When a bank or loan provider stops trading, customers sometimes assume that they can stop paying interest and repayment terms. In reality, the administrator or liquidator sells the loan portfolio to an investor or bank to continue the loan under the same terms. Non-performing loans with high default rates or loans that have not been paid for a longer time, are bundled and sold to collectors. Similar to the other assets of the bank, such as the investment portfolio and real estate, the value of loan portfolios is often lower than the total worth of the individual loans. Some borrowers will not be able to repay the loan, while others pay in accordingly the agreement.
A traditional loan portfolio is not of interest for creditors for the time it takes to collect on all the loans and the corresponding variety in maturity. The non-performing loan portfolio is a different subject, especially because some of these loans are collateralized and immediately claimable. Non-performing loan portfolios are similar to investment portfolios sold below par. The upside potential in such a portfolio is high but rarely complete. The uncertain factor to determine the exact profitability is part of the negotiation with the administrator or liquidator of the estate.
Regulators distinguish traditional loans from non-performing loans. A practical difference is that no license to handle a non-performing loan portfolio is required, where the offering, administration and collection of traditional loans follows the domestic laws for credit institutions. This means that the non-performing loan portfolio can be used for the purpose of distribution to creditors in bank failure, where the traditional loans are served by credit institutions.
Collecting on non-performing loan portfolios deserves a profound and well thought approach to maximize the outcome. Therefore, a network of professionals is involved in the process for collection. Alongside the deposit insurance, settlements, and liquidation this alternative strategy aims to raise the payment for creditors.