An Analytical Overview of the Factors Affecting Non-performing Loans in Selected Banks of Bangladesh

Abstract

Non-performing loans are a severe hindrance when we consider the fact that the profitability and the liquidity of a bank can be affected by a large margin, considering the sheer volume of such loans that the domestic banks seem to acquire every year. For countries with emerging economies, previous studies state that external and internal factors can influence the determination of credit risk and the level of non-performing loans. This paper studies some bank-related factors like inefficiency, profitability, bank size, leverage, and macroeconomic factors like GDP growth rate, interest rate, and unemployment rate. Fifteen banks and seven years of data are used for the study. A panel data study with the Hausman test was run. Individuality and time factor was considered, and the fixed effect method was applied. The results showed that poor management decisions or inefficiency positively correlated with non-performing loans. Profitability showed a negative relationship, while bank size showed a significantly negative relationship with NPL. GDP growth rate and unemployment rate show a significant positive relationship. But the Interest rate shows a significant negative relationship. The overall findings show that both bank performance and macroeconomic factors play an essential role in the level of non-performing loans in the commercial banks of Bangladesh.