Determinants of Non-Performing Loans (NPLS) of The Commercial Banks in Bangladesh: An Application of Camel Model

Abstract

The loan portfolio represents a significant portion of a bank’s total assets. This asset generates interest income, which is a measurement of bank’s financial performance and stability. Non-performing loans (NPLs) are those loans that default on paying interest or principal. Hence, NPL ratio is one of the important indicators of a bank’s performance. In order to ensure good performance, a thorough understanding of NPL ratios and factors that affect NPL are necessary. This research evaluates NPL ratio in the Banking sector of Bangladesh and the relationship among the variables of CAMEL (capital, asset, management, earnings and liquidity) model of performance. Last 24 years (1997-2020) time series data of banking sector have been used in this study. Upon analysis of the time series data VECM model is developed to demonstrate the relationship among the variables. The developed model shows high goodness of fit and reasonable explanatory power. Results of the study will help practitioners and regulators to pin-point policies and operational interventions to manage (reduce) NPL. Social Science Review, Vol. 38(2), December 2021 Page 71-89