Loan Loss Provisions and Lending Behaviour of Banks: Asian Evidence During 1992-2009

Abstract

Effects of loan loss provisioning on lending behaviour of banks remain a major concern in policy circles in order to strengthen both bank stability and financial intermediation. A sample of 686 commercial banks in Asian countries over the 1992 - 2009 period is used to identify factors contributing to the occurrence of a procyclical effect of loan loss provisions on loan growth. Our empirical results highlight that non-discretionary provisions have a procyclical effect, as higher non-discretionary provisions reduce loan growth of banks. This procyclical effect holds for large banks but not small banks. A closer investigation shows that bank market structure, economic development and institutional quality also affect the link between non-discretionary provisions and loan growth of banks. More specifically, higher bank competition, higher per capita income and higher rule of law mitigate the procyclical effect of non-discretionary provisions on loan growth regardless of whether banks are large or small. These findings have policy implications concerning the adoption of the dynamic provisioning system for Asian banks.