Return of the NPLs to the bright side: which Unlikely to Pay firms are more likely to pay?

Unlikely to pay loans (UTPs) are non-performing loans (NPLs) that have a non-zero probability of returning to the performing state. This paper draws on Italian Central Credit Register data on the entire population of Italian UTP firms from 2005 to 2019, matched with firm and bank balance sheet data, to detect the characteristics of UTP firms that have returned to the performing state. During the crises, even in the most acute phases, the share of UTP firms returning to the performing state has never been negligible. This suggests that the analysis of the factors most closely related to the return of UTP firms to the performing state could also provide policy guidance during the pandemic. Our results show that the factors that have a stronger statistical and economic correlation with the probability of a UTP firm recovering are (negatively) its size and the absolute value of its debt, and (positively) its capital. Results are strongly heterogeneous over time and across economic sectors and Italian regions. Lending bank characteristics matter, but less than firm characteristics.