Determinants of NPL growth in Macedonia

Non-performing loans are one of the most vulnerable categories in the balance sheet of banks. Their increase can affect banks’ liquidity and solvency. That is why defining the main indicators that influence the development of non-performing loans is crucial for both bank performance and the financial system as a whole. This paper investigates macroeconomic and bank determinants of NPLs in Macedonia for the period 2006-2015, including descriptive and econometric analyses. The first analysis presents the correlation between NPLs and two macroeconomic indicators: GDP and Inflation. The second econometric analysis shows the correlation between NPLs and two bank indicators: Capital to Assets and Return on Equity. In these estimations, we also include the inflation as an independent variable. The analyses show that in a period of economic growth and higher inflation, non-performing loans are low and stable. The increase of the capital to asset and return on equity ratios reduces the level of NPLs as well. We conclude that as long as the economy is stable and banks are profitable and have adequate capital, nonperforming loans are on a level suitable for the banks.