In the approach traditionally taken in Italy, NPLs can be divided into at least two large and very dissimilar categories based on the degree of difficulty faced by debtors: of the € billion worth of gross NPLs outstanding at the end of 2015, bad loans accounted for € billion; € billion were in loans classified as “unlikely to be repaid”, past-due or in breach of overdraft ceilings.
These two categories of NPLs obviously have different requirements in terms of coverage and write-downs. Both types of loans must be booked in the balance sheets with due prudence, but not at values corresponding to their immediate liquidation.