Determinants of Non-Performing Loans: Evidence from Banking Sector in an Emerging Economy

Abstract

Non-performing loans have been an area of concern since the inception of banking sector and they have been hindering the progress of banking and financial sectors. An extensive research has been done so far on these bad loans but still, there always exists a room for betterment in any field. The non-performing loans mostly hit the financial sector and create a sudden deflation. To overcome the nuance of non-performing loans, first of all, it is necessary to understand the root causes behind their generation and what factors can be held responsible for their occurrence. Moreover, to get rid of these w1recoverable credits, enterprises need to take some precautionary measures. From the individual level to banking or financial sector, or considering the country-noncountry loaning, non-perfo1ming loans occur everywhere. Different factors are involved in generating non-performing loans. They can be circumstantial, ethical or can be related to poor performance of a specific entity for a specific period. As far as the banking sector is concerned, which is the focal area of this study, it can be retconned as the "most badly affected" sector of the economy by the non-pe1forming loans. The degree to which different banks are affected by non-perf01ming loans is different. As a cliche, the larger banks are most likely to be hit by the non-performing loans. This is because as the volume and areas of operations of banks increase, their credit advancement policies towards private sector get more relaxed and therefore they are more prone to non-performing loans. It is the level of stability of these large-scale banks that, in most cases, save them from bankruptcy or from hostile takeovers.