Determinants of non-performing loans in North Macedonia

2.5. NPLs-classification and current research
Within the banking sector and in accordance with Basel standards, loans are classified as NPLs 
when the borrower has not made any payments for the loan obligations (both principal and 
interest) for three consecutive months (90 days). In this respect, the credit repayment history of 
borrowers is being classified as A, B, C or D, with D being the riskiest category representing NPLs. 
This type of classification, which is formed by the Central Bank, following international standards, is 
used by the banks as a starting point in their evaluation processes. Furthermore, banks are not 
allowed to approve loans to clients classified as credit risk C or worse (Angelova & Boskovska, 
2016
). In the literature three main categories on the determinants of NPLs are located: macro-
economic, bank-specific and industry-related factors (Naili & Lahrichi, 
2020
). The most frequently 
used factors to gauge the variations of NPLs are briefly discussed below. GDP growth is the primary 
indicators to mirror the good status of business cycle. In this sense under good economic condi-
tions households and firms seems to settle their obligations. As Quagliariello (
2007
) argued, the 
NPLs swelled during economic slowdowns and the opposite happens during economic booms. In 
the same fashion Nkusu (
2011
), examined 26 countries spanning between 1998 and 2009, and 
found that slower economic growth leads to higher NPLs. Most recent studies lend support to this 
argument (Dimitrios Anastasiou et al., 
2016
; Gulati et al., 
2019
; Kuzucu & Kuzucu, 
2019
; Vouldis & 
Louzis, 
2018
). In addition, unemployment seems that rather deteriorate NPLs. A lot of studies gave 
agreed upon this macroeconomic determinant and its direct positive linkage to bad loans 
(Dimitrios Anastasiou et al., 
2016
; Jabbouri & Naili, 
2019
; Klein, 
2013
; Kuzucu & Kuzucu, 
2019
; 
Rinaldi & Sanchis-Arellano, 
2006
).
There are several studies that have attempted to identify the relation between inflation and 
NPLs. However, their results are highly controversial. Some studies argued that higher inflation 
lead to higher levels of NPLs (Amit Ghosh, 
2017
; Amuakwa-Mensah et al., 
2017
; Jabbouri & 
Naili, 
2019
; Klein, 
2013
; Rinaldi & Sanchis-Arellano, 
2006
). On the contrary, some studies 
reports a negative relationship between inflation and NPLs (Gulati et al., 
2019
; Makri et al., 
2014
). Furthermore, interest rates also provide competing evidence that the higher the interest 
rates the higher the NPLs rates (Espinoza & Prasad, 
2010
; Messai & Jouini, 
2013
; Roland Beck 
et al., 
2015a
).
Regarding the evidence based on the specific region, there are several studies investigating the 
determinants of NPLs. Keeton (
1999
) argues that higher credit growth will eventually lead to an 
increased number of NPLs if credit growth is guided by increased loan supply rather than loan 
Golitsis et al., Cogent Business & Management (2022), 9: 2140488