The Impact of Provisioning Policies on Non-Performing Loans

The Central Bank has specific regulations, including asset classification guidelines and how to perform loan’s loss provisioning to oversee banks and credit institutions. The Central Bank seeks to improve the quality of the loan and reduce the amount of non-performing loans by reducing the revenues of the bank or credit institution through imposing fine on balance of each of the categories of non-performing loans. In this study, the effectiveness of this policy has been investigated using the system dynamics method. The results of the research indicate that the application of the above policy would at least lead to a 17% reduction in the amount of non-performing loans’ accumulation. Research suggests that, if the coverage factor of a pledge during the provision of loan, increases the effectiveness of the policy in the fight against the accumulation of non-performing loans will be eliminated. This phenomenon suggests that the Central Bank needs to focus more on preventive regulatory approaches than on a priori methods in monitoring the credit institutions in providing a loan.