The paper investigated the impact of micro and macro-economic indicators on non-performing loans and the extent to which those indicators vary through time; using a cross-sectional analysis from a sample of 70, 69 and 63 world countries. As far as non-performing loans are affected by bank specific factors and macroeconomic factors, this study investigated two sets of factors including macroeconomic indicators and bank specific (micro) indicators. Using the robust regression approach, the impact of economic indicators on non-performing loans is analyzed for the period from 2015 to 2017. The results of this research are mostly in line with results of research conducted by many other authors. There are tested statistically inflation, population growth, unemployment rate, interest rate, domestic credit to private sector, current balance account, bank capital asset ratio, claims on private sector, strength of legal index, foreign direct investment and Gross domestic product growth.
On one hand, the results show that the economic indicators negatively related to non-performing loans are population growth rate (PG), current balance account (CBA), claims on private sector (CPS) and domestic credit to private sector (DCPS). On the other hand, economic indicators positively related to non-performing loans are gross domestic product growth (GDPG) and inflation. The findings also show that economic indicators that are related to non-performing loans are changing. During the periods analyzed, the there is an increase in economic indicators relate to non-performing loans. Those economic indicators were only domestic credit to private sector, current balance account and claims on private sector in 2015. In 2016, another economic indicator occurred in addition of those of 2015, inflation. In 2017, additional economic indicator occurred, population growth and gross domestic product growth. Hypothesis that there are factors that affect non-performing loans in the countries under study is not rejected. The second hypothesis that factors affecting non-performing loans are changing through time is also confirmed.
Based on our findings, banks should pay more attention to several factors when providing loans in order to restrict the level of impaired loans. These banks should also take recovery measures so as to reduce non-performing loans. Banks should assess well the repayment capacity of the future customers. Further investigations are needed to better understand the interactions and relationships between non-performing loans and the different types of borrowers, namely; individuals, small and medium enterprises, and corporate borrowers for a better customer selection because an increase in domestic credit to private sector reduces non-performing loans. Banks should develop a credit risk assessment model combining internal and customer factors. Banks should also reduce risk concentration by diversifying borrowers. Countries should reduce inflation as it has been shown that an increase in inflation will increase non-performing loans as inflation reduces borrowers’ revenue. Finally, it is important for other studies to investigate the procedures that banks undertake to manage credit cycle, since credit granting to credit recovery.
Having directly handled loan portfolios over extended periods of time, I can conform that the causative factors certainly vary with time.
Of course, the factors that affect non-performing loans are changing as changes in the economic environment, employment, income and spending of households occur.
You are right Krasimira. This is in line with my findings while analyzing 2015-2017 periods.
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