Determinants of Non Performing Loan (NPL) : A Case of an Emerging Economy

Commercial banks are the most influential element in the financial market of a country. But commercial banks get pegged back when their main income-generating asset i.e. loans and advances become non-performing. Based on a sample of 22 conventional private commercial banks with 10 years’ data, this study looked at bank-specific and macroeconomic determinants of non-performing loans (NPLs) using Generalized Method of Moments (GMM) analysis. Among the bank-specific variables such ROA, size, loan-to-deposit ratio, credit growth, and board independence, only ROA, a proxy for managerial efficiency, was found to have significantly negative relationship with NPLs. Among the macroeconomic variables, GDP growth rate, inflation, real interest rate, unemployment, and stock prices were found to have a significantly positive relationship with NPL. The study suggests that banks should focus more on improving managerial efficiency and supervision to improve their loan quality. In addition, regulators have a role to perform regular stress tests on the banks to check banks’ asset quality against macroeconomic shocks