PORTFOLIO DIVERSIFICATION AS A TOOL FOR MANAGING NON-PERFORMING ASSETS OF BANKS IN UKRAINE
Abstract
As a result of multiple cycles of economic instability, including the consequences of the full-scale war, the level of non-performing loans (NPLs) and non-performing assets (NPAs) in Ukrainian banks remains a significant challenge to financial stability. This article examines the challenges of managing non-performing assets in Ukraine's banking sector under conditions of economic instability and martial law. The role of asset and income diversification in reducing credit risk and enhancing banks’ financial resilience is substantiated, with regulatory requirements and international best practices taken into account. In the context of problem assets, diversification can facilitate the dispersion of risk exposures across different asset types, mitigate the impact of critical losses from individual insolvent borrowers, and increase portfolio resilience to adverse macroeconomic shocks. The effectiveness of traditional and alternative approaches to NPL management is analysed, including restructuring, securitisation, active credit management, and the “skin in the game” principle. During 2020–2025, the Ukrainian banking sector demonstrated the capacity to sustain growth in active operations while gradually reducing non-performing assets, even under conditions of full-scale war. According to the NBU, over the five-year period, the credit portfolio of the banking sector increased by 44%, while the investment portfolio grew by 111%, and the share of non-performing assets declined to 9.5% as of the end of 2025. At the same time, state-owned banks continue to exhibit a persistently high share of problem loans. Based on an analysis of the share of non-performing assets in banks’ credit and investment portfolios, recommendations are proposed to strengthen corporate governance and adapt internal bank policies, with particular emphasis on state-owned banks, in order to reduce NPL volumes and reinforce financial stability. Potential directions for reducing non-performing loans include restructuring and resolution, write-offs of irrecoverable loans, sales on the secondary market, improved risk assessment, enhanced monitoring and early warning systems, high-quality corporate governance, and specialised mechanisms for managing non-performing assets.
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