The aftermath of the coronavirus disease (COVID-19) pandemic, the Russian Invasion of Ukraine, and global  monetary tightening are raising uncertainties about global and regional financial conditions. Higher debt  levels in many countries and deteriorating credit quality have aggravated the situation, putting the region’s  financial systems at risk. Against this backdrop, a sharp increase in nonperforming loans (NPLs) could destabilize  the region’s banking and financial systems and compromise a post-pandemic and sustained economic recovery. 

By end-2021, NPLs held by banks in the region were already considerably higher than pre-COVID-19 levels, and  these could worsen as troubles persist and as many central banks hike interest rates to tame inflation. 

A developed market for NPL trading can effectively help reduce NPLs in banking systems by mobilizing private  capital to relieve distressed bank assets. Indeed, development and deepening of NPL markets was already on the  policy agenda before COVID-19. The current economic and financial challenges only underscore the relevance of  this strategy to facilitate swift resolution of banks’ NPLs.

A silver lining of the pandemic has been the accelerated adoption of digital solutions across economies. In fact,  digital technology has transformed financial systems worldwide, producing noticeably greater efficiency and  transparency by promoting information flows, reducing operational and transactional costs, and improving  financial inclusion. As such, an online NPL trading platform could help further develop NPL markets in the region  by bringing together buyers, sellers, and service providers in a digital marketplace. It could streamline the overall  transaction process and address some of the supply-side, demand-side, and structural impediments weighing on  the smooth functioning of NPL markets.

To this end, this report examines the feasibility of establishing an online NPL transaction platform in Asia and  the Pacific as an additional tool for resolving NPLs. It (i) examines the state and level of development of Asia’s  NPL markets; (ii) discusses benefits, functions, and practical considerations of an electronic NPL trading platform;  (iii) assesses countries’ readiness for an electronic platform; and (iv) proposes a road map for the development of  NPL markets in the region and of an online NPL trading platform. 

I hope this report can serve as a useful reference for the development of the region’s NPL markets. I am also  confident that the road map can help guide policy actions that will advance regional NPL markets and hence  strengthen financial stability.