WTW urges Asia-Pacific banks to consider non-payment insurance

Uncertainties such as the Chinese real estate crisis require effective credit risk management.

Asia Pacific (APAC) Banks should look to non-payment insurance (NPI) to mitigate declining loan volumes, abundant liquidity and rising bad debt provisions, particularly in the commercial real estate sectors.

In this uncertain economic environment, effective risk management is crucial for banks in the APAC region, warned Deesha Doshi, Head of Lender Solutions Team, Financial Solutions, APAC at WTW.

NPIs protect banks against defaults by counterparties such as borrowers or guarantors on various debt instruments.

By insuring part of their credit exposure through the NPI, banks have greater certainty that defaulted debts will be repaid by the insurer, thereby reducing financial risk.

Although historically less used in the APAC region compared to global markets, the case for NPI adoption is growing stronger.

It enables banks to expand their positions, obtain new mandates and manage their capital more efficiently by improving the overall performance of their relationships.

In addition, NPIs can ease pressure on capital buffers by reducing risk-weighted assets (RWA) in line with Basel Framework rules for insured exposures.

Despite these benefits, banks in the Asia-Pacific region have been slower to adopt NPI due to historically strong balance sheets and less stringent regulatory pressures.

However, with economic uncertainties such as the Chinese real estate crisis affecting the region, the need for effective credit risk management is growing.

“The economic and business environment suggests that a new approach to credit risk management may now be needed. China’s property crisis has already led to defaults by property companies on $140 billion worth of dollar bonds – and more bad news is likely to follow. Other Asia-Pacific markets are starting to worry about similar issues as the contagion spreads,” WTW’s analysis said.

Some banks are already reducing exposure or exiting markets, but many continue to view APAC as a growth opportunity amid expectations of a global economic recovery.

NPI not only helps banks manage new types of loan and transaction structures, but also enables them to be more competitive in a competitive marketplace.

While insurer costs and default risks are factors to consider, the NPI market is growing with competitive pricing and increased insurer capacity, providing flexibility through syndicated placements and standardized policy designs.

“It is also important for NPI users to invest in ensuring the product is used effectively – for example, by conducting internal training and establishing operational processes to ensure key policy conditions are met. Where a bank has no prior experience of using credit insurance, a lack of understanding among key internal stakeholders can be an initial barrier to setting up an NPI programme that needs to be overcome,” he added.