Measuring the Recovery Performance of a Portfolio NPLs

Non-Performing Loans (NPLs) are exposures in state of insolvency, i.e. loans whose collectionby banks is uncertain in terms of the amount that will be returned and the time of return.In order to measure the recovery performance of a portfolio of NPLs, our idea is to draw acurve representing the recovery rates during time, here assumed discretized, for example, inyears. In this way, the user can get simultaneously information about recovery rate and time toliquidate of the portfolio. However, the computation of this curve becomes infeasible whensome elements of the portfolio are right censored, i.e. the recovery rate trajectory is knownonly until a particular year. In this talk, a new method of estimation of the recovery rate curvein case of right censored data is presented. It is studied from a theoretical point of view in asimulation study, where it is tested and compared with other methods. It is studied from apractical point of view, where it is applied to a real financial data set about some portfolios ofItalian unsecured NPLs taken in charge by a specialized operator.