European Research Studies Journal

Volume XXV, Issue 1, 2022

pp. 563-582

Credit Policy of Commercial Banks in EU and the Asset

Quality of Non-Financial Corporate Loan Portfolio
in 2009-2021
Submitted 12/11/21, 1st revision 11/12/21, 2nd revision 18/01/22, accepted 20/02/22

Aneta Kosztowniak1
Abstract:

Purpose: The study aims to identify changes in the credit activity of banks in EU, including
the loan portfolio of non-financial corporation’s (NFCs) and main determinants of non-
performing loans (NPLs) in Poland in the period Q1.2009 - Q4.2021.
Design/Methodology/Approach: The study presents the differences in the NPL rates and
debt servicing costs in the Visegrad Group countries, as well as Germany and France. The
author presents the results of an overview of NPL research on EU countries. In modelling
the NPLs granted to NFCs in Poland the variables used are, macroeconomic (market),
financial variables of corporations, and banking conditions.
Findings: The analysis of NPL changes shows that there was a long-term downward trend
confirming the improvement in the quality of the portfolio of loans of NFCs. However, the
last quarters (during the COVID pandemic) have brought an increase in the NPLs. Results of
the impulse function confirmed, that the NPLs showed declining trends in response to
impulses from, NPL's own changes, GDP, CPI, WIBOR, ROAC, GFCF, TOFSP and the
increasing trends in response to changes, CROAC, GTPR, AIRCL, CAR and CR of CR.
Results of variance decomposition indicate that the main pillar of the explanation of NPL
changes were, GDP, GFCF as well as CPI and WIBOR.
Practical Implications: The results of the research will enable the management of the loan
portfolio of NFCs and credit risk management.
Orginality/Value: The article contains a literature review and current research results
concerning the analyzed issue Results of the NPLs research confirmed the pro-cyclical
nature of lending activity in Poland in the verified years.

Keywords: Banks, credit policy, asset quality, loan portfolio, NPLs, NFCs, credit risk, UE,
Poland.

JEL classification: E4, E5, G2.

Papier type: A research study.

Funding: The study is financed by SGH Warsaw School of Economics.

1
SGH Warsaw School of Economics, College of Management and Finance, Department of
Applied Economics, Warsaw, Poland, and the NBP. The views expressed in this study are the
views of the author and do not necessarily reflect those of NBP.
ORCID ID: 0000-0001-6088-1899, [email protected];
 Credit Policy of Commercial Banks in EU and the Asset Quality of Non-Financial
Corporate Loan Portfolio in 2009-2021
564

1. Introduction

The bank's credit policy is adjusted to its specificity and changing economic
conditions, while maintaining the security of loan portfolio management. In terms of
risk assessment in the banking sector, the Basel regulations are of great importance
(Basel Committee on Banking Supervisio, 2014). An important group of instruments
used to mitigate credit risk are exposure concentration limits: internal (created by
banks) and external (supervisory), which are defined in legal regulations (including
numerous directives.

A significant problem related to the credit policy is the quality of the loan portfolio.
The quality of the loan portfolio depends on the exposure to banking risks,
especially credit risk. Among the credit risk factors, there are internal factors –
endogenous inside business entities and external factors – endogenous in the
environment of enterprises and independent of them. The bank's credit policy and
credit portfolio management are adjusted to the internal and external factors
independent from them. Among the many reasons for the quality of the portfolio, the
following should be mentioned:

• overall increase in financial risk in the economy,

• sudden changes in the economy, resulting on the one hand in the need for quick
adjustments of all business entities, and on the other hand – reducing the
possibility of hedging against risk,
• increasing number of bankrupting enterprises, which results from the increase
in the number of companies established in order to obtain high ad hoc profits,
often on speculative transactions, increasing risk in foreign trade due to the
increase in the number of heavily indebted countries and with a high inflation
rate,
• growing competition on the banking services market, limiting the banks' ability
to choose customers.

When analyzing credit risk, it is important to distinguish between individual risk,

portfolio risk and risk of individual client (natural person) from the credit risk of
institutional client (enterprise). Individual assessment of the creditworthiness of
enterprises is determined on the basis of many financial indicators. In addition,
banks for internal needs forecast changes in the quality of loans, for example to
enterprises, using: credit exposures, the results of corporate financial statements and
numerous macroeconomic indicators.

One of the final effects of the assessment of banks' lending policies is changes in the
portfolio of non-performing loans (NPLs). As NPLs can cause monetary crises that
may turn into financial crises affecting an entire economy, monitoring them is very
important. If NPLs are not identified and recognized efficiently, both in terms of
speed and scope, NPL resolution effectiveness is undermined, which in turn will
have negative effects on banking sector and finally on GDP growth.
 Aneta Kosztowniak

565

There are still differences in NPL levels between EU countries, despite many
common regulations followed by commercial banks. Therefore, the study presents
the main differences in the lending policy and NPLs between the Visegrad group
countries as well as Germany and France. Finally, the study aims to identify changes
in the credit activity of banks in EU, including the loan portfolio of non-financial
corporation’s (NFCs) and main determinants of non-performing loans (NPLs) in
Poland in the period Q1.2009 - Q4.2021.

2. Credit Policy and Non-Performing Loans

Due to the multithreaded scope of portfolio quality in banking activity, the scope of
legal regulations, including monitoring, is also extensive. Among the regulations of
the European Commission (EC) in the field of financial supervision and
management, it is worth mentioning (EC, 2022):

• Financial conglomerates - Directive (2002/87/EC)

• Banking prudential requirements - Directive 2013/36/EU
• Banking prudential requirements - Regulation (EU) No 575/2013
• Bank recovery and resolution - Directive 2014/59/EU
• Deposit guarantee schemes - Directive 2014/49/EU
• Credit rating agencies - Regulation (EC) No 1060/2009
• Prudential supervision of investment firms - Directive (EU) 2019/2034
• Prudential supervision of investment firms - Regulation (EU) 2019/2033.

Supervision of the quality of loan portfolio (including NPLs), is one of the key areas
of risk reduction in the European banking sector. European Council notes that the
financial crisis and ensuing recessions, together with structural factors, accompanied
by inadequate loan origination practices, have left the banks in some Member States
with high ratios of NPLs.

The Commission and other EU authorities have long highlighted the urgency of
taking the necessary measures to address the risks related to NPLs (ECS, 2019). In
order to reduce the high NPL stocks, the EU agreed on a comprehensive set of
measures outlined in the “Action Plan to Tackle NPLs in Europe” (European
Council, 2017), which is currently being implemented. The ongoing decline of NPLs
has been and continues to be one of the key areas for reducing risk in the European
banking sector. Still, high NPL ratios remain an important challenge, for some (EC,
2019, June 12; EC, 2019, July 11).

Monitoring the quality of the corporate loan portfolio in the banking sector results
from prudential regulations. As part of its package of proposals on NPLs put forward
in March 2018, the Commission proposed a Regulation amending the CRR
(Regulation EU 575/2013, European Parliament, 2013), introducing a ‘statutory
prudential backstop’ in order to prevent the risk of under-provisioning of future
 Credit Policy of Commercial Banks in EU and the Asset Quality of Non-Financial
Corporate Loan Portfolio in 2009-2021
566

NPLs (Regulation EU, 2019/630, European Parliament, 2019). The regulation was
adopted in April 2019 and it requires banks to have sufficient loan loss coverage (i.e.
common minimum coverage levels) for newly originated loans if these become non-
performing exposures (NPEs). In case a bank does not meet the applicable minimum
coverage level, it has to deduct the shortfall from its own funds.

In a narrow sense, the monitoring of NPLs concerns the diagnosis of the quality of
the banking portfolio in terms of many financial indicators (IMF, 2003, May 14, p.
12). A bank loan is considered non-performing when more than 90 days pass
without the borrower paying the agreed installments or interest. According European
Central Bank (ECB) – the NPLs are also called “bad debt” (ECB, 2020a). The ECB
requires asset and definition comparability to evaluate risk exposures across euro
area central banks. The ECB specifies multiple criteria that can cause an NPL
classification when it performs stress tests on participating banks.

The ECB has performed a comprehensive assessment and developed criteria to

define loans as nonperforming if they are:

• 90 days past due, even if they are not defaulted or impaired

• Impaired with respect to the accounting specifics for U.S. GAAP and
International Financial Reporting Standards (IFRS) banks
• In default according to the Capital Requirements Regulation (CRR).

The increase in the NPL ratio proves the deterioration of the lending policy.
If a bank has too many bad loans on its balance sheet, its profitability will suffer
because it will no longer earn enough money from its credit business. However,
limiting lending on the part of banks means limiting the sources of financing
investments among enterprises and, further, increases unemployment
in the economy. Asset quality monitoring is a key area of supervision in banks,
along side liquidity and profitability.

The asset quality analysis mainly involves calculation:

• NPLs to total loans,

• NPLs less provisions to capital,
• Sectoral distribution of loans to total loans.

NPLs may affect financial stability as they weigh on the viability and profitability of
the affected institutions and have an impact, via reduced bank lending, on economic
growth. More specifically, high stocks of NPLs can weigh on bank performance
through two main channels:

• NPLs generate less income for a bank than performing loans and thus reduce its
profitability, and may cause losses that reduce the bank’s capital. In the most
 Aneta Kosztowniak

567

severe cases, these effects can put in question the viability of a bank, with
potential implications for financial stability.
• NPLs tie up significant amounts of a bank’s resources, both human and
financial. This reduces the bank’s capacity to lend, including too small and
medium-sized enterprises, which rely on bank lending to a much greater extent
than larger companies. In turn, this negative effect in terms of credit supply also
reduces the capacity of businesses to invest, affecting economic growth and job
creation, hence creating a tangible effect on the real economy (European
Commission Services, ECS, 2020).

In case of Poland in the years 2009-2021, the credit policy of banks consisted of:

• on the one hand, the liberalization of interest rates on loans for private and
institutional clients, including NFCs – mainly since 2012 – by lowering interest
rates on loans,
• on the other hand, increasing the capital requirements of banks, including
increasing the capital adequacy ratio and reserves for securing credit risk –
which was also served by national recommendations (Polish Financial
Supervision Authority, PFSA) and numerous EU directives.

In the period Q3.2012 - Q3.2021, the average interest rate on corporate loans fell
from 7.0% to 2.4%. Only in Q4.2021 these rates were raised to 2.9% due to the
increase in inflation (consumer price index, CPI) (Figure 1, left panel). In terms of
capital requirements and securing capital adequacy, banks systematically raised
them. Total own funds for solvency purposes (TOFSP) grew from PLN 95,692
million to PLN 228,037 million. These capitals made it possible to maintain the
capital adequacy systematically growing, from 13.7% in Q1.2009 to 20.0% in
Q3.2021 on average in banks in Poland (Figure 1, right panel).

Figure 1. Average interest rate on corporate loans (left panel), the total own funds
for solvency purposes and the capital adequacy ratio (right panel) in Poland in the
period of Q1.2009-Q4.2021 (%, PLN million)
250 000 % 25
8 PLN million
%
7
200 000 20
6

5 150 000 15

4
100 000 10
3

2 50 000 5

1
0 0
0
2009-03
2009-09
2010-03
2010-09
2011-03
2011-09
2012-03
2012-09
2013-03
2013-09
2014-03
2014-09
2015-03
2015-09
2016-03
2016-09
2017-03
2017-09
2018-03
2018-09
2019-03
2019-09
2020-03
2020-09
2021-03
2021-09
2009-03
2009-09
2010-03
2010-09
2011-03
2011-09
2012-03
2012-09
2013-03
2013-09
2014-03
2014-09
2015-03
2015-09
2016-03
2016-09
2017-03
2017-09
2018-03
2018-09
2019-03
2019-09
2020-03
2020-09
2021-03
2021-09

Total own funds for solvency purposes, TOFSP (PLN million)

Average interest rate on corporate loans, ARCL (%) Capital adequacy raito, CAR (%)

Sources: Author`s compilation based on NBP 2022.

 Credit Policy of Commercial Banks in EU and the Asset Quality of Non-Financial
Corporate Loan Portfolio in 2009-2021
568

In the case of Poland, it is worth paying attention to the numerous recommendations

of the PFSA regarding the lending policy of banks, including the quality of assets
(KNF, 2022):

• Recommendation M – concerning operational risk management in banks.

• Recommendation P – concerning the management of banks' liquidity risk.
• Recommendation R – concerning the principles of identifying balance sheet
credit exposures that are impaired, determining: impairment losses on balance
sheet credit exposures and provisions for off-balance sheet credit exposures.
• Recommendation R – concerning the principles of credit exposure
classification, estimation and recognition of expected credit losses and credit
risk management / Recommendation R comes into force on 1 January 2022.
• Recommendation S – concerning good practices in the management of
mortgage-secured credit exposures.
• Recommendation S – concerning good practices in the management of
mortgage-secured credit exposures.
• Recommendation T – concerning best practices in managing the risk of retail
credit exposures.
• Recommendation U – concerning good practices in the field of bancassurance.
• Recommendation W – concerning model risk management in banks.
• Recommendation W – on model risk management in banks.
• Recommendation Z – concerning the principles of internal governance in banks.

The above-mentioned recommendations and supervision of banks in Poland in terms

of their implementation by the PFSA significantly improve the quality of the lending
policy, and thus the level of NPLs. Moreover, systematic lowering of interest rates
on loans to corporations as well as an increase in capital requirements and securing
capital adequacy on the part of banks – to legal regulations (directives, numerous
recommendations) – guaranteed an appropriate credit policy and credit risk
protection. Due to these actions, there were no bank failures in the commercial
banking sector in Poland.

3. Review of Researches in the Field of NPLs

Many researchers analyze changes in NPLs taking into account the impact of many
macroeconomic and banking variables. In the group of macroeconomic factors
commonly studied are, the real GDP growth, the value of GDP/GDP per capita, the
exchange rate, the interest rates and the level of inflation. The results confirm that,
real GDP growth usually translates into a higher level of income, improving the
financial standing of borrowers and decreasing NPLs. When an economy is below
normal conditions or in a recession, NPL levels may rise due to the ensuing rise in
unemployment, and borrowers face severe debt repayment difficulties (Salas and
Suarina, 2002; Ranjan and Dhal, 2003; Fofack, 2005; Jiménez and Saurina, 2005;
Thalassinos et al., 2015).
 Aneta Kosztowniak

569

Exchange rate fluctuations may have a negative impact on the quality of assets,
especially in countries with a large amount of foreign currency loans. The same
applies to interest rate increases, particularly in the case of loans with flexible
interest rate (Louzis et al., 2012; Zaman and Meunier, 2017). However, on the one
hand, higher inflation may ease debt compensation by affecting the real value of
unpaid credit, while on the other hand it may also reduce the real income of
unprotected borrowers. In countries where credit rates are flexible, higher inflation
may lead to higher rates resulting from monetary policy actions to fight inflation
(Nkusu, 2011).

Klein (2013) for NPLs in Central, Eastern and South-Eastern European countries
(CESEE) in 1998-2011 confirmed that NPLs responded to macroeconomic
conditions, i.e., unemployment, GDP growth and inflation, and that high NPLs in
these countries have a negative effect on economic recovery. According to Mazreku
et al. (2018) for 10 transition countries (Central and Eastern Europe, CEE) in 2006
and 2016, dynamic panel estimates show that GDP growth and inflation are both
negatively and significantly correlated with the level of NPLs, while unemployment
is positively related to NPLs. Export growth shows largely insignificant results,
indicating that NPLs in the sample are mainly influenced by domestic conditions
rather than external economic shocks.

Vogiazas and Nikolaidou (2011) investigate the determinants of nonperforming

creditors in the Romanian banking sector during the Greek crises (2001-2010) and
find that inflation and external GDP information influence the credit risks of the
banking system in the country. According to Hada et al. (2020), the exchange rates
(mainly EUR, USD and CHF), unemployment rate and inflation rate had a
significant impact on NPLs in the Romanian banking system in the period 2009-
2019.

Among the banking variables that define NPLs, research focuses on return on assets
(ROA), bank efficiency, and bank capital. However, the specificity of each bank and
its customers are very important for NPL changes. For example, Godlewski (2008)
investigates the association between NPLs and return on assets (ROA) and states
that the lower the rate of ROA, the higher the NPLs and vice versa. Boudriga et al.
(2010) confirm from their study that there is a negative association between ROA
and NPLs. They conclude that when the ROA decreases, then a bank starts to make
investments in high-risk projects and as a result the level of NPLs rises.

Anastasiou et al. (2016) investigate the various determinants of NPLs in the euro
banking system and conclude that ROA has a significant impact upon NPLs.
An insufficient control of the loan portfolio (including short-term loans) increases
risk and NPLs. Fiordelisi et al. (2011) examine the various factors that increase
the risk level in the EU banks and conclude that a declining efficiency hikes the risk
level of banks in future. Furthermore, efficiency and performance factors have
 Credit Policy of Commercial Banks in EU and the Asset Quality of Non-Financial
Corporate Loan Portfolio in 2009-2021
570

influence on NPLs in the Greek banking sector (Louzis et al., 2012). Rachman et al.
(2018) state that operating efficiency does not influence NPLs.

The effect of bank capital on NPLs works in the opposite direction. For one part,
incentivised managers of low capitalized banks tend to get involved in high-risk
investments and give loans that are issued without proper credit rating and
monitoring (Keeton, 1999). For another part, banks with a high level of capital tend
to give loans easily as they know that owing to these loans banks are not going to be
bankrupt and fail; therefore, banks are highly engaged with these kinds of risky
credit activities suggesting a positive association between capital and NPLs (Rajan,
1994).

Moreover, the capital adequacy ratio (CAR) shows the ability of an organization to
face abnormal losses and to survive that situation. Makri et al. (2014) also state that
there is a negative association between CAR and NPLs. Constant and Djiogap et al.
(2012) claim that NPLs and CAR have a positive association with each other. Bank
profitability and sustainability can only be provided through a proper flow of interest
income generated through the lending function.

However, since banks are no longer able to generate enough interest income through
classical safe credit and are required to maintain reserves in the form of provisions to
cover for eventual loan losses, bank capital decreases together with their health,
which is becoming fragile, increasing the trend of NPLs. Therefore, banks are
required to take proactive action to deal with the phenomenon of a poor choice of
borrowers by identifying and understanding the macroeconomic factors that
contribute to the rise of classified credit in the banking system (Anjom and Karim,
2015).

According to Baudino and Yun (2017), the resolution of NPLs that have reached
systemic levels is complex and costly. Bank NPL problems tend to emerge after
credit booms or protracted periods of low growth in structurally weak financial
systems. NPLs crowd out new lending, eroding both the profitability and solvency of
banks. When high NPL levels affect a sufficiently large number of banks, the
financial system stops functioning normally, and banks can no longer provide credit
to the economy. A prompt recovery can be obstructed by impaired market
functioning and coordination failures among banks. In such circumstances,
authorities usually step in to lead the crisis response. To this end, they can deploy
a variety of resolution instruments, although these typically require a large amount
of resources and take time to deliver results.

Moreover, results of Baudino and Yun (2017), show that the resolution toolkit used
by the authorities has remained broadly unchanged for several decades in Europe
(Iwanicz-Drozdowska, 2015), and the United States. Success of resolution policies
varies from case to case. Important role paly structural banking sector conditions, the
type of problem assets, the fiscal space for public sector intervention, and legal and
 Aneta Kosztowniak

571

judicial frameworks for NPL resolution. These country-specific characteristics

determine how far specific resolution options may be applicable and effective in one
country but not in another (ECB, 2020b).

4. Differences in the NPLs between EU Countries

The bank non-performing loans to total gross loans according to the World Bank
(2021) show significant differences in the banking sectors of EU countries (e.g.,
27.0% Greece, 15.0% Cyprus, 5.8 % Bulgaria, 4.9% Portugal, 3.7% Poland, 2.93%
Czech Republic, 2.71% France, 2.53% Slovak Republic, 1.1% Germany and 0.93%
in Hungary in 2020).

The differences in the average NPL ratio (e.g., for the years 2009-2020) reached
several percentage points between the banking sectors. The lowest level of NPL
in the presented period was maintained by Germany (2.1%), France (3.7%), Poland,
the Czech Republic and Slovakia (4.4% - 4.5%) compared to the highest level in
Hungary (9.1%) (Figure 2).

Figure 2. Bank non-performing loans in selected countries in 2009-2020 (%)

18 10
9,1
% 9 %
16

14 8

12
7

6
10
5 4,4 4,5 4,5
8
4 3,7
6
3
4 2,1
2
2
1
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0
2009-2020
Czech Republic France
Germany Poland Germany France Poland
Slovak Republic Hungary Czech Republic Slovak Republic Hungary

Sources: Author`s compilation based on WDI (2022).

The varying quality of bank portfolios in the EU countries is also accompanied by

significant differences in debt servicing costs. Lower and relatively stable debt
servicing costs are usually accompanied by better portfolio quality and lower NPL
values, such as in the Czech Republic, Poland or Germany (Figure 3).

In the case of Poland, a more detailed analysis of the changes in NPLs in 2009.Q1-
2021.Q4 in relation to the structure of the NFCs` loan portfolio indicates that with
the gross loan increase, the NPL decreased annually. The total value of corporate
loans in the banking sector in Poland showed a general upward trend in the years
Q1.2009 - Q1.2020 (from PLN 242.9 million to PLN 401.6 million). Only the period
Q2.2020 - Q4.2020 brought a decrease in the total value of loans (PLN 383.5 million
 Credit Policy of Commercial Banks in EU and the Asset Quality of Non-Financial
Corporate Loan Portfolio in 2009-2021
572

and PLN 366.9 million) and re-growth. The NPL ratio showed quarterly
fluctuations, however generally it showed a downward trend in the period Q4.2010 -
Q1.2020 (from 12.3% to 9.4%), and next quarter decreased in the Q4.2021 (7.7%
(Figure 4).

Figure 3. Debt service ratio for the private NFCs in selected countries in Q1.2009 -
Q2.2021 (%)
25 20

% 18
%
20 16
14
15 12
10
10
8
6
5
4
2
0
0
2009-03-01

2010-05-01
2010-12-01
2011-07-01
2012-02-01
2012-09-01
2013-04-01

2014-06-01
2015-01-01

2016-03-01
2016-10-01

2017-12-01
2018-07-01

2019-09-01
2020-04-01
2020-11-01
2021-06-01
2009-10-01

2013-11-01

2015-08-01

2017-05-01

2019-02-01

Q1.2009-Q2.2021

Czech Republic Poland

Germany Hungary
Czech Republic France Germany
France
Poland Hungary

Sources: Author`s compilation based on BIS (2022).

Figure 4. Changes of loans impaired and without impairment of non-financial

corporations in Poland in the period of Q1.2009-Q4.2021 (%, PLN million)
450 000 PLN million % 14

400 000
12
350 000
10
300 000

250 000 8

200 000 6

150 000
4
100 000
2
50 000

0 0
2009-03
2009-06
2009-09
2009-12
2010-03
2010-06
2010-09
2010-12
2011-03
2011-06
2011-09
2011-12
2012-03
2012-06
2012-09
2012-12
2013-03
2013-06
2013-09
2013-12
2014-03
2014-06
2014-09
2014-12
2015-03
2015-06
2015-09
2015-12
2016-03
2016-06
2016-09
2016-12
2017-03
2017-06
2017-09
2017-12
2018-03
2018-06
2018-09
2018-12
2019-03
2019-06
2019-09
2019-12
2020-03
2020-06
2020-09
2020-12
2021-03
2021-06
2021-09
2021-12

Loan impaired (PLN million) Loan without impairment (PLN million)

Gross loans (PLN million) NPL (%)

Note: The increase in NPL in the period Q4.2017-Q2.2018 – is the result of changes
introduced in the classification of impaired receivables. The anomalies shown in the box in
the chart are the result of changes (in the qualification of receivables to phase 3 / impaired)
in the mandatory reporting of banks to the NBP (FINREP) and bank adjustments related to
the obligation to include in the gross carrying amount also interest on receivables included
in the phase 3. After about six months, a significant part of this interest was written off the
balance sheet and charged to provisions.
Source: The author`s compilation based on NBP (2022).
 Aneta Kosztowniak

573

Despite the fact that the value of loans generally increased, the dynamics of growth
of loans without impairment was weaker in the period 2009-2021. The indicated
increased in the NPL ratio in the period Q2-Q4.2020 (8.7%-9.0%) was results from
quickly decreased in loans without impairment (from PLN 350.0 million to PLN
333.8 million) than impaired loans (PLN 33.5 million to PLN 33.2 million) (Figure
5).

Figure 5. Changes of the impaired loans and loans without impairment of NFCs in
Poland in the period of Q1.2009-Q4.2021 (%, PLN millions)
400 000 40 000
PLN million
350 000 35 000
y = 3282,9ln(x) + 20759
300 000
R² = 0,7291 30 000

250 000 25 000

200 000 20 000

150 000 15 000

100 000 10 000

50 000 5 000

0 0
2009-03

2009-09

2010-03

2010-09

2011-03

2011-09

2012-03

2012-09

2013-03

2013-09

2014-03

2014-09

2015-03

2015-09

2016-03

2016-09

2017-03

2017-09

2018-03

2018-09

2019-03

2019-09

2020-03

2020-09

2021-03

2021-09
Loans without impairment (PLN millions) (left axis)
Imparied loans (PLN millions) (right axis)
Log. (Imparied loans (PLN millions) (right axis))

Sources: Author`s compilation based on NBP (2022).

The indicated changes in the loan portfolio (Q2-Q4.2020) and increases in NPL rates
were mainly caused by the reduction of economic activity and, consequently, lower
income. While in Q4.2019 the value of gross revenues from the total activity of
corporations in Poland amounted to PLN 3 235 515.6 million, it decreased to PLN
786 700.6 million in the Q1.2020. The following quarters saw a slow increase in this
revenues (Central Statistical Office, CSO, 2022). With the outbreak of the Covid-19
pandemic, additional regulatory requirements were imposed on banks to maintain
security in the banking sector (BIS, 2020).

5. Research Methodology

The importance of diagnosing changes in NPLs of NFCs in Poland results, apart

from the legal obligations of banks, also from the role of this segment of loans.
The share of corporate loans in the structure of the gross loan portfolio was 57%.
This means that any changes in this portfolio had a significant impact on the entire
loan portfolio (NBP, 2022).

The NPL rate is calculated as the ratio of the non-performing loans (impaired loans)
and advances of non-financial corporation to the gross value of total loans and
advances of these corporations (NBP, 2020).
 Credit Policy of Commercial Banks in EU and the Asset Quality of Non-Financial
Corporate Loan Portfolio in 2009-2021
574

(1)

In this study author made an attempt to assess the quality of the portfolio of loans
granted to non-financial corporations, therefore, respectively, impaired loans and
total loans granted to these corporations (included in the so-called phase III,
portfolio B) were taken into account.

In modelling the quality of the portfolio of NPLs granted to NFCs, mainly the
following variables are taken into account: market and financial variables of
corporations – determine the possibility of servicing loans, and variables of banking
conditions – serving as capital hedging against an increase in banking risk. In order
to analyse the relationship between changes in NPL ratio and chosen variables a
final formula for the NPL function was developed:

(2)

The explained variable: – The non-performed loan ratio

Explanatory variables: (Table 1) and – random component, – period

Table 1. Description of model and data source

Variable Description Source Expected impact
Macroeconomic variables
Gross domestic product OECD “−“
Consumer price index CSO “−“
Warsaw Interbank Offered Rate OECD “+”
Variables of the financial standing of corporations
Revenues from the overall activity of corporations CSO ““ − “”
Costs of obtaining revenues from the overall activity of CSO “+”
corporations
Gross fixed capital formation CSO “−“
NBP “
Banking variables
NBP “+”
Capital adequacy ratio NBP
Total own funds for solvency purposes NBP in line with
changes in the
Capital requirements of credit risk NBP NPL ratio

Sources: The author`s compilation based on NBP (2022), CSO (2022) and OECD Internet
databases (2022).
 Aneta Kosztowniak

575

The methodology of changes in the quality of the loan portfolio corresponds to the
methodologies used by central banks, e.g., by NBP and IMF (2003), Matthewes,
Guo, and Zhang (2007), Maggi and Guida (2010). The study period includes 52
quarters data for the period Q1.2009 - Q4.2021, used the first differences.

In this study, methods are used known from literature on international economics
and international finance and econometric methods like the VECM model (Vector
Error Correction Method) including the impulse response functions and forecast
error variance decomposition analysis. The data verification procedure and the
selection of the analysis method included, ADF test, KPSS stationary test, VAR
inverse root, the Engle-Granger and Johanson test and lag order (AIC, BIC, HQC
criteria). In order to verify correctness of the VECM model results, two tests were
carried out verifying the Autocorrelation Ljung-Box Q' test, and ARCH test. Co-
integration was verified by means of the Engle-Granger and Johansen tests which
confirmed the occurrence of co-integration and thus justified the use of the VECM
model for the lag order 2 and co-integration of order 1 (Annex, Table 1, Figure 1).

In accordance with the Granger representation theorem, if variables and are

integrated to the order of I(1) and are co-integrated, the relationship between them
can be represented as a vector error correction model (VECM) (Piłatowska, 2003).

The general form of the VECM can be written as:

(3)

where:

and is a unit matrix.

6. Empirical Results

Analysis of the NPL response to impulses from the explanatory variables confirmed
that the strength of the influence of these impulses increased over time. The impact
of explanatory variables increased especially from the 4th-8th quarter, showing
changes (positive/ negative) in the following quarters. The NPL showed the
following reactions (responses) in the end 20th quarter:

• The NPLs showed declining trends in response to impulses from: NPL's own
changes, GDP, CPI, WIBOR, ROAC, GFCF, TOFSP.
 Credit Policy of Commercial Banks in EU and the Asset Quality of Non-Financial
Corporate Loan Portfolio in 2009-2021
576

• The NPLs showed increasing trends in response to changes: CROAC, GTPR,

AIRCL, CAR and CRofCR (Figure 6).

The analysis of the decomposition of explanatory variables shows, in turn, that the
NPL rate was significant in explaining the changes in the first period, by own
changes (100.0%), in the 2nd period own NPL (65.5%), GDP (27.9%), CAR (2.8%),
CROAC (1.4%) and TOFSP (1.3%) In the 8th period decreased rate of explanation
own NPL (1.5%), increased GDP (94.33) and TOFSP (2.8%). Finally, in the 20th
period this rate of explanation was stronger on the side of GDP (95.0%), own NPL
(1.5%), GFCF (0,7%), CPI (0.1%) and also WIBOR (0.1%). This means that the
main pillar of the explanation of NPL changes were changes in GDP (i.e., changes in
the business cycle) and investment expenditure (GFCF) as well as CPI and WIBOR
(Figure 7).

Figure 6. The impulse response functions for NPLs

response of d_NPL to a shock in d_NPL, with bootstrap confidence interval response of d_NPL to a shock in d_GDP, with bootstrap confidence interval response of d_NPL to a shock in d_CPI, with bootstrap confidence interval

2.5 4 2
90 percent confidence band 90 percent confidence band 90 percent confidence band
point estimate point estimate point estimate
1.5
2 3
1

1.5
2 0.5

1 0
1
-0.5
0.5

0 -1

0
-1.5
-1

-0.5 -2

-2 -2.5
-1

-3
-3 0 5 10 15 20
-1.5 0 5 10 15 20 quarters
0 5 10 15 20
quarters
quarters

response of d_NPL to a shock in d_WIBOR, with bootstrap confidence interval response of d_NPL to a shock in d_ROAC, with bootstrap confidence interval response of d_NPL to a shock in d_GFCF, with bootstrap confidence interval

4 4 5
90 percent confidence band 90 percent confidence band 90 percent confidence band
point estimate point estimate point estimate
4
3 3

2 2
2

1 1
1

0 0 0

-1
-1 -1

-2

-2 -2
-3

-3
-3 -4

-4 -5
-4

-6
-5 0 5 10 15 20
-5
0 5 10 15 20
0 5 10 15 20 quarters
quarters
quarters
 Aneta Kosztowniak

577

response of d_NPL to a shock in d_CROAC, with bootstrap confidence interval response of d_NPL to a shock in d_GTPR, with bootstrap confidence interval response of d_NPL to a shock in d_AIRCL, with bootstrap confidence interval

1.5 2.5 1.5

90 percent confidence band 90 percent confidence band 90 percent confidence band
point estimate point estimate point estimate

2
1
1

1.5
0.5
0.5
1

0.5 0

-0.5
0
-0.5

-1 -0.5

-1
-1
-1.5

-1.5 -1.5
-2 0 5 10 15 20 0 5 10 15 20
0 5 10 15 20 quarters quarters
quarters

response of d_NPL to a shock in d_CAR, with bootstrap confidence interval response of d_NPL to a shock in d_TOFSP, with bootstrap confidence interval response of d_NPL to a shock in d_CRofCR, with bootstrap confidence interval
1.2 1.5 1.2
90 percent confidence band 90 percent confidence band 90 percent confidence band
point estimate point estimate point estimate
1 1
1

0.8 0.8
0.5
0.6 0.6

0
0.4 0.4

0.2 -0.5 0.2

0 0
-1

-0.2 -0.2
-1.5
-0.4 -0.4

-2
-0.6 -0.6

-0.8 -2.5 -0.8

0 5 10 15 20 0 5 10 15 20 0 5 10 15 20
quarters quarters quarters

Note: Forecast horizon 20q, include bootstrap confidence interval 1-alfa=0.90 (shaded
area).
Sources: Author`s compilation calculations.
Figure 7. Variance decomposition for the NPL variables
forecast variance decomposition for d_NPL
100
d_NPL
d_GDP
d_CPI
d_WIBOR
d_ROAC
d_CROAC
80 d_GFCF
d_GTPR
d_AIRCL
d_CAR
d_TOFSP
d_CRofCR
60

40

20

0
0 5 10 15 20
quarters

Sources: Author`s calculations.

 Credit Policy of Commercial Banks in EU and the Asset Quality of Non-Financial
Corporate Loan Portfolio in 2009-2021
578

7. Conclusions

The EU countries conduct a credit policy adapted to their macroeconomic and

financial conditions of commercial banks. Although the main regulations of credit
policies in the EU countries are common, the effects of, for example, the NPL level
or debt servicing costs differ.

In case of Poland in the analyzed period, banks pursued a liberal policy of interest
rates on loans while maintaining adequate capital requirements. The analysis of NPL
changes shows that there was a long-term downward trend confirming the
improvement in the quality of the portfolio of loans of non-financial companies in
the period Q1.2009-Q4.2021. However, the last analysis quarters (during the
COVID pandemic), brought an increase in the NPL ratio, respectively, Q2.2020
(8.7%) and Q4.2020 (9.0%). Whereas, in the entire period Q1.2009-Q4.2021, the
structure of the loan portfolio in the Polish banking sector showed stable levels.

The results of the response function indicate negative NPL responses (in the end
20th quarter) to impulses (earlier) own NPL fluctuations, GDP, CPI, WIBOR,
ROAC, GFCF and TOFSP. The NPLs showed increasing trends in response to
changes: CROAC, GTPR, AIRCL, CAR and CRofCR. The results of variance
decomposition indicate that the main pillar of the explanation of NPL changes were:
GDP (i.e., changes in the business cycle) and investment expenditure (GFCF) as
well as CPI and WIBOR. Also, the results of the NPLs research confirmed the pro-
cyclical nature of lending activity in Poland in the verified years.

Resuming, in the period 2009-2021 there was a long-term trend of improving the
quality of the loan portfolio of NFCs, which was mainly explained by market
(macroeconomic factors). Taking into account the implementation of prudential
standards by banks in Poland, resulting from EU directives and numerous
recommendations of the Polish Financial Supervision Authority, it should be stated
that banks conducted a proper credit policy (they took care of the quality of assets).
Moreover, the relatively liberal monetary policy of the NBP (in terms of the basic
interest rates) in the last decade and the maintained GDP growth rate also
contributed to lowering the NPLs.

The main problems of banking in Poland (which are mostly common problems of
EU countries) are, adaptation to new customer expectations, the need for new
financing, macroeconomic situation, possible rebound in banking sector profits?,
consequences of the Court of Justice of the European Union (CJEU) judgment on
loans in Swiss francs and cybersecurity and efficiency of systems.

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Annex:
Table 1. The VECM model
VECM system, lag order 2, observations 2009:4-2021:4
Cointegration rank = 1, Case 3: Unrestricted constant
(cointegrating vectors, standard errors in parenthes) (adjustmentvectors)
d_NPL 1.00000000 (0.000000) 0.003979
d_GDP -0.00016200 (1.7367e-005) 2996.900
d_CPI 0.85891000 (0.16988) 0.033845
d_WIBOR 0.55756000 (0.46830) 0.013416
d_ROAC 0.00024900 (2.3832e-005) -84285.00
d_CROAC -0.00025000 (2.5030e-005) -78706.00
d_GFCF 2.5807e-005 (2.7929e-005) 18765.00
d_GTPR -3.83350000 (0.457030) -0.032702
d_AIRCL -0.56276000 (0.531870) -0.001631
d_CAR -0.52482000 (0.540560) 0.029559
d_TOFSP 2.7142e-005 (5.0592e-005) -186.3200
d_CRofCR -1.5653e-007 (1.2032e-006) 1770.100
Specification EC1 R2 DW
d_NPL 0.0039786 0.651156 1.870413
d_GDP 2996.9000 0.925976 2.504727
d_CPI 0.0338452 0.539619 1.777390
d_WIBOR 0.0134158 0.260813 1.964910
d_ROAC −84285.400 0.952997 2.845320
d_CROAC −78705.600 0.952637 2.845786
d_GFCF 18765.100 0.502046 1.298878
d_GTPR −0.0327022 0.667980 2.236949
d_AIRCL −0.0016309 0.270642 1.639750
d_CAR 0.0295587 0.559291 2.244385
d_TOFSP −186.32200 0.456752 2.328057
d_CRofCR 1770.1500 0.396276 2.267642
Source: The author’s own calculations.
 Credit Policy of Commercial Banks in EU and the Asset Quality of Non-Financial
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582

Figure 1. VAR inverse roots in relation to the unit circle

VAR inverse roots in relation to the unit circle

0 0.5 1

Source: The author’s own calculations.