Bad debts of banks - what are they?
In the press there are more and more reports about bad debts of banks. Economists, politicians, and businessmen are all speaking out about it. They discuss the amount of these debts, what can be done about them, and what consequences their presence can lead to.
What is bad debt?
When talking about bad debts, most often we mean bad debts of banks. There is no established definition of this concept in open sources, so here is the most common one.
Bad, or troubled, debts - are loans that the bank has issued to businesses or individuals, the repayment of which is delayed and/or the repayment of which is unlikely or impossible.
If we look at the websites of international organizations, we can find there a small addition to this definition. Bad debts may also be considered bad if the collateral against which they were issued has depreciated considerably. However, in the Russian business press, when referring to bad debts, they most often mean exactly what we defined in the beginning.
What's wrong with bad debts?
If we answer this question from the bank's point of view, there are three disadvantages associated with the presence of bad debts:
The first trouble with bad debts is that they deprive the bank of "live" profit. Since most of the bank's income is generated by interest payments on loans, the existence of 5-10% bad debts can significantly reduce the amount of income and, consequently, profits.
The second problem is that, if the bank recognizes the debt as problematic, it is obliged to increase the amount of reserves. This is done in order to ensure that if the loan is not paid back at all, the increased reserves will be used to pay off obligations to depositors. The increase in the bank's reserves in this case also results in a decrease in profits.
The third problem is that a large the number of bad debts in the bank accounts can cause unrest among depositors. Rushing to seize their bank depositsThey can create new difficulties for the bank.
What is the value of bad debts in Russia
Already from the mere definition bad debts it is clear that one of their peculiarities is that it is difficult to estimate their value. Each bank has its own way of assessing the likelihood of repayment of a particular loan and thus classifying it or not as a problem loan. Considering the fact that in most cases the bank has an incentive to underestimate such debts, their real value may be several times higher than on paper. In case this situation occurs throughout the banking industry, it may pose a real threat to the stability of the country's financial system. The second wave of the crisis is often attributed precisely to bad debts in the banking industry.
One of the most objective assessments of bad debts - the value of overdue debt. According to the survey of the Central Bank of the banking sector at the beginning of July the value of this debt was equal to 7.6% of the total amount of issued loans. Even by international standards, this is a very small value.
But it is worth considering that this debt can be two or three times less than the real value of bad debts. Why? Firstly, according to the law, it is not the entire debt that is overdue, but only the part that has not been repaid on time. For example, if the company took a three-year loan of 1 million rubles and was supposed to repay 300 thousand rubles in the first year of the loan and didn't repay it, only those 300 thousand rubles are set off as an overdue debt. Although it is reasonable to assume that bad debts already by a million. Second, the bank can hide bad debt from accounting altogether by restructuring. So, if the debtor cannot pay the next installment of the loan, the bank can negotiate on new terms to postpone payment to the future, only not to recognize this debt as bad.
If you try to take into account all of the above "but", the value of bad debts in Russia may be 2-3 times higher than officially stated, that is about 15-20%.