Abstract
This study investigates the influences of a set of financial ratios on non-performing loans and to show to what extent of listed commercial banks in Bangladesh. In this study, we applied an econometric model to find out correlations among financial ratios and a sample of 96 observations has been analyzed from 20 banks out of 30 listed commercial banks during 2010-2015. This paper mostly agrees with the existing literature that, credit-deposit ratio, net interest margin have a positive influence on the non-performing loans and capital adequacy ratio, return on assets have a negative influence on the non-performing loans. This research also reveals that, sensitive sector’s loan, priority sector’s loan have significant positive influence on the non-performing loans and unsecured loans, profit per employee, investment deposit ratio have significant negative impact on gross non-performing loan. The findings of this research would help commercial banks to maintain standard financial ratios in order to improve their loan qualities and it would be beneficial to the central bank to examine its existing policy in banking supervision relating to the ratios of regulatory requirements like capital adequacy ratio the banks shall maintain.
Highlights
The economic development of a country and constancy of banking system are perpetually interrelated
Banks should control and modify their credit improvement policy relating to influencing variables to have lower non-performing loan ratio (Filip et al, 2014) and it is necessary to identify the influences of financial ratios on Non-Performing Loans (NPLs) to ensure economic development of the country which is the major motivation of this research
We applied an econometric model that facilitated to identify the influences of financial ratios on non-performing loans of listed commercial banks in Bangladesh
Summary
The economic development of a country and constancy of banking system are perpetually interrelated. NPLs refer to loans or advances whose credit quality has declined such that full collection of principal and/or interest in reference to contractual repayment conditions of the loan or advances is due and uncollected for 90 (ninety) consecutive days or more away from the scheduled payment date or maturity They are known as non-performing because the loan ceases to “perform” or produce income for the bank (Adhikary, 2006). Banks should control and modify their credit improvement policy relating to influencing variables to have lower non-performing loan ratio (Filip et al, 2014) and it is necessary to identify the influences of financial ratios on NPLs to ensure economic development of the country which is the major motivation of this research.
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