The banks are increasingly getting rid of «rotten debt»
Banks sell defaulted loans, aka «rotten debt», to debt collection companies to a greater extent than before. This happens in step with increasing defaults. This frees up resources and improves the capital adequacy of the banks.
Defaulted loans are often referred to as «rotten debt». Sales of this type of debt from the banks to the debt collectors have increased by around eight per cent from the third quarter of 2017 to the third quarter of 2018, according to the Norwegian Financial Supervisory report «Financial outlook».
The total price tag on the consumer loan portfolios last year was NOK 3.9 billion. It was around NOK 3.6 billion in 2017. The reason the banks sell the debt on is to avoid having to recover these amounts themselves. In this way, they strengthen their capital adequacy, reduce operating costs and avoid using resources on demanding money that it is uncertain whether they can recoup, writes Dinero.no.
Collectors are better at recouping «rotten debt»
The banks get rid of some risk when they outsource loans they cannot collect themselves, as the loan can end up in debt settlement, obsolescence, bankruptcy and the like. For the banks, the advantage is therefore large – they reduce the risk, improve the capital adequacy and, at the same time, obtain better liquidity. Consequently, the risk is transferred to debt collection companies. This is the reason why banks have to sell consumer loan portfolios at a discount.
According to the bank manager of the consumer bank Monobank, Bent Gjendem, the banks’ losses will be as big whether they sell the loans further or not.
“The main motivation for the banks to sell is that the collection companies are better at recovering the money than the banks are. A small bank often does not even have a debt collection department. It is quite common for banks to sell defaulted portfolios,” he tells Dinero.no
He says that it is common to do this also in cases of default on housing debt.
Payment issues are temporary
The consumer bank, Bank Norwegian, tells Dinero.no that their policy is not to sell off defaulted loans on an ongoing basis, but that it happens that they sell individual portfolios to the debt collection companies.
“The fact that a bank customer has failed to pay interest and instalments for more than 90 days does not exclude that he or she can resume servicing the loan later.” Morten Terning, informs Dinero.no.
Bank Norwegian is one of the most profitable consumer banks in Norway. Terning adds that in some cases it is more sensible to sell consumer loan portfolios rather than keeping them.
“By leaving substantially defaulted outstanding loans to professional debt collection companies, the bank can focus on its core business. In addition, increased capital requirements from the Financial Supervisory have made it more relevant with sales of loan portfolios than before,” he explains.
Increase in «rotten debt» despite less consumer loan growth
Since the introduction in 2017, the Government’s tightening of lending of unsecured credit has contributed to a decline in consumer loan growth. Norwegians currently owe around NOK 115 billion in consumer loan debt, and in excess of NOK 3 billion in mortgage loans. Despite the fact that consumer loan growth has decreased, defaults on those have increased, which in turn can be the reason why sales of «rotten debt» portfolios have followed suit.
“The reason for increasing defaults, despite declining growth, is because consumer lending growth in previous years has contributed to more households incurring consumer loans. This will level out over time,” according to Bank Manager of Instabank, Robert Berg,
“Defaults probably increases due to that the proportion of the Norwegian population with unsecured loans grows,” Berg continues to Dinero.no.
“When customers cannot pay, there is no mortgage on houses or items that can be retrieved or sold. The claim will, therefore, remain for many years; until the customer has repaid. This will lead to accumulation for a period; until the level is normalised,” he adds.
“Reducing tied-up capital is one of the main reasons for the banks choosing to sell their portfolios. Especially since the Financial Supervisory has now increased banks’ capital requirements,” according to Berg.
“Sales will provide a smoother transition. In addition, sales of non-performing portfolios, that do not generate income from capital adequacy, help. It’s important when there is little access to capital in the market, as the situation is now,” Berg concludes.