Do Non-Performing Loans Propagate the Transmission of Monetary Policy Tightening Shocks to Sectorial Credit?

Do non-performing loans (NPLs) propagate the effect of tight monetary policy on credit growth and induce sectorial credit shifts? Have the amplification capabilities of NPLs changed pre-2008 and post-2008? Evidence shows that the deterioration in the banks’ credit books and the increase in credit risk exacerbate the effects of an adverse financial shock on aggregate credit growth and GDP growth. In the absence of NPLs, aggregate credit growth would increase at a robust pace. This means that NPLs had a severe dampening effect on aggregate credit growth post-2008Q1. In addition, the presence of NPLs worsens the response of credit growth to a monetary policy tightening shock, because they exacerbate the adverse effects of tight monetary policy shocks on credit growth. The historical decompositions indicate that since 2013 the actual share of credit to households was lower than its counterfactual compared to the share of credit to companies. This suggests that the increase in credit risk was mainly associated with the decline in the households’ sector share of credit as opposed to that of companies. The propagation of tight monetary policy shocks effects by credit risk was disproportionate on sectorial credit and resulted in a decline in the share of credit to the households sector. Thus, heightened credit risk exerts disproportionate monetary policy tightening effects on credit to the households sector.