This paper examines the microeconomic and macroeconomic determinants of nonperforming loans (NPLs) across six loan categories in the Philippines during periods of robust economic growth. Using instrumented dynamic panel models, the results indicate that NPLs tend to persist over time. In addition, bank-specific characteristics and macroeconomic conditions are likely to affect agricultural and SME NPLs (mandatory loans), while only macroeconomic factors seem to have an impact on corporate and consumption NPLs (regular loans). In particular, costinefficient banks tend to have higher agricultural and SME NPLs indicating that the loan quality of these two mandatory credits is associated with operational inefficiency. Additionally, rising unemployment rates seem to increase agricultural NPLs. Furthermore, highly capitalized banks tend to have more agricultural NPLs implying higher credit risk for agricultural loans. Meanwhile, higher SME NPLs are associated with tighter credit standards. In addition, rising GDP growth rates are likely to contribute to higher SME NPLs and the impact tends to last for a long period. These findings suggest a deterioration in SME loan quality and a possible credit risk build-up in SME lending segment of banks along with Philippine economic progress. Similarly, higher GDP growth rates tend to increase corporate and consumption NPLs (regular loans). However, microfinance and housing NPLs seem to be not sensitive to macroeconomic developments.
