Uneven Risks, Future Preparedness: How Asia Is Managing Nonperforming Loans

By Rachita Gulati, Bambang Brodjonegoro, Dil Rahut (via Asian Development Bank Institute, Tokyo)

Cover Image Attribute: Image by Steve Buissinne from Pixabay

In today’s dynamic global economic environment, financial crisis preparedness is not optional but an imperative. The interconnectedness of banking institutions and financial markets means that crises rarely remain contained within a single country. Instead, they can trigger “domino effects” through trade disruptions, supply chain shocks, digital connectivity, investment shifts, and changes in investor sentiment. This underscores the crucial need for regional cooperation on financial oversight and crisis preparedness.

Nonperforming loans (NPLs) are a recurring source of financial vulnerability, capable of sparking both domestic instability and cross-border contagion. This was seen during the Asian financial crisis of 1997–1998, when NPLs were exacerbated by factors such as high state ownership, regulatory forbearance, and weak resolution regimes. The 2008 global financial crisis also exposed weak credit governance, culminating in episodes such as Viet Nam’s 2011 banking crisis and India’s NPL surge and twin balance sheet problem during 2013–2018, triggered by real estate and state-owned enterprise lending booms. Other examples include the European debt and banking crisis of 2010–2013. More recently, COVID-19 debt moratoria masked underlying NPLs, with Sri Lanka reaching 12.8%  and Tajikistan exceeding 35% NPL ratios in 2023.

Uneven Regional Trends

Between 2005 and 2022, NPL patterns in Asia diverged widely, indicating varying levels of structural progress in the management of asset quality and vulnerability to external shocks. South Asia experienced persistently elevated NPL ratios, with a spike following the global financial crisis. Sri Lanka and Bangladesh, in particular, faced NPL increases during the post-COVID-19 period due to economic and political instability. Central Asia has seen the highest and most volatile NPL ratios, peaking at nearly 15% around 2016, though NPLs have declined in subsequent years. Despite this decline, Central Asia’s NPL ratio remains significantly higher than in other parts of Asia.

Pacific island countries, such as Solomon Islands and Fiji, showed moderate but rising NPL trends post-2020, likely due to COVID-19-induced credit stress. Southeast Asia and East Asia have demonstrated the most stable and resilient NPL levels, with ratios declining sharply after 2005 but stabilizing below 3% post-2010, indicating strong credit discipline and effective support measures, both pre- and post-COVID.

Reform Momentum

Asian economies have made notable progress in strengthening their regulatory architecture for NPLs, with a significant shift from incurred loss to forward-looking provisioning through expected credit loss (ECL). The adoption of prompt corrective action (PCA) frameworks and the acceleration of asset management companies (AMCs) are also crucial for a resilient crisis response.

A comparative mapping of NPL management strategies across selected Asian countries reveals several key developments. India has operationalized National Asset Reconstruction Company Ltd. (NARCL) and India Debt Resolution Company Ltd. since 2021, and has had a PCA framework since 2001 (revised in 2017). This was extended to nonbanking financial companies in 2022 during the post-COVID-19 years, with full Basel III implementation since 2019. Sri Lanka adopted the SLFRS 9 financial reporting standards in 2018 and has empowered its central bank under the Banking Act for PCA and implemented Basel III since 2017. Pakistan implemented a 90-day NPL rule in 2018 and PCA in 2020, though its asset reconstruction company proposals are stalled.

Progress is also evident in East Asia and Southeast Asia. For instance, the People’s Republic of China has had AMCs in operation since 1999, adopted a stage-based ECL model in 2018, and applies a 90-day standard. Countries have strengthened NPL resolution through centralized or private AMCs and regulatory alignment with Basel III. Examples include Malaysia with private AMCs; the Republic of Korea with KAMCO and full International Financial Reporting Standard (IFRS) 9 adoption in 2018; Thailand with centralized AMCs and the IFRS-aligned Thai Financial Reporting Standards; and Viet Nam with the establishment of the Vietnam Asset Management Company in 2013 and its forthcoming transition to the Viet Nam Financial Reporting Standards. The Philippines implemented the Financial Institutions Strategic Transfer Act in 2021 to facilitate NPL offloading to private corporations, though it lacks a centralized AMC.

Persistent Gaps

Despite progress, significant gaps remain. Some countries remain entrenched in post-crisis forbearance regimes or lack the institutional capacity to enforce early intervention. Others have limited NPL preparedness, making them vulnerable to shocks such as market volatility and sovereign distress. Stress testing remains underdeveloped or siloed, often conducted only at the macro level and not linked to sectoral or climate risks. Growing concerns are compounded by overlapping risks like rising NPLs, IT vulnerabilities, digital fraud, climate shocks, and debt volatility.

Priorities for Strengthened Preparedness

To strengthen NPL crisis preparedness, Asian financial systems must adopt a multi-pronged approach.

First, capital buffers aligned with Basel III and strict NPL recognition through ECL models must be enforced, complemented by accelerated legal reforms such as India’s Insolvency and Bankruptcy Code and functional secondary markets for distressed assets (like NARCL). Second, dynamic supervision frameworks should incorporate forward-looking tools, such as PCA mechanisms with transparent triggers, climate-adjusted stress testing, and regional risk dashboards for cross-border monitoring. Third, strategic crisis governance should build effective resolution frameworks while harnessing technology to enhance cybersecurity and optimize digital platforms for more efficient NPL resolution.

By prioritizing financial resilience, adaptive supervision, and cross-border collaboration, Asia can transform its NPL challenges into pillars of long-term stability while safeguarding against emerging geopolitical and climate-related shocks.

This insight was first published on the Asian Development Bank Institute's blog.

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