Non-Performing Loan Disposals without Resolution

Management Science

70 Pages Posted: 12 Feb 2021 Last revised: 25 Oct 2023

See all articles by Ben Charoenwong

Ben Charoenwong

National University of Singapore - Department of Finance; Chicago Global

Meng Miao

Renmin University of China-School of Finance

Tianyue Ruan

National University of Singapore (NUS) - Department of Finance

Date Written: October 25, 2023

Abstract

Using proprietary data on non-performing loan (NPL) transactions in China, we document that banks conceal NPLs in disposal transactions that are supposed to resolve NPLs. In these transactions, banks provide financing and retain the credit risks and debt collection obligations. Transaction prices contradict underlying credit risks: Despite being delinquent for 4.5 years, the median NPL package is sold at face value with zero haircut. The majority of NPL packages are re-sold at a premium to banks' non-government-owned borrowers, further supporting the concealment view. Banks under stricter regulation conceal NPLs more and engage in more illicit concealment. NPL-concealing banks increase zombie lending, suggesting that an ineffective resolution exacerbates credit misallocation. Recognizing the hidden NPLs implies the total NPLs in China is two to three times the reported amount.

Keywords: non-performing loan (NPL), NPL disposal, bad bank, troubled bank resolution, banking regulation, regulatory arbitrage, financial stability, credit misallocation, Chinese economy

JEL Classification: G21, G23, G28, G18, G38

Suggested Citation

Charoenwong, Ben and Miao, Meng and Ruan, Tianyue, Non-Performing Loan Disposals without Resolution (October 25, 2023). Management Science, Available at SSRN: https://ssrn.com/abstract=3662344 or http://dx.doi.org/10.2139/ssrn.3662344

Ben Charoenwong (Contact Author)

National University of Singapore - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://bizfaculty.nus.edu/faculty-profiles/519-ben

Chicago Global ( email )

67 AYER RAJAH CRESCENT, #02-10/17, Singapore
Singapore, 139950
Singapore

HOME PAGE: http://chicago.global

Meng Miao

Renmin University of China-School of Finance ( email )

59 Zhongguancun Street
Beijing, 100872
China

Tianyue Ruan

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://https://truan.github.io/

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