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2017 DARP Partner Summit

Why distressed asset resolution is important to development finance

Joaquim Levy's picture
© Jonathan Ernst/World Bank
© Jonathan Ernst/World Bank

Addressing high levels of non-performing loans (NPLs) is key to preserving financial stability and an important element of an integrated development agenda. High levels of NPLs lock in capital that could support fresh lending, and they create a negative macro-financial feedback loop, as debt overhang depresses borrowers’ investment and consumption decisions. High NPLs have particularly adverse implications in emerging market and developing economies (EMDEs), which lack fully developed capital markets and where credit is provided mostly by banks. Hence expanding the role of debt servicing companies and a secondary market for distressed debt is a constructive strategy: it should be a priority in most EMDEs.