Non-Performing Loans Ratio Measurement and Determinants Assessment

Abstract

This article examines what macroeconomic factors affect the NPL ratio and how to better measure this ratio to reduce the valuation bias caused by credit growth over the reporting period. The study is based on current publications in the context of the topic and the macroeconomic indicators available in the Eurostat database for regression analysis during the period 2001-2018. As a result of the study, it is proposed to adjust the traditionally used NPL ratio with credit growth during the reporting period. Statistical tests that were carried out with 623 regression models provide strong evidence to conclude that the adjusted NPL ratio leads to higher explanatory power of macroeconomic indicators and thus increase the level of confidence of NPL ratio predictions.

Estimates show that NPL ratio is mostly determined by some key macroeconomic variables, such as loans to GDP ratio, loan growth, unemployment, foreign investment growth, household income growth, inflation rates, and others. Macroeconomic development tendencies must be carefully considered when formulating policies in order to reduce credit risk.