Loan renegotiation and the long-term impact on total factor productivity

Abstract

When a loan is close to becoming non-performing, banks have stronger incentives to renegotiate it in favourable conditions for the borrower (loan forbearance) rather than for recognising and resolving the non-performing loan. At the aggregated level and looking at borrowers (non-financial corporations), the preference for loan renegotiation may affect total factor productivity and aggregate productivity growth, as new entrants, typically using technologies that are more advanced, may be crowded out from bank funding by incumbent non-financial corporations (this would particularly be the case in the absence of well-developed financial markets). The empirical analysis finds that a wider use of loan renegotiation, seen through lower values of provisions to total loans, has a negative effect on the change of total factor productivity (in addition to the influence of consumption growth). These results provide useful insights when considering the resolution of non-performing loans and the long-term consequences on the real economy.