Abstract
The increase in non-performing loans around the world has had quite a negative impact on many nations’ banking systems. To address these problems, many creative regulatory solutions and well-designed risk techniques have been utilized in the hope of reducing non-performing loans to an acceptable level. The purpose of this study is to apply a newly developed data envelopment analysis model to suggest the most efficient plan (called Plan 4) to reduce non-performing loans that can maximize the efficiency of the entire banking industry’s control over the bad debts. For comparison purpose, three other reduction plans are also represented. The four plans are presented using data from Taiwan’s banking industry. The empirical results show that among the plans presented, Plan 4 shows the most effective allocation of the industry-wide reduction target. The plan focuses on a finite number of banks, helping identify the key units to improve industry-wide efficiency. The findings implicitly suggest that the regulator should devise more incentive measures to encourage target banks to perform the non-performing loan reduction task. Our results also suggest that for the regulator, forcing banks to cut their non-performing loans by the same ratio will not help improve the relative efficiency of the industry.
Highlights
The global financial crisis has, since its onset in 2008, taken a toll on the world economy
We present and compare four non-performing loans (NPLs) reduction plans, including (1) reduction according to a given rate of decrease, (2) reduction according to the efficiency with which a bank controls NPLs, (3) reduction according to a mixed strategy combining the first two, and (4) reduction suggested from the proposed DEA model to maximize the industry-wide efficiency of controlling NPLs
The present paper has suggested a DEA-based approach for disaggregating an industrywide NPL reduction target into the aim of each bank so as to maximize banking system efficiency
Summary
The global financial crisis has, since its onset in 2008, taken a toll on the world economy. Financial institutions facing the crisis generally have exhibited unsafe and unsound practices. The quality of loan portfolios has deteriorated significantly, causing an increase in non-performing loans (NPLs) and sizeable profit reduction in banking systems. Because of their rising volume and their impact on the economy as a whole, on the banking system and on its credit supply, NPLs have been an increasingly hot topic in the international scene (Scardovi 2016). Reduction of non-performing loans in the banking industry: an application of data
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