Higher lending costs drive firms to utilise internal sources of financing, resulting, on average, in the avoidance of large investment projects. A reduction in NPLs has the reverse effect, improving the willingness, incentives and ability of economic agents to invest in new projects.
The practical implications of NPLs for growth opportunities are evident when looking at European data on bank lending to non-financial corporations and households. The contraction of bank lending is particularly pronounced in countries suffering from high levels of NPLs.