Bank of Valletta plc (BOV) on Wednesday shared that it is set to sell a portion of its long-standing non-performing loans.

The bank confirmed that it is in “advanced negotiations” over the sales.

This move is being done with a view to “strengthening its capital and liquidity buffers”, BOV said. In selecting the portfolio, BOV followed a "rigorous process" using predefined criteria.

The bank said that it "always aims to identify workable solutions" to reinstate the quality of borrowings whenever a customer experiences credit financing issues. However, in this specific portfolio, BOV has "over several years" taken a number of steps to recover the outstanding amounts, yet clients defaulted on their obligations and agreed terms on multiple occasions.

BOV clarified that the portfolio does not include any loans where the underlying borrowers defaulted on their obligations due to health-related reasons.

BOV stated that it will keep the market informed about any developments and will publish further details in due course.

What are non-performing loans?

A non-performing loan is a situation where debtors, both individuals and businesses, are unable to pay their installments or debts on time. These situations can be brought about due to various reasons, including the debtor losing their main source of income or being absent in a planned manner in making payments.

Should the non-performing loan condition not be resolved immediately, the debtor’s credit history and score will worsen. This has an impact on whether they will be able to apply for financing from other lenders.

Why do banks sell non-performing loans?

Banks commonly sell non-performing loans in order to avoid the possibility of a complete write-off, thus reducing the chances of producing a significant loss.

These loans tend to be sold to investors, who often ask for a discount on the value given the high risk involved in acquiring them.

However, there are also other ways for banks to resolve non-performing loans, such as renegotiating the terms of the loan with the debtor, giving them more time to repay. This can enable the individual or business with temporary issues to survive and pay the loan back in due course.