Regional-Specific Determinants of Non-Performing Loans

Abstract

This paper investigates the determinants of non-performing loans in the Armenian banking sector during the period 2004-2016. The study is motivated by the hypothesis that both macroeconomic and regional-specific variables have an effect on loan quality. The study uses macroeconomic and regional specific factors to identify the determinants of NPLs of Armenian banks. To our best knowledge this study is the first to analyse the detriments of both national and foreign currency NPLs on regional level. I analyze NPLs in national currency and foreign currency, the results suggest NPLs in national currency are more driven by macroeconomic factors than NPLs in foreign currency. The analysis includes fundamental determinants of the NPL, such as GDP, wages, interest rate, housing price, return on assets, loan loss. The results suggest that the NPL is sensitive to interest rate in national currency and unemployment in almost all samples. I find statistically significant effects of wage increases on NPLs in OLS and FE models. The impact of the financial crisis is incorporated into the model by using a financial crisis dummy, the crisis dummy variable takes the value one for years 2008, 2014, while is zero for years 2004-2016. I used GMM dynamic panel data methods in order to estimate the effect of regional economic determinants of non-performing loans. After the application of the method of panel data we found the problem loans very negatively with the growth rate of GDP, the profitability of banks' assets (ROA) and positively with the unemployment rate, house prices.