Bad loans in banking sector

One of the leading indicators of the performance/health of the banking sector are bad loans. In the banking professional terminology, they are called NPL (non-performing loans) and are most often expressed as a share/percentage of total (gross) loans. Gross loans are loans without correction in values, and in NPL are loans for which the client is late with a payment for more than 3 months (90 days). If NPLs are smaller, banks are healthier and safer for depositors/creditors.

In the last 8 years, the world average for NPL is about 4%. The Austrian banking sector is below this figure, which means that it is very healthy, in relation to the Bosnian economy and the Serbian banking sector. Banks in Austrian ownership are dominant in the BH market, which indirectly supports the maintenance of the stability of the BH banking sector, but not direct, as it depends on the quality of the balance sheets of domestic banks. Serbia and BH have similar dynamics in the movement of NPL, the difference in size of NPL has existed for decades, and in Q1 2018 it disappears. In the first quarter of this year, NPLs were 9.7% (BH) and 9.2% (Serbia). NPLs in BH reached a peak in 2013 (15.1%) and since then they have been falling. NPLs are cyclical, they are the lowest in the year of the outbreak of the global financial and economic crisis (2008). A significant reduction in the NPL (relative to some maximum value) is an indicator of improving the performance of the banking sector, but also a sign that the beginning of the new phase of the financial and business cycle is approaching, which will be marked by the growth of NPL and disturbances in the functioning of the credit system, with negative consequences on the economic system.

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