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Determinants of the Corporate Non-performing Loan Volume in the Republic of Croatia

In the Republic of Croatia banks are the most important financial institutions and their loans are a key source of funds for households and non- financial corporations. The ratio of nonperforming loans, one of the key indicators of banks’ performance and asset quality, for nonfinancial corporations in Croatia is currently nearly triple than those for households, being severely impacted by the global financial crisis and local weaknesses of the Croatian economy, but also because of many other factors. This issue certainly has an effect on the regional development, where data indicates strong disparities and underdevelopment of certain regions. Therefore, to locate potential contributors for the economic growth, the aim of this article is to analyse banks specific and macroeconomic determinants of the non-performing loan ratio in three corporate economic subsectors (NACE activities C, F and G-I) which are key for the employment level and economic prosperity of Eastern Croatia. To estimate the long run relationship and cointegration between NPLs and independent variables in the period 2010- 2018 Autoregressive Distributed Lag (ARDL) model is used. The model results indicate importance of macroeconomic factors for the levels of the NPLs in Croatia in the long run, especially the GDP growth rate, while bank specific factors are significant in the short run. The obtained results can be used to form policies to reduce bad loans and thus attributing to the stability of business environment, more favourable loan arrangements and higher overall economic development of Croatia.

non-performing loan ratio ; banks ; corporate sector ; Republic of Croatia

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