Abstract
Through the collection and disbursement of money, banks often face the risk of default of the loan. These Non-Performing loans (NPLs) should be identified and cared for avoiding vulnerability to other risk. Banks may mitigate this risk using loan loss provisioning (LLP). Using the aggregate data of 56 commercial banks in the last 9 years (2009-2017), this study attempts to evaluate the Impacts of LLP maintained for NPLs on profitability, as it may help to take the level of the LLP, and NPLs in the optimum level of business success. The dependent variables used in this study are Non-Interest Income to Total Assets and Net-Interest Income to Total Assets as a representative of the profitability of a bank. The dependent variables are analyzed using Least Square Multiple Regression on three independent variables, which were Gross NPL to Total Loans Outstanding, Loan Loss Provision Maintained, and Surplus/ (Shortfall) resulted from the required loan provisioning. The result showed that the profitability is very significantly influenced by the independent variables. NPLs and LLPs maintained by the commercial banks negatively related with the profitability of the business, especially LLPs shown statistical significance to impact on profitability negatively. it is better to take the LLPs and NPLs in the minimum level for maximum profitability of banks.
Highlights
Commercial banks do business as an intermediary between depositor and borrower, ; they collect money in exchange of interest on the deposited money and lend the money to other businesses, individuals with interest
loan loss provisioning (LLP) are used as a cushion to adapt to the expected loss resulted from the missed payment of installment on a bank’s loan portfolio; it is interchangeably known as provision for bad debts (Ozili& Outa, 2017).When a bank can predict a loan loss, it needs to be charged to the income statement as “provision” to set a loan loss provision (LLP) account to be shown on the balance sheet
As shown in the above figure, the study has identified two separate segments of profitability of a commercial bank, one is Non-interest segment which are not related to loans and advances and the other one is Net-interest segment which directly related to loans, Non-Performing Loans (NPLs), LLPs
Summary
Commercial banks do business as an intermediary between depositor and borrower, ; they collect money in exchange of interest on the deposited money and lend the money to other businesses, individuals with interest. Packer and Zhu (2012) did a study on 240 banks of different countries to investigate the loan loss provisioning practices for income smoothing operation with a data set of 2000-2009 time frame. The objective of this empirical study is to understand the LLPs maintained for NPLs by the commercial banks in Bangladesh and to estimate and evaluate the impact of the LLPs along with NPLs, on the profitability of banks It will show us the relationship between loan loss provisioning and profitability in the form of impact analysis and can be used for finding future direction of research in the field of finance and banking. The data used in this study has a time frame of 09 years starting from 2009 to 2017
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