Nonperforming Loan Disposals Without Resolution

Ben Charoenwong (), Meng Miao () and Tianyue Ruan
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Ben Charoenwong: National University of Singapore Business School, Singapore 119245, Singapore
Meng Miao: Renmin University of China School of Finance, Beijing 100872, China

Management Science, 2025, vol. 71, issue 1, 898-916

Abstract: Using proprietary data on nonperforming loan (NPL) transactions in China, we document that banks conceal NPLs in disposal transactions that are supposed to resolve NPLs. In these transactions, banks provide financing and retain the credit risks and debt collection obligations. Transaction prices contradict underlying credit risks: Despite being delinquent for 4.5 years, the median NPL package is sold at face value with zero haircut. The majority of NPL packages are resold at a premium to banks’ non–government-owned borrowers, further supporting the concealment view. Banks under stricter regulation conceal NPLs more and engage in more illicit concealment. NPL-concealing banks increase zombie lending, suggesting that an ineffective resolution exacerbates credit misallocation. Recognizing the hidden NPLs implies the total NPLs in China is two to three times the reported amount.

Keywords: nonperforming loan (NPL); NPL disposal; bad bank; troubled bank resolution; banking regulation; regulatory arbitrage; financial stability; credit misallocation; Chinese economy (search for similar items in EconPapers)
Date: 2025
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