NON-PERFORMING LOANS RESOLUTION AS ESSENTIAL FACTOR OF BANKING SECTOR STABILITY

Abstract

The origin of crisis in financial sector was created in a period of credit expansion i.e. period of credit boom in emerging and transition economies. Namely, during credit expansion there had not been sufficient caution regarding loan riskiness and as a consequence there was a significant growth of total non-performing loans (i.e. NPL loans). Described processes were inherent for Serbian economy as well banking industry. Banking sector in Serbia passed through significant structural changes in the last decade. Although there are many improvements in banking operations and their regulations, there are also unsolved problems accompanied with non-performing loans, uncertainty on global financial markets and high exposure to operational risks. Increase of NPL loans should be considered together with negative macroeconomic indicators primarily: GDP decrease and unemployment rate growth, as well as liquidity problems of banks and inadequate structure of previously disbursed loans. Taking adequate measures for NPL resolution and in that way “cleaning” bank’s balance sheets from additional ballast, which they have in terms of more than significant share of NPLs, remains the biggest challenge. On the other hand, category of NPLs represents the best connection between real and financial sector and it could be observed as paradigm for Serbian economy overview. Effective and efficient functioning of banking system assumes identification and resolution of NPLs in the manner to provide and maintain the stability of economy as a whole. Issues regarding NPLs and its resolution with the focus on Serbian economy are essential from the perspective of future development of banking industry and that is the main subject of this paper.