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

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.