In today’s challenging economic landscape, Non-Performing Loans (NPLs) continue to burden financial institutions across both emerging and mature markets. Too often, these distressed assets are written off as unrecoverable or assumed to be commercially unviable to enforce. However, with the right strategy, many NPLs can be converted into real recoveries.

At Annecto Legal, we specialise in helping clients realise the hidden value in their NPL portfolios. Combining legal expertise with litigation funding solutions helps us to deliver commercially sound strategies that make recovery a reality.

What is a Non-Performing Loan?

A loan is typically classified as non-performing when the borrower is in default, meaning that they have failed to make payments of principal or interest periods for a set period (most commonly 90 days or more). Once a loan passes this threshold, it poses elevated credit risk and is no longer generating income for the lender.

While definitions may vary slightly across regulatory bodies, the International Monetary Fund (IMF) broadly defines NPLs as loans that are either in default or close to being in default, regardless of collateral or guarantees.

Why Non-Performing Loans matter

Non-Performing Loans (NPLs) are far more than a technical accounting issue; they reflect deeper structural problems within the financial system and can have far-reaching economic consequences. When loans go unpaid and borrowers default, they accumulate on balance sheets and reduce the institution’s ability to lend to other, creditworthy borrowers.

A high volume of NPLs also undermines market confidence. Investors become wary of institutions burdened with distressed assets, which can lead to reduced valuations and difficulty raising capital. Regulators often impose stricter requirements or supervisory action on banks with excessive exposure to non-performing debt.

Managing and Resolving Non Performing Loans

Refinanced or delayed repayment structures – In some cases, modifying loan terms through refinancing or payment rescheduling can help rehabilitate a loan and convert it back into a performing loan. However, this only works if the borrower has a realistic path to financial recovery.

Selling the loans to asset management companies – Banks may sell NPLs to asset management companies or investors in secondary markets. This allows lenders to remove toxic assets from their books, realise some value, and redeploy capital toward more productive lending.

Engaging a collections agency – When enforcement is necessary but internal capacity is limited, working with a specialised collections agency can expedite asset recovery, particularly for consumer or SME debts.

Litigation and asset tracing – For larger or more complex NPLs, legal enforcement may be the most viable path. This includes tracing assets, freezing orders, and cross-border litigation. This process is often supported by litigation funding to offset costs.

Litigation funding: Unlocking Capital, Mitigating Risk

One of Annecto Legal’s key differentiators is our expertise across retainers and litigation funding. We can pull together a package of lawyers, experts and litigation funders who cover the legal costs of enforcement in exchange for a share of any successful recovery – transforming risky or under-resourced into financially viable opportunities. All with zero upfront cost.

Our team has experience managing individual cases and portfolio arrangements and advising on joint ventures between clients and funders to pursue high-value claims. This approach enables institutions to unlock the value of distressed debts while minimising financial exposure and internal resource strain.

Listed below are some of the options typically available for funding:

Third party litigation funding – The enforcement and recovery of Non-Performing Loans can be significantly strengthened through non-recourse third party litigation funding. This type of off balance sheet funding enables banks, funds, and asset managers to deploy capital strategically and tactically, ensuring their legal and enforcement teams are properly resourced to act quickly, before debtor assets are hidden or lost.

After the event insurance – For NPL enforcement actions – especially those with lower claims values – After the Event (ATE) insurance offers a more cost-effective alternative to full litigation funding. It can cover disbursement costs and the legal team’s time post-judgement, helping clients manage risk and preserve cash.

In parallel, judgement preservation insurance acts as a safety net for lenders or investors who have secured a court win, protecting against the financial impact of a judgement being overturned or reduced on appeal. This can be critical in jurisdictions where appeals are common.

Contingency fee agreements – Where appropriate, law firms and investigation teams may agree to pursue Non-Performing Loan recoveries on a contingency basis, charging only if they succeed in recovering funds. This approach, typically based on a percentage of the recovered amount, aligns incentives and provides an access-to-justice route for claimants who may lack the budget for upfront legal fees.

If the claim is unsuccessful, no fees are payable. In some circumstances, however, fees for Counsel and other disbursements may still be payable by the client, and so litigation funding may be a complimentary option.

Why choose Annecto Legal?

At Annecto Legal, we specialise in advising and supporting clients on all aspects of debt recovery. We work with a diverse range of clients to identify the most suitable funding solutions and connect them with experienced debt recovery solicitors to maximise asset recovery.

We also collaborate closely with leading commercial debt recovery law firms that advise businesses on Non-Performing Loan enforcement matters. If you are currently pursuing or defending a debt recovery claim and want expert assistance to help you meet your obligations and achieve the best possible outcome, contact Annecto Legal today.