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New Guidelines for Decreasing Non-Performing Exposures in Financial Institutions in Croatia

The aim of this paper is to present new guidelines for commercial banks established by the European Council and decrease the negative effect of nonperforming exposure (NPE) in banks’ books, which has a direct effect on the profitability of banks. To decrease non- performing exposure (NPE) in banks’ books, a clear NPE strategy needs to be determined. This paper examines the readiness of the Croatian banking system to implement new strategies for decreasing the negative effect of NPE, as laid down by the European Council. The NPE strategy includes the internal capabilities of credit institutions, their external conditions and the capital implications. The research covers several measures that financial institutions in Croatia can take to decrease NPE and emphasizes the importance of creating a clear operational plan for the banks in Croatia by taking into consideration macroeconomic conditions, NPE markets development, legal framework, and tax implications in the country. It also shows the importance of the organizational structure of the NPE workout units, human and technical resources, as well as control functions. All collection measures and the strategy for decreasing of NPE described in the paper are in line with the European Council guidelines. Using empirical analysis, the authors claim that the Croatian banking system faces several issues when collecting bad debts, such as legal difficulties and still insufficiently developed NPE markets.

European Council guidelines, non-performing exposure, Croatia, NPE strategy, legal and regulatory framework

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