European Banks Face Growing Concern as Non-Performing Loan Volumes Inch Upwards

According to the Risk Assessment Report of the European Banking Authority (December 2023), there are indications that the number of non-performing loans (NPLs) could increase. Even though NPLs on banks’ balance sheets remain relatively low in total – thanks to the current low unemployment rates and the robust liquidity accumulated by businesses and households during the pandemic – a pivotal moment is on the horizon, suggesting a potential shift in this trend.

In the first half of 2023, EU banks reported a net inflow of EUR 6 billion in non-performing loans. This was a consequence of both higher inflows (EUR 112 billion) and lower outflows of NPLs (EUR 106 billion) compared to the same period last year. Sectors affected by the pandemic are leading the deterioration in asset quality, while energy-intensive and real estate-related firms are grappling not only with abruptly rising borrowing costs but also with inflationary pressures and reduced demand.

“In anticipation of a potential increase in NPLs, leveraging automated software solutions becomes crucial for banks. Specifically, adopting IFRS 9 software can offer a pragmatic approach to risk reduction by facilitating the timely recognition of impairment based on expected losses, ensuring a comprehensive consideration of both economic and balance sheet factors”, says Sanjin Bogdan, Head of IFRS 9 Aryza.

With integrated data capabilities, it is useful to streamline the impairment calculation process across various stages, offering a practical means for financial institutions to navigate and manage the potential impact of rising NPLs in a dynamic economic environment.

In today’s financial landscape, the significance of automation and software solutions extends beyond IFRS 9 risk management. Their impact is equally crucial in the collections process, particularly given the rising trend of non-performing loans. In this context, the integration of technologies plays a pivotal role even after loans have defaulted, providing an efficient means to optimize the collections and recovery process and mitigate default risks.