Regulatory and Policy Measures to Address the Problem of Non-Performing Loans: A Cross-Country Comparison

The financial and banking system witnessed one of the greatest periods of stress due to the Global Financial Crisis (GFC) and the COVID-19 pandemic. Many banks across the globe failed due to a bubble in the real estate sector, which was triggered in the USA and percolated around the world in no time, resulting in a liquidity crunch. As a result, the non-performing loans (NPLs) increased in developed and emerging nations. The thesis critically argues the impact of the macroeconomic and microeconomic determinants that influence the NPLs positively and negatively.

The financial sector takes excessive risks to generate more profits and grossly ignores the due diligence process required to grant loans, including evaluation of collateral, assessment of re-payment capacity, etc., thus leading to long-term cascading effects on financial stability. The thesis also examines the regulatory, supervisory, and policy-related measures adopted by the UK, India, and Ireland at the macro and micro levels. It concludes that these measures alone will remain ineffective in curtailing the level of NPLs due to the ever-evolving financial sector, with the excessive use of new technology that led to the evolution of new payment methods in the banking business.

The thesis also examined how proactive sovereign support during the GFC and COVID-19 pandemic through liquidity injection and effective policy and regulatory measures has rescued the banks from possible insolvency. It also looked into the risk management system at the micro level by conducting three case studies involving the Lloyd Banking Group, Punjab National Bank and Bank of Ireland Group.

The thesis further examined the initiatives these jurisdictions had taken to mitigate the issues that emerged due to the COVID-19 pandemic. Lastly, it has identified some suggestive interventions that mainly focus on new policy and regulatory interventions and structural changes in the institutional framework to address the problem of NPLs more effectively and avoid a downturn.