One of the think tanks of the European Parliament, the Economic Governance Support Unit, has been periodically publishing a number of reports and briefings on the state of play of Non-Performing Loans (“NPLs”) in the European Union. The authors of the report have broken down the various EU countries in three broad groups: “Low level of NPL and no significant increase throughout the crisis”, “Relatively low level, after a significant increase during the crisis” and “High level of non-performing loans.” It takes but a glance at the details of the relevant groups, to realize that the exact same categorization would be followed had we decided to break the various countries down in geographic terms: North-Western, North-Eastern and Southern Europe. Indeed, southern European economies are still rocked very hard by the wake of the financial crisis, with Greece, Cyprus, Portugal and Italy, being the ones that stand out for all the wrong reasons by being the worst performers of the “High level of non-performing loans” group.
The catch-22 here is that high unemployment weakens domestic demand and may lead to brain-drain which makes it all the more unlikely to fuel growth through exports, thereby leading to weak, real GDP growth. Conversely, high NPL levels reduce profitability by increasing banking costs and tying capital up, which impacts credit supply and ultimately growth.
It is therefore imperative, not just for the banks, but for the stability of the economy as a whole, that NPL reduction be treated as the absolute number one priority of every banker.
The treatment may differ from country to country, owing to differences in the quality of the supervisory and legal frameworks, as well as the idiosyncratic bank lending practices. In the absence of a European approach to the development of secondary markets of NPLs (due by the summer of 2018) and exempting any extreme cases that are beyond salvation, it is very common for banks to attempt to restructure any NP (or about to become NP) business loans in their portfolio. The first step to such an attempt is usually for the banks to request that an independent advisor perform an IBR of the organization that is about to have their loans restructured. This is mainly because the mere fact that a borrower has -or is about to- defaulted on their loan sends most bankers into a panic frenzy. Note that I am not taking sides here: For every banker that I have met that is afraid of taking responsibility for their actions, I have also met an equal number of entrepreneurs that are incapable of effectively running any table-game business (let alone a real one). Conversely, I have met an equal number of highly competent individuals on both sides of the deal.
They say that when glass breaks, it is impossible to glue back together without visible marks. Well I say, what if we recycle both broken pieces, melt them and create a whole new piece of glass? Would the marks still show? No. There are many entrepreneurs who consider the advisors performing the IBR to be the bank’s lackeys. And there are some advisors who do act this way. But if you know your business, you are good at what you do and honestly believe that the cash flows you are presenting are your best possible estimate, this is your chance to shine. You will find no better ally in your effort to reestablish your credibility in the eyes of your lender and get a fair deal, than a third-party expert.