UTP: How to Manage Unlikely to Pay Credits

In the banking sector, in addition to NPLs, the acronym UTP arouses a great deal of interest: UTP stands for Unlikely To Pay, that is, literally, “unlikely to pay”; in other words, it refers to credits cataloged by banks as probable defaults.  

Using the level of risk as a parameter, UTPs are lower in the ranking than NPLs. However, they present a higher level of risk when compared with impaired past-due and/or overdue exposures.

The management of NPLs, given their higher level of risk and strong impact on the economy in general, has been a priority for the European Central Bank for years. UTPs, on the other hand, has only emerged in the last year, gaining the interest of national and supranational bodies.

UTPs are loans that are formally intact but carry a certain degree of risk because they are unlikely to be fulfilled.

On the other hand, an NPL is a loan classified by banks as a sure default.

Since UTPs are the fetal stage of NPLs, banks prefer not to hold them; selling them or managing them before they become non-performing loans is the best solution to contain the level of risk.

In fact, banks are following the trend of selling loans before they become impaired, i.e., when the debtor is still potentially able to pay because no legal proceedings have yet been initiated against him.

In fact, in the real estate sector, if there is no compulsory sale of the property, selling an unlikely-to-pay loan allows the value of the asset to be preserved and saves costs, time, and exposure to risk.

Whether it is a matter of credit transfer or internal management within the institution, what finally seems to be the trend is not to let UTPs mature and cross over into NPLs, but to try to recover what is possible while the debtor is still considered a customer and not an unrecoverable debtor.

As Massimiliano Bertolino (CEO of Frontis NPL) notes for AziendaBanca.it:

“The ECB has sent a clear message to the banks: in order to reduce the weight of non-performing loans, they must intervene earlier, by selling off deteriorating loans and anticipating the solution to the problem. That is, by creating a new type of financial product. (…) One of the problems of UTPs is that they are not treated differently than NPLs. Instead, they should involve the debtor who is not just a debtor but still a customer.”

What are the issues in being able to manage UTPs on time? 

The lack of a suitable apparatus.

In general, the banks do not have within their competence sectors the capability to analyze and understand the real situation behind the data. In addition to the documents attesting to the credit, there is a concrete reality that escapes analysis and often differs from the written data.

In real estate, for example, in the structure of the banks, there is no department that is able to analyze the real value of the mortgaged property or the real possibility of recovering the credit; in these cases, it is necessary that the analysis is entrusted to experts in order to obtain a complete picture of the debt situation. Here the problem of information asymmetries returns.

If we consider, in fact, that in the case of UTP, the debtor is in a situation of temporary difficulty, Unlikely To Pay receivables can potentially be satisfied as soon as the cause of the debtor’s crisis is eliminated.

Furthermore, Unlikely To Pay receivables allow faster and more effective management, resulting in out-of-court credit recovery activities, unlike NPLs, which are often managed after legal action has been taken.

Under a hypothetical sale of UTPs, they will be sold to servicers and investors at much higher prices than NPLs because the probability of debt collection is higher in Unlikely than in Non-Performing.

Within this framework, banks are also more inclined to manage UTPs internally rather than outsource them. We think this is understandable given the still low level of risk and the still fairly high chance of recovery. In both cases, however, what seems undeniable at the present time is that the banks are not yet equipped to analyze debtor profiles and understand which credits are worth managing internally and proceeding with effective credit recovery, and which ones are not worth keeping to degrade, opting instead for assignment to third parties.

Managing Unlikely to Pay (UTP) Credits 

In any case, rebus sic stantibus, if you want to manage and restore banks and the country, it is necessary that in this dynamic we turn to companies that are able to analyze the various portfolios in the belly of the bank to outline the real equity situation and personal data of the individual positions contained.

Obtaining investigative information allows us to have a picture corresponding to the true debt condition and thus subdivide it into different clusters according to the debtors’ actual equity situation generating UTP.

In recent years, our structure and experience have enabled us to massively process the data contained in NPL and UTP portfolios, making it possible to obtain and upstream a large amount of information very quickly and at low cost, and, downstream, to carry out the actual recovery of the credit.

We dissect the UTP portfolios, assess their quality through the analysis of the debtor’s real assets and personal data, and actually recover the loans.

Our massive analysis closely investigates the debtor behind a probable default by returning:

  • Real addresses (real or fictitious residences and domiciles, company headquarters, real estate, etc.)
  • Telephone calls (both in the name of the debtor and not, to identify and contact the debtor)
  • Official and hidden income (work activity, leases, legal transactions in place, etc.)
  • Other current accounts (at other banks or Post Office)
  • Debtor’s state of health/deceasement (to determine the actual collectability of the debt)

Only with this information is it possible to manage and take advantage of UTPs. 

CreditVision is an investigative agency present in Padua, Milan, and Naples with 50 years of experience. For more information or proposals for collaboration, please fill out the form below.