Hidden Debts, Bad Loans Stopping New Credits – W/Bank

The World Bank Group has said non-performing loans and hidden debts are making it difficult for banks to grant new credits to customers.

In a report released yesterday, the bank disclosed that developing countries face growing risks from financial fragility created by the COVID-19 crisis and non-transparent debt.

The World Development Report 2022: “Finance for an Equitable Recovery” said that risks may be hidden because the balance sheets of households, businesses, banks, and governments are tightly interrelated.

World Bank Group President David Malpass, explained that as rising inflation and interest rate increases pose further challenges to recovery, developing countries need to focus on creating healthier financial sectors.

Today, high levels of non-performing loans and hidden debt impair access to credit, and disproportionately reduce access to finance for low-income households and small businesses.

“The risk is that the economic crisis of inflation and higher interest rates will spread due to financial fragility.

Tighter global financial conditions and shallow domestic debt markets in many developing countries are crowding out private investment and dampening the recovery,” Malpass said.

“It is critical to work toward broad-based access to credit and growth-oriented capital allocation. This would enable smaller and more dynamic firms – and sectors with higher growth potential — to invest and create jobs.”

The report further highlights four pressing economic risks and concrete steps that policymakers can take to address them and support a robust and equitable recovery:

Rising nonperforming loans. Increasing transparency and reducing the share of non-performing loans enables financial institutions to remain stable, well-capitalized, and able to provide credit, especially to low-income households and small businesses.

Delayed resolution of distressed loans. Effective insolvency procedures, including out-of-court options, can reduce the social costs of widespread debt distress, prevent the misallocation of resources, and limit government interference in debt resolution. Delayed action can reduce access to credit, discourage entrepreneurship, and delay the recovery of economic activity.

Tighter access to credit. Innovations in digital finance and lending models can help financial institutions reliably assess and manage risk and continue to provide credit, especially to low-income borrowers. Households that maintain financial access are more likely to sustain consumption, while businesses can invest and create jobs.

Elevated levels of sovereign debt. The proactive management and reduction of sovereign debt can free up fiscal resources needed to support the recovery. Delays in addressing debt sustainability are associated with protracted recessions, rising inflation, and reduced spending on social safety nets, public health, and education, which have disproportionate impacts on the poor.