Determinants of non-performing loans of deposit banks in Turkey

Abstract

This study empirically analyzes the factors that determine the non-performing loans (so-called bad loans) of 20 deposit banks in Turkey for 2006-2012 period using panel data analysis method. The analysis results reveal that solvency, profitability, credit quality, diversification, economic growth and the recent financial crisis are essential indicators of non-performing loans rate in Turkish banking sector. More specifically, greater profitability and revenue diversification significantly lowers non-performing loans rate, whereas greater capital and loan loss provisions significantly increase non-performing loans rate. In terms of macroeconomic variables, only economic growth has a negative effect on the non-performing loans (NPLs) ratio. Moreover, our results also uncover that deposit banks’ NPLs ratio increases during the latest global financial turmoil period.