Control of non-performing loans in retail banking by raising financial and consumer awareness of clients

Non-performing loan (NPL) problems remain urgent, or even threatening in some countries, despite relatively long-lasting macroeconomic recovery since the 2008-2010 crisis. NPL handling tools and methods currently used by the banks are not efficient enough to significantly reduce the NPL ratio and keep it within safe and sustainable limits. This paper analyses the current state and causes of NPLs in retail banking and the ways of improving their handling efficiency. An idea that retail banks should not only focus on administrative handling methods, but also actively promote financial awareness and especially rational consumer behaviour of clients as measures preventing the NPL, is presented. The idea is based on a synthesis of research results performed within three segments, which shape the background of the problem: first, the current NPL situation in retail banking, theoretical framework and methods of their control, second, the budgetary and borrower performance of households and contemporary trends within consumer behaviour and, third, the NPL determinants, evaluation and comparison of their impact. Recommendations for retail banks to invest into preventive NPL reducing measures and run them parallel to the currently used “follow-up” type NPL handling tools are developed. The recommendations are supported by simulation of payback potential of investment by using specially developed algorithm. Research methods used: comparative analysis, processing of statistical data, expert evaluation, mathematical analysis.