Resolving Non-Performing Loans After Crises: A Review of Strategies, Evidence, And the Forbearance Debate

Abstract

Every major banking crisis leaves behind a stock of non-performing loans (NPLs), and how that stock is resolved shapes the speed and completeness of the subsequent recovery. This paper reviews the theory and cross-country evidence on NPL resolution strategies — write-offs and provisioning, loan restructuring, market sales, and transfers to asset management companies — and on their principal alternative, regulatory forbearance. The review synthesises evidence from the canonical historical episodes (Japan's lost decade, the Nordic crises, the Asian financial crisis, the European sovereign debt crisis, and the COVID-19 policy experiment) and from the firm- and bank-level literature on zombie lending. The weight of evidence supports early, transparent loss recognition paired with credible recapitalisation as the strategy most consistently associated with restored credit growth, while sustained forbearance is associated with capital misallocation, depressed competition, and prolonged stagnation. The review also identifies the conditions under which the consensus prescription is qualified: fiscal capacity constraints, the distinct dynamics of the COVID-19 moratoria, and the institutional prerequisites — insolvency regimes, distressed-debt markets, AMC governance — without which aggressive resolution fails in execution. The paper concludes with implications for crisis-preparedness frameworks and a research agenda on resolution in fiscally constrained emerging economies.