NPLs.
To decrease the possibilities of debts turning into NPLs, banks have to adjust loan rates and terms to the current market efficiently. They also have to be discerning enough to consider their debtors’ profiles. Banks which perform poorly in this aspect will create more NPLs.
With all these causes of NPLs, it is inevitable for NPLs to happen in an ever-growing economy and changing markets. Even in such markets, there are always investment opportunities and for individuals to be a part of it. It used to be difficult in the traditional market, but not anymore today.
How can you benefit from the NPL market with Reditus?
In a traditional market, NPLs would be available for trading and liquidation through a bond market. However, it would take a lot of time, due to legal procedures, and creditors tend to have to bear financial losses, due to selling the entire receivable (NPL) at a discounted price against its value.
Additionally, the barriers to entry in the traditional bond market is high due to many factors, one of which is a high amount of minimum investment would be required and most individuals looking for investment opportunities may not be able to afford. It is also important to note that while there are high barriers to entry, the revenues generated from normal bonds management are typically higher than other financial investments, which results in a high demand to be exposed to this market.
However, Reditus introduces convenience and lowers the barriers to entry by allowing creditors to tokenize their debt agreements on the Receivables Management System (RMS), secondary creditors to come in and easily trade these tokenised receivables. Paired with a debt collection agency, trading receivables and recovering loans have never been easier.