Title Page
AFRICAN DEPARTMENT
HOW TO NOTES
How to Assess the Benefits of Nonperforming Loan Disposal in Sub-Saharan Africa Using a Simple Analytical Network
NOTE 21/06
Title Page
African Department
How to Assess the Benefits of Nonperforming Loan Disposal in Sub-Saharan Africa Using a Simple Analytical Framework
Prepared by Irina Bunda, Luc Eyraud, and Zhangrui Wang
INTERNATIONAL MONETARY FUND
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©2021 International Monetary Fund
Cover Design: IMF Creative Services
Composition: The Grauel Group
HOW TO NOTE
African Department
How to Assess the Benefits of Nonperforming Loan Disposal in Sub-Saharan Africa Using a Simple Analytical Framework
Prepared by by Irina Bunda, Luc Eyraud, and Zhangrui Wang
Names: Bunda, Irina. | Eyraud, Luc. | Wang, Zhangrui. | International Monetary Fund. African Department, issuing body. | International Monetary Fund, publisher.
Title: How to assess the benefits of nonperforming loan disposal in Sub-Saharan Africa using a simple analytical framework / prepared by Irina Bunda, Luc Eyraud, and Zhangrui Wang.
Other titles: How to notes (International Monetary Fund)
Description: Washington, DC : International Monetary Fund, 2021. | June 2021. | Includes bibliographical references.
Identifiers: ISBN 9781513583099 (paper)
Subjects: LCSH: Bank loans—Africa, Sub-Saharan—Evaluation. | Credit—Africa, Sub-Saharan. | Banks and banking—Africa, Sub-Saharan—Econometric models.
Classification: LCC HG1642.A357 B86 2021
Nadia Margevich and Cheryl Toksoz were responsible for document production. The work benefited from the comments and inputs from Paul Cashin, Bruno Chailloux, Annalisa Fedelino, Jose Garrido, Dirk Jan Grolle-man, Tarak Jardak, Andy Jobst, Mahmut Kutlukaya, Amina Lahreche, Lusine Lusinyan, Andre Mialou, Dermot Monaghan, Sami Ben Naceur, Jean Portier, Luc Riedweg, Natalia Stetsenko, Helen Wang Wagner, Torsten Wezel, and participants in the financial network seminar organized by the IMF African Department on September 10, 2020.
DISCLAIMER: African Department (AFR) How to Notes offer practical advice from IMF staff members to policymakers on important economic issues in sub-Saharan Africa. The views expressed in AFR How to Notes are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Contents
Executive Summary
Purpose of the Note
A Glimpse of the Analytical Framework
2. Key Concepts: Haircut, Capital Loss, and Unprovisioned Loss
Definition of the Haircut and Equivalence with “Capital Loss”
Equivalence with “Unprovisioned Loan Loss”
Computation of Unprovisioned Loan Loss
Computation of the Loss Under Default
Model-based Haircut Formula
3. Main Steps of the Simulations
Step 1: Calculation of the Tied-up Capital
Step 2: Calculation of the Capital Relief
Step 3: Use of the Freed-up Capital to Grant New Loans
4. Structure, Calibration, and Outputs of the Excel Template
Structure and Calibration of the Template
Outputs of the Template
References
Executive Summary
The coronavirus (COVID-19) crisis, which has hit financial systems across Africa, is likely to deteriorate banks’ balance sheets. The largest threat to banks pertains to their loan portfolios, since many borrowers have faced a sharp collapse in their income, and therefore have difficulty repaying their obligations as they come due. This could lead to a sharp increase in nonperforming loans (NPLs) in the short to medium term.
Elevated NPLs can generate macroprudential and financial stability risks and impair banks’ ability to support the economy during the recovery. NPLs raise capital requirements, dent banks’ net interest margins, and generate service and management costs, thus potentially weakening the ability of banks to grant new loans. In sub-Saharan Africa, there are various structural impediments to the resolution of NPLs, partly related to weak debt enforcement procedures and legal rights, and financial infrastructure gaps.
This note and the accompanying Excel template look at the implications of NPL disposal strategies on credit provision in sub-Saharan Africa. Specifically, the template estimates how cleaning banks’ balance sheets by disposing of NPLs could create space for new loans, unlock credit, and support economic activity.
This note builds and expands on earlier work published by the IMF and others. Jobst, Portier, and Sanfilippo (2015) conducted similar simulations in the context of NPL resolution in Europe following the global financial crisis. To the authors’ knowledge, such work has never been applied to African countries.