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Impact of non-performing loans on banks' loan portfolio and economic growth in the Republic of Croatia and Bosnia and Hercegovina

Bank loans are the most important source of the banks’ income and profitability. The structure of loan portfolio, such as maturity, currency, type of interest rate or credited sector, is also highly significant for banks’ business performance. In the latest global financial crisis, quality of the loans sharply deteriorated, therefor increasing the percentage of non-performing loans in banks’ balance sheets and causing major problems in business activity for many banks. The events emphasized the importance and potential impact of non-performing loans not just on banks, but on the whole economy and society. The aim of this article is to analyse determinants of non-performing loans and their impact on economy and economic growth in the Republic of Croatia and Bosnia and Hercegovina. Multiple regression analysis will be used to determine strength and coefficient of the independent micro and macro variables (GDP, unemployment rate, interest rates, exchange rate, banks’ balance sheet and income statement indicators) on the level of non-performing loans. This will allow comparison of the two economies, also the identification of the causes and effects of non-performing loans which could be used to prevent future crisis and enhance recovery of banks’ loan portfolio. Both countries were strongly impacted by the long lasting recession which had a major role in unemployment rates and household income levels. Preliminary analysis indicate that the economic contraction was the most important factor of the deterioration of non-performing loan levels, which was much higher in analysed countries than the EU average and caused liquidity challenges in balance sheets of the banks. Thereby, potential funds in banks were unavailable for new investments and projects needed to increase economic growth and stabilize economy. Despite current economic expansion, banks are still slightly reluctant in approving loans, alert of the potential growth of the non- performing loans and its effect on banking performance. Results of this paper will help in understanding key factors influencing quality of banks’ loan portfolio and policies to overcome this challenges which should be of interest to the bank management and regulatory bodies but also, due to the importance of banks, for the wider public and economy.

Non-performing loans, banks, banking loans, Croatia, Bosnia and Hercegovina

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