PTSB is being damaged by the large volume of Non-Performing Loans (NPLs) on its balance sheet. The same must be true for AIB and other banks operating in the State.
There is a reason for this.
Regulators require banks to hold capital against NPLs meaning the banks are restrained in the amount of lending they can do once they hold volumes of NPLs.
Furthermore, the costs of servicing NPLs is substantial. For performing loans there is little a bank is required to do – but once a loan goes into default, costs shoot up as the process of fixing the loan or enforcement begins.
But despite all this another important factor must be considered.
Banks are not very good at dealing with NPLs. They are constrained in the deals they can do to avoid contagion – if I get a big write off why would my neighbour continue to pay? And chasing bad debts is not the business of a bank. The business of a bank is fundamentally to protect depositors’ funds and to lend those funds prudently into the economy and of course to manage the flow of money though the economy.
The choice facing PTSB is to continue as it goes – and suffer an ongoing dead weight of NPLs or to sell them on.
There are buyers of NPLs out there well established in the market. My view is that PTSB and AIB should go ahead that dispose of its NPLs as soon as possible leaving those institutions free to do what they are supposed to be doing.
The only reason the banks might not sell their NPLs is political. They are afraid of an adverse political reaction to such sales.
However, from what we see such concern is unfounded.
Borrowers remain fully protected and are often in a better position when their loan is acquired. This is because the new owners are motivated to do deals to move things on and are generally good at it.
Our experience is that funds are easier to deal with; far more responsive and are genuinely open to solutions. For example, the majority of Mortgage to Rent solutions (over 70%) have been put in place by non-bank lenders – AIB on the other hand is responsible for less than 2% of such solutions.
The Personal Insolvency system which has special protections built in to deal with family homes applies to banks and non-bank lenders equally. The law means that anybody who can afford a mortgage based on the current value of their property over the longest possible period and at the lowest possible interest rate is entitled to a deal which will keep them in their home.
All in all, we encourage Irish banks to sell their NPLs. It has been 10 years now – surely it is time to move on!