Bank-specific and macroeconomic determinants of non-performing loans in the Republic of Macedonia: Comparative analysis of enterprise and household NPLs

Jordan Kjosevski,Mihail Petkovski,Elena Naumovska

doi:10.1080/1331677x.2019.1627894

Abstract

The purpose of this paper is to explore the influence of bank-specific and macroeconomic determinants of all non-performing loans (NPLs) to enterprises and households in the Republic of Macedonia. The analysis is performed for the whole banking sector for the period 2003Q4 to 2014Q4, by applying the Autoregressive Distributed Lag Modelling Approach (ARDL), the co-integration model implementing quarterly time series. The results of the research indicate that the profitability of banks, the growth of loans to enterprises and to households respectively, as well as the growth of GDP, all have a negative impact, while banks’ solvency and unemployment have a positive impact on the rise of non-performing loans in both models. In addition, regarding enterprises, we found that the exchange rate has a positive and statistically significant impact on the level of NPLs, while inflation has a negative and statistically significant impact on the increase in non-performing loans to households. The main contribution of this paper is that the results obtained by econometric analysis may be used for forecasting non-performing loans several years in the future, as well as for stress-testing both the entire banking system and the individual banks operating in the Republic of Macedonia.

Highlights

Non-performing loans are one of the basic indicators of the financial ‘health’ of banks and constitute the main measure of credit risk in the banking system
This paper’s findings confirm the hypothesis that bank-specific and macroeconomic determinants have an impact on the amount of non-performing loans to enterprises and to households in Macedonia
As for the macroeconomic determinants in both specifications, the results indicate that a negative relationship exists between economic growth and growth of non-performing loans, while real exchange rate is a statistically significant determinant only in the first model

Summary

Introduction

Non-performing loans are one of the basic indicators of the financial ‘health’ of banks and constitute the main measure of credit risk in the banking system. The increase in non-performing loans indicates that the number of economic entities that have difficulties in servicing their credit debt is on the rise, increasing the probability of loans not being repaid (credit default). In this case, the bank assets value erodes and its wealth decreases as a result of the losses incurred due to debt write-offs (Morttinen, Poloni, Sandars, and & Vesala (2005). Considering the previous findings, the issue of non-performing loans, along with the factors they depend on and their effect on the real economy, became a primary concern of almost all countries in the world, and resolving this issue became a precondition for regaining the functionality of financial markets (Klein (2013)

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Conclusion