The Economic Impact of Reducing Non-Performing Loans

45 Pages Posted: 8 Feb 2018

See all articles by Maria Balgova

Maria Balgova

University of Oxford - University of Oxford, Corpus Christi College, Students

Michel Nies

Citigroup London

Alexander Plekhanov

European Bank for Reconstruction and Development (EBRD)

Date Written: October 10, 2016

Abstract

Non-performing loans (NPLs) are a burden for both lender and borrower; they contract credit supply, distort allocation of credit, worsen market confidence and slow economic growth. So what is the best way to deal with them? This paper compares three different scenarios: actively reducing NPLs, waiting until fast growth of new loans renders the NPL problem obsolete, or doing nothing. We find that reducing NPLs has an unambiguously positive medium-term impact on the economy. And while countries that experience an influx of fresh credit grow the fastest, the economies that actively seek to resolve NPLs do comparably well. When the NPL problem is ignored, economic performance suffers.

Keywords: non-performing loans, economic growth

JEL Classification: G21, G33, O40

Suggested Citation

Balgova, Maria and Nies, Michel and Plekhanov, Alexander, The Economic Impact of Reducing Non-Performing Loans (October 10, 2016). EBRD Working Paper No. 193, Available at SSRN: https://ssrn.com/abstract=3119677 or http://dx.doi.org/10.2139/ssrn.3119677

Maria Balgova

University of Oxford - University of Oxford, Corpus Christi College, Students ( email )

Merton Street
Oxford
United Kingdom

Michel Nies

Citigroup London ( email )

33 Canada Square
London, E14 5LB
United Kingdom

Alexander Plekhanov (Contact Author)

European Bank for Reconstruction and Development (EBRD) ( email )

One Exchange Square
London, EC2A 2EH
United Kingdom

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