Non Performing Loans (NPLs) are loans that have payment delays of more than 90 days. NPL’s lead to provisions and to credit losses. That is why the level of NPLs, expressed as percentage of total loans, is an important indicator for the health of the financial system in a country. They are closely monitored within banks, reported to regulators, discussed in meetings with IMF officials, presented at international conferences and analysed by rating agencies.

Reporting financial indicators that are significantly worse than they appear in reality is not good for the country. Still, that is exactly what we are doing with NPL levels in Romania. This is an old problem and this is not the first time I draw attention on this matter. Recent meetings made it clear to me – yet again – how the NPL levels affect Romania’s image abroad. So then, what do we do about this? Simple: adopt the international standards so that the Romanian indicator is based on the same method as the one in other countries.

International Standards

International practice is to stop accruing interest for the provisioned part of a loan. How much of a NPL is provisioned depends on a number of factors, especially collateral. This means that banks no longer show revenues for these (parts of these) loans by means of stopping interest accrual. This practice does not affect the relationship between bank and client. Legally speaking the bank still has the contractual right to claim the full amount, including the accrued interest and penalty interest. The bank just reflects a more appropriate value for this loan in its books.

Romanian Regulations

Romanian regulations oblige banks to keep accruing interest for these already provisioned (part of) loans even though it is increasingly unlikely that this interest will ever be collected.  The Romanian indicator contains therefor higher levels of accrued interested which increases the NPL levels in Romanian banks in comparison with other countries. Please note that this accrued interest is immediately provisioned, so this does not affect the Profit and Loss account.

A Simple Example

Let’s take two hypothetical  banks with identical portfolios and identical customers that have identical loans with identical behaviour. The only difference is that the banks are in different countries and different rules apply.

In order to keep it simple, we will take one loan in both banks that at the moment the client stops paying has an outstanding balance of  10.000 with an interests rate of 10% and a penalty interest rate of another 10%.

Bank INT stops accruing interest after 180 days  which means that the amount of the loan in their books is 11.000, consisting of 10.000 remaining principal and 1.000 interest ((10.000x180x(10+10))/36000) From that moment on the amount of the loan in their books will not change.

Bank ROM does not stop accruing interest and after 360 days the amount in their books is already 12.000. If we now assume for both banks a total loan portfolio of 100.000, Bank INT has a NPL ratio of 10% but Bank ROM has a NPL ratio of 12%.

It is also easy to see that, as time goes by, the NPL level will keep increasing for Bank ROM while it remains stable for Bank INT. After 2 years Bank ROM has a non performing loan of 14.000 with a ratio of 14% and after 3 years of 16.000 with a ratio of 16%. If we were to compound interest the amount would be even higher.

Is there a difference in quality, soundness between these banks? Is Bank ROM in a worse shape and deteriorating over time?  Of course not, there is no difference. Even the profits will be identical because the additional interest that Bank ROM accrues is provisioned at the same time.

It is easy to extrapolate this mechanism from an individual loan to a loan portfolios, from the portfolio to a bank and from the bank to the entire banking system.

There Is More….

This is not the only difference between Romanian regulations and international standards that influence NPL levels. The other is in the so called write off policy. It is easy to see that the sooner a loan is written of by a bank, the lower the NPL level will be. This is especially the case in our Bank ROM, where loans keep accruing interest until they are written off. Romanian banks may not write off loans unless they have “exhausted all legal means”. If they nevertheless do so, the expense is considered non tax deductible and some even argue that this would be a gift from the bank to the client that needs to be taxed as income. It is not very difficult to see that the cost of  “exhausting all legal means” is in many cases not justified by the expected amount to be recovered. This not only increases the costs of credit in Romania, it also inflates the NPL levels.

Nothing New

Some analysts might be aware of these differences but in my experience most people are not and I have explained this many times over to officials, analysts, head office representatives, politicians, regulators and rating agencies. Banks have been asking for years for a solution and I dedicated a blog entry tackling the issue after yet another unfavourable comparison in the international press in 2010.

How Big Is The Difference?

The real question is of course how big the difference is. The only one that can find out is the National Bank of Romania (BNR) because they are the ones that have access to consolidated data. In my view something needs to be done. Otherwise Romania will soon hit 20% NPL ratio which looks really bad in comparison with neighbouring countries. Countries we are competing with when we want to attract investment and financing.



by SvG on 29 December, 2012

I wanted to write about the cost of fraud in the banking system but because I have taken the rest of the year off, I decided to pick something that is totally unrelated to work, namely fasting. Before Christmas I did a six day water fast, that means that for six days I didn’t eat at all, I only drank water, no tea or juices.

Not My First Time

This was not the first time I went on a fast. It is not so hard and it seems as if my body adapts faster to it the more I do it. Normally I would start on a Friday and use the weekend to adapt. So Monday I can go to work and stick to my normal schedule, which includes attending lunches and dinners. This takes a bit of explaining but most of the time people not only understand but they also find it interesting. It might seem like a bit of self torture to sit a dinner table watching others having good food and wine but honestly, it is not really that hard. This time I started on the first day of my winter holidays.

Why Now

For some time I wanted to do another fast. This year I have not been very disciplined about food and lifestyle (yes, everything is relative in life). At least not like in 2011 when I participated in the European Ironman Championship. That took a lot of preparation and discipline. Still, I cannot keep it up like this forever and alternate periods of intense physical activity with periods when I have to take it easier. Yes, It might be better, or even healthier (who knows)  to keep a reasonable level all the time instead of these fluctuations, but then I would never do an Ironman. Anyway, increasing body weight, less sleep, more coffee, less attention to the quality of my food, it all adds up and I knew I was moving in a direction I didn’t want to go. So I needed a “reset”, a recalibration of my body and the way to do it was to fast.


The idea is not so much about weight loss but to give the body a period of rest and a cleansing. The fact that (all) religions have periods of fasting also shows that the benefits of fasting have been known to mankind for ages. I had contemplated fasting for some time but it was the book “Fasting and Eating for Health” by Joel Fuhrman that gave me the understanding I needed. Fasting provides the body the rest it needs to undergo important maintenance and clean up. Some call it detoxification. This process is most effective once the body changes its metabolism and goes into protein saving mode. This happens after all sources of carbohydrates are depleted, usually after two days and is called ketosis. In this phase the body will be actively looking for tissue that is not essential and that can be burned for energy.

How Does It Feel

I felt cold during the fast. This is normal. Digesting food is hard work for the body and this takes up a lot of energy and generates heat. No digestion, less heat. So you feel cold.

Blood pressure is lower, so you have to pay attention and get up slowly but even so, I felt lightheaded from time to time.

Headaches are usual during the first few days, I attribute mine to caffeine depravation. Only a minor issue in my case.

Strange taste in my mouth and my tongue turned almost white, this seems to be normal.

I was not hungry nor thirsty and had to make sure I drank at least a litter of water a day.

Energy levels are lower than usual. This doesn’t mean I couldn’t work or that I had to stay in bed all the time. It is just better to do light administrative work.

My only problem were my legs at night. The backside of my upper legs hurt so much that I couldn’t lie down comfortably. A hot shower helped, bath probably would have been better but we don’t have a bathtub. I searched the internet a bit  and there are some indications that this might be linked to caffeine depravation. Not impossible, I drank a lot of coffee in the weeks before I started my fast. Next time I’ll make sure I don’t take any coffee at all or only modest amounts before I start fasting.

Weight Loss?

I lost almost a kilo a day. I guess most of this is water and loss of muscle mass but this will be reversed. Still a few kilos less, no more sugar cravings, no more need for caffeine to get through the day, a cleaner and leaner body. I feel good about it and am motivated to build on these achievements by maintaining a healthy lifestyle. In my experience only a healthy life style will bring my weight down, not keeping diets, starving myself. I see fasting in that context and not as a method of sustainable weight loss.

Final Note

As a 55 year old with a history of high performance in sports I like to think I know my body well. If you are interested in fasting and how it might help you I highly recommend the book “Eating and Fasting for Health” by Joel Fuhrman as a fist step. I just wanted to share my experience and that should not be taken as advice.





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