Formation, Consequences and Mechanisms for Managing Problem Loans in Commercial Banks

The banking sector plays a pivotal role in economic development, with lending as a core function that sustains production, investment, and consumption. However, the rise in non-performing loans (NPLs) poses a significant threat to the financial stability and effectiveness of commercial banks globally and within Uzbekistan. While previous studies have discussed credit risk in general, there is a lack of comprehensive evaluation of the multifactorial causes and management mechanisms of NPLs specific to the context of Uzbekistan’s banking sector. This study aims to investigate the formation causes, consequences, and strategic management approaches of problem loans in commercial banks, using Uzbekistan as a case study. The findings reveal that problem loans result from a combination of microeconomic, macroeconomic, institutional, and behavioral factors, including poor financial literacy, macro-instability, inadequate risk assessment systems, and weak internal governance. Additionally, empirical analysis shows that in recent years, problem loans have accounted for 5–7% of total bank assets in Uzbekistan, impairing liquidity, profitability, and credit intermediation. The study integrates international practices with local regulatory structures and banking behavior, offering a multi-stage approach to problem loan management that emphasizes pre-loan risk assessment, post-loan monitoring, and institutional reform. The research underscores the need for systemic reforms in bank governance, borrower evaluation, financial education, and regulatory oversight. Implementing these measures will help reduce the share of NPLs, stabilize financial institutions, and enhance the real impact of banking services on economic growth.