Source: International Monetary Fund (IMF); Central Bank of Russia; National Bank of Ukraine; National Bank of Canada; United States Department of Treasury
As seen in this Results section and the preceding sections and data presentation, the national economic policy, combined with adequate plans to reduce NPL ratios when it becomes too high or becomes out of control, is essential to keeping a healthy level of NPL ratio in the economy. If the NPL ratio becomes too high, there are many consequences (as discussed in this section). The high NPL countries will need to adopt economic policies that can properly lower the national NPL ratio, otherwise both their economic growth as well as the commercial banking sector will be damaged. Many of these countries’ problems originated at the end of the 2008-09 financial crisis and have not recovered. Even countries like the US experienced an upsurge in its NPL ratio, but some countries recovered better from the surge than others. This was mainly due to a combination of plans to decrease the NPL ratio as well as control over the commercial banking sector to allow recoveries to occur quickly yet naturally over the course of years.
It is important to note the potential impact of the COVID-19 pandemic and how that may impact the NPL ratios of not only banks in pandemic breakout regions but as well as countries suffering from the economic and social reel back of the pandemic. The responses to COVID-19 has varied from country to country, but the general expected trend is for NPL ratios to go up in COVID-19 impacted regions. This follows the logic that loaners are not able to pay back their loans with the COVID-19 induced financial stress. If loaners are not able to pay back, the loans become non- performing—thus causing the rate to rise. If nations are able to effectively hand out a plan that gives stimulus incentives to banks, loaners, or both, the NPL ratio may be maintained at a healthy level that does not involve the national NPL ratio to rise significantly after COVID-19. This, however, may not necessarily solve the issue of at the local bank level.
The COVID-19 pandemic may also exacerbate already high NPL ratios in economies like Russia, Ukraine, and the like. These consequences combined with the leftover high ratios from the 2008 to 2009 financial crisis may make it even more difficult to recover. These governments will need smart planning and sensible economic policies in order to facilitate a partial or full recovery from not only the COVID-19 pandemic socially, but also in their non-performing loan amount and how much they can make in profits.
It is also important to mention findings about the effectiveness of government regulations. It is found that handing out incentives for banks during recessional periods allows the ratio to stay down by ensuring the banks are still able to keep an even spread on their loan types. It also helps to decrease the ratio if national governments give incentives to their citizens to take out loans. This includes tax cuts or even cash incentives that allow citizens to take out loans and get a reward for that action. Indeed, the paper found that the more effective government comes from giving incentives.