, one of the main channels through which financial developments can have a feedback effect on the macro economy is through the capacity of banks to lend to the economy, the so - called “ balance sheet channel ”. the reduction in npls can weigh positively on the supply of credit by unlocking bank capital and funding for the financing of productive companies. the reduction in npls improves the profitability of banks through higher interest income, reduced provisioning or write - offs and reduced administrative expenses for the monitoring and management of npls. at the same time, by removing doubts about the bank ’ s future revenues, it allows banks to benefit from lower funding costs. such developments positively affect loan supply. in addition, as impaired assets carry a higher risk weight, a lower level of npls allows banks to be more aggressive in funding investment opportunities, unconstrained by a scarcity of capital or the distraction of managements ’ attention to the management of a large - scale troubled 4 / 5 bis central bankers'speeches assets portfolio. in addition, a lower level of npls improves the allocation of credit from non - viable firms that are kept artificially alive to viable firms. according to research by the oecd, when more industry capital is sunk in non - viable ( “ zombie ” ) firms, the average viable firm undertakes less investment than otherwise1. hence, a rise in the fraction of non - viable firms in the economy crowds out the growth of more productive firms, thus reducing the efficiency of capital allocation and causing a slow - down in multifactor productivity growth. simulations by the oecd suggest that reducing the share of capital of non - viable firms in greece to the minimum across oecd countries would be associated with a gain in investment for a typical viable firm of 4. 7 % per annum. this number is economically very significant. it is indicative of the potential gains of npl resolution for corporate investment, aggregate productivity and long - term economic growth. the policy implication is that there is considerable scope for policy reforms that facilitate npl resolution in order to improve productivity - enhancing capital reallocation in the greek economy. on top of the above, the economy is also positively affected from the demand side, the so - called “ borrower balance - sheet channel ”. from a debt overhang perspective, non - financial corporations with loans in arrears might have less incentive to invest in new projects in order to avoid using the upside potential to service current debt. in addition,

reviewed. the above initiatives are about to be significantly enhanced by the implementation of further policy actions that are in the pipeline. specifically, important steps are being taken regarding the revision of the out - of - court workout in order to facilitate coordination among banks and other creditors, including the state and social security funds. significant focus will be on standardizing procedures for small business professionals and small and medium enterprises to ensure a rapid, effective and transparent resolution of arrears. in addition, the revision of bankruptcy law is expected to streamline procedures, allowing for creditor - led restructuring for companies with negative net worth, while the tax treatment of impairment losses and loan write - offs is in the final stages of being legislated. on the remaining steps, it is important that bank managers and employees acting in good faith in managing non - performing loans should be protected from criminal prosecution, while the platform for electronic auctions should become operational. additionally, the full deployment of debt information / counseling centres across the country will facilitate borrowers ’ understanding of the optimum solutions to managing their loans. the full implementation of the above reforms, in conjunction with a more active npl management policy on the part of banks is beneficial from both a micro and a macro prudential perspective. it can improve the financial soundness of banks ; it will free - up capital that can be directed to productive sectors of the economy, resulting in an increase in productivity and potential growth. finally, it will diminish the power of strategic defaulters who, until now, see no immediate consequences from failing to pay. a conservative estimate, based on a sample of 13, 000 firms with loans that exceed one million euro, indicates that, on average, one in six companies appear to strategically default, while anecdotal evidence suggests that this value is significantly higher for smaller businesses and households. on the macroeconomic implications of npls, the academic literature has established a strong two - way relationship between macroeconomic developments and asset quality. the profound and well - documented negative relationship between economic growth and npls is enriched by recent studies that also identify a negative feedback effect from the banking sector to the economy. the size of that feedback is related to the ability of banks to channel savings to investment, to allocate risks and to transmit monetary policy decisions to the real economy. this ability has also been found to be related to bank - specific drivers, such as management quality, the level of capital, cost efficiency and risk preferences. in particular