AN INVESTIGATION OF MACROECONOMIC FACTORS ON NON-PERFORMING LOANS: A STUDY BASED ON COMMERCIAL BANKS OF PAKISTAN

Abstract

Following privatisation, Pakistan's banking industry grew and is now one of the main drivers of the country's economy. Nonetheless, the sector is vulnerable to a number of hazards, the most important of which is credit risk. This risk appears when borrowers fail to make their loan payments on schedule, which leads to non-performing loans. In order to maintain their operational, liquidity, and profitability position, banks must manage these loans. This study looks into how the nation's economic circumstances, inflation, and interest rates affect non performing loans. Time-series data analysis is used, and secondary data covering the last ten years (2008–2017) is used. The study looks at the link between the independent and dependent variables using a multivariate linear regression model. Non-performing loans are the dependent variable, whereas interest rates, inflation, and the nation's economic status (as indicated by GDP) are the independent factors. The study found that the non-performing loans of Pakistani commercial banks are significantly influenced by all three variables. On the other hand, there is an inverse relationship between inflation, GDP, and NPL, whereas there is a direct association between interest rates and NPL. The study's findings will assist Pakistan's banking industry in lowering the percentage of non performing loans.