In response to ongoing economic uncertainties, such as the Chinese real estate crisis, Asia Pacific (APAC) banks are being advised to adopt non-payment insurance (NPI) as a critical component of their risk management strategy. This recommendation comes amidst declining loan volumes, abundant liquidity, and increasing provisions for bad debts, particularly in the commercial property sectors.
Deesha Doshi, Head of Lenders Solutions Team, Financial Solutions, APAC at WTW, emphasized the importance of effective risk management in the current economic climate. NPIs offer banks protection against defaults by counterparties, including borrowers and guarantors, across various debt instruments.
“By insuring a portion of their credit exposure through NPI, banks can mitigate financial risk and gain assurance that defaulted debts will be covered by the insurer,” Doshi stated.
Despite historically lower adoption rates in APAC compared to global markets, the argument for implementing NPI is becoming stronger. The insurance mechanism not only allows banks to expand their positions and secure new mandates but also facilitates more efficient capital management, thereby enhancing overall relationship returns.
Furthermore, NPI can help alleviate pressure on capital reserves by reducing Risk-Weighted Assets (RWA) under Basel framework rules for insured exposures.
However, APAC banks have been slower to embrace NPI, largely due to historically robust balance sheets and less stringent regulatory pressures. The recent economic uncertainties, such as the Chinese real estate crisis, underscore the need for enhanced credit risk management strategies across the region.
“The economic landscape suggests a paradigm shift in credit risk management practices. The fallout from the real estate crisis in China, which has seen significant defaults among property companies, serves as a stark reminder of the potential risks,” noted insights from WTW.
While some banks are scaling back exposure or exiting markets, many view APAC as a growth opportunity amid forecasts of global economic recovery.
NPI not only enables banks to navigate new lending and transaction structures but also enhances their competitiveness in a challenging market environment. Despite considerations such as costs and insurer default risks, the NPI market is expanding with competitive pricing and increased insurer capacity, offering flexibility through syndicated placements and standardized policy templates.
“It’s crucial for NPI users to invest in effective utilization, including internal training and operational processes to ensure compliance with policy terms. Lack of understanding among key stakeholders can initially impede the establishment of an NPI program,” the statement added.
