Nonperforming Loans in Asia: Determinants & Macrofinancial Linkages

Asian economies have seen recent rises in nonperforming loans. This paper analyzed the determinants, macrofinancial feedback effects, and implications of NPLs for financial stability. It also examined the determinants and evolution of bank-specific NPLs in Asia and found that macroeconomic conditions and bank-specific factors—such as rapid credit growth and excessive bank lending—contribute to the buildup of NPLs. It demonstrated that a shock to the NPL ratio reduces credit supply, increases unemployment, and slows overall economic activity. Therefore, an increase in NPLs reflects weak macroeconomic and financial conditions and induces harmful feedback effects on the real economy and the financial sector. The paper also underlined policy options to swiftly and effectively manage and respond to a buildup of NPLs in Asia.