Determinants of Non-Performing Loans: An Empirical Analysis Across Major Sectors

This paper investigates the determinants of non-performing bank loans (NPLs) across six key sectors in Estonia from 2005 to 2023, employing a dynamic linear regression model. The analysis focuses on agriculture, manufacturing, construction, wholesale and retail trade, transportation, and real estate. The model incorporates both macroeconomic factors like unemployment and real GDP growth, and sector-specific financial variables including sector-specific bank lending interest rates and profitability indicators. The results reveal strong persistence in NPLs across all sectors, with business cycle indicators, particularly the unemployment rate, consistently explaining variations in NPLs, albeit with varying impact across sectors. Sector-specific variables generally play a less important role, except in the wholesale and retail trade sector, where leverage and profitability correlate more significantly with credit risk.