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Return of the NPLs to the Bright Side: Which Unlikely to Pay Firms are More Likely to Pay?

Author

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  • Massimiliano Affinito

    (Bank of Italy - Via Nazionale 91 - 00184 Rome - Italy)

  • Giorgio Meucci

    (Bank of Italy - Via Nazionale 91 - 00184 Rome - Italy)

Abstract

Bank loans are divided into performing and non-performing loans (NPLs). NPLs are in turn divided into categories characterized by different degrees of difficulty of the debtor and level of risk for the creditor bank. Unlikely to pay loans (UTPs) are NPLs that have a non-zero probability of returning to the performing status. This paper analyzes at the firm and bank level the entire pool of UTPs vis-à -vis firms (UTP firms) in Italy from 2005 to 2019 to detect the characteristics of UTP firms that are more likely to return to the performing state. So far, the literature focused only on status changes from performing to NPLs. To our knowledge, this is the first paper that reverses the perspective and examines the drivers of return to the performing state. The paper shows that the factors most closely related to the new upgrade are — negatively — firm size and absolute value of debts, and — positively — capital and liquidity endowments. Results show that the soundness of lending banks increases the likelihood that firms return to the performing state.

Suggested Citation

  • Massimiliano Affinito & Giorgio Meucci, 2023. "Return of the NPLs to the Bright Side: Which Unlikely to Pay Firms are More Likely to Pay?," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 13(02), pages 1-48, June.
    • Handle: RePEc:wsi:qjfxxx:v:13:y:2023:i:02:n:s2010139223400049
    DOI: 10.1142/S2010139223400049
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    Cited by:

    1. Massimiliano Affinito & Fabiana Sabatini & Massimiliano Stacchini, 2021. "Collateral in bank lending during the financial crises:a borrower and a lender story," Temi di discussione (Economic working papers) 1352, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    Non-performing loans; firm distress; firm recovery;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models

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