Lazy loans: Necessary evil or interesting tax trick?
Lazy loans are dangerous: they put banks in financial distress, they are a risk to the taxpayer, and they are a sign of bankers’ greed. That, at the very least, is the prevailing opinion in the media, given the current coverage. On closer inspection, the situation looks a bit different. Distressed loans can cause financial difficulties for a bank if they are not repaid. However, a high number of “bad” loans does not automatically mean that the bank advisors make careless loans. As always, it depends on the consideration of the individual case, as evidenced by a new analysis of the search center on behalf of the Germany’s leading newspapers.
A rich state with black sheep
The risk behavior of the German savings banks was in the foreground of an analysis of the Germany’s leading newspapers, which was published a few months ago. She brought surprising results. The majority of German savings banks only show a manageable share of bad loans. On average, 1.62 percent of loans were in distress in 2014. The average value of the German banks was 2.34 percent, so the savings banks were well below the average. Ironically, in the two richest states, however, showed an amazing gap. In Bavaria, the rate of the savings banks was extremely good, there was at 0.68 percent of the loans, the risk of bursting. In Sout East Asia, however, the share was 2.34 percent.
Thus, the economically well-established federal state takes a negative leading position among the savings banks. The analysis included all 409 savings banks in Germany. A high proportion of bad loans is actually an indication that the bank takes a high risk when it lends. Financing is considered “lazy” if the debtor fails to keep to his obligations for more than 90 consecutive days and, for example, does not repay installments as agreed. Among the ten savings banks with a high ratio of non-performing loans – the so-called NPL ratio – came from Southwest German. But what exactly does the NPL quote say?
Lazy loans carry risks and benefits
On the one hand, a high NPL ratio could suggest a risky lending by the banks. The savings bank would then also grant financing to customers who do not actually have the required credit rating. This interpretation is usually in the foreground when talking about bad loans. Many consumers still remember the financial and banking crisis of 2008 and 2009. At that time, even established big banks got into an economic imbalance due to their generous lending, which eventually had to be compensated by the taxpayer. Basically, with a high NPL ratio, one could assume that the savings banks willingly lend, even if the repayment is not secured. Thus, a correspondingly high value speaks in some respects indeed for the greed of the lenders, because with weak creditworthiness the bank demands usually a correspondingly high interest.
However, a high proportion of non-performing loans could also point to a particularly cautious valuation policy of the credit institutions. Perhaps all of the leeway is used on the value adjustments that a financial institution has to assess its outstanding claims against its clients. The Commercial Code sets a certain framework when assessing outstanding loans. Any financial institution may use this framework. However, the leeway in both directions. If a savings bank is already set up financially weak today, it may postpone write-offs on wobbling loans to a later date. In a year in which she shows very high profits, she may declare more bad loans. This value adjustment has a direct impact on the taxable profit for the year. If a company writes off a high proportion of non-performing loans, it will reduce the taxable profit and thus the tax burden. Ultimately, the NPL ratio is a clever financial instrument that banks can use legally to influence their taxable profits and their tax payments. Against this background, a high proportion of bad loans has disadvantages, but from the point of view of the bank, it also has advantages.
Assessment of the savings banks only in the overall context
According to experts, the NPL ratio should never be used as the sole instrument for assessing the financial strength of a bank. It makes far more sense to use more business figures and to examine the regulations of lending more closely.
For example, a high NPL ratio may well imply active and pro-business lending. It is the public mission of the savings banks to provide the entire population and especially the middle class with loans. So if a savings bank in an economically strong environment complies with this task and assigns a high proportion of corporate loans, this inevitably creates a higher risk that such loans may burst. This is all the more true when financing is given to small and medium-sized enterprises that are more likely to experience financial difficulties. From the people in charge of the Savings Banks Association, one also hears that the banks would basically have to grant a lot more credits, because this corresponds to their economic task. Against this background, a high proportion of bad loans, and in particular a high NPL rate, is not in principle a sign of careless lending or even of the greed of bank advisers. Rather, the situation must always be assessed taking into account all economic and financial aspects, before a clear and hasty opinion is reached.