Determinants of non-performing loans and its impact on the performance of banks: evidence from Pakistan

Abstract

The study was conducted to identify and study the determinants of non-performing loans in Pakistan banking sector. For the purpose of analysis the panel data of fifteen banks from the banking sector of Pakistan for the period of five years was used. The purpose to conduct a study was to identify the factors influencing Non Performing Loans. And on the other hand its impact on performance of the banking sector. The regression analysis was used on the panel data of 5 years i.e. 2006 to 2010, to examine relation of non-performing loans with key macroeconomic as well as banking sector specific variables. To measure impact of different variables on NON PERFORMING LOAN and thereafter its impact on bank’s performance the data was collected for 15 banks for the period of 5 years i.e. from 2006 to 2010. To verify the relation between different variables of NON PERFORMING LOAN and its impact on performance correlation as well as regression were run by using EViews. The results disclosed that three variables i.e, Excessive Lending, GROSS DOMESTIC PRODUCT & Leverage have significant positive relation with NON PERFORMING LOAN. While unemployment, interest rate, size, inflation rate, net interest and income did not prove to have significant relationship with NON PERFORMING LOAN. Furthermore, NON PERFORMING LOAN showed significant relationship with performance of the financial institutions. Future aspects as well as its practical implications were also elaborated.