Forecasting nonperforming loans using machine learning

Abstract

Nonperforming loans play a critical role in financial institutions' overall performance and can be controlled by forecasting the probable nonperforming loans. This paper employs a series of machine learning techniques to forecast bank nonperforming loans on emerging countries' financial institutions. Using quarterly cross‐sectional data of 322 banks from 15 emerging countries, this study finds that advanced machine learning‐based models outperform simple linear techniques in forecasting bank nonperforming loans. Among all 14 linear and nonlinear models, the random forest model outperforms other models. It achieves a 76.10% accuracy in forecasting nonperforming loans. The result is robust in different performance metrics. The variable importance analysis reveals that bank diversification is the most critical determinant for future nonperforming loans of a bank. Additionally, this study revealed that macroeconomic factors are less prominent in predicting nonperforming loans compared with bank‐specific factors.

An Intelligent Model to Assess the Credit Risk in Egyptian Banks

“…Their experimental results demonstrated a significant improvement, surpassing the 80% accuracy threshold, offering promising implications for the financial sector. In (Abdullah et al, 2023), the research objective focused on forecasting nonperforming loans in financial institutions, recognizing their significance in overall performance. Employing machine learning techniques, the study utilized quarterly cross-sectional data from 322 banks in 15 emerging countries.…”