Introduction

Non-performing loans are a category of loans that the debtors will not repay in full or that are subject to late repayment. 

High levels of NPL in banks balance sheets compromise the capital requirements, reduce ROI and subtract resources that could be employed in more productive ways (ex. Lent to other parties – families/companies).  Consequently, the excessive presence of NPL in an economy compromises the role undertaken by banks of providing fresh finance to the economical system.

Post-pandemic Numbers

Italy is one of the largest markets for Non Performing Exposures. In addition, the pandemic crisis and Covid-19 worsened the position of banks respective to the NPL market. In 2021, 90 billion on NPL were on banks’ financial statements in Italy. In addition, the NPE volume is expected to reach 113 billion by 2023.  The reasons behind this rapid hike in Non performing exposures are the moratorium measures taken by the government to counter the Covid-19 economic crisis that delayed the payments of debtors. At the end of 2021, the market of NPL and UTP in Italy was worth 345 billion and  in 2023 it is expected to reach 430 billion Euro.

 

How the market works

There are two ways  investing in the NPL market:

  1. Direct purchase from banks: 

  Banks sell large portfolios of NPL generally valued from 100 million to one billion euros to private investors (funds, specialized operators). In this case the market is highly illiquid and accessible only to few operators having large sums of capital.

  1. Securitization of NPL portfolio:

  The NPL portfolio is securitized by an SPV

  The SPV issues financial securities backed by the NPL portfolio

  This financial securities are sold on the market to institutional and private accredited investors

Market inefficiencies

Given the abnormal increase in volume of NPL and UTP expected in the short term, it is extremely important to have an efficient market that is able to cope with the demand.

Today the market is relatively closed and reserved to a small number of investors so much as to define it an oligopsony since there are a lot of barriers to entry. An oligopsony is a market in which, contrary to an oligopoly, the number of sellers outnumber the number of buyers which is relevantly small. Why is this the case? To start with, due diligence is extremely costly and time consuming, the analysis of a portfolio requires high profile resources and transaction costs are high. Moreover, there are information asymmetries among parties with respect to NPL offers present on the market. For this reason, the NPL market is characterized by barriers to entry that makes it accessible to only a limited number of actors.

How can these barriers and inefficiencies be overcomed?

In an official paper, the ECB states that: “ Transaction platforms are being considered as a possible solution to Europe’s high stock of non-performing loans since they have the potential to mitigate a number of market failures which appear to be in evidence in the secondary market.”

Therefore, the market of NPL is seeking innovative ways to deal with its weak points that, if not solved, will not sustain the rapid increase in volume of NPL in the next few years. 

Security tokens powered by the potential of the blockchain technology can represent the most disruptive innovation in the NPL market.  A security token is a new financial instrument that consists of a digital asset based on blockchain. The main feature of this tool applied to the NPL market is that it is backed by a real asset.

What benefits may arise from the use of security token in the NPL market?

A set of benefits arise by using security token for both sellers and buyers. Sellers would benefit from using the above mentioned technology since it could have a wider investor reach while shortening the deal duration, increasing the volume sold.

On the other hand, the buyer would minimize the transaction costs as well as the due diligence. In fact, For each investment opportunity, there would be updated documents reducing asymmetric information. Another potential benefit would be the smaller entry ticket to invest in such asset classes granted to investors thanks to the tokenization of the underlying assets (democratization of medium-high return asset classes). 

 

BlockInvest role in the NPL market

Blockinvest is a new generation platform powered by the blockchain technology thought for institutional and financial players. This platform was created to make up for the current market inefficiencies such as the ones mentioned in this article. Hence, its application in the NPL market would be highly beneficial for all the parties involved in the transactions.

Blockinvest has already participated in the tokenization of an NPL portfolio during what was called “Operazione Barolo” with Sorec Srl.  In 2021, Sorec purchased an NPL portfolio made up by retail Non performing unsecured credit. This portfolio was valued EUR 12 million and was securitized by Dolomiti SPV and then bought by Sorec. BlockInvest has digitized the buying process (recorded on blockchain) augmenting its transparency, efficiency and increasing the potential investors range and the investment liquidity.

Sources:

https://www.nortonrosefulbright.com/en/knowledge/publications/c514b74f/the-europeans-comissions-action-plan-to-tackle-nonperforming-loans

https://www.nplmeeting.it/wp-content/uploads/2021/09/20210924_NPLMeeting_The-anti-crisis-measures-have-limited-the-impact-of-non-performing-loans_ENG.pdf 

https://www.bankingsupervision.europa.eu/ecb/pub/pdf/guidance_on_npl.en.pdf

https://www.creditvillage.news/2021/01/12/operazione-barolo-sorec-chiude-primo-acquisto-di-portafoglio-npl-tokenizzato-attraverso-blockinvest/