Bank-Specific and Macroeconomic Determinants of Non-Performing Loans of Commercial Banks in Bangladesh

Abstract

The prime objective of this research is to identify the main determinants of non-performing loans in the commercial banking system of Bangladesh for the period 2011-2016 using panel data modeling. This paper uses balanced panel data method to examine both bank-specific (return on average assets, net loans to deposit ratio, bank size, cost-to-income ratio, and capital adequacy ratio) and macroeconomic (real GDP growth rate and inflation rate) variables. To attain the objectives, the present research analyzed historical data and panel data model using secondary data. To examine panel data modeling, the researcher considers 16 private commercial banks in Bangladesh and executed pooled OLS model, fixed effect model, random effect model and random effect with the robust standard error. The researcher found a negative significant relationship for return on average assets, net loans to deposit ratio and inflation rate in relation to NPLs and results are supporting the previous researcher. Based on the findings, the study offers some valuable strategies to the management to improve return on average assets, net loans to deposit ratio and inflation rate to reduce the NPLs at least under the tolerance level. The study also delineates the limitations of this work and direction for future research.

Non-performing Loans and Bank Profitability

“…Our findings are consistent with the scholarly and empirical findings that NPLs have a detrimental impact on bank profitability (Adhikary, 2006;Akinlo & Emmanuel, 2014;Khatun & Ghosh, 2019;Nsobilla, 2016;Stephen Kingu et al, 2018;Towhid et al, 2020), while goes against the results found by some scholars (Boahene et al, 2012;Chimkono et al, 2016;Widana et al, 2021).…”

“…Due to the negative association between NPLs and the economy and the substantial negative relationship between ROA, loan-deposit ratio, and inflation rate (Towhid et al, 2020). Therefore, this trend in NPLs should be controlled for the shake of the country's growth and development and overall economic stability and regulators can make NPLs less of a problem by changing a country's financial regulatory framework based on what they learn from studying how NPLs affect a country (Khatun & Ghosh, 2019).…”

Factors Affecting Non-performing Loans of Nepalese Commercial Banks: A Perception of Bankers

“…Similarly, low economic activities, higher unemployment and inflation rates, weak monetary policy, and unstable financial system are the major macroeconomic situations that cause high NPLs. Towhid et al (2019) used panel data modelling to uncover the key factors contributing to non-performing loans in Bangladesh's commercial banking sector between 2011 and 2016. In order to investigate both bankspecific (return on average assets, net loans to deposit ratio, bank size, cost-to-income ratio, and capital adequacy ratio) and macroeconomic (real GDP growth rate and inflation rate) factors, this study used the balanced panel data approach.…”