An empirical analysis on the impact of non-performing loans on investment and economic growth and the role of political governance

Abstract

Objective: To empirically analyze the link between nonperforming loans and investments along with the role of political governance. The estimation technique used is the fixed effects model including both the country and timMethods: e fixed effects. The dataset consists a panel of 103 countries with annual data over the period from 2000 to 2017. A unique composite political governance index has been prepared combining the six existing governance indicators via Principal Component Analysis (PCA). Findings: It is found that NPL has significant negative impact whereas, governance has significant positive impact on investments as per expectations. However, it is found that the negative impact of NPL on investment gets stronger in presence of good governance. This is a paradoxical result and further attempts has been made to rationalize the outcome. Applications: The study empirically proves the theory of negative impacts of NPL on investment in the economy. Furthermore, the role of political governance has been scrutinized. No prior works have been carried out on this topic. The paradoxical result in this study has opened up new areas for research. An extensive literature review has been provided along with a detailed discussion on the possible measures to tackle with the problems. JEL Classification: C3, E6, G0. Keywords: NPL; investment; political governance institutions; fixed effects model; composite political governance index