Non Performing Loans and the Macroeconomy

The boom-bust cycle in CESEE countries has left a legacy of non-performing loans (NPLs) in the region. In some countries NPLs reach levels comparable to those seen in the wake of earlier financial crises. Although the problem is serious, there are important differences in its gravity across countries and sectors and it is not found to be on a scale where it would imperil financial stability or where it would be symptomatic of a generalized debt overhang in the countries of the region. Rather, the danger lies in lingering NPLs becoming a drag on economic growth as they weigh on credit growth, which remains subdued in most of the region. More generally, unresolved NPLs tend to mute activity of overextended borrowers and hinder the reallocation of their assets to more productive uses. The clouded economic outlook for CESEE countries suggests that “growing out of the NPL problem” is probably not a realistic option for the region. Instead, a more pro-active and cooperative approach to NPL resolution is needed. This holds the promise of improved growth performance, with positive knock-on effects on banks' asset quality and credit demand