Non-performing loans have been shown to negatively affect credit supply, investment, and growth. Countries that have struggled to recover from financial crisis typically have had higher and more persistent non-performing loan levels. While these empirical facts have been well established, neither the mechanisms causing the great cross-country heterogeneity in non-performing loan dynamics, nor the channels through which they affect the real economy are well understood. In this paper I propose a structural model with search frictions in secondary capital markets that can link slow capital reallocation and non-performing loans.