Non-performing and problem loan portfolios : opportunities and challenges in the Maltese banking industry

Abstract

Banking, as with any other economic activity, is invariably affected by risks. This study, by mainly focusing on credit risk (risk of loss due to a debtor's non-payment of a loan or other line of credit) faced by banks actively operating in Malta, attempts to evaluate the opportunities and challenges in the management of non-performing and problem loan portfolios. To achieve this objective an assessment of the identification process of such portfolios is undertaken to determine the bearing that these loan portfolios have on banks' overall financial soundness. The effectiveness of practices employed by Maltese banking institutions in the management of their portfolios is evaluated in terms of improved stability, sustainability, and the retention of a competitive edge in the market. The study suggests that, despite a rather sound banking model, the Maltese banking system is still burdened with significant non performing loan (NPLs) portfolios. Notwithstanding various challenges, a number of opportunities for improving the credit approval and recovery processes as well as for addressing various NPL issues in the local environment exist. If wisely implemented, these opportunities could further promote Malta's appeal as a safe and attractive place to conduct banking activity.