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Eye on a new NPL peak

Deleveraging Asia 2021

Our third edition of Deleveraging Asia examines the region’s macroeconomic and banking sector landscapes, as well as providing an update on NPL market developments amid the pandemic.

The year 2020 brought new, previously unforeseen challenges and uncertainty, testing societies in many ways. As economies were hit by the COVID-19 pandemic, NPL stocks in APAC economies have increased to USD 753 billion at the end of December 2020, from USD 679 billion at the same time in 2019.

Key NPL markets

China’s NPL market continues to expand with the NPL ratio rising steadily from 1.3% in 2013 to 1.8% in Q4 2020 according to the China Banking and Insurance Regulatory Commission (CBIRC). Although the market saw a general decrease in activities during H1 2020 as a result of the pandemic, NPL transactions started to pick up in Q3 2020. 2021 may see a further increase in NPL levels and higher disposals from banks following the end of the moratorium scheme and other stimulus measures. While AMCs are likely to continue as the main buyers, we note an increasing level of foreign interests in the Chinese NPL market.

India’s overall NPL ratio stood at 7.5% as of September 2020 (the latest full data available), and without any further extension on loan moratoriums, is expected to increase to 13.5%-14.8% by September 2021 according to Reserve Bank of India. In the face of this the Indian government resolved to establish a national Asset Reconstruction Company (equivalent to a national AMC) to acquire NPLs from banks and manage recoveries of the bad debts as a response to the increased asset quality deterioration amid COVID-19.

In 2020, total NPLs in Indonesia increased by 18% from 2019 to IDR 168 trillion (USD 12 billion). We have seen several successful transactions in recent years including portfolio acquisitions by foreign investors. Increasing activity in the Indonesian NPL market will create more opportunities for investors as banks, especially state-owned and policy banks, come under pressure to reduce NPL levels.

Thailand total NPL stocks increased by 12.5% from last year to THB 523.3 billion (USD 18 billion). Foreign investors have been more active in recent years although Bangkok Commercial Asset Management (BAM) and Sukhumvit Asset Management (SAM) continue to be the main buyers of NPLs.

Impact on the banking sector

To date, asset quality across banks in the region has not yet been significantly impaired. However; real asset quality is likely to be partially obscured by government led policy responses to the pandemic such as debt moratoria and regulatory forbearance and as such bad debts are expected to increase as governments’ relief measures unwind. Moody’s1, the credit rating agency, has forecast that the volume of NPLs will double on average across the major APAC economies by 2022.

Future trends

Against a backdrop of an already low interest rate environment depressing banks’ profitability, the elevated risks of higher loan defaults and credit losses looks set to continue to drive deleveraging activity.

As stimulus measures and loan moratoria unwind, we expect that China, India, Indonesia and Thailand to continue to be the primary area of focus for NPL transactions in Asia for the foreseeable future based on NPL stock level and transaction activities observed in the past. In addition, we note Vietnam governments have announced their intentions to investigate the steps necessary to develop NPL markets, including the prospect of cross-border trading.


1 Moody’s, Banks - Asia-Pacific: Risks will grow as coronavirus bites but creditworthiness will mostly remain intact, 6 October 2020, Moodys-Risks-rise-substantially-for-APAC-banks-but-credit-profiles--PBC_1248198?showPdf=true

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